| Variable Interest Entity | (20) 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 25, 2022, this promissory note was amended and restated to allow EyeLock LLC to borrow up to $ 71,200 . 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 September 30, 2023. 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 $ 66,761 as of May 31, 2023. 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, Voxx's President, and 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 a re deducted from the annual fee. The value of the put/call arrangement was not significant at May 31, 2023 . The quarterly installment payment owed by GalvanEyes of $ 1,250 f or the three months ended May 31, 2023 , remains unpaid and is currently past due. GalvanEyes and the Company are considering renegotiating the distribution agreement and have agreed to defer the payments due on May 31, 2023 and August 31, 2023 to February 29, 2024, pending the resolution of the renegotiation. The past due payment is recorded as a receivable due from GalvanEyes at May 31, 2023 on the accompanying Consolidated Balance Sheet. 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. As of May 31, 2023 and February 28, 2023, the balance of the liability was $ 8,567 and $ 7,317 , respectively. 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, 2023 and February 28, 2023:
May 31, February 28,
Assets (unaudited)
Current assets:
Cash and cash equivalents $ — $ 158
Accounts receivable, net 8 520
Inventory, net 1,945 1,836
Receivables from vendors 4 1
Due from GalvanEyes LLC 1,250 —
Prepaid expenses and other current assets 77 92
Total current assets 3,284 2,607
Property, plant and equipment, net 7 9
Intangible assets, net 1,718 1,786
Other assets 6 8
Total assets $ 5,015 $ 4,410
Liabilities and Partners' Deficit
Current liabilities:
Accounts payable $ 810 $ 864
Interest payable to VOXX 15,227 14,803
Accrued expenses and other current liabilities 361 296
Due to VOXX 66,761 66,175
Total current liabilities 83,159 82,138
Prepaid ownership interest in EyeLock LLC due to GalvanEyes LLC 8,567 7,317
Other long-term liabilities 1,200 1,200
Total liabilities 92,926 90,655
Commitments and contingencies
Partners' deficit:
Capital 41,416 41,416
Retained losses ( 129,327 ) ( 127,661 )
Total partners' deficit ( 87,911 ) ( 86,245 )
Total liabilities and partners' deficit $ 5,015 $ 4,410 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 for the three months ended May 31, 2023 and 2022:
For the three months
2023 2022
Net sales $ 100 $ 103
Cost of sales 52 78
Gross profit 48 25
Operating expenses:
Selling 189 165
General and administrative 439 373
Engineering and technical support 658 869
Total operating expenses 1,286 1,407
Operating loss ( 1,238 ) ( 1,382 )
Other expense:
Interest and bank charges ( 428 ) ( 433 )
Other, net — —
Total other expense, net ( 428 ) ( 433 )
Loss before income taxes ( 1,666 ) ( 1,815 )
Income tax expense — —
Net loss $ ( 1,666 ) $ ( 1,815 ) |
