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EX-32.2 - EXHIBIT 32.2 - VOXX International Corpex322q32017.htm
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EX-31.1 - EXHIBIT 31.1 - VOXX International Corpex311q32017.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended November 30, 2016

 or
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 0-28839
 
VOXX International Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
13-1964841
(IRS Employer Identification No.)
 
2351 J Lawson Blvd., Orlando, Florida
(Address of principal executive offices)
 
32824
(Zip Code)
 
(800) 654-7750
(Registrant's telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   x No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o      Accelerated filer  x Non-accelerated filer  o      Smaller reporting company   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   o       No   x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes   x No   o

Number of shares of each class of the issuer's common stock outstanding as of the latest practicable date.



1



Class
As of January 6, 2017
Class A Common Stock
21,899,370

Shares
Class B Common Stock
2,260,954

Shares

2




VOXX International Corporation and Subsidiaries
 

 
Table of Contents
 
 
Page
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1
FINANCIAL STATEMENTS (unaudited)
 
 
Consolidated Balance Sheets at November 30, 2016 and February 29, 2016
 
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended November 30, 2016 and 2015
 
Consolidated Statements of Cash Flows for the Nine Months Ended November 30, 2016 and 2015
 
Notes to Consolidated Financial Statements
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 4
CONTROLS AND PROCEDURES
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1
LEGAL PROCEEDINGS
Item 1A
RISK FACTORS
Item 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Item 6
EXHIBITS
SIGNATURES
 


3



PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

VOXX International Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands)

4



 
 
November 30, 2016
 
February 29, 2016
Assets
 
(unaudited)
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
5,672

 
$
11,767

Accounts receivable, net
 
110,408

 
87,055

Inventory, net
 
158,636

 
144,028

Receivables from vendors
 
2,914

 
2,519

Prepaid expenses and other current assets
 
19,681

 
17,256

Income tax receivable
 
1,365

 
1,426

Total current assets
 
298,676

 
264,051

Investment securities
 
10,417

 
10,206

Equity investments
 
22,343

 
21,949

Property, plant and equipment, net
 
79,664

 
79,422

Goodwill
 
103,265

 
104,349

Intangible assets, net
 
178,300

 
185,022

Deferred income taxes
 
23

 
23

Other assets
 
1,818

 
2,168

Total assets
 
$
694,506

 
$
667,190

Liabilities and Stockholders' Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
71,778

 
$
55,790

Accrued expenses and other current liabilities
 
44,785

 
50,748

Income taxes payable
 
39

 
4,081

Accrued sales incentives
 
17,243

 
12,439

Current portion of long-term debt
 
11,820

 
8,826

Total current liabilities
 
145,665

 
131,884

Long-term debt, net of debt issuance costs
 
105,267

 
88,169

Capital lease obligation
 
704

 
1,381

Deferred compensation
 
4,276

 
4,011

Other tax liabilities
 
5,043

 
4,997

Deferred income tax liabilities
 
30,107

 
30,374

Other long-term liabilities
 
9,988

 
10,480

Total liabilities
 
301,050

 
271,296

Commitments and contingencies (see Note 22)
 


 


Stockholders' equity:
 
 

 
 

Preferred stock:
 
 
 
 
No shares issued or outstanding (see Note 19)
 

 

Common stock:
 
 
 
 
Class A, $.01 par value, 60,000,000 shares authorized, 24,067,444 shares issued and 21,899,370 shares outstanding at both November 30, 2016 and February 29, 2016
 
256

 
256

Class B Convertible, $.01 par value, 10,000,000 shares authorized, 2,260,954 shares issued and outstanding
 
22

 
22

Paid-in capital
 
295,087

 
294,038

Retained earnings
 
159,459

 
154,947

Non-controlling interest
 
3,413

 
8,524

Accumulated other comprehensive loss
 
(43,605
)
 
(40,717
)
Treasury stock, at cost, 2,168,074 shares of Class A Common Stock at both November 30, 2016 and February 29, 2016
 
(21,176
)
 
(21,176
)
Total stockholders' equity
 
393,456

 
395,894

Total liabilities and stockholders' equity
 
$
694,506

 
$
667,190

See accompanying notes to consolidated financial statements.

5



VOXX International Corporation and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
 (In thousands, except share and per share data)
(unaudited)

 
 
Three Months Ended
November 30,
 
Nine Months Ended
November 30,
 
 
2016
 
2015
 
2016
 
2015
Net sales
 
$
198,937

 
$
192,506

 
$
513,655

 
$
511,063

Cost of sales
 
140,724

 
136,663

 
362,848

 
362,202

Gross profit
 
58,213

 
55,843

 
150,807

 
148,861

Operating expenses:
 
 

 
 

 
 
 
 
Selling
 
12,421

 
12,464

 
36,200

 
36,182

General and administrative
 
27,240

 
29,536

 
79,214

 
83,530

Engineering and technical support
 
11,243

 
9,459

 
36,013

 
26,190

Intangible asset impairment charges
 

 

 

 
6,210

Acquisition costs
 

 
800

 

 
800

Total operating expenses
 
50,904

 
52,259

 
151,427

 
152,912

Operating income (loss)
 
7,309

 
3,584

 
(620
)
 
(4,051
)
Other income (expense):
 
 

 
 

 
 
 
 
Interest and bank charges
 
(1,995
)
 
(1,772
)
 
(5,560
)
 
(4,964
)
Equity in income of equity investees
 
1,931

 
1,927

 
5,284

 
5,002

Gain on bargain purchase
 

 
4,679

 

 
4,679

Other, net
 
100

 
636

 
(228
)
 
1,103

Total other income (expense), net
 
36

 
5,470

 
(504
)
 
5,820

Income (loss) before income taxes
 
7,345

 
9,054

 
(1,124
)
 
1,769

Income tax expense (benefit)
 
3,435

 
2,968

 
(218
)
 
791

Net income (loss)
 
3,910

 
6,086

 
(906
)
 
978

Less: net loss attributable to non-controlling interest
 
(1,890
)
 
(1,691
)
 
(5,418
)
 
(1,691
)
Net income attributable to Voxx International Corporation
 
$
5,800

 
$
7,777

 
$
4,512

 
$
2,669

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
        Foreign currency translation adjustments
 
(6,684
)
 
(7,993
)
 
(3,168
)
 
(9,026
)
        Derivatives designated for hedging
 
752

 
(32
)
 
240

 
(1,673
)
        Pension plan adjustments
 
96

 
155

 
44

 
154

        Unrealized holding gain (loss) on available-for-sale investment securities, net of tax
 
4

 
5

 
(4
)
 
1

          Other comprehensive loss, net of tax
 
(5,832
)
 
(7,865
)
 
(2,888
)
 
(10,544
)
Comprehensive (loss) income attributable to Voxx International Corporation
 
$
(32
)
 
$
(88
)
 
$
1,624

 
$
(7,875
)
 
 
 
 
 
 
 
 
 
Net income per common share attributable to Voxx International Corporation (basic)
 
$
0.24

 
$
0.32

 
$
0.19

 
$
0.11

Net income per common share attributable to Voxx International Corporation (diluted)
 
$
0.24

 
$
0.32

 
$
0.19

 
$
0.11

Weighted-average common shares outstanding (basic)
 
24,160,324

 
24,183,791

 
24,160,324

 
24,177,061

Weighted-average common shares outstanding (diluted)
 
24,287,431

 
24,219,555

 
24,237,357

 
24,211,651


See accompanying notes to consolidated financial statements.



6



VOXX International Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)

 
 
Nine Months Ended
November 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net (loss) income
 
$
(906
)
 
$
978

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 

 
 

Depreciation and amortization
 
13,637

 
11,356

Amortization of debt discount
 
614

 
847

Impairment charges
 

 
6,210

Bad debt expense
 
191

 
615

Non-cash bank charges
 
187

 

Non-cash interest on borrowings
 
1,817

 

Interest on notes receivable from EyeLock, Inc.
 

 
(677
)
Gain on forward contracts
 
(590
)
 
(3,289
)
Loss on interest rate swap unwind
 
114

 

Equity in income of equity investees
 
(5,284
)
 
(5,002
)
Distribution of income from equity investees
 
4,889

 
4,309

Deferred income tax benefit
 
(108
)
 
(1,491
)
Non-cash compensation adjustment
 
1,261

 
350

Stock based compensation expense
 
568

 
686

Venezuela currency devaluation on investment securities
 

 
23

Gain on sale of property, plant and equipment
 
(12
)
 
(202
)
       Gain on sale of intangible asset
 

 
(30
)
       Gain on bargain purchase
 

 
(4,679
)
Changes in operating assets and liabilities:
 
 

 
 

Accounts receivable
 
(24,299
)
 
(1,491
)
Inventory
 
(15,897
)
 
327

Receivables from vendors
 
(67
)
 
827

Prepaid expenses and other
 
(2,139
)
 
7,580

Investment securities-trading
 
(210
)
 
264

Accounts payable, accrued expenses, accrued sales incentives and other liabilities
 
15,006

 
3,806

Income taxes payable
 
(3,904
)
 
1,160

Net cash (used in) provided by operating activities
 
(15,132
)
 
22,477

Cash flows from investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(8,622
)
 
(16,625
)
Proceeds from sale of property, plant and equipment
 
15

 
317

Proceeds from sale of intangible asset
 

 
150

Increase in notes receivable
 

 
(4,176
)
Sale of short term investments
 

 
251

Purchase of business
 

 
(15,504
)
Net cash used in investing activities
 
(8,607
)
 
(35,587
)
Cash flows from financing activities:
 
 

 
 

Principal payments on capital lease obligation
 
(356
)
 
(310
)
Repayment of bank obligations
 
(30,763
)
 
(180,686
)
Borrowings on bank obligations
 
48,353

 
198,325


7



Deferred financing costs
 

 
(332
)
Proceeds from exercise of stock options
 

 
436

Repurchase of common stock
 

 
(227
)
Net cash provided by financing activities
 
17,234

 
17,206

Effect of exchange rate changes on cash
 
410

 
(109
)
Net (decrease) increase in cash and cash equivalents
 
(6,095
)
 
3,987

Cash and cash equivalents at beginning of period
 
11,767

 
8,448

Cash and cash equivalents at end of period
 
$
5,672

 
$
12,435


See accompanying notes to consolidated financial statements.


8



VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)

(1)    Basis of Presentation

The accompanying unaudited interim consolidated financial statements of VOXX International Corporation and Subsidiaries ("Voxx" or the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America and include all adjustments (consisting of normal recurring adjustments), which, in the opinion of management, are necessary to present fairly the consolidated financial position, results of operations and cash flows for all periods presented.  The results of operations are not necessarily indicative of the results to be expected for the full fiscal year or any interim period.  These consolidated financial statements do not include all disclosures associated with consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. Accordingly, these statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto contained in the Company's Form 10-K for the fiscal year ended February 29, 2016. Certain amounts in the prior year have been reclassified to conform to the current year presentation.

We operate in three reportable segments, Automotive, Premium Audio and Consumer Accessories. See Note 21 for the Company's segment reporting disclosures.

(2)    Acquisitions

EyeLock

Effective September 1, 2015 ("the Closing Date"), Voxx completed its acquisition of a 54% voting equity interest in substantially all of the assets and certain specified liabilities of Eyelock, Inc. and Eyelock Corporation (collectively the “Seller”), a market leader of iris-based identity authentication solutions, through a newly-formed entity, Eyelock LLC.  Eyelock LLC acquired substantially all of the assets and certain specified liabilities of the Seller for a total purchase consideration of $31,880, which consisted of a cash payment of $15,504, assignment of the fair value of the indebtedness owed to the Company by the Seller of $4,676 and the fair value of the non-controlling interest of $12,900, reduced by $1,200 for amounts owed to the LLC by the selling shareholders. Additionally, units in Eyelock LLC were issued to certain executives of EyeLock LLC. The fair value of these units is recorded as compensation expense over the requisite service period of two years. This acquisition allows the Company to enter into the growing biometrics market. The fair value of the non-controlling interest was determined, with the assistance of a third party valuation expert, by grossing up the consideration transferred for the controlling interest by the voting equity interest percentage (adjusted for certain distribution thresholds required until a return of capital is achieved). The Company considered all the rights and preferences of the different classes of security holders and determined that there was no evidence of any disproportionate allocation of cash flow between the controlling and non-controlling interest at the date of acquisition. The adjusted controlling interest percentage in the fair value calculation amounted to 61%. The non-controlling interest of $12,900, valued at 39%, did not contain any further discount for lack of control. The Company believes the bargain gain implied in the transaction would eliminate any further discount for lack of control.

In connection with the closing, the Company entered into a loan agreement with Eyelock LLC. The terms of the loan agreement allowed Eyelock LLC to borrow up to $12,000 at an interest rate of 10%. During the second and third quarters of Fiscal 2017, the Company issued two convertible promissory notes to EyeLock LLC, allowing the entity to borrow up to a total of $12,000 in additional funds. The outstanding principal balance of these two promissory notes are convertible at the sole option of Voxx into units of EyeLock LLC. The convertible promissory notes bear interest at 10%, and can be used for working capital purposes related to new business opportunities. If Voxx chooses not to convert into equity, the outstanding loan principal will be repaid at a multiple ranging from 1.35 to 1.45 based on the repayment date. Amounts outstanding under the first loan agreement, as well as the convertible promissory note executed during the second quarter of Fiscal 2017 are due on September 1, 2017, while the convertible promissory note executed during the third quarter of Fiscal 2017 is due on November 1, 2017. All three agreements include customary events of default and are collateralized by all of the property of Eyelock LLC.

The following table summarizes the allocation of the purchase price over the fair values of the assets acquired and liabilities assumed, as of the Closing Date:

9

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

 
 
September 1, 2015
Assets acquired:
 
 
     Accounts receivable
 
$
77

     Inventory
 
304

     Property, plant and equipment
 
259

     Intangible assets
 
43,780

        Total assets acquired
 
$
44,420

 
 
 
Liabilities assumed:
 
 
     Accounts payable and accrued expenses
 
729

     Deferred tax liability
 
2,756

     Bridge loans payable to Voxx
 
3,176

     Other long-term liabilities
 
1,200

        Net assets acquired
 
36,559

        Less: purchase price
 
31,880

Gain on bargain purchase
 
$
4,679


The acquisition of substantially all of the assets and certain specified liabilities of Eyelock, Inc. and Eyelock Corporation resulted in a bargain purchase gain of $4,679, which was recognized in the Company's Consolidated Statement of Operations and Comprehensive Income (Loss) during the third quarter of Fiscal 2016. Prior to the recognition of the bargain purchase gain, the Company reassessed the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition. The Company believes it was able to acquire those assets of Eyelock LLC for less than their fair value due to the distressed financial position of the company, its inability to secure additional financing to support its ongoing operations, and the lack of potential bidders for the entity prior to Voxx's acquisition.

The fair values assigned to the intangible assets acquired and their related amortization periods are as follows:

 
September 1, 2015
 
 
 
Amortization Period (Years)
Developed technology
$
31,290

 
 
 
11.5 years
Tradename
8,435

 
 
 
Indefinite
Customer relationships
3,470

 
 
 
15.5 years
Non-compete agreement
585

 
 
 
5 years
 
$
43,780

 
 
 
 

The fair values of the intangible assets acquired were measured using Level 3 inputs and were determined using variations of the income approach, such as the discounted cash flows and relief of royalty valuation methods. Significant inputs and assumptions used in determining the fair values of the intangible assets acquired included management’s projections of future revenues, earnings and cash flows from Eyelock LLC, a weighted average cost of capital and distributor rates, customer attrition rates, royalty rates and technological obsolescence rates.

Acquisition related costs relating to this transaction of $800 were expensed as incurred during the year ended February 29, 2016. Net sales attributable to EyeLock LLC in the Company's consolidated statements of operations for the three and nine months ended November 30, 2016 were approximately $100 and $211, respectively.

The results of EyeLock LLC's operation have been included in the Company's consolidated financial statements since the date of acquisition.

Pro-forma Financial Information

10

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)


The following unaudited pro-forma financial information for the three and nine months ended November 30, 2015 represents the results of the Company's operations as if EyeLock LLC was included in these periods of Fiscal 2016. The unaudited pro-forma financial information does not necessarily reflect the results of operations that would have occurred had the companies constituted a single entity during the period.



 
Three Months Ended November 30,
 
Nine Months Ended November 30,
 
 
2015
 
2015
Net sales:
 
 
 
 
As reported
 
$
192,506

 
$
511,063

Pro forma
 
192,506

 
512,178

Net income (loss) attributable to Voxx International Corporation:
 
 
 
 
As reported
 
$
7,777

 
$
2,669

Pro forma
 
6,116

 
(4,152
)
Basic income (loss) per share:
 
 
 
 
As reported
 
$
0.32

 
$
0.11

Pro forma
 
0.25

 
(0.17
)
Diluted income (loss) per share:
 
 
 
 
As reported
 
$
0.32

 
$
0.11

Pro forma
 
0.25

 
(0.17
)
Average shares - basic
 
24,183,791

 
24,177,061

Average shares - diluted
 
24,219,555

 
24,211,651


The above pro-forma results include certain adjustments for the periods presented to adjust the financial results and give consideration to the assumption that the acquisition occurred on the first day of Fiscal 2015. These adjustments include costs such as an estimate for amortization associated with intangible assets acquired, the adjustment of interest expense, the reversal of rent and utility expenses on debt and property leases not assumed, as well as the movement of expenses and gains specific to the acquisition from Fiscal 2016 to Fiscal 2015. These pro-forma results of operations have been estimated for comparative purposes only and may not reflect the actual results of operations that would have been achieved had the transaction occurred on the date presented or be indicative of results to be achieved in the future.

(3)    Net Income (Loss) Per Common Share
 
Basic net income (loss) per common share is based upon the weighted-average common shares outstanding during the period.  Diluted net income (loss) per common share reflects the potential dilution that would occur if common stock equivalent securities or other contracts to issue common stock were exercised or converted into common stock.

There are no reconciling items which impact the numerator of basic and diluted net income (loss) per common share.  A reconciliation between the denominator of basic and diluted net income (loss) per common share is as follows:

 
 
Three Months Ended
November 30,
 
Nine Months Ended
November 30,
 
 
2016
 
2015
 
2016
 
2015
Weighted-average common shares outstanding
 
24,160,324

 
24,183,791

 
24,160,324

 
24,177,061

Effect of dilutive securities:
 
 

 
 

 
 

 
 

Stock options, warrants and restricted stock
 
127,107

 
35,764

 
77,033

 
34,590

Weighted-average common shares and potential common shares outstanding
 
24,287,431

 
24,219,555

 
24,237,357

 
24,211,651

 

11

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

Restricted stock, stock options and warrants of 121,250 and 131,250 for the three months ended November 30, 2016 and 2015, respectively, and 252,067 and 126,808 for the nine months ended November 30, 2016 and 2015, respectively, were not included in the net income (loss) per diluted share calculation because the exercise price of these stock options and warrants was greater than the average market price of the Company’s common stock during these periods or the inclusion of these components would have been anti-dilutive.


12

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

(4)    Fair Value Measurements and Derivatives

The Company applies the authoritative guidance on “Fair Value Measurements," which among other things, requires enhanced disclosures about investments that are measured and reported at fair value. This guidance establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices, or for which fair value can be measured from actively quoted prices, generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Investments measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable.
Level 3 - Unobservable inputs developed using the Company's estimates and assumptions, which reflect those that market participants would use.

The following table presents assets measured at fair value on a recurring basis at November 30, 2016:

 
 
 
Fair Value Measurements at Reporting Date Using
 
Total
 
Level 1
 
Level 2
Cash and cash equivalents:
 
 
 
 
 
Cash and money market funds
$
5,672

 
$
5,672

 
$

Derivatives
 

 
 

 
 

Designated for hedging
$
489

 
$

 
$
489

Investment securities:
 

 
 

 
 

Trading securities
$
4,127

 
$
4,127

 
$

Available-for-sale securities
12

 
12

 

Other investments at amortized cost (a)
6,278

 

 

Total investment securities
$
10,417

 
$
4,139

 
$


The following table presents assets measured at fair value on a recurring basis at February 29, 2016:

 
 
 
Fair Value Measurements at Reporting Date Using
 
Total
 
Level 1
 
Level 2
Cash and cash equivalents:
 
 
 
 
 
Cash and money market funds
$
11,767

 
$
11,767

 
$

Derivatives
 

 
 

 
 

Designated for hedging
$
30

 
$

 
$
30

Investment securities:
 

 
 

 
 

Trading securities
$
3,917

 
$
3,917

 
$

Available-for-sale securities
18

 
18

 

Other investments at amortized cost (a)
6,271

 

 

Total investment securities
$
10,206

 
$
3,935

 
$


(a)
Included in this balance are investments in two non-controlled corporations accounted for at cost (see Note 5). The fair values of these investments would be based upon Level 3 inputs. At November 30, 2016 and February 29, 2016, it is not practicable to estimate the fair values of these items.

The carrying amount of the Company's accounts receivable, short-term debt, accounts payable, accrued expenses, bank obligations and long-term debt approximates fair value because of (i) the short-term nature of the financial instrument; (ii)

13

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

the interest rate on the financial instrument being reset every quarter to reflect current market rates, and (iii) the stated or implicit interest rate approximates the current market rates or are not materially different than market rates.
Derivative Instruments
The Company's derivative instruments include forward foreign currency contracts utilized to hedge a portion of its foreign currency inventory purchases, local operating expenses, as well as its general economic exposure to foreign currency fluctuations created in the normal course of business. The Company also has two interest rate swap agreements as of November 30, 2016, one of which hedges interest rate exposure related to the forecasted outstanding borrowings on a portion of its senior secured credit facility ("the Amended Credit Facility"), and a second that hedges interest rate exposure related to the forecasted outstanding balance of its Florida Mortgage, with monthly payments due through March 2026. A third interest rate swap agreement that also hedged interest rate exposure related to the Amended Credit Facility, expired during the first quarter of Fiscal 2017 with a fair value of $0 on the date of expiration, and a fourth agreement, which hedged interest rate exposure related to the forecasted outstanding balance of one of its mortgage notes, was unwound during the first quarter of Fiscal 2017 when that mortgage was paid in full (see Note 15). The fair value of this interest rate swap agreement on the date it was unwound was $(114), which was charged to interest expense in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss) during the nine months ended November 30, 2016. The swap agreement related to the Amended Credit Facility locks the Company's LIBOR rate at 0.515% (exclusive of credit spread) through the swap's maturity date of February 28, 2017. The swap agreement related to the Company's Florida Mortgage locks the interest rate on the debt at 3.48% (inclusive of credit spread) through the maturity date of the loan. The forward foreign currency derivatives qualifying for hedge accounting are designated as cash flow hedges and valued using observable forward rates for the same or similar instruments (Level 2). The duration of open forward foreign currency contracts range from 1 - 15 months and are classified in the balance sheet according to their terms. Interest rate swap agreements qualifying for hedge accounting are designated as cash flow hedges and valued based on a comparison of the change in fair value of the actual swap contracts designated as the hedging instruments and the change in fair value of a hypothetical swap contract (Level 2). We calculate the fair value of interest rate swap agreements quarterly based on the quoted market price for the same or similar financial instruments. Interest rate swaps are classified in the balance sheet as either assets or liabilities based on the fair value of the instruments at the end of the period.
It is the Company's policy to enter into derivative instrument contracts with terms that coincide with the underlying exposure being hedged. As such, the Company's derivative instruments are expected to be highly effective. Hedge ineffectiveness, if any, is recognized as incurred through Other Income (Expense) in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss) and amounted to $190 and $177 for the three and nine months ended November 30, 2016, respectively, and $166 for $153 the three and nine months ended November 30, 2015, respectively.
Financial Statement Classification
The Company holds derivative instruments that are designated as hedging instruments. The following table discloses the fair value as of November 30, 2016 and February 29, 2016 of derivative instruments:
 
 
Derivative Assets and Liabilities
 
 
 
 
Fair Value
 
 
Account
 
November 30, 2016
 
February 29, 2016
Designated derivative instruments
 
 
 
 
 
 
Foreign currency contracts
 
Accrued expenses and other current liabilities
 
$
(189
)
 
$
(98
)
 
 
Prepaid expenses and other current assets
 
1,039

 
989

Interest rate swap agreements
 
Other long term liabilities
 
(363
)
 
(862
)
 
 
Prepaid expenses and other current assets
 
2

 
1

 
 
 
 
 
 
 
Total derivatives
 
 
 
$
489

 
$
30


14

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)


Cash flow hedges

During Fiscal 2016 and during the third quarter of Fiscal 2017, the Company entered into forward foreign currency contracts, which have a current outstanding notional value of $39,070 and are designated as cash flow hedges at November 30, 2016. The current outstanding notional values of the Company's two interest rate swaps at November 30, 2016 are $3,750 and $9,238. For cash flow hedges, the effective portion of the gain or loss is reported as a component of Other Comprehensive Income (Loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.

Activity related to cash flow hedges recorded during the three and nine months ended November 30, 2016 and 2015 was as follows:
 
Three months ended
 
Nine months ended
 
November 30, 2016
 
November 30, 2016
 
Pretax Gain(Loss) Recognized in Other Comprehensive Income
 
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (a)
 
Gain (Loss)for Ineffectiveness in Other Income
 
Pretax Gain (Loss) Recognized in Other Comprehensive Income
 
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (a)
 
Gain (Loss) for Ineffectiveness in Other Income
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
837

 
$
160

 
$
190

 
$
241

 
$
582

 
$
177

Interest rate swaps
$
313

 
$

 
$

 
$
386

 
$
(114
)
 
$


 
Three months ended
 
Nine months ended
 
November 30, 2015
 
November 30, 2015
 
Pretax Gain(Loss) Recognized in Other Comprehensive Income
 
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (a)
 
Gain (Loss)for Ineffectiveness in Other Income
 
Pretax Gain (Loss) Recognized in Other Comprehensive Income
 
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (a)
 
Gain (Loss) for Ineffectiveness in Other Income
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
989

 
$
747

 
$
166

 
$
1,358

 
$
2,921

 
$
153

Interest rate swaps
$
(127
)
 
$

 
$

 
$
(474
)
 
$

 
$

(a) Gains and losses related to foreign currency contracts are reclassified to cost of sales. Gains and losses related to interest rate swaps are reclassified to interest expense.

The net income (loss) recognized in Other Comprehensive Income (Loss) for foreign currency contracts is expected to be recognized in cost of sales within the next eighteen months. No amounts were excluded from the assessment of hedge effectiveness during the respective periods. As of November 30, 2016, no foreign currency contracts originally designated for hedge accounting were de-designated or terminated.

(5)    Investment Securities


15

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

As of November 30, 2016 and February 29, 2016, the Company had the following investments:

 
November 30, 2016
 
February 29, 2016
 
Cost
Basis
 
Unrealized
Holding
Gain/(Loss)
 
Fair
Value
 
Cost
Basis
 
Unrealized
Holding
Gain/(Loss)
 
Fair
Value
Investment Securities
 

 
 

 
 

 
 

 
 

 
 

Marketable Securities
 

 
 

 
 

 
 

 
 

 
 

Trading
 

 
 

 
 

 
 

 
 

 
 

Deferred Compensation
$
4,127

 
$

 
$
4,127

 
$
3,917

 
$

 
$
3,917

Available-for-sale
 

 
 

 
 

 
 

 
 

 
 

Cellstar

 
12

 
12

 

 
18

 
18

Total Marketable Securities
4,127

 
12

 
4,139

 
3,917

 
18

 
3,935

Other Investments
6,278

 

 
6,278

 
6,271

 

 
6,271

Total Investment Securities
$
10,405

 
$
12

 
$
10,417

 
$
10,188

 
$
18

 
$
10,206



Long-Term Investments

Trading Securities

The Company’s trading securities consist of mutual funds, which are held in connection with the Company’s deferred compensation plan. Unrealized holding gains and losses on trading securities are offset by changes in the corresponding deferred compensation liability.

Available-For-Sale Securities

The Company’s available-for-sale marketable securities include a less than 20% equity ownership in CLST Holdings, Inc. (“Cellstar").

Unrealized holding gains and losses, net of the related tax effect (if applicable), on available-for-sale securities are reported as a component of Accumulated Other Comprehensive Income (Loss) until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis and reported in Other Income (Expense).

A decline in the market value of any available-for-sale security below cost that is deemed other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. No other-than-temporary losses were incurred by the Company during the three and nine months ended November 30, 2016 or 2015.

Other Long-Term Investments

Other long-term investments include investments in two non-controlled corporations accounted for by the cost method. As of November 30, 2016, the Company's investments in Rx Networks and 360fly, Inc. (formerly EyeSee360, Inc.) totaled $1,825 and $4,453, respectively, or a total investment balance of $6,278. We held 10.2% and 4.7% of the outstanding shares of Rx Networks and 360fly, Inc., respectively, at November 30, 2016. No additional investment was made in either of these companies during the three and nine months ended November 30, 2016.

(6)    Accumulated Other Comprehensive (Loss) Income

The Company’s accumulated other comprehensive (losses) income consist of the following:

16

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)


 
 
Foreign Currency Translation Gains (Losses)
 
Unrealized gains (losses) on investments, net of tax
 
Pension plan adjustments, net of tax
 
Derivatives designated in a hedging relationship, net of tax
 
Total
Balance at February 29, 2016
 
$
(38,637
)
 
$
(81
)
 
$
(2,102
)
 
$
103

 
$
(40,717
)
Other comprehensive (loss) income before reclassifications
 
(3,168
)
 
(4
)
 
44

 
530

 
(2,598
)
Reclassified from accumulated other comprehensive income (loss)
 

 

 

 
(290
)
 
(290
)
Net current-period other comprehensive (loss) income
 
(3,168
)
 
(4
)
 
44

 
240

 
(2,888
)
Balance at November 30, 2016
 
$
(41,805
)
 
$
(85
)
 
$
(2,058
)
 
$
343

 
$
(43,605
)

During the three and nine months ended November 30, 2016, the Company recorded tax expense (benefit) related to unrealized losses on investments of $0 in both periods, pension plan adjustments of $0 in both periods, and derivatives designated in a hedging relationship of $225 and $(51), respectively.

Included in foreign currency translation losses of $3,168 for the nine months ended November 30, 2016, was $1,012 resulting from translating the financial statements of the Company’s non-U.S. dollar functional currency subsidiaries into our reporting currency, which is the U.S. dollar, as well as approximately $1,891 resulting from the re-measurement of an intercompany loan, payable in Euros, which is of a long-term investment nature. Remaining gains or losses pertain to the re-measurement of intercompany transactions of a long-term investment nature, with certain subsidiaries whose functional currency is not the U.S. dollar. Intercompany loans and transactions that are of a long-term investment nature are remeasured and resulting gains and losses shall be reported in the same manner as translation adjustments. Within foreign currency translation losses in Other Comprehensive Income (Loss) for the nine months ended November 30, 2016, the Company recorded losses of $3,066 related to the Euro, which was caused by the strengthening of the U.S. dollar against the Euro by approximately 2%, and a loss of $102 related to various other currencies.


(7)    Supplemental Cash Flow Information

The following is supplemental information relating to the consolidated statements of cash flows:

 
 
Nine Months Ended
November 30,
 
 
2016
 
2015
Non-cash investing and financing activities:
 
 
 
 
Capital expenditures funded by long-term obligations
 
$

 
$
1,109

       Mortgage settlement funded by long-term obligations
 
5,590

 

       Deferred financing costs funded by long-term obligations
 
1,779

 

       Non-cash acquisition of long-term investment
 

 
1,453

Cash paid during the period:
 
 
 
 
Interest (excluding bank charges)
 
$
1,366

 
$
2,328

Income taxes (net of refunds)
 
$
3,610

 
$
1,089


(8)    Accounting for Stock-Based Compensation
 

17

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

The Company has various stock-based compensation plans, which are more fully described in Note 1 of the Company’s Form 10-K for the fiscal year ended February 29, 2016.

The Company granted 125,000 options in October 2014, which vested on October 16, 2015, expire two years from date of vesting (October 15, 2017), have an exercise price equal to $7.76, $0.25 above the sales price of the Company’s stock on the day prior to the date of grant, have a contractual term of 3.0 years and a grant date fair value of $2.78 per share determined based upon a Black-Scholes valuation model. These options are included in the outstanding options and warrants table below and are exercisable at November 30, 2016.

In addition, the Company issued 15,000 warrants in October 2014 to purchase the Company’s common stock with the same terms as those of the options above as consideration for future legal and professional services. These warrants are included in the outstanding options and warrants table below and are exercisable at November 30, 2016.

During the three and nine months ended November 30, 2016, there were no stock-based compensation costs or professional fees recorded by the Company and there were no unrecognized compensation costs or professional fees as of November 30, 2016 related to stock options and warrants.

Information regarding the Company's stock options and warrants is summarized below:

 
 
Number of Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
Outstanding at February 29, 2016
 
131,250

 
$
7.76

 
 
Granted
 

 

 
 
Exercised
 

 

 
 
Forfeited/expired
 
10,000

 
7.76

 
 
Outstanding and exercisable at November 30, 2016
 
121,250

 
$
7.76

 
0.88

A restricted stock award is an award of common stock that is subject to certain restrictions during a specified period. Restricted stock awards are independent of option grants and are subject to forfeiture if employment terminates for a reason other than death, disability or retirement, prior to the release of the restrictions. In Fiscal 2014, the Company established a Supplemental Executive Retirement Plan (SERP) and granted 84,588 shares of restricted stock under this plan. During Fiscal 2015, Fiscal 2016 and Fiscal 2017, an additional 118,058, 79,268 and 165,619 shares of restricted stock were granted under the SERP, respectively. These shares were granted based on certain performance criteria and vest on the later of three years from the date of grant (or three years from the date of participation in the SERP with respect to the Fiscal 2014 grants), or the grantee reaching the age of 65 years. The shares will also vest upon termination of the grantee's employment by the Company without cause, provided that the grantee, at the time of termination, has been employed by the Company for at least 10 years. Upon vesting, the shares will be issued to the grantee or settled in cash, at the Company's sole option. The grantee cannot transfer the rights to receive shares before the restricted shares vest. There are no market conditions inherent in the award, only an employee performance requirement, and the service requirement that the respective employee continues employment with the Company through the vesting date. The Company expenses the cost of the restricted stock awards on a straight-line basis over the requisite service period of each employee or a maximum of 12.75 years. For these purposes, the fair market values of the restricted stock, $13.62, $7.77, $8.13 and $2.69, respectively, were determined based on the mean of the high and low price of the Company's common stock on the grant dates.

The following table presents a summary of the Company's restricted stock activity for the nine months ended November 30, 2016:


18

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

 
Number of Shares
 
Weighted Average Grant Date Fair Value
Balance at February 29, 2016
271,824
 
$
9.61

Granted
165,619

 
2.69

Vested

 

Forfeited

 

Balance at November 30, 2016
437,443

 
$
6.99


During the three and nine months ended November 30, 2016, the Company recorded $205 and $568 in stock-based compensation related to restricted stock awards. As of November 30, 2016, there was $1,526 of unrecognized stock-based compensation expense related to unvested restricted stock awards.

(9)    Supply Chain Financing

The Company has four supply chain financing agreements ("factoring agreements") that were entered into for the purpose of accelerating receivable collection and better managing cash flow. The factored balances for all four agreements are sold without recourse and are accounted for as sales of accounts receivable. Total receivable balances sold for the three and nine months ended November 30, 2016, net of discounts, were $73,389 and $191,944, respectively, compared to $75,196 and $199,438 for the three and nine months ended November 30, 2015, respectively.

(10)    Research and Development

Expenditures for research and development are charged to expense as incurred. Such expenditures amounted to $7,964 and $26,411 for the three and nine months ended November 30, 2016, respectively, compared to $6,412 and $16,990 for the three and nine months ended November 30, 2015, respectively, net of customer reimbursement, and are included within Engineering and Technical Support Expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

The Company enters into development and long-term supply agreements with certain of its OEM ("Original Equipment Manufacturer") customers. Reimbursements of the development services are recorded based upon the milestone method of revenue recognition provided certain criteria are met. Amounts due from OEM customers for development services are reflected as a reduction of research and development expense because the performance of contract development services is not central to the Company's operations. For the three and nine months ended November 30, 2016, the Company recorded $1,642 and $3,119, respectively, of development service reimbursements as a reduction of research and development expense based upon the achievement of a milestone, as compared to $3,326 and $6,446, respectively, for the three and nine months ended November 30, 2015.

(11)    Goodwill and Intangible Assets

The change in goodwill by segment is as follows:


19

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

Automotive:
Amount
Beginning balance at March 1, 2016
$
57,816

Currency translation
(1,084
)
Balance at November 30, 2016
$
56,732

 
 
Gross carrying amount at November 30, 2016
$
56,732

Accumulated impairment charge

Net carrying amount at November 30, 2016
$
56,732

 
 
Premium Audio:
 
Beginning balance at March 1, 2016
$
46,533

Activity during the period

Balance at November 30, 2016
$
46,533

 
 
Gross carrying amount at November 30, 2016
$
78,696

Accumulated impairment charge
(32,163
)
Net carrying amount at November 30, 2016
$
46,533

 
 
Total Goodwill, net
$
103,265


Note: The Company's Consumer Accessories segment did not carry a goodwill balance at November 30, 2016 or February 29, 2016.

At November 30, 2016, intangible assets consisted of the following:  

 
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Total Net
Book
Value
Finite-lived intangible assets:
 


 
 
 
 
Customer relationships
 
$
64,803

 
$
26,713

 
$
38,090

Trademarks/Tradenames
 
415

 
393

 
22

Developed technology
 
31,290

 
3,401

 
27,889

Patents
 
8,501

 
4,587

 
3,914

License
 
1,400

 
1,400

 

Contract
 
2,141

 
1,703

 
438

Total finite-lived intangible assets
 
$
108,550

 
$
38,197

 
70,353

Indefinite-lived intangible assets
 
 
 
 
 
 
Trademarks
 
 
 
 
 
107,947

Total net intangible assets
 
 
 
 
 
$
178,300


At February 29, 2016, intangible assets consisted of the following: 


20

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

 
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Total Net
Book
Value
Finite-lived intangible assets:
 
 
 
 
 
 
Customer relationships
 
$
65,290

 
$
23,527

 
$
41,763

Trademarks/Tradenames
 
415

 
389

 
26

Developed technology
 
31,290

 
1,360

 
29,930

Patents
 
8,638

 
4,079

 
4,559

License
 
1,400

 
1,400

 

Contract
 
2,141

 
1,615

 
526

Total finite-lived intangible assets
 
$
109,174

 
$
32,370

 
76,804

Indefinite-lived intangible assets
 
 
 
 
 
 
Trademarks
 
 
 
 
 
108,218

Total net intangible assets
 
 
 
 
 
$
185,022


The Company recorded amortization expense of $2,039 and $6,137 for the three and nine months ended November 30, 2016, respectively, and $2,044 and $4,599 for the three and nine months ended November 30, 2015, respectively. The estimated aggregate amortization expense for all amortizable intangibles for November 30 of each of the succeeding years is as follows:

Year
 
Amount
2017
 
$
8,117

2018
 
7,933

2019
 
7,877

2020
 
7,794

2021
 
7,640


We evaluate the carrying value of long-lived assets, including intangible assets subject to amortization, when events and circumstances warrant such a review. During the second quarter of Fiscal 2016, the Company re-evaluated its projections for its Klipsch reporting unit, located in the Premium Audio segment, based on lower than anticipated results due to certain marketing strategies and re-evaluation of its market position for certain product lines. Accordingly, this was considered an indicator of impairment requiring the Company to test the related indefinite-lived tradename for impairment, and perform a step 1 impairment analysis on the goodwill for this reporting unit. Fair value is determined primarily by using a discounted cash flow methodology that requires considerable management judgment and long-term assumptions, and is considered a Level 3 (unobservable) fair value determination in the fair value hierarchy (see Note 4). A five-year period is analyzed using a risk adjusted discount rate. The discount rates (developed using a weighted average cost of capital analysis) used in the goodwill and intangible analyses were 13.1% and 13.8%, respectively. Long-term growth rates ranged from 0.7% to 2.9%. As a result of this analysis, the Company determined that the tradename for this reporting unit was impaired and recorded an impairment charge of $6,210 for the nine months ended November 30, 2015. In addition, the Company determined that the goodwill of the reporting unit was not impaired as of this interim testing date. There were no triggering events during the three and nine months ended November 30, 2016, therefore, management believes the carrying values of its intangible assets is not impaired.

(12)    Equity Investment

As of November 30, 2016 and February 29, 2016, the Company had a 50% non-controlling ownership interest in ASA Electronics, LLC and Subsidiary (“ASA") which acts as a distributor of mobile electronics specifically designed for niche markets within the automotive industry, including RV's; buses; and commercial, heavy duty, agricultural, construction, powersport, and marine vehicles.


21

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

The following presents summary financial information for ASA.  Such summary financial information has been provided herein based upon the individual significance of ASA to the consolidated financial information of the Company.

 
 
November 30,
2016
 
February 29,
2016
Current assets
 
$
45,839

 
$
44,097

Non-current assets
 
5,782

 
5,658

Current liabilities
 
6,935

 
5,857

Members' equity
 
44,686

 
43,898

 
 
Nine Months Ended
November 30,
 
 
2016
 
2015
Net sales
 
$
70,982

 
$
69,967

Gross profit
 
22,936

 
21,633

Operating income
 
10,527

 
9,983

Net income
 
10,567

 
10,004

 
The Company's share of income from ASA was $1,931 and $5,284 for the three and nine months ended November 30, 2016, respectively and $1,927 and $5,002 for the three and nine months ended November 30, 2015, respectively.  

(13)    Income Taxes

For the three and nine months ended November 30, 2016, the Company recorded an income tax provision of $3,435 and an income tax benefit of $218, respectively, which includes a discrete income tax provision of $98 and $264, respectively. The calculation of the overall income tax provision (benefit) primarily consists of foreign taxes and an income tax provision resulting from the increase in deferred tax liabilities related to indefinite-lived intangible assets. The discrete income tax provision for the three and nine months ended November 30, 2016 relates to the accrual of interest for unrecognized tax benefits and the impact of re-measurement of state deferred tax rates related to finalization of Fiscal 2016 tax filings. For the three and nine months ended November 30, 2015, the Company recorded an income tax provision of $2,968 and $791, respectively.

The effective tax rate for the three and nine months ended November 30, 2016 was an income tax provision of 46.8% and an income tax benefit of 19.4%, respectively, compared to an income tax provision of 32.8% and 44.7%, respectively, in the comparable prior periods. The effective tax rate for the three and nine months ended November 30, 2016 differs from the U.S. statutory rate of 35% primarily due to the mix of domestic and foreign earnings, and an income tax provision resulting from the increase in deferred tax liabilities related to indefinite-lived intangible assets.

At November 30, 2016, the Company had an uncertain tax position liability of $5,043, including interest and penalties. The unrecognized tax benefits include amounts related to various U.S. federal, state and local and foreign tax issues. The Company believes it is reasonably possible that a decrease in unrecognized tax benefits may be necessary within the coming year as a result of the expected resolution of various income tax examinations.

(14)    Inventory

Inventories by major category are as follows:


22

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

 
 
November 30,
2016
 
February 29,
2016
Raw materials
 
$
48,341

 
$
46,941

Work in process
 
3,893

 
4,457

Finished goods
 
106,402

 
92,630

Inventory, net
 
$
158,636

 
$
144,028


(15)     Financing Arrangements

The Company has the following financing arrangements:

 
 
November 30,
2016
 
February 29,
2016
Debt
 
 
 
 
Domestic credit facility (a)
 
$
100,151

 
$
72,300

Florida mortgage (b)
 
9,238

 
9,223

Euro asset-based lending obligation (c)
 
4,401

 
5,412

Schwaiger mortgage (d)
 
705

 
892

Klipsch note (e)
 
168

 
262

Woodview Trace mortgage (f)
 

 
5,720

Voxx Germany mortgage (g)
 
4,058

 
4,710

Hirschmann line of credit (h)
 
2,052

 
998

Total debt
 
120,773

 
99,517

Less: current portion of long-term debt
 
11,820

 
8,826

Long-term debt before debt issuance costs
 
108,953

 
90,691

Debt issuance costs
 
3,686

 
2,522

 Total long-term debt
 
$
105,267

 
$
88,169


(a)          Domestic Credit Facility
 
From March 1, 2016 through April 25, 2016, the Company had a senior secured credit facility (the "Credit Facility") with an aggregate availability of $125,000, consisting of a revolving credit facility of $125,000, with a $30,000 multicurrency revolving credit facility sublimit, a $15,625 sublimit for Letters of Credit and a $6,250 sublimit for Swingline Loans. This Credit Facility was due on January 9, 2019; however, it was subject to acceleration upon the occurrence of an Event of Default (as defined in the Credit Agreement).

On April 26, 2016, the Company amended and restated the Credit Facility ("Amended Credit Facility"). The Amended Credit Facility provides for a revolving credit facility with committed availability of up to $140,000, which may be increased, at the option of the Company, up to a maximum of $175,000; a $15,000 sublimit for Letters of Credit; a $15,000 sublimit for Swingline Loans and a Term Loan in the amount of $15,000.

The Term Loan is repayable in consecutive quarterly installments of $938 through April 1, 2020. All other amounts outstanding under the Amended Credit Facility will mature and become due on April 26, 2021; however, it is subject to acceleration upon the occurrence of an Event of Default (as defined in the Amended Credit Agreement). The Company may prepay any amounts outstanding at any time, subject to payment of certain breakage and redeployment costs relating to LIBOR Rate Loans; provided that the Term Loan shall not be voluntarily prepaid except as set forth in the agreement. The commitments under the Amended Credit Facility may be irrevocably reduced at any time, without premium or penalty as set forth in the agreement.


23

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

Generally, the Company may designate specific borrowings under the Amended Credit Facility as either Base Rate Loans or LIBOR Rate Loans, except that Swingline Loans may only be designated as Base Rate Loans. Loans designated as LIBOR Rate Loans shall bear interest at a rate equal to the then applicable LIBOR rate plus a range of 1.75 - 2.25%. Loans designated as Base Rate loans shall bear interest at a rate equal to the applicable margin for Base Rate Loans of 0.75 - 1.25% as defined in the agreement. Amounts outstanding in respect of the Term Loan shall bear interest at a rate equal to either (as selected by the Company pursuant to the agreement) (a) the then-applicable LIBOR Rate (not to be less than 0.00%) plus 4.25% or (b) the then-applicable Base Rate plus 3.25%. As of November 30, 2016, the weighted average interest rate on the facility was 2.86%.

The Amended Credit Facility requires compliance with a financial covenant calculated as of the last day of each fiscal quarter consisting of a Fixed Charge Coverage Ratio. The Amended Credit Facility also contains covenants that limit the ability of the Loan Parties and certain of their Subsidiaries which are not Loan Parties to, among other things: (i) incur additional indebtedness; (ii) incur liens; (iii) merge, consolidate or dispose of a substantial portion of their business; (iv) transfer or dispose of assets; (v) change their name, organizational identification number, state or province of organization or organizational identity; (vi) make any material change in their nature of business; (vii) prepay or otherwise acquire indebtedness; (viii) cause any Change of Control; (ix) make any Restricted Junior Payment; (x) change their fiscal year or method of accounting; (xi) make advances, loans or investments; (xii) enter into or permit any transaction with an Affiliate of any Borrower or any of their Subsidiaries; (xiii) use proceeds for certain items; (xiv) issue or sell any of their stock; (xv) consign or sell any of their inventory on certain terms. In addition, if excess availability under the Amended Credit Facility were to fall below certain specified levels, as defined in the agreement, the lenders would have the right to assume dominion and control over the Company's cash. As of November 30, 2016, the Company was in compliance with this cash dominion covenant.

The Obligations under the Loan Documents are secured by a general lien on and security interest in substantially all of the assets of the Borrowers and certain of the Guarantors, including accounts receivable, equipment, real estate, general intangibles and inventory. The Company has guaranteed the obligations of the Borrowers under the Credit Agreement.

As of November 30, 2016, $87,026 was outstanding under the revolving credit facility and $13,125 was outstanding under the term loan. Charges incurred on the unused portion of the Amended Credit Facility during the three and nine months ended November 30, 2016 totaled $62 and $184, respectively, compared to $70 and $235 during the three and nine months ended November 30, 2015, respectively. These charges are included within Interest and Bank Charges on the Consolidated Statement of Operations and Comprehensive Income (Loss).

The Company has accounted for the latest amendment as a modification of debt and has added the costs incurred to amend the agreement, totaling $1,779, to the remaining financing costs related to the previous credit facility. These deferred financing costs are included in Long-term debt on the accompanying Consolidated Balance Sheets as a contra-liability balance, and are amortized through Interest and Bank Charges in the Consolidated Statements of Operations and Comprehensive Income (Loss) over the five year term of the Amended Credit Facility. During the three and nine months ended November 30, 2016, the Company amortized $198 and $591 of these costs, respectively, compared to $279 and $838 for the three and nine months ended November 30, 2015, respectively. The net unamortized balance of these debt issuance costs as of November 30, 2016 was $3,399.

(b)    Florida Mortgage
        
On July 6, 2015, VOXX HQ LLC, the Company’s wholly owned subsidiary, closed on a $9,995 industrial development revenue tax exempt bond under a loan agreement in favor of the Orange County Industrial Development Authority (the “Authority”) to finance the construction of the Company's manufacturing facility and executive offices in Lake Nona, Florida.  Wells Fargo Bank, N.A. ("Wells Fargo") was the purchaser of the bond and U.S. Bank National Association is the trustee under an Indenture of Trust with the Authority. Voxx borrowed the proceeds of the bond purchase from the Authority during construction as a revolving loan, which converted to a permanent mortgage upon completion of the facility in January 2016 (the "Florida Mortgage"). The Company makes principal and interest payments to Wells Fargo, which began March 1, 2016 and will

24

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

continue through March of 2026. The Florida Mortgage bears interest at 70% of 1-month LIBOR plus 1.54% (1.28% at November 30, 2016) and is secured by a first mortgage on the property, a collateral assignment of leases and rents and a guaranty by the Company. The financial covenants of the Florida Mortgage are as defined in the Company’s Amended Credit Facility with Wells Fargo dated April 26, 2016.

The Company incurred debt financing costs totaling approximately $332 as a result of obtaining the Florida Mortgage, which are recorded as deferred financing costs and included in Long-term Debt as a contra-liability balance on the accompanying Consolidated Balance Sheet and are being amortized through Interest and Bank Charges in the Consolidated Statement of Operations and Comprehensive Income (Loss) over the ten year term of the Florida Mortgage. During the three and nine months ended November 30, 2016, the Company amortized $7 and $23 of these costs, respectively, as compared to $5 and $9 for the three and nine months ended November 30, 2015.

On July 20, 2015, the Company entered into an interest rate swap agreement in order to hedge interest rate exposure related to the Florida Mortgage and pays a fixed rate of 3.48% under the swap agreement (See Note 4).

(c)          Euro Asset-Based Lending Obligation
 
Foreign bank obligations include a Euro accounts receivable factoring arrangement, which has a credit limit of up to 60% of eligible non-factored accounts receivable (see Note 9), and a Euro Asset-Based Lending ("ABL") credit facility, which has a credit limit of €8,000 and expires on July 31, 2017 for the Company's subsidiary, VOXX Germany. The rate of interest for these credit facilities is the three month Euribor plus 1.6% (1.91% at November 30, 2016). As of November 30, 2016, the amounts outstanding under these credit facilities, which are payable on demand, do not exceed their respective credit limits.
  
(d)          Schwaiger Mortgage
 
In January 2012, the Company's Schwaiger subsidiary purchased a building, entering into a mortgage note payable. The mortgage note bears interest at 3.75% and will be fully paid by December 2019.
 
(e)    Klipsch Notes

This balance represents a mortgage on a facility included in the assets acquired in connection with the Klipsch acquisition on March 1, 2011 and assumed by Voxx. The balance of this note will be fully paid by the end of Fiscal 2018.

(f)    Woodview Trace Mortgage

During Fiscal 2013, the Company purchased the building housing Klipsch's headquarters in Indianapolis, IN. The interest rate on the mortgage was equal to the 1-month LIBOR plus 2.25% and the Company had an interest rate swap agreement in order to hedge interest rate exposure related to this mortgage, paying a fixed rate of 3.92% under the agreement. In April 2016, the Company repaid this mortgage in conjunction with the amendment of the Company's credit facility (see Note 15(a)) and unwound the interest rate swap (see Note 4).

(g)    Voxx Germany Mortgage

This balance represents a mortgage on the land and building housing Voxx Germany's headquarters in Pulheim, Germany, which was entered into in January 2013. The mortgage bears interest at 2.85%, payable in twenty-six quarterly installments through June 2019.

(h)    Hirschmann Line of Credit

In December 2014, Hirschmann entered into an agreement for a €8,000 working capital line of credit with a financial institution. The line of credit is payable on demand and is mutually cancelable. The rate of interest is

25

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

the three month Euribor plus 2% (2.31% at November 30, 2016). Hirschmann and Voxx Germany are joint and severally liable for the line of credit balance, which is also guaranteed by VOXX International Corporation.

(16)     Other (Expense) Income

Other (expense) income is comprised of the following:

 
 
Three Months Ended
November 30,
 
Nine Months Ended
November 30,
 
 
2016
 
2015
 
2016
 
2015
Foreign currency gain (loss)
 
$
314

 
$
487

 
$
(459
)
 
$
432

Interest income
 
22

 
38

 
124

 
781

Rental income
 
149

 
109

 
498

 
320

Miscellaneous
 
(385
)
 
2

 
(391
)
 
(430
)
Total other, net
 
$
100

 
$
636

 
$
(228
)
 
$
1,103


Included in interest income for the nine months ended November 30, 2015 is income related to notes receivable from EyeLock, Inc. and EyeLock Corporation that were outstanding prior to the acquisition on September 1, 2015 of a majority voting interest in substantially all of the assets and certain liabilities of these entities.

(17)    Foreign Currency

The Company has certain operations in Venezuela. Venezuela is currently experiencing significant political and civil unrest and economic instability and has been troubled with various foreign currency and price controls. The country has experienced high rates of inflation over the last several years. The President of Venezuela has the authority to legislate certain areas by decree, which allows the government to nationalize certain industries or expropriate certain companies and property. These factors may have a negative impact on our business and our financial condition. In 2003, Venezuela created the Commission of Administration of Foreign Currency ("CADIVI") which establishes and administers currency controls and their associated rules and regulations. These controls include creating a fixed exchange rate between the Bolivar Fuerte and the U.S. Dollar, and the ability to restrict the exchange of Bolivar Fuertes for U.S. Dollars and vice versa.

Effective January 1, 2010, according to the guidelines in ASC 830, "Foreign Currency," Venezuela was designated as a hyper-inflationary economy.  A hyper-inflationary economy designation occurs when a country has experienced cumulative inflation of approximately 100 percent or more over a 3 year period.  The hyper-inflationary designation requires the local subsidiary in Venezuela to record all transactions as if they were denominated in U.S. dollars.  The Company transitioned to hyper-inflationary accounting on March 1, 2010 and continues to account for its operation in Venezuela under this method.

From February 2013 through February 2016, the official exchange rate of the Venezuelan Bolivar Fuerte was 6.3 per U.S. dollar; however, since January 2014, the Venezuelan government has created multiple alternative exchange rates designated to be used for the purchase of goods and services deemed non-essential. In February 2015, the Venezuelan government introduced a new currency system, referred to as the Marginal Currency System, or SIMADI rate. This market-based exchange system consisted of a mechanism from which both businesses and individuals were allowed to purchase and sell foreign currency at the price set by the market. The SIMADI rate was used by the Company at November 30, 2015 and was approximately 200 Bolivar Fuerte/$1. In February 2016, the Venezuelan government announced further changes to its foreign currency exchange mechanisms, including a 59% devaluation of the official government exchange rate (re-named DIPRO) from 6.3 bolivars to 10.0 bolivars to the U.S. dollar.  Additionally, the SIMADI exchange rate was replaced by the DICOM exchange rate, a new floating exchange rate for non-essential imports. The Venezuelan government has reported that the DICOM exchange rate will be allowed to float to meet market needs. The Company has evaluated all of the facts and circumstances surrounding its Venezuelan operations and determined that as of November 30, 2016, the DICOM (formerly SIMADI) rate continues to be the appropriate rate to use for remeasuring its Venezuelan subsidiary’s financial statements. As of November 30, 2016, the published DIPRO and DICOM rates offered were 10.0 and 664 bolivars to the U.S. dollar, respectively. Net currency exchange losses of $0 and

26

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

$8 were recorded for the three and nine months ended November 30, 2016, respectively, representing currency devaluation, which are included in Other Income (Expense) on the Consolidated Statements of Operations and Comprehensive Income (Loss).

Our investment in Venezuela mainly consists of $3,714 of properties that are currently being held for investment purposes. During Fiscal 2015, the Company impaired these properties based on an assessment of their recoverability. In reviewing the recoverability of its investment properties, the Company considered the expected cash flows from these properties, the length of time the properties have been held, the volatile market conditions, the Company’s financial condition, and the intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value. No additional impairments were recorded during the three and nine months ended November 30, 2016.

Our automotive business in Venezuela and our ability to obtain U.S. dollars are impacted by the continued economic instability, increasing inflation and currency restrictions imposed by the government. The Company continues to monitor this situation closely and will continue to evaluate its local properties. Further devaluations or regulatory actions could impair the carrying value of these properties.

(18)     Lease Obligations

At November 30, 2016, the Company was obligated under non-cancelable operating leases for equipment, as well as warehouse and office facilities for minimum annual rental payments as follows:

 
Operating
Leases
2017
$
2,714

2018
4,204

2019
902

2020
225

2021
182

Thereafter
357

Total minimum lease payments
$
8,584


The Company has three capital leases with a total lease liability of $1,062 at November 30, 2016. These leases have maturities through Fiscal 2021.

The Company previously leased a facility from its principal stockholder. During the second quarter of Fiscal 2017, the facility was sold to an unrelated third party.

(19)     Capital Structure
 
The Company's capital structure is as follows:
 

27

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

 
 
 
 
Shares Authorized
 
Shares Outstanding
 
 
 
 
Security
 
Par
Value
 
November 30,
2016
 
February 29,
2016
 
November 30,
2016
 
February 29,
2016
 
Voting
Rights per
Share
 
Liquidation
Rights
Preferred Stock
 
$
50.00

 
50,000

 
50,000

 

 

 

 
$50 per share
Series Preferred Stock
 
$
0.01

 
1,500,000

 
1,500,000

 

 

 

 
 
Class A Common Stock
 
$
0.01

 
60,000,000

 
60,000,000

 
21,899,370

 
21,899,370

 
1
 
Ratably with Class B
Class B Common Stock
 
$
0.01

 
10,000,000

 
10,000,000

 
2,260,954

 
2,260,954

 
10
 
Ratably with Class A
Treasury Stock at cost
 
at cost

 
2,168,074

 
2,168,074

 
N/A
 
N/A
 
N/A
 
 


(20)    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, 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.

Effective 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 (See Note 2). We have 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

a loan agreement with EyeLock LLC, executed in conjunction with the acquisition, as well as two convertible promissory notes executed in the second and third quarters of Fiscal 2017, in which the subsidiary may borrow funds from Voxx for working capital purposes (see Note 2). The total outstanding balance of these loans as of November 30, 2016 was $18,947.
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. Prior to September 1, 2015, EyeLock, Inc. and EyeLock Corporation were not required to be consolidated within our consolidated financial statements because we concluded that we were not the primary beneficiary of the entities prior to that time.

Assets and Liabilities of EyeLock LLC
In accordance with ASC 810, the consolidation of EyeLock LLC was treated as an acquisition of assets and liabilities and, therefore, the assets and liabilities of EyeLock LLC were included in our consolidated financial statements at their

28

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

fair value beginning on September 1, 2015. Refer to Note 2 for the fair value of the assets and liabilities of EyeLock LLC on the acquisition date and the discussion of purchase accounting considerations.

 The following table sets forth the carrying values of assets and liabilities of EyeLock LLC that were included on our Consolidated Balance Sheet as of November 30, 2016:

 
 
November 30, 2016
 
February 29, 2016

Assets
 
(unaudited)
 

Current assets:
 
 
 
 
Cash and cash equivalents
 
$
21

 
$
20

Accounts receivable, net
 
340

 
195

Inventory, net
 
395

 
304

Prepaid expenses and other current assets
 
208

 
256

Total current assets
 
964

 
775

Property, plant and equipment, net
 
286

 
302

Intangible assets, net
 
39,953

 
42,249

Other assets
 
108

 

Total assets
 
$
41,311

 
$
43,326

Liabilities and Stockholders' Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
527

 
$
746

Accrued expenses and other current liabilities
 
2,570

 
1,103

Total current liabilities
 
3,097

 
1,849

Long-term debt
 
18,947

 
9,104

Other long-term liabilities
 
1,200

 
1,200

Total liabilities
 
23,244

 
12,153

Commitments and contingencies
 
 
 
 
Partners' equity:
 
 
 
 
Capital
 
40,628

 
39,841

Retained earnings
 
(22,561
)
 
(8,668
)
Total partners' equity
 
18,067

 
31,173

Total liabilities and stockholders' equity
 
$
41,311

 
$
43,326



Revenue and Expenses of EyeLock LLC
The following table sets forth the revenues and expenses of EyeLock LLC that were included in our Consolidated Statements of Operations for the three and nine months ended November 30, 2016 and 2015, respectively:


29

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)

 
 
Three months ended
 
Nine months ended
 
 
November 30, 2016
 
November 30, 2016
Net sales
 
$
100

 
$
211

Cost of sales
 
37

 
67

Gross profit
 
63

 
144

Operating expenses:
 
 
 
 
Selling
 
553

 
1,639

General and administrative
 
1,759

 
5,056

Engineering and technical support
 
2,154

 
6,248

Total operating expenses
 
4,466

 
12,943

Operating loss
 
(4,403
)
 
(12,799
)
Interest and bank charges
 
(441
)
 
(1,092
)
Loss before income taxes
 
(4,844
)
 
(13,891
)
Income tax expense
 

 

Net loss
 
$
(4,844
)
 
$
(13,891
)
 
 
Three months ended
 
Nine months ended
 
 
November 30, 2015
 
November 30, 2015
Net sales
 
72

 
72

Cost of sales
 
11

 
11

Gross profit
 
61

 
61

Operating expenses:
 
 
 
 
Selling
 
359

 
359

General and administrative
 
1,779

 
1,779

Engineering and technical support
 
2,142

 
2,142

Total operating expenses
 
4,280

 
4,280

Operating loss
 
(4,219
)
 
(4,219
)
Interest and bank charges
 
(117
)
 
(117
)
Loss before income taxes
 
(4,336
)