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
. In August 2016, the Company issued a convertible promissory note to EyeLock LLC, allowing the entity to borrow up to
$6,000
in additional funds. The promissory note is convertible at the sole option of Voxx into shares of EyeLock LLC. Both the loan agreement and convertible promissory note bear interest at
10%
and can be used for working capital purposes related to new business opportunities. Amounts outstanding under both agreements are due on September 1, 2017, include customary events of default and are collateralized by all of the property of Eyelock LLC.
Net sales attributable to EyeLock LLC in the Company's consolidated statements of operations for the
three and six months ended
August 31, 2016
were approximately
$64
and
$111
, respectively.
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:
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 year ended February 29, 2016.
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
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 six months ended
August 31, 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 August 31,
|
|
Six Months Ended August 31,
|
|
|
2015
|
|
2015
|
Net sales:
|
|
|
|
|
As reported
|
|
$
|
154,174
|
|
|
$
|
318,557
|
|
Pro forma
|
|
154,284
|
|
|
319,672
|
|
Net loss attributable to Voxx International Corporation:
|
|
|
|
|
As reported
|
|
$
|
(4,394
|
)
|
|
$
|
(5,108
|
)
|
Pro forma
|
|
(6,865
|
)
|
|
(10,212
|
)
|
Basic income per share:
|
|
|
|
|
As reported
|
|
$
|
(0.18
|
)
|
|
$
|
(0.21
|
)
|
Pro forma
|
|
(0.28
|
)
|
|
(0.42
|
)
|
Diluted income per share:
|
|
|
|
|
As reported
|
|
$
|
(0.18
|
)
|
|
$
|
(0.21
|
)
|
Pro forma
|
|
(0.28
|
)
|
|
(0.42
|
)
|
Average shares - basic
|
|
24,193,606
|
|
|
24,173,733
|
|
Average shares - diluted
|
|
24,193,606
|
|
|
24,173,733
|
|
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 March 1, 2014. These adjustments include costs such as an estimate for amortization associated with intangible assets acquired, the adjustment of interest expense, as well as rent and utility expenses on debt and property leases not assumed. 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
August 31,
|
|
Six Months Ended
August 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Weighted-average common shares outstanding
|
|
24,160,324
|
|
|
24,193,606
|
|
|
24,160,324
|
|
|
24,173,733
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, warrants and restricted stock
|
|
82,123
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted-average common shares and potential common shares outstanding
|
|
24,242,447
|
|
|
24,193,606
|
|
|
24,160,324
|
|
|
24,173,733
|
|
Restricted stock, stock options and warrants of
328,576
and
403,645
for the
three months ended
August 31, 2016
and
2015
, respectively, and
460,869
and
395,690
for the
six months ended
August 31, 2016
and
2015
, respectively, were not included in the net income (loss) per diluted share calculation because the exercise price of these restricted stock, stock
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
options and warrants was greater than the average market price of the Company’s common stock during these periods or their inclusion would have been anti-dilutive.
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
August 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Total
|
|
Level 1
|
|
Level 2
|
Cash and cash equivalents:
|
|
|
|
|
|
Cash and money market funds
|
$
|
4,851
|
|
|
$
|
4,851
|
|
|
$
|
—
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Designated for hedging
|
$
|
(523
|
)
|
|
$
|
—
|
|
|
$
|
(523
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
Trading securities
|
$
|
4,007
|
|
|
$
|
4,007
|
|
|
$
|
—
|
|
Available-for-sale securities
|
12
|
|
|
12
|
|
|
—
|
|
Other investments at amortized cost (a)
|
6,295
|
|
|
—
|
|
|
—
|
|
Total investment securities
|
$
|
10,314
|
|
|
$
|
4,019
|
|
|
$
|
—
|
|
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
August 31, 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)
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
August 31, 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 the Amended Credit Facility, expired in April 2016 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 in April 2016 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
six months ended
August 31, 2016
. The remaining 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 - 6 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
$37
and
$(13)
for the
three and six months ended
August 31, 2016
, respectively, and
$(65)
for
$(13)
the
three and six months ended
August 31, 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
August 31, 2016
and
February 29, 2016
of derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets and Liabilities
|
|
|
|
|
Fair Value
|
|
|
Account
|
|
August 31, 2016
|
|
February 29, 2016
|
Designated derivative instruments
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Accrued expenses and other current liabilities
|
|
$
|
(120
|
)
|
|
$
|
(98
|
)
|
|
|
Prepaid expenses and other current assets
|
|
271
|
|
|
989
|
|
Interest rate swap agreements
|
|
Other long term liabilities
|
|
(678
|
)
|
|
(862
|
)
|
|
|
Prepaid expenses and other current assets
|
|
4
|
|
|
1
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
(523
|
)
|
|
$
|
30
|
|
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, the Company entered into forward foreign currency contracts, which have a current outstanding notional value of
$20,609
and are designated as cash flow hedges at
August 31, 2016
. The current outstanding notional values of the Company's two interest rate swaps at
August 31, 2016
are
$7,500
and
$9,350
. 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 six months ended
August 31, 2016
and
2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
August 31, 2016
|
|
August 31, 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
|
$
|
222
|
|
|
$
|
98
|
|
|
$
|
37
|
|
|
$
|
(596
|
)
|
|
$
|
422
|
|
|
$
|
(13
|
)
|
Interest rate swaps
|
$
|
(107
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
73
|
|
|
$
|
(114
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
August 31, 2015
|
|
August 31, 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
|
$
|
(122
|
)
|
|
$
|
887
|
|
|
$
|
(65
|
)
|
|
$
|
369
|
|
|
$
|
2,174
|
|
|
$
|
(13
|
)
|
Interest rate swaps
|
$
|
(299
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(347
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
(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
August 31, 2016
,
no
foreign currency contracts originally designated for hedge accounting were de-designated or terminated.
(5)
Investment Securities
As of
August 31, 2016
and
February 29, 2016
, the Company had the following investments:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 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
|
$
|
4,007
|
|
|
$
|
—
|
|
|
$
|
4,007
|
|
|
$
|
3,917
|
|
|
$
|
—
|
|
|
$
|
3,917
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cellstar
|
—
|
|
|
12
|
|
|
12
|
|
|
—
|
|
|
18
|
|
|
18
|
|
Total Marketable Securities
|
4,007
|
|
|
12
|
|
|
4,019
|
|
|
3,917
|
|
|
18
|
|
|
3,935
|
|
Other Investments
|
6,295
|
|
|
—
|
|
|
6,295
|
|
|
6,271
|
|
|
—
|
|
|
6,271
|
|
Total Investment Securities
|
$
|
10,302
|
|
|
$
|
12
|
|
|
$
|
10,314
|
|
|
$
|
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. The Company considers numerous factors, on a case-by-case basis, in evaluating whether the decline in market value of an available-for-sale security below cost is other-than-temporary. Such factors include, but are not limited to, (i) the length of time and the extent to which the market value has been less than cost; (ii) the financial condition and the near-term prospects of the issuer of the investment; and (iii) whether the Company's intent to retain the investment for the period of time is sufficient to allow for any anticipated recovery in market value.
No
other-than-temporary losses were incurred by the Company during the
three and six months ended
August 31, 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
August 31, 2016
, the Company's investments in Rx Networks and 360fly, Inc. (formerly EyeSee360, Inc.) totaled
$1,842
and
$4,453
, respectively, or a total investment balance of
$6,295
. We held
13.8%
and
4.7%
of the outstanding shares of Rx Networks and 360fly, Inc., respectively, at
August 31, 2016
. No additional investment was made in either of these companies during the
three and six months ended
August 31, 2016
.
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(6)
Accumulated Other Comprehensive Income (Loss)
The Company’s accumulated other comprehensive losses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange 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 income (loss) before reclassifications
|
|
3,516
|
|
|
(8
|
)
|
|
(52
|
)
|
|
(334
|
)
|
|
3,122
|
|
Reclassified from accumulated other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(178
|
)
|
|
(178
|
)
|
Net current-period other comprehensive income (loss)
|
|
3,516
|
|
|
(8
|
)
|
|
(52
|
)
|
|
(512
|
)
|
|
2,944
|
|
Balance at August 31, 2016
|
|
$
|
(35,121
|
)
|
|
$
|
(89
|
)
|
|
$
|
(2,154
|
)
|
|
$
|
(409
|
)
|
|
$
|
(37,773
|
)
|
During the
three and six months ended
August 31, 2016
, the Company recorded tax (benefit) expense 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
$38
and
$(291)
, respectively.
Included in foreign exchange gains for the
six months ended
August 31, 2016
was
$949
, 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
$2,166
resulting from the remeasurement of an intercompany loan, payable in Euros, which is of a long-term investment nature. Remaining gains or losses pertain to the remeasurement 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 exchange gains in Other Comprehensive Income (Loss) for the
six months ended
August 31, 2016
, the Company recorded gains of
$3,271
related to the Euro,
$270
for the Canadian dollar and a loss of
$25
related to various other currencies. These adjustments were caused by the weakening of the U.S. dollar against the Euro and Canadian dollar by approximately
3%
for the
six months ended
August 31, 2016
.
(7)
Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
August 31,
|
|
|
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
|
|
1,769
|
|
|
—
|
|
Non-cash acquisition of long-term investment
|
|
—
|
|
|
1,453
|
|
Cash paid during the period:
|
|
|
|
|
Interest (excluding bank charges)
|
|
$
|
1,320
|
|
|
$
|
1,131
|
|
Income taxes (net of refunds)
|
|
$
|
3,086
|
|
|
$
|
561
|
|
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(8)
Accounting for Stock-Based Compensation
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
August 31, 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
August 31, 2016
.
During the
three and six months ended
August 31, 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
August 31, 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 August 31, 2016
|
|
121,250
|
|
|
$
|
7.76
|
|
|
1.13
|
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 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
six months ended
August 31, 2016
:
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 August 31, 2016
|
437,443
|
|
|
$
|
6.99
|
|
During the
three and six months ended
August 31, 2016
, the Company recorded
$188
and
$363
in stock-based compensation related to restricted stock awards. As of
August 31, 2016
, there was
$1,732
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 six months ended
August 31, 2016
, net of discounts, were
$62,811
and
$121,436
, respectively, compared to
$62,108
and
$127,149
for the
three and six months ended
August 31, 2015
, respectively.
(10)
Research and Development
Expenditures for research and development are charged to expense as incurred. Such expenditures amounted to
$8,673
and
$18,870
for the
three and six months ended
August 31, 2016
, respectively, compared to
$5,939
and
$10,897
for the
three and six months ended
August 31, 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 six months ended
August 31, 2016
, the Company recorded
$1,074
and
$1,530
, respectively, of development service reimbursements as a reduction of research and development expense based upon the achievement of a milestone, as compared to
$1,450
and
$3,226
, respectively, for the
three and six months ended
August 31, 2015
.
(11)
Goodwill and
Intangible Assets
The change in goodwill by segment is as follows:
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
|
1,242
|
|
Balance at August 31, 2016
|
$
|
59,058
|
|
|
|
Gross carrying amount at August 31, 2016
|
$
|
59,058
|
|
Accumulated impairment charge
|
—
|
|
Net carrying amount at August 31, 2016
|
$
|
59,058
|
|
|
|
Premium Audio:
|
|
Beginning balance at March 1, 2016
|
$
|
46,533
|
|
Activity during the period
|
—
|
|
Balance at August 31, 2016
|
$
|
46,533
|
|
|
|
Gross carrying amount at August 31, 2016
|
$
|
78,696
|
|
Accumulated impairment charge
|
(32,163
|
)
|
Net carrying amount at August 31, 2016
|
$
|
46,533
|
|
|
|
Total Goodwill, net
|
$
|
105,591
|
|
Note: The Company's Consumer Accessories segment did not carry a goodwill balance at
August 31, 2016
or
February 29, 2016
.
At
August 31, 2016
, intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Total Net
Book
Value
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
65,848
|
|
|
$
|
26,003
|
|
|
$
|
39,845
|
|
Trademarks/Tradenames
|
|
415
|
|
|
392
|
|
|
23
|
|
Developed technology
|
|
31,290
|
|
|
2,721
|
|
|
28,569
|
|
Patents
|
|
8,795
|
|
|
4,537
|
|
|
4,258
|
|
License
|
|
1,400
|
|
|
1,400
|
|
|
—
|
|
Contract
|
|
2,141
|
|
|
1,673
|
|
|
468
|
|
Total finite-lived intangible assets
|
|
$
|
109,889
|
|
|
$
|
36,726
|
|
|
73,163
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
108,695
|
|
Total net intangible assets
|
|
|
|
|
|
$
|
181,858
|
|
At
February 29, 2016
, intangible assets consisted of the following:
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
$2,047
and
$4,098
for the
three and six months ended
August 31, 2016
, respectively, and
$1,280
and
$2,555
for the
three and six months ended
August 31, 2015
, respectively. The estimated aggregate amortization expense for all amortizable intangibles for each of the succeeding years ending August 31,
2021
is as follows:
|
|
|
|
|
|
Fiscal Year
|
|
Amount
|
2018
|
|
$
|
8,123
|
|
2019
|
|
7,983
|
|
2020
|
|
7,877
|
|
2021
|
|
7,863
|
|
2022
|
|
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 three and six months ended August 31, 2015. In addition, the Company determined that the goodwill of the reporting unit was not impaired as of August 31, 2015. There were no triggering events during the
three and six months ended
August 31, 2016
, therefore, management believes the carrying values of its intangible assets is not impaired.
(12)
Equity Investment
As of
August 31, 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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
2016
|
|
February 29,
2016
|
Current assets
|
|
$
|
45,264
|
|
|
$
|
44,097
|
|
Non-current assets
|
|
5,765
|
|
|
5,658
|
|
Current liabilities
|
|
7,113
|
|
|
5,857
|
|
Members' equity
|
|
43,916
|
|
|
43,898
|
|
|
|
Six Months Ended
August 31,
|
|
|
2016
|
|
2015
|
Net sales
|
|
$
|
47,864
|
|
|
$
|
47,232
|
|
Gross profit
|
|
15,093
|
|
|
14,301
|
|
Operating income
|
|
6,686
|
|
|
6,126
|
|
Net income
|
|
6,706
|
|
|
6,150
|
|
The Company's share of income from ASA was
$1,545
and
$3,353
for the
three and six months ended
August 31, 2016
, respectively and
$1,457
and
$3,075
for the
three and six months ended
August 31, 2015
, respectively.
(13)
Income Taxes
For the
three and six months ended
August 31, 2016
, the Company recorded an income tax benefit of
$2,261
and
$3,653
, respectively, which includes a discrete tax provision of
$64
and
$166
, respectively. The calculation of the overall tax 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 tax provision for the
three and six months ended
August 31, 2016
relates to the accrual of interest for unrecognized tax benefits. For the
three and six months ended
August 31, 2015
, the Company recorded an income tax benefit of
$2,453
and
$2,177
, respectively.
The effective tax rate for the
three and six months ended
August 31, 2016
was a benefit of
236.3%
and
43.1%
, respectively, compared to a benefit of
35.8%
and
29.9%
, respectively, in the comparable prior periods. The effective tax rate for the
three and six months ended
August 31, 2016
is higher than the U.S. statutory rate of
35%
primarily due to an income tax provision resulting from the increase in deferred tax liabilities related to indefinite-lived intangible assets.
At
August 31, 2016
, the Company had an uncertain tax position liability of
$5,142
, including interest and penalties. The unrecognized tax benefits include amounts related to various U.S. federal, state and local and foreign tax issues.
(14)
Inventory
Inventories by major category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
2016
|
|
February 29,
2016
|
Raw materials
|
|
$
|
50,629
|
|
|
$
|
46,941
|
|
Work in process
|
|
3,399
|
|
|
4,457
|
|
Finished goods
|
|
106,805
|
|
|
92,630
|
|
Inventory, net
|
|
$
|
160,833
|
|
|
$
|
144,028
|
|
(15)
Financing Arrangements
The Company has the following financing arrangements:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
2016
|
|
February 29,
2016
|
Debt
|
|
|
|
|
Domestic credit facility (a)
|
|
$
|
87,469
|
|
|
$
|
72,300
|
|
Florida mortgage (b)
|
|
9,350
|
|
|
9,223
|
|
Euro asset-based lending obligation (c)
|
|
4,429
|
|
|
5,412
|
|
Schwaiger mortgage (d)
|
|
801
|
|
|
892
|
|
Klipsch note (e)
|
|
182
|
|
|
262
|
|
Woodview Trace mortgage (f)
|
|
—
|
|
|
5,720
|
|
Voxx Germany mortgage (g)
|
|
4,437
|
|
|
4,710
|
|
Hirschmann line of credit (h)
|
|
1,000
|
|
|
998
|
|
Total debt
|
|
107,668
|
|
|
99,517
|
|
Less: current portion of long-term debt
|
|
10,840
|
|
|
8,826
|
|
Long-term debt before debt issuance costs
|
|
96,828
|
|
|
90,691
|
|
Debt issuance costs
|
|
3,892
|
|
|
2,522
|
|
Total long-term debt
|
|
$
|
92,936
|
|
|
$
|
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 shall be repayable in consecutive quarterly installments of
$938
commencing on July 1, 2016 through April 1, 2020. All other amounts outstanding under the Amended Credit Facility will mature and become due on April 26, 2021. 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.
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
August 31, 2016
, the weighted average interest rate on the facility was
2.92%
.
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
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
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
August 31, 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
August 31, 2016
,
$73,407
was outstanding under the revolving credit facility and
$14,062
was outstanding under the term loan. Charges incurred on the unused portion of the Amended Credit Facility during the
three and six months ended
August 31, 2016
totaled
$73
and
$122
, respectively, compared to
$77
and
$165
during the
three and six months ended
August 31, 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
$1,769
, 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 six months ended
August 31, 2016
, the Company amortized
$198
and
$394
of these costs, respectively, compared to
$279
and
$559
for the
three and six months ended
August 31, 2015
, respectively. The net unamortized balance of these debt issuance costs as of
August 31, 2016
was
$3,597
.
(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 continue through March of 2026. The Florida Mortgage bears interest at
70%
of 1-month LIBOR plus
1.54%
(
1.91%
at
August 31, 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 six months ended
August 31, 2016
, the Company amortized
$8
and
$16
of these costs, respectively, as compared to
$3
for the
three months ended
August 31, 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).
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(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%
(
1.30%
at
August 31, 2016
). As of
August 31, 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 the three month Euribor plus
2%
(
1.70%
at
August 31, 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
August 31,
|
|
Six Months Ended
August 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Foreign currency (loss) gain
|
|
$
|
(67
|
)
|
|
$
|
(398
|
)
|
|
$
|
(773
|
)
|
|
$
|
(55
|
)
|
Interest income
|
|
77
|
|
|
708
|
|
|
102
|
|
|
743
|
|
Rental income
|
|
176
|
|
|
107
|
|
|
349
|
|
|
211
|
|
Miscellaneous
|
|
(2
|
)
|
|
(226
|
)
|
|
(6
|
)
|
|
(432
|
)
|
Total other, net
|
|
$
|
184
|
|
|
$
|
191
|
|
|
$
|
(328
|
)
|
|
$
|
467
|
|
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
Included in interest income for the
three and six months ended
August 31, 2015
is income related to notes receivable from EyeLock, Inc. that were outstanding prior to the acquisition on September 1, 2015 of substantially all of the assets and certain liabilities of this entity.
(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
August 31, 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
August 31, 2016
, the DICOM (formerly SIMADI) rate continues to be the appropriate rate to use for remeasuring its Venezuelan subsidiary’s financial statements. As of
August 31, 2016
, the published DIPRO and DICOM rates offered were
10.0
and
645
bolivars to the U.S. dollar, respectively. Net currency exchange losses of
$0
and
$8
were recorded for the
three and six months ended
August 31, 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
$3,748
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 six months ended
August 31, 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
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
At
August 31, 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
|
$
|
3,144
|
|
2018
|
2,294
|
|
2019
|
782
|
|
2020
|
224
|
|
2021
|
190
|
|
Thereafter
|
370
|
|
Total minimum lease payments
|
$
|
7,004
|
|
The Company has three capital leases with a total lease liability of
$1,231
at
August 31, 2016
. These leases have maturities through Fiscal 2021.
The Company previously leased a facility from its principal stockholder. During the three months ended
August 31, 2016
, the facility was sold to an unrelated third party.
(19)
Capital Structure
The Company's capital structure is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Authorized
|
|
Shares Outstanding
|
|
|
|
|
Security
|
|
Par
Value
|
|
August 31,
2016
|
|
February 29,
2016
|
|
August 31,
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.
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
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 a convertible promissory note executed in August 2016, in which the subsidiary may borrow funds from Voxx for working capital purposes (see Note 2). Both loans bear interest at
10%
and the total outstanding balance of these loans as of
August 31, 2016
was
$16,033
.
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 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
August 31, 2016
:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2016
|
|
February 29, 2016
|
|
Assets
|
|
(
unaudited
)
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16
|
|
|
$
|
20
|
|
Accounts receivable, net
|
|
240
|
|
|
195
|
|
Inventory, net
|
|
306
|
|
|
304
|
|
Prepaid expenses and other current assets
|
|
180
|
|
|
256
|
|
Total current assets
|
|
742
|
|
|
775
|
|
Property, plant and equipment, net
|
|
307
|
|
|
302
|
|
Intangible assets, net
|
|
40,718
|
|
|
42,249
|
|
Other assets
|
|
124
|
|
|
—
|
|
Total assets
|
|
$
|
41,891
|
|
|
$
|
43,326
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
460
|
|
|
$
|
746
|
|
Accrued expenses and other current liabilities
|
|
1,547
|
|
|
1,103
|
|
Total current liabilities
|
|
2,007
|
|
|
1,849
|
|
Long-term debt
|
|
16,033
|
|
|
9,104
|
|
Other long-term liabilities
|
|
1,200
|
|
|
1,200
|
|
Total liabilities
|
|
19,240
|
|
|
12,153
|
|
Commitments and contingencies
|
|
|
|
|
Partners' equity:
|
|
|
|
|
Capital
|
|
40,366
|
|
|
39,841
|
|
Retained earnings
|
|
(17,715
|
)
|
|
(8,668
|
)
|
Total partners' equity
|
|
22,651
|
|
|
31,173
|
|
Total liabilities and stockholders' equity
|
|
$
|
41,891
|
|
|
$
|
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 six months ended
August 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
August 31,
|
|
Six Months Ended
August 31,
|
Net sales
|
|
$
|
64
|
|
|
$
|
111
|
|
Cost of sales
|
|
21
|
|
|
30
|
|
Gross profit
|
|
43
|
|
|
81
|
|
Operating expenses:
|
|
|
|
|
Selling
|
|
416
|
|
|
1,086
|
|
General and administrative
|
|
1,611
|
|
|
3,297
|
|
Engineering and technical support
|
|
2,038
|
|
|
4,094
|
|
Total operating expenses
|
|
4,065
|
|
|
8,477
|
|
Operating loss
|
|
(4,022
|
)
|
|
(8,396
|
)
|
Interest and bank charges
|
|
(376
|
)
|
|
(651
|
)
|
Loss before income taxes
|
|
(4,398
|
)
|
|
(9,047
|
)
|
Income tax expense
|
|
—
|
|
|
—
|
|
Net loss
|
|
$
|
(4,398
|
)
|
|
$
|
(9,047
|
)
|
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(21)
Segment Reporting
The Company operates in three distinct segments based upon our products and our internal organizational structure. The three operating segments, which are also the Company's reportable segments, are Automotive, Premium Audio and Consumer Accessories.
Our Automotive segment designs, manufactures, distributes
and markets rear-seat entertainment devices, satellite radio products, automotive security, remote start systems, digital TV tuners, mobile antennas, mobile multimedia devices, aftermarket/OE-styled radios, car link-smartphone telematics applications, collision avoidance systems and location-based services.
Our Premium Audio segment designs, manufactures, distributes
and markets home theater systems, high-end loudspeakers, outdoor speakers, iPod/computer speakers, business music systems, cinema speakers, flat panel speakers, Bluetooth speakers, soundbars, headphones and DLNA (Digital Living Network Alliance) compatible devices.
Our Consumer Accessories segment designs and markets remote controls; rechargeable battery packs; wireless and Bluetooth speakers; karaoke products; action cameras; iris identification and security related products; personal sound amplifiers; infant/nursery products; and A/V connectivity, portable/home charging, reception, and digital consumer products.
The accounting principles applied at the consolidated financial statement level are generally the same as those applied at the operating segment level and there are no material intersegment sales. The segments are allocated interest expense, based upon a pre-determined formula, which utilizes a percentage of each operating segment's intercompany balance, which is offset in Corporate/Eliminations.
Segment data for each of the Company's segments are presented below:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
Premium Audio
|
|
Consumer Accessories
|
|
Corporate/ Eliminations
|
|
Total
|
Three Months Ended August 31, 2016
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
79,885
|
|
|
$
|
34,902
|
|
|
$
|
44,271
|
|
|
$
|
204
|
|
|
$
|
159,262
|
|
Equity in income of equity investees
|
1,545
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,545
|
|
Interest expense and bank charges
|
892
|
|
|
1,294
|
|
|
1,151
|
|
|
(1,467
|
)
|
|
1,870
|
|
Depreciation and amortization expense
|
1,846
|
|
|
865
|
|
|
1,167
|
|
|
675
|
|
|
4,553
|
|
Income (loss) before income taxes
|
4,493
|
|
|
1,494
|
|
|
(4,811
|
)
|
|
(2,133
|
)
|
|
(957
|
)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, 2015
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
84,316
|
|
|
$
|
30,215
|
|
|
$
|
39,123
|
|
|
$
|
520
|
|
|
$
|
154,174
|
|
Equity in income of equity investees
|
1,457
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,457
|
|
Interest expense and bank charges
|
1,493
|
|
|
2,258
|
|
|
1,305
|
|
|
(3,431
|
)
|
|
1,625
|
|
Depreciation and amortization expense
|
1,867
|
|
|
860
|
|
|
330
|
|
|
501
|
|
|
3,558
|
|
Income (loss) before income taxes
|
3,883
|
|
|
(8,087
|
)
|
|
(2,976
|
)
|
|
333
|
|
|
(6,847
|
)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31, 2016
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
161,291
|
|
|
$
|
67,035
|
|
|
$
|
85,957
|
|
|
$
|
435
|
|
|
$
|
314,718
|
|
Equity in income of equity investees
|
3,353
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,353
|
|
Interest expense and bank charges
|
1,845
|
|
|
2,488
|
|
|
2,172
|
|
|
(2,940
|
)
|
|
3,565
|
|
Depreciation and amortization expense
|
3,708
|
|
|
1,731
|
|
|
2,322
|
|
|
1,343
|
|
|
9,104
|
|
Income (loss) before income taxes
|
5,959
|
|
|
971
|
|
|
(10,360
|
)
|
|
(5,039
|
)
|
|
(8,469
|
)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31, 2015
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
174,291
|
|
|
$
|
59,538
|
|
|
$
|
83,863
|
|
|
$
|
865
|
|
|
$
|
318,557
|
|
Equity in income of equity investees
|
3,075
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,075
|
|
Interest expense and bank charges
|
2,982
|
|
|
4,490
|
|
|
2,711
|
|
|
(6,991
|
)
|
|
3,192
|
|
Depreciation and amortization expense
|
3,674
|
|
|
1,727
|
|
|
655
|
|
|
999
|
|
|
7,055
|
|
Income (loss) before income taxes
|
9,254
|
|
|
(10,525
|
)
|
|
(5,281
|
)
|
|
(733
|
)
|
|
(7,285
|
)
|
(22)
Contingencies
The Company is currently, and has in the past been a party to various routine legal proceedings incident to the ordinary course of business. If management determines, based on the underlying facts and circumstances, that it is probable a loss will result from a litigation contingency and the amount of the loss can be reasonably estimated, the estimated loss is accrued for. The Company believes its outstanding litigation matters disclosed below will not have a material adverse effect on the Company's financial statements, individually or in the aggregate; however, due to the uncertain outcome of these matters, the Company disclosed specific matters as outlined below.
The products the Company sells are continually changing as a result of improved technology. As a result, although the Company and its suppliers attempt to avoid infringing known proprietary rights, the Company may be subject to legal proceedings and claims for alleged infringement by patent, trademark or other intellectual property owners. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, or require the Company to either enter into royalty or license agreements which are not advantageous to the Company, or pay material amounts of damages.
Securities and Derivative Proceedings:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
On July 8, 2014, a purported class action suit, Brian Ford v. VOXX International Corporation et. al., was filed against us and two of our present executive officers (collectively, the "Defendants") in the U.S. District Court for the Eastern District of New York. On July 16, 2015, the judge approved the designation of the lead plaintiffs and counsel for the plaintiffs. On September 28, 2015, the plaintiff filed an amended complaint which alleges the same claims as the original complaint (that the Defendants violated the federal securities laws by making false or misleading statements which artificially inflated the price of our stock and that purchasers of our stock during the relevant period were damaged when the stock price later declined) under Sections 10(a) and 20(a) of the Securities Exchange Act but expands the class period by five months, from January 9, 2013 through May 14, 2014. According to the allegations contained in the amended complaint, the defendants knew or should have known, by virtue of their roles and positions, that their statements were false and misleading and the Defendants were purportedly motivated because their conduct enabled Company insiders to sell VOXX stock at inflated prices. On November 25, 2015, the Defendants moved to dismiss the Amended Complaint for failure to state a claim. On July 22, 2016, the judge granted the Defendants' motion to dismiss the Amended Complaint. The plaintiffs did not file a Second Amendment Complaint by the Court-ordered deadline of October 4, 2016.
(23)
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenues from Contracts with Customers (Topic 606)," which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements comprehensive information about the nature, amounts, timing and uncertainty of revenue and cash flows arising from a company's contracts with customers. In August, 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.” The amendment in this ASU defers the effective date of ASU 2014-09 for all entities for one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods with that reporting period. Retrospective or modified retrospective application of the accounting standard is required. The Company is currently evaluating the impact of the standard on the Company's Consolidated Financial Statements and disclosures.
In March 2016, the FASB issued ASU 2016-08,
"
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)." This update provides clarifying guidance regarding the application of ASU 2014-09 when another party, along with the reporting entity, is involved in providing a good or a service to a customer. In these circumstances, an entity is required to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing," which clarifies the identification of performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU 2016-11, "Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 Emerging Issues Task Force Meeting (“EITF”)," which rescinds SEC paragraphs pursuant to SEC staff announcements. These rescissions include changes to topics pertaining to accounting for shipping and handling fees and costs and accounting for consideration given by a vendor to a customer. In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients," which provides clarifying guidance in certain narrow areas and adds some practical expedients. The effective dates for these ASU’s are the same as the effective date for ASU No. 2014-09, for annual and interim periods beginning after December 15, 2017. The Company is reviewing its policies and processes to ensure compliance with the requirements in this update with regard to its operations.
In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory.” The new standard amends the guidelines for the measurement of inventory from lower of cost or market to the lower of cost and net realizable value (NRV). NRV is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. Under existing standards, inventory is measured at lower of cost or market, which requires the consideration of replacement cost, NRV and NRV less an amount that approximates a normal profit
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
margin. This ASU eliminates the requirement to determine and consider replacement cost or NRV less an approximately normal profit margin for inventory measurement. The new standard is effective prospectively for fiscal years beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact, if any, of adopting this new accounting guidance on our results of operations and financial position.
In January 2016, the FASB issued ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities," which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This amendment requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). This standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact, if any, the adoption of ASU 2016-01 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This amendment will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company has not yet determined the effect of the adoption of this standard on the Company’s consolidated financial position and results of operations.
In March 2016, the FASB issued ASU 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force)." ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 is effective for the Company for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect that the adoption of ASU 2016-05 will have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-07, "Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting," which eliminates the retroactive adjustments to an investment upon it qualifying for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence by the investor. ASU 2016-07 requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment qualifies for equity method accounting. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2016-07 is not expected to have a material effect on the Company's consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments," which addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.