Notes to Unaudited 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 as defined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 270 for interim financial information, and in accordance with accounting principles generally accepted in the United States of America (“GAAP”), 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, changes in stockholders’ equity, 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 unaudited 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, 2020. Certain amounts in the prior year have been reclassified to conform to the current year presentation.
We operate in three reportable segments: Automotive Electronics, Consumer Electronics, and Biometrics. See Note 23 for the Company's segment reporting disclosures.
Directed LLC and Directed Electronics Canada, Inc. Acquisition
On July 1, 2020, the Company completed the acquisition of certain assets and liabilities, which comprise the aftermarket vehicle remote start and security systems and connected car solutions (telematics) businesses from Directed LLC and Directed Electronics Canada Inc. (collectively, with Directed LLC, “Directed”) via an asset purchase agreement. The acquired assets include inventory, accounts receivable, certain fixed assets, IT systems, and intellectual property. The cash purchase price was $11,000. Net sales from the Company’s newly formed subsidiaries, VOXX DEI LLC and VOXX DEI Canada, Ltd. (collectively, with VOXX DEI LLC, “DEI”), included in our consolidated results for the three and six months ended August 31, 2020 represented approximately 3.7% and 2.4%, respectively, of our consolidated net sales. DEI’s results of operations are included in the consolidated financial statements of Voxx in our Automotive Electronics segment. The purpose of this acquisition was to expand the Company’s market share within the automotive electronics industry.
The following summarizes the allocation of the purchase price based upon the fair value of the assets acquired and liabilities assumed at the date of acquisition:
7
|
|
July 1, 2020
|
|
Assets acquired:
|
|
|
|
|
Inventory
|
|
$
|
7,054
|
|
Accounts receivable
|
|
|
5,173
|
|
Other current assets
|
|
|
160
|
|
Property and equipment
|
|
|
2,815
|
|
Operating lease, right of use asset
|
|
|
1,771
|
|
Customer relationships
|
|
|
2,600
|
|
Trademarks
|
|
|
4,500
|
|
Patented technology
|
|
|
1,030
|
|
Goodwill
|
|
|
3,290
|
|
Total assets acquired
|
|
$
|
28,393
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable
|
|
|
8,144
|
|
Accrued expenses
|
|
|
1,406
|
|
Contract liabilities
|
|
|
4,872
|
|
Warranty accrual
|
|
|
1,200
|
|
Operating lease liability
|
|
|
1,771
|
|
Total
|
|
$
|
17,393
|
|
Total purchase price
|
|
$
|
11,000
|
|
The purchase allocation presented above is preliminary. We are in the process of refining the valuation of acquired assets and liabilities, including goodwill, and expect to finalize the purchase price allocation in the fourth quarter of Fiscal 2021. Goodwill was determined as the excess of the purchase price over the fair value of the assets acquired (including the identifiable intangible assets) and represents synergies expected.
Vehicle Safety Holdings Corp.
On January 31, 2020, the Company acquired certain assets and liabilities of Vehicle Safety Holdings Corp. (“VSHC”) via an asset purchase agreement for a preliminary purchase price of $16,610, which included $16,500 in cash and contingent consideration with a fair value of $110. Contingent consideration of up to a maximum of $750 is payable based upon the achievement of specified operating results, or the occurrence of certain events over the twelve-month period following the completion of the acquisition. Net sales from the Company’s newly formed subsidiary, VSM-Rostra, LLC (“VSM”) included in our consolidated results for the three and six months ended August 31, 2020 represented approximately 4.7% and 5.4% of our consolidated net sales, respectively. VSHC’s results of operations are included in the consolidated financial statements of Voxx in our Automotive Electronics segment. The purpose of this acquisition was to expand the Company’s product offerings and market share, as VSM is a leading developer, manufacturer, and distributor of safety electronics.
The following summarizes the allocation of the purchase price based upon the fair value of the assets acquired and liabilities assumed at the date of acquisition:
8
|
|
January 31, 2020
|
|
Assets acquired:
|
|
|
|
|
Inventory
|
|
$
|
6,982
|
|
Accounts receivable
|
|
|
3,415
|
|
Right of use assets
|
|
|
483
|
|
Other current assets
|
|
|
145
|
|
Property and equipment
|
|
|
714
|
|
Customer relationships
|
|
|
5,460
|
|
Trademarks
|
|
|
560
|
|
Patented technology
|
|
|
280
|
|
Goodwill
|
|
|
215
|
|
Other non-current assets
|
|
|
3
|
|
Total assets acquired
|
|
$
|
18,257
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable
|
|
|
757
|
|
Accrued expenses
|
|
|
483
|
|
Lease liabilities
|
|
|
219
|
|
Warranty accrual
|
|
|
188
|
|
Total
|
|
$
|
1,647
|
|
Total purchase price
|
|
$
|
16,610
|
|
The purchase allocation presented above is preliminary. We are in the process of refining the valuation of acquired assets and liabilities, including goodwill, and expect to finalize the purchase price allocation in the fourth quarter of Fiscal 2021. Goodwill was determined as the excess of the purchase price over the fair value of the assets acquired (including the identifiable intangible assets) and represents synergies expected.
(3)
|
Net Income (Loss) Per Common Share
|
Basic net income (loss) per common share, net of non-controlling interest, is based upon the weighted-average common shares outstanding during the period. Diluted net income (loss) per common share, net of non-controlling interest, 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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Weighted-average common shares outstanding (basic)
|
|
|
24,224,478
|
|
|
|
24,481,477
|
|
|
|
24,223,935
|
|
|
|
24,457,482
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock and stock grants
|
|
|
327,586
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted-average common shares and potential common shares outstanding (diluted)
|
|
|
24,552,064
|
|
|
|
24,481,477
|
|
|
|
24,223,935
|
|
|
|
24,457,482
|
|
Restricted stock and stock grants totaling 15,666 and 657,015 for the three months ended August 31, 2020 and 2019, respectively, and 593,632 and 642,280 for the six months ended August 31, 2020 and 2019, respectively, were not included in the net income (loss) per diluted share calculation because the grant price of the restricted stock and stock grants was greater than the average market price of the Company’s common stock during these periods, or the inclusion of these components would have been anti-dilutive.
9
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(4)
|
Investment Securities
|
As of August 31, 2020, and February 29, 2020, the Company had the following investments:
|
|
August 31, 2020
|
|
|
|
Fair Value
|
|
Investment Securities
|
|
|
|
|
Marketable Equity Securities
|
|
|
|
|
Mutual funds
|
|
$
|
1,838
|
|
Total Marketable Equity Securities
|
|
|
1,838
|
|
Total Investment Securities
|
|
$
|
1,838
|
|
|
|
February 29, 2020
|
|
|
|
Fair Value
|
|
Investment Securities
|
|
|
|
|
Marketable Equity Securities
|
|
|
|
|
Mutual funds
|
|
$
|
2,282
|
|
Total Marketable Securities
|
|
|
2,282
|
|
Total Investment Securities
|
|
$
|
2,282
|
|
Equity Securities
Mutual Funds
The Company’s mutual funds are held in connection with its deferred compensation plan. Changes in the carrying value of these securities are offset by changes in the corresponding deferred compensation liability.
(5)
|
Fair Value Measurements and Derivatives
|
The Company applies the authoritative guidance on “Fair Value Measurements," which among other things, requires enhanced disclosures about assets and liabilities 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.
At August 31, 2020 and February 29, 2020, the Company did not have any assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
10
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
The following table presents financial assets measured at fair value on a recurring basis at August 31, 2020:
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date Using
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market funds
|
|
$
|
45,889
|
|
|
$
|
45,889
|
|
|
$
|
—
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated for hedging
|
|
$
|
(993
|
)
|
|
$
|
—
|
|
|
$
|
(993
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
1,838
|
|
|
$
|
1,838
|
|
|
$
|
—
|
|
Total investment securities
|
|
$
|
1,838
|
|
|
$
|
1,838
|
|
|
$
|
—
|
|
The following table presents financial assets and liabilities measured at fair value on a recurring basis at February 29, 2020:
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date Using
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market funds
|
|
$
|
37,425
|
|
|
$
|
37,425
|
|
|
$
|
—
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated for hedging
|
|
$
|
(476
|
)
|
|
$
|
—
|
|
|
$
|
(476
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
2,282
|
|
|
$
|
2,282
|
|
|
$
|
—
|
|
Total investment securities
|
|
$
|
2,282
|
|
|
$
|
2,282
|
|
|
$
|
—
|
|
At August 31, 2020, the carrying value of the Company's accounts receivable, short-term debt, accounts payable, accrued expenses, bank obligations and long-term debt approximates fair value because of either (i) the short-term nature of the financial instrument; (ii) the interest rate on the financial instrument being reset every quarter to reflect current market rates; or (iii) the stated or implicit interest rate approximates the current market rates or are not materially different from market rates.
Derivative Instruments
The Company’s derivative instruments include forward foreign currency contracts and an interest rate swap agreement. The forward foreign currency contracts are utilized to hedge a portion of the Company’s foreign currency inventory purchases. 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 ranges from 1 month to 7 months and are classified in the balance sheet according to their terms. The Company’s interest rate swap agreement hedges interest rate exposure related to the outstanding balance of its Florida Mortgage, with monthly payments due through March 2026. The swap agreement locks the interest rate on the debt at 3.48% (inclusive of credit spread) through the maturity date of the loan. 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 our interest rate swap agreement 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.
11
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
Financial Statement Classification
The following table discloses the fair value as of August 31, 2020 and February 29, 2020 of the Company’s derivative instruments:
|
|
Derivative Assets and Liabilities
|
|
|
|
|
|
Fair Value
|
|
|
|
Account
|
|
August 31, 2020
|
|
|
February 29, 2020
|
|
Designated derivative instruments
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
63
|
|
|
$
|
—
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
(465
|
)
|
|
|
—
|
|
Interest rate swap agreement
|
|
Other long-term liabilities
|
|
|
(591
|
)
|
|
|
(476
|
)
|
Total derivatives
|
|
|
|
$
|
(993
|
)
|
|
$
|
(476
|
)
|
Cash Flow Hedges
The Company's policy is 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. For derivative instruments that are designated and qualify as cash flow hedges, the entire change in fair value of the hedging instrument included in the assessment of the hedge ineffectiveness is recorded to Other comprehensive income (loss). When the amounts recorded in Other comprehensive income (loss) are reclassified to earnings, they are presented in the same income statement line item as the effect of the hedged item.
During the first quarter of Fiscal 2021, the Company entered into forward foreign currency contracts, which have a current outstanding notional value of $5,600 and are designated as cash flow hedges at August 31, 2020. During Fiscal 2020, the Company did not enter into any forward foreign currency contracts and all previous contracts were settled through February 29, 2020. The current outstanding notional value of the Company's interest rate swap at August 31, 2020 is $7,364. For cash flow hedges, 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. The net (loss) income recognized in Other comprehensive income (loss) for foreign currency contracts is expected to be recognized in Cost of sales during the next ten months. No amounts were excluded from the assessment of hedge effectiveness during the respective periods. The gain or loss on the Company’s interest rate swap is recorded in Other comprehensive income (loss) and subsequently reclassified into Interest and bank charges in the period in which the hedged transaction affects earnings. As of August 31, 2020, no interest rate swaps originally designated for hedge accounting were de-designated or terminated.
Activity related to cash flow hedges recorded during the three and six months ended August 31, 2020 and 2019 was as follows:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
August 31, 2020
|
|
|
August 31, 2020
|
|
|
|
Pretax Gain
(Loss)
Recognized in
Other
Comprehensive
Income
|
|
|
Pretax Loss
Reclassified from
Accumulated Other
Comprehensive
Income
|
|
|
Pretax Loss
Recognized in
Other
Comprehensive
Income
|
|
|
Pretax Gain
Reclassified from
Accumulated Other
Comprehensive
Income
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
(465
|
)
|
|
$
|
(16
|
)
|
|
$
|
(465
|
)
|
|
$
|
52
|
|
Interest rate swaps
|
|
|
15
|
|
|
|
—
|
|
|
|
(115
|
)
|
|
|
—
|
|
12
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
August 31, 2019
|
|
|
August 31, 2019
|
|
|
|
Pretax Gain (Loss)
Recognized in
Other
Comprehensive
Income
|
|
|
Pretax Gain
Reclassified
from
Accumulated Other
Comprehensive
Income
|
|
|
Pretax Gain (Loss)
Recognized in
Other
Comprehensive
Income
|
|
|
Pretax Gain
Reclassified
from
Accumulated Other
Comprehensive
Income
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
98
|
|
|
$
|
109
|
|
|
$
|
316
|
|
|
$
|
228
|
|
Interest rate swaps
|
|
|
(167
|
)
|
|
|
—
|
|
|
|
(339
|
)
|
|
|
—
|
|
(6)
|
Accumulated Other Comprehensive Income (Loss)
|
The Company’s accumulated other comprehensive income (loss) consists of the following:
|
|
Foreign
Currency
Translation
Losses
|
|
|
Pension plan
adjustments,
net of tax
|
|
|
Derivatives
designated
in a hedging
relationship,
net of tax
|
|
|
Total
|
|
Balance at February 29, 2020
|
|
$
|
(17,739
|
)
|
|
$
|
(887
|
)
|
|
$
|
(429
|
)
|
|
$
|
(19,055
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
3,529
|
|
|
|
(79
|
)
|
|
|
(481
|
)
|
|
|
2,969
|
|
Reclassified from accumulated other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
10
|
|
Net current-period other comprehensive income (loss)
|
|
|
3,529
|
|
|
|
(79
|
)
|
|
|
(471
|
)
|
|
|
2,979
|
|
Balance at August 31, 2020
|
|
$
|
(14,210
|
)
|
|
$
|
(966
|
)
|
|
$
|
(900
|
)
|
|
$
|
(16,076
|
)
|
During the three and six months ended August 31, 2020, the Company recorded other comprehensive income (loss), net of taxes of $141 and $163, respectively, related to derivatives designated in a hedging relationship, and $0 in both periods related to pension plan adjustments.
The other comprehensive income (loss) before reclassification of $3,529 includes the remeasurement of intercompany transactions of a long-term investment nature of $(693) with certain subsidiaries whose functional currency is not the U.S. dollar, and $4,222 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.
13
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(7)
|
Supplemental Cash Flow Information
|
The following is supplemental information relating to the Unaudited Consolidated Statements of Cash Flows:
|
|
Six months ended
August 31,
|
|
|
|
2020
|
|
|
2019
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Issuance of redeemable equity
|
|
$
|
286
|
|
|
$
|
1,025
|
|
Reclassification of stockholders' equity to redeemable equity
|
|
|
-
|
|
|
|
745
|
|
Right of use assets obtained in exchange for operating lease obligations
|
|
|
347
|
|
|
|
534
|
|
Right of use assets obtained in exchange for finance lease obligations
|
|
|
-
|
|
|
|
1,024
|
|
Right of use assets recorded in exchange for operating lease obligations upon the adoption of ASC 842
|
|
|
-
|
|
|
|
2,227
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
508
|
|
|
$
|
459
|
|
Operating cash flows from finance leases
|
|
|
17
|
|
|
|
24
|
|
Finance cash flows from finance leases
|
|
|
329
|
|
|
|
310
|
|
Cash paid during the period:
|
|
|
|
|
|
|
|
|
Interest (excluding bank charges)
|
|
$
|
569
|
|
|
$
|
554
|
|
Income taxes (net of refunds)
|
|
|
742
|
|
|
|
410
|
|
(8)
|
Accounting for Stock-Based Compensation
|
The Company has various stock-based compensation plans, which are more fully described in Note 1 of the Notes to the Consolidated Financial Statements contained in the Company’s Form 10-K for the fiscal year ended February 29, 2020.
Restricted stock awards are granted pursuant to the Company's 2012 Equity Incentive Plan (the "2012 Plan"). A restricted stock award is an award of common stock that is subject to certain restrictions during a specified period. Restricted stock awards are independent of option grants and are subject to forfeiture if employment terminates for a reason other than death, disability, or retirement prior to the release of the restrictions.
The Company's Omnibus Equity Incentive Plan was established in 2014 (the "2014 Plan"). Pursuant to the 2014 Plan, Restricted Stock Units ("RSUs") may be awarded by the Company to any individual who is employed by, provides services to, or serves as a director of the Company or its affiliates. RSUs vest on the later of three years from the date of grant, or the grantee reaching the age of 65 years. The RSU awards will also vest upon the sale of all of the Company's issued and outstanding stock, the sale of all, or substantially all, of the assets of a subsidiary of which the grantee serves as CEO and/or President, or the termination of the grantee's employment without cause, provided that the grantee at the time of termination has been employed for at least 10 years. When vested, RSU awards may be settled in shares of common stock or in cash, at the Company's sole option. There are no market conditions inherent in an RSU award, only the employee performance requirement for performance awards, and the service requirement that the respective employee continues employment with the Company through the vesting date. In July 2020, the Company granted 48,269 RSU awards under the 2014 Plan. The Company expenses the cost of RSU awards on a straight-line basis over the requisite service period of each grantee. For these purposes, the fair market value of each RSU is determined based on the mean of the high and low price of the Company's common stock on the grant date. The fair market value of each RSU granted in July 2020 was $5.76.
Grant of Shares to Chief Executive Officer
On July 8, 2019, the Board of Directors approved a five-year Employment Agreement (the “Employment Agreement”), effective March 1, 2019, by and between the Company and Patrick M. Lavelle, the Company’s President and Chief Executive Officer. Under the terms of the Employment Agreement, in addition to a $1,000 annual salary and a cash bonus based on the Company’s Adjusted EBITDA, Mr. Lavelle agreed to receive certain stock-based compensation as discussed below:
|
-
|
An initial stock grant of 200,000 fully vested shares of Class A Common Stock issued in July 2019 under the 2012 Plan.
|
|
-
|
Additional stock grants of 100,000 shares of Class A Common Stock to be issued on each of March 1, 2020, March 1, 2021, and March 1, 2022. Compensation expense of $103 and $206 was recognized during the three and six months ended August 31, 2020, respectively, based upon the grant fair value of $4.15 per share using the
|
14
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
graded vesting attribution method. During the six months ended August 31, 2020, Mr. Lavelle forfeited 26,835 shares of stock grants that were to be issued on March 1, 2021 in accordance with reductions to executive officer compensation related to the Company’s COVID-19 cost saving measures.
|
|
-
|
Grant of market stock units (“MSU’s”) up to a maximum value of $5,000, based upon the achievement of a 90-calendar day average stock price of no less than $5.49 over the performance period ending on the third and fifth anniversary of the effective date of the Employment Agreement. The value of the MSU award increases based upon predetermined targeted 90-calendar day average stock prices with a maximum of $5,000 if the 90-calendar day average high stock price equals or exceeds $15.00. The number of shares to be issued related to the MSUs based upon achievement of the maximum award value of $5,000, and if issued at $15.00 per share, is estimated at 333,333 shares. Actual results may differ based upon when the high average stock price is achieved and settled. We recognized stock-based compensation expense of $61 and $122 during the three and six months ended August 31, 2020, respectively, related to these MSU’s using the graded vesting attribution method over the performance period. As of August 31, 2020, all of the MSU’s remain outstanding.
|
All stock grants under the Employment Agreement are subject to a hold requirement as specified in the Employment Agreement. The Employment Agreement gave Mr. Lavelle, in certain limited change of control situations, the right to require the Company to purchase the shares in connection with the Employment Agreement, shares personally acquired by Mr. Lavelle, and shares issued to him under other incentive compensation arrangements. Accordingly, the stock awards issued in connection with the Employment Agreement are presented as redeemable equity on the Consolidated Balance Sheet at grant-date fair value. RSUs previously held by Mr. Lavelle under the 2014 Plan and shares personally purchased by Mr. Lavelle have been reclassified from permanent equity to redeemable equity. As the contingent events that would allow Mr. Lavelle to redeem the shares are not probable at this time, remeasurement of the amounts in redeemable equity have not been recorded. The Employment Agreement contains certain restrictive and non-solicitation covenants.
The following table presents a summary of the activity related to the initial stock grant, additional stock grants under the Employment Agreement, and RSU grants under the 2014 Plan for the six months ended August 31, 2020:
|
|
Number
of Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested award balance at February 29, 2020
|
|
|
715,152
|
|
|
$
|
5.07
|
|
Granted
|
|
|
48,269
|
|
|
|
5.76
|
|
Vested
|
|
|
59,697
|
|
|
|
6.09
|
|
Vested and settled
|
|
|
100,000
|
|
|
|
4.15
|
|
Forfeited
|
|
|
26,835
|
|
|
|
4.15
|
|
Unvested award balance at August 31 2020
|
|
|
576,889
|
|
|
$
|
4.80
|
|
At August 31, 2020, there were 238,318 vested and unsettled RSU awards under the Company’s 2014 Plan with a weighted average fair value of $7.51. In July 2020, the vested RSU awards for two of the Company’s former employees, totaling 105,123 award units, were settled in cash in an amount totaling $303.
During the three and six months ended August 31, 2020, the Company recorded $335 and $686, respectively, in total stock-based compensation related to the 2014 Plan, additional stock grants and MSU’s under the Employment Agreement. As of August 31, 2020, there was approximately $2,060 of unrecognized stock-based compensation expense related to unvested RSU awards, stock grants and MSU’s.
(9)
|
Supply Chain Financing
|
The Company has supply chain financing agreements and factoring agreements that were entered into for the purpose of accelerating receivable collection and better managing cash flow. The balances under the 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, 2020, net of discounts, were $19,320 and $39,184, respectively, compared to $14,404 and $36,987, respectively, for the three and six months ended August 31, 2019.
(10)
|
Research and Development
|
15
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
Expenditures for research and development are charged to expense as incurred. Such expenditures amounted to $1,666 and $3,521 for the three and six months ended August 31, 2020, respectively, compared to $1,899 and $3,762, respectively, for the three and six months ended August 31, 2019. All amounts are net of customer reimbursements, and are included within Engineering and technical support expenses on the Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss).
(11)
|
Goodwill and Intangible Assets
|
The change in goodwill by segment is as follows:
Automotive Electronics:
|
|
Amount
|
|
Beginning balance at March 1, 2020
|
|
$
|
8,467
|
|
Activity during the period
|
|
|
3,383
|
|
Balance at August 31, 2020
|
|
$
|
11,850
|
|
Gross carrying value at August 31, 2020
|
|
$
|
11,850
|
|
Accumulated impairment charge
|
|
|
—
|
|
Net carrying value at August 31, 2020
|
|
$
|
11,850
|
|
Consumer Electronics:
|
|
|
|
|
Beginning balance at March 1, 2020
|
|
$
|
46,533
|
|
Activity during the period
|
|
|
—
|
|
Balance at August 31, 2020
|
|
$
|
46,533
|
|
Gross carrying value at August 31, 2020
|
|
$
|
78,696
|
|
Accumulated impairment charge
|
|
|
(32,163
|
)
|
Net carrying value at August 31, 2020
|
|
$
|
46,533
|
|
Total Goodwill, net
|
|
$
|
58,383
|
|
The Company's Biometrics segment did not carry a goodwill balance at August 31, 2020 or February 29, 2020.
At August 31, 2020, intangible assets consisted of the following:
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Total Net
Book
Value
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
54,670
|
|
|
$
|
34,234
|
|
|
$
|
20,436
|
|
Trademarks/Tradenames
|
|
|
5,545
|
|
|
|
550
|
|
|
|
4,995
|
|
Developed technology
|
|
|
14,144
|
|
|
|
12,380
|
|
|
|
1,764
|
|
Patents
|
|
|
6,726
|
|
|
|
4,154
|
|
|
|
2,572
|
|
License
|
|
|
1,400
|
|
|
|
1,400
|
|
|
|
—
|
|
Contract
|
|
|
1,556
|
|
|
|
1,556
|
|
|
|
—
|
|
Total finite-lived intangible assets
|
|
$
|
84,041
|
|
|
$
|
54,274
|
|
|
|
29,767
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
|
|
|
|
|
64,583
|
|
Total intangible assets, net
|
|
|
|
|
|
|
|
|
|
$
|
94,350
|
|
16
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
At February 29, 2020, intangible assets consisted of the following:
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Total Net
Book
Value
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
51,491
|
|
|
$
|
31,880
|
|
|
$
|
19,611
|
|
Trademarks/Tradenames
|
|
|
1,045
|
|
|
|
437
|
|
|
|
608
|
|
Developed technology
|
|
|
14,144
|
|
|
|
12,244
|
|
|
|
1,900
|
|
Patents
|
|
|
5,651
|
|
|
|
3,691
|
|
|
|
1,960
|
|
License
|
|
|
1,400
|
|
|
|
1,400
|
|
|
|
—
|
|
Contract
|
|
|
1,556
|
|
|
|
1,556
|
|
|
|
—
|
|
Total finite-lived intangible assets
|
|
$
|
75,287
|
|
|
$
|
51,208
|
|
|
|
24,079
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
|
|
|
|
|
64,209
|
|
Total intangible assets, net
|
|
|
|
|
|
|
|
|
|
$
|
88,288
|
|
The Company recorded amortization expense of $1,327 and $2,496, respectively, for the three and six months ended August 31, 2020 and $1,748 and $3,496 for the three and six months ended August 31, 2019, respectively. The estimated aggregate amortization expense for all amortizable intangibles for August 31 of each of the succeeding years is as follows:
Year
|
|
Amount
|
|
2021
|
|
$
|
5,852
|
|
2022
|
|
|
5,194
|
|
2023
|
|
|
4,441
|
|
2024
|
|
|
4,171
|
|
2025
|
|
|
4,038
|
|
As of August 31, 2020 and February 29, 2020, the Company has 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.
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, 2020
|
|
|
February 29, 2020
|
|
Current assets
|
|
$
|
48,675
|
|
|
$
|
47,738
|
|
Non-current assets
|
|
|
5,130
|
|
|
|
5,453
|
|
Liabilities
|
|
|
9,195
|
|
|
|
9,343
|
|
Members' equity
|
|
|
44,610
|
|
|
|
43,848
|
|
|
|
Six months ended
August 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
$
|
40,858
|
|
|
$
|
50,281
|
|
Gross profit
|
|
|
14,150
|
|
|
|
15,542
|
|
Operating income
|
|
|
5,345
|
|
|
|
5,227
|
|
Net income
|
|
|
5,490
|
|
|
|
5,410
|
|
17
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
The Company's share of income from ASA was $1,883 and $2,745 for the three and six months ended August 31, 2020, respectively, and $1,265 and $2,705 for the three and six months ended August 31, 2019, respectively.
The Company’s provision for income taxes consists of federal, foreign, and state taxes necessary to align the Company’s year-to-date tax provision with the annual effective rate that it expects to achieve for the full year. At each interim period, the Company updates its estimate of the annual effective tax rate and records cumulative adjustments, as necessary.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act made various tax law changes, including among other things (i) increased the limitation under IRC Section 163(j) for 2019 and 2020 to permit additional expensing of interest (ii) enacted technical corrections so that qualified improvement property can be immediately expensed under IRC Section 168(k) and net operating losses arising in tax years beginning in 2017 and ending in 2018 can be carried back two years and carried forward twenty years without a taxable income limitation as opposed to carried forward indefinitely, and (iii) made modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years. With respect to the technical correction to net operating losses, the Company recorded a discrete income tax provision of $4,275 during the six months ended August 31, 2020, as its valuation allowance related to net operating losses with limited carryforward periods increased.
For the three months ended August 31, 2020, the Company recorded an income tax provision of $2,609, which includes a discrete income tax benefit of $142 related primarily to the reversal of uncertain tax provision liabilities as a result of the lapse of the applicable statute of limitations. For the three months ended August 31, 2019, the Company recorded an income tax provision of $1,115, which includes a discrete income tax benefit of $1,400. The Company recorded discrete tax benefits of $1,204 and $196 in connection with excluding the U.S. tax jurisdiction from the estimated annual effective tax rate and the reversal of uncertain tax provision liabilities as a result of the lapse of the applicable statute of limitations, respectively.
The effective tax rates for the three months ended August 31, 2020 and 2019 were an income tax provision of 28.5% on pre-tax income of $9,164 and an income tax provision of 18.4% on a pre-tax loss of $6,049, respectively. The effective tax rate for the three months ended August 31, 2020 differs from the U.S. statutory rate of 21% primarily due to the anticipated reversal of a portion of the U.S. valuation allowance based on projected current year earnings, immediate U.S. taxation of foreign earnings, non-controlling interest related to EyeLock LLC, state and local income taxes, nondeductible permanent differences, and income taxed in foreign jurisdictions at varying tax rates. The effective tax rate for the three months ended August 31, 2019 differed from the statutory rate of 21% primarily due to the calculation of the U.S. taxation provision on a discrete basis, nondeductible permanent differences, non-controlling interest related to EyeLock LLC, an increase in the valuation allowance primarily for capital assets, state and local income taxes, and income taxed in foreign jurisdictions at varying tax rates.
For the six months ended August 31, 2020, the Company recorded an income tax provision of $4,390, which includes a discrete income tax provision of $4,151. The Company recorded a discrete tax provision of $4,275 related to an increase in valuation allowance as a result of the technical correction to net operating losses as provided in the CARES Act, and a discrete income tax benefit of $155 related to the reversal of uncertain tax provision liabilities as a result of the lapse of the applicable statute of limitations, offset with a discrete tax provision of $31 related to the accrual for interest for unrecognized tax benefits. For the six months ended August 31, 2019, the Company recorded an income tax benefit of $1,530, which includes a discrete income tax benefit of $1,380. The Company recorded discrete tax benefits of $1,204 and $176 in connection with excluding the U.S. tax jurisdiction from the estimated annual effective tax rate and the reversal of uncertain tax provision liabilities as a result of the lapse of the applicable statute of limitations, respectively.
The effective tax rates for the six months ended August 31, 2020 and 2019 were an income tax provision of 238.6% on pre-tax income of $1,840 and an income tax benefit of 13.8% on a pre-tax loss of $11,066, respectively. The effective tax rate for the six months ended August 31, 2020 differs from the U.S. statutory rate of 21% primarily due to the anticipated reversal of a portion of the U.S. valuation allowance based on projected current year earnings, immediate U.S. taxation of foreign earnings, non-controlling interest related to EyeLock LLC, state and local income taxes, nondeductible permanent differences, and income taxed in foreign jurisdictions at varying tax rates. The effective tax rate for the six months ended August 31, 2019 differed from the statutory rate of 21% primarily due to the calculation of the U.S. taxation provision on a discrete basis, nondeductible permanent differences, non-controlling interest related to EyeLock LLC, an increase in the valuation allowance primarily for capital assets, state and local income taxes, and income taxed in foreign jurisdictions at varying tax rates.
18
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
At August 31, 2020, the Company had an uncertain tax position liability of $1,094, including interest and penalties. The unrecognized tax benefits include amounts related to various U.S. federal, state and local, and foreign tax issues.
Inventories by major category are as follows:
|
|
August 31,
2020
|
|
|
February 29,
2020
|
|
Raw materials
|
|
$
|
23,287
|
|
|
$
|
29,115
|
|
Work in process
|
|
|
1,960
|
|
|
|
2,366
|
|
Finished goods
|
|
|
101,160
|
|
|
|
67,629
|
|
Inventory
|
|
$
|
126,407
|
|
|
$
|
99,110
|
|
(15)
|
Product Warranties and Product Repair Costs
|
The following table provides a summary of the activity with respect to product warranties and product repair costs. The liability for product warranties is included within Accrued expenses and other current liabilities and the reserve for product repair costs is recorded as a reduction of Inventory on the Consolidated Balance Sheets.
|
|
Three months ended
August 31,
|
|
|
Six months ended
August 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Opening balance
|
|
$
|
4,566
|
|
|
$
|
4,151
|
|
|
$
|
4,748
|
|
|
$
|
4,469
|
|
Liabilities for warranties accrued during the period
|
|
|
684
|
|
|
|
1,147
|
|
|
|
1,475
|
|
|
|
2,434
|
|
Liabilities acquired during acquisition
|
|
|
1,200
|
|
|
|
|
|
|
|
1,200
|
|
|
|
|
|
Warranty claims settled during the period
|
|
|
(930
|
)
|
|
|
(1,236
|
)
|
|
|
(1,903
|
)
|
|
|
(2,841
|
)
|
Ending balance
|
|
$
|
5,520
|
|
|
$
|
4,062
|
|
|
$
|
5,520
|
|
|
$
|
4,062
|
|
(16)
|
Accrued Restructuring Expense
|
At February 29, 2020, the Company had accrued restructuring charges of $637 included in Accrued expenses and other current liabilities, representing charges incurred in Fiscal 2019 for the realignment of certain businesses within the organization. During the three and six months ended August 31, 2020, an additional $168 and $469 of the accrual was settled and no additional restructuring expenses were incurred. At August 31, 2020, the remaining restructuring accrual in Accrued expenses and other current liabilities is $168.
(17)
|
Financing Arrangements
|
The Company has the following financing arrangements:
|
|
August 31,
2020
|
|
|
February 29,
2020
|
|
Debt
|
|
|
|
|
|
|
|
|
Domestic credit facility (a)
|
|
$
|
20,335
|
|
|
$
|
—
|
|
Florida mortgage (b)
|
|
|
7,364
|
|
|
|
7,614
|
|
Euro asset-based lending obligation - VOXX Germany (c)
|
|
|
—
|
|
|
|
—
|
|
Euro asset-based lending obligation - Magnat (d)
|
|
|
459
|
|
|
|
607
|
|
Total debt
|
|
|
28,158
|
|
|
|
8,221
|
|
Less: current portion of long-term debt
|
|
|
959
|
|
|
|
1,107
|
|
Long-term debt
|
|
|
27,199
|
|
|
|
7,114
|
|
Less: debt issuance costs
|
|
|
880
|
|
|
|
1,015
|
|
Total long-term debt, net of debt issuance costs
|
|
$
|
26,319
|
|
|
$
|
6,099
|
|
19
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
20
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
(a)
|
Domestic Credit Facility
The Company has a senior secured credit facility (the "Credit Facility"), which was amended in June 2020 and provides for a revolving credit facility with committed availability of up to $127,500. The Credit Facility also includes a $15,000 sublimit for letters of credit and a $15,000 sublimit for swingline loans. The availability under the revolving credit line within the Credit Facility is subject to a borrowing base, which is based on eligible accounts receivable, eligible inventory and certain real estate, subject to reserves as determined by the lender, and is also limited by amounts outstanding under the Florida Mortgage (see Note 17(b)). The availability under the revolving credit line of the Credit Facility was $77,905 as of August 31, 2020.
All amounts outstanding under the Credit Facility will mature and become due on April 26, 2022; however, it is subject to acceleration upon the occurrence of an Event of Default (as defined in the Credit Agreement). The Company may prepay any amounts outstanding at any time, subject to payment of certain breakage and redeployment costs relating to LIBOR Rate Loans. The commitments under the 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 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 bear interest at a rate equal to the then applicable LIBOR rate plus a range of 2.00 - 2.50%. Loans designated as Base Rate loans bear interest at a rate equal to the applicable margin for Base Rate Loans of 1.00 - 1.50% as defined in the agreement and shall not be lower than 2.00%. As of August 31, 2020, the weighted average interest rate on the facility was 2.75%.
Provided that the Company is in a Compliance Period (the period commencing on that day in which Excess Availability is less than 20% of the Maximum Revolver Amount and ending on a day in which Excess Availability is equal to or greater than 20% for any consecutive 30 day period thereafter), the Credit Facility requires compliance with a financial covenant calculated as of the last day of each month, consisting of a Fixed Charge Coverage Ratio. The Credit Facility also contains covenants, subject to defined carveouts, that limit the ability of the loan parties and certain of their subsidiaries which are not loan parties to, among other things: (i) incur additional indebtedness; (ii) incur liens; (iii) merge, consolidate or dispose of a substantial portion of their business; (iv) transfer or dispose of assets; (v) change their name, organizational identification number, state or province of organization or organizational identity; (vi) make any material change in their nature of business; (vii) prepay or otherwise acquire indebtedness; (viii) cause any change of control; (ix) make any restricted junior payment; (x) change their fiscal year or method of accounting; (xi) make advances, loans or investments; (xii) enter into or permit any transaction with an affiliate of any borrower or any of their subsidiaries; (xiii) use proceeds for certain items; (xiv) issue or sell any of their stock; or (xv) consign or sell any of their inventory on certain terms. In addition, if excess availability under the 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, 2020, the Company was not in a Compliance Period.
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.
Charges incurred on the unused portion of the Credit Facility during the three and six months ended August 31, 2020 totaled $125 and $241, respectively, compared to $126 and $252 during the three and six months ended August 31, 2019, respectively. These charges are included within Interest and bank charges on the Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss).
The Company has deferred financing costs related to the Credit Facility and previous amendments and modification of the Credit Facility. In conjunction with the amendment to its Credit Facility in June 2020, the Company incurred additional financing fees of $260 that will be amortized over the remaining term of the facility. The Company accounted for the June 2020 amendment to the Credit Facility as a modification of debt; however, as there were certain changes to the syndicate bank participation, unamortized deferred financing costs of $53 were written off and charged to Interest and bank charges in the Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended
August 31, 2020. 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 Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) over the term of the Credit Facility, which expires in April 2022. During the three and six months ended August 31, 2020, the Company amortized $128 and $326 of these costs, as compared to $197 and $395 during the three and six months ended August 31, 2019. The net unamortized balance of these deferred financing costs as of August 31, 2020 is $709.
|
|
|
(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% (1.65% at August 31, 2020) 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 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 Sheets and are being amortized through Interest and bank charges in the Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) over the ten-year term of the Florida Mortgage. The Company amortized $8 and $16 of these costs during both the three and six months ended August 31, 2020 and 2019. The net unamortized balance of these deferred financing costs as of August 31, 2020 is $171.
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 5).
|
|
|
(c)
|
Euro Asset-Based Lending Obligation – VOXX Germany
Foreign bank obligations include a Euro Asset-Based Lending ("ABL") credit facility, which has a credit limit of €8,000 for the Company's subsidiary, VOXX Germany, which expires on July 31, 2023. The rate of interest for the ABL is the three-month Euribor plus 2.3% (2.30% at August 31, 2020). As of August 31, 2020, there is no balance outstanding under this credit facility.
|
|
|
(d)
|
Euro Asset-Based Lending Obligation - Magnat
Foreign bank obligations also include an ABL credit facility, for the Company's subsidiary, Magnat, which expires on December 31, 2020. The rate of interest for the ABL is the three-month Euribor plus 2.1% (2.10% at August 31, 2020).
|
21
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(18)
|
Other (Expense) Income
|
Other (expense) income is comprised of the following:
|
|
Three months ended
August 31,
|
|
|
Six months ended
August 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Foreign currency (loss) gain
|
|
$
|
(363
|
)
|
|
$
|
130
|
|
|
$
|
(479
|
)
|
|
$
|
236
|
|
Interest income
|
|
|
(15
|
)
|
|
|
225
|
|
|
|
71
|
|
|
|
615
|
|
Rental income
|
|
|
182
|
|
|
|
142
|
|
|
|
368
|
|
|
|
284
|
|
Miscellaneous
|
|
|
(196
|
)
|
|
|
50
|
|
|
|
182
|
|
|
|
1,056
|
|
Total other, net
|
|
$
|
(392
|
)
|
|
$
|
547
|
|
|
$
|
142
|
|
|
$
|
2,191
|
|
The decrease in interest income for the three and six months ended August 31, 2020 as compared to the prior year periods primarily relates to the decrease in interest rates applicable to the Company’s short-term money market investments. Included within miscellaneous for the six months ended August 31, 2020 are the proceeds from a key man life insurance policy in the amount of $420 related to a Company executive who passed away during the first quarter of Fiscal 2021. For the six months ended August 31, 2019, miscellaneous included proceeds from a key man life insurance policy in the amount of $1,000 related to a former employee of Klipsch Group, Inc. that Voxx became the beneficiary of in conjunction with the acquisition of Klipsch in Fiscal 2012.
The Company has a subsidiary in Venezuela. Venezuela has experienced significant political and civil unrest, as well as economic instability for several years, and has implemented various foreign currency and price controls. The Company accounts for its Venezuela subsidiary as hyper-inflationary in accordance with the guidelines in ASC 830, "Foreign Currency." 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. As of August 31, 2020, the DICOM rate for the Sovereign Bolivar was approximately 323,800 bolivars to the U.S. dollar compared to 20,460 at August 31, 2019. Total net currency exchange gains for Venezuela of $19 and $20 were recorded for the three and six months ended August 31, 2020, respectively, as compared to ($2) for both the three and six months ended August 31, 2019, and are included in Other income (expense) on the Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss).
The Company has certain long-lived assets in Venezuela, which are held for investment purposes. These properties had no value at August 31, 2020
We account for leases in accordance with ASC 842 “Leases” (“ASC 842”). We determine whether an arrangement is a lease at inception. This determination generally depends on whether the arrangement conveys the right to control the use of an identified fixed asset explicitly or implicitly for a period of time in exchange for consideration.
We have operating leases for office equipment, as well as offices, warehouses, and other facilities used for our operations. We also have finance leases comprised primarily of computer hardware and machinery and equipment. Our leases have remaining lease terms of less than 1 year to 11 years, some of which include renewal options. We consider these renewal options in determining the lease term used to establish our right-of-use assets and lease liabilities when it is determined that it is reasonably certain that the renewal option will be exercised. The Company had no short term leases during the three and six months ended August 31, 2020.
Refer to Note 7 for supplemental cash flow information related to leases.
22
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
The components of lease cost for the three and six months ended August 31, 2020 and 2019 were as follows:
|
|
Three months ended
August 31,
|
|
|
Six months ended
August 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Operating lease cost (a) (c)
|
|
$
|
265
|
|
|
$
|
233
|
|
|
$
|
508
|
|
|
$
|
459
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right of use assets (a)
|
|
|
161
|
|
|
|
117
|
|
|
|
326
|
|
|
|
349
|
|
Interest on lease liabilities (b)
|
|
|
8
|
|
|
|
12
|
|
|
|
17
|
|
|
|
24
|
|
Total finance lease cost
|
|
$
|
169
|
|
|
$
|
129
|
|
|
$
|
343
|
|
|
$
|
373
|
|
|
(a)
|
Recorded within Selling, General and administrative, Engineering and technical support, and Cost of sales on the Consolidated Statement of Operations and Comprehensive (Loss) Income.
|
|
(b)
|
Recorded within Interest and bank charges on the Consolidated Statement of Operations and Comprehensive Income (Loss).
|
|
(c)
|
Includes immaterial amounts related to variable rent expense.
|
Supplemental balance sheet information related to leases is as follows:
|
|
August 31, 2020
|
|
|
February 29, 2020
|
|
Operating Leases
|
|
|
|
|
|
|
|
|
Operating lease, right of use assets
|
|
$
|
4,990
|
|
|
$
|
3,143
|
|
Total operating lease right of use assets
|
|
$
|
4,990
|
|
|
$
|
3,143
|
|
Accrued expenses and other current liabilities
|
|
$
|
1,126
|
|
|
$
|
784
|
|
Operating lease liabilities, less current portion
|
|
|
3,996
|
|
|
|
2,391
|
|
Total operating lease liabilities
|
|
$
|
5,122
|
|
|
$
|
3,175
|
|
Finance Leases
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, gross
|
|
$
|
2,503
|
|
|
$
|
2,503
|
|
Accumulated depreciation
|
|
|
(1,535
|
)
|
|
|
(1,209
|
)
|
Total finance lease right of use assets
|
|
$
|
968
|
|
|
$
|
1,294
|
|
Accrued expenses and other current liabilities
|
|
$
|
508
|
|
|
$
|
613
|
|
Finance lease liabilities, less current portion
|
|
|
490
|
|
|
|
720
|
|
Total finance lease liabilities
|
|
$
|
998
|
|
|
$
|
1,333
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
|
|
|
|
Operating leases
|
|
6.2 years
|
|
|
4.4 years
|
|
Finance leases
|
|
2.2 years
|
|
|
3.9 years
|
|
Weighted Average Discount Rate
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
4.59
|
%
|
|
|
5.98
|
%
|
Finance leases
|
|
|
3.87
|
%
|
|
|
3.87
|
%
|
23
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
At August 31, 2020, maturities of lease liabilities for each of the succeeding years were as follows:
|
|
Operating Leases
|
|
|
Finance Leases
|
|
2021
|
|
$
|
1,291
|
|
|
|
525
|
|
2022
|
|
|
1,175
|
|
|
|
342
|
|
2023
|
|
|
853
|
|
|
|
157
|
|
2024
|
|
|
650
|
|
|
|
—
|
|
2025
|
|
|
463
|
|
|
|
—
|
|
Thereafter
|
|
|
1,353
|
|
|
|
—
|
|
Total lease payments
|
|
|
5,785
|
|
|
|
1,024
|
|
Less imputed interest
|
|
|
663
|
|
|
|
26
|
|
Total
|
|
$
|
5,122
|
|
|
|
998
|
|
As of August 31, 2020, the Company has not entered into any lease agreements that have not yet commenced.
The Company owns and occupies buildings as part of its operations. Certain space within these buildings may, from time to time, be leased to third parties from which the Company earns rental income as lessor. This leased space is recorded within property, plant and equipment and was not material to the Company's Consolidated Balance Sheets at August 31, 2020 and February 29, 2020. Rental income earned by the Company for the three and six months ended August 31, 2020 and 2019 was $182 and $368, respectively, and $142 and $284, respectively, which is recorded within Other income (expense).
The Company's capital structure is as follows:
|
|
|
|
|
|
Shares Authorized
|
|
|
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
Security
|
|
Par
Value
|
|
|
August 31, 2020
|
|
|
February 29, 2020
|
|
|
August 31, 2020
|
|
|
February 29, 2020
|
|
|
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
|
|
|
|
21,656,976
|
|
|
|
21,556,976
|
|
|
|
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
|
|
|
|
2,749,218
|
|
|
|
2,749,218
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
(22)
|
Variable Interest Entities
|
A variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support, or (ii) has equity investors who lack the characteristics of a controlling financial interest. Under ASC 810 - Consolidation, an entity that holds a variable interest in a VIE and meets certain requirements would be considered to be the primary beneficiary of the VIE and required to consolidate the VIE in its consolidated financial statements. In order to be considered the primary beneficiary of a VIE, an entity must hold a variable interest in the VIE and have both:
|
•
|
the power to direct the activities that most significantly impact the economic performance of the VIE; and
|
|
•
|
the right to receive benefits from, or the obligation to absorb losses of, the VIE that could be potentially significant to the VIE.
|
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 October 9, 2020, this
24
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
promissory note was amended and restated to allow EyeLock LLC to borrow up to $60,600. 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 June 30, 2021. 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 $57,767 as of August 31, 2020.
|
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.
25
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
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 August 31, 2020 and February 29, 2020:
|
|
August 31,
2020
|
|
|
February 29,
2020
|
|
Assets
|
|
(unaudited)
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
—
|
|
Accounts receivable, net
|
|
|
250
|
|
|
|
147
|
|
Inventory, net
|
|
|
2,238
|
|
|
|
2,052
|
|
Prepaid expenses and other current assets
|
|
|
203
|
|
|
|
313
|
|
Total current assets
|
|
|
2,691
|
|
|
|
2,512
|
|
Property, plant and equipment, net
|
|
|
34
|
|
|
|
69
|
|
Intangible assets, net
|
|
|
2,464
|
|
|
|
2,600
|
|
Other assets
|
|
|
59
|
|
|
|
76
|
|
Total assets
|
|
$
|
5,248
|
|
|
$
|
5,257
|
|
Liabilities and Partners' Deficit
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,390
|
|
|
$
|
2,086
|
|
Interest payable to VOXX
|
|
|
10,707
|
|
|
|
9,994
|
|
Accrued expenses and other current liabilities
|
|
|
674
|
|
|
|
252
|
|
Accrued sales incentives
|
|
|
10
|
|
|
|
—
|
|
Due to VOXX
|
|
|
57,767
|
|
|
|
54,074
|
|
Total current liabilities
|
|
|
70,548
|
|
|
|
66,406
|
|
Other long-term liabilities
|
|
|
1,200
|
|
|
|
1,200
|
|
Total liabilities
|
|
|
71,748
|
|
|
|
67,606
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Partners' deficit:
|
|
|
|
|
|
|
|
|
Capital
|
|
|
41,416
|
|
|
|
41,416
|
|
Retained losses
|
|
|
(107,916
|
)
|
|
|
(103,765
|
)
|
Total partners' deficit
|
|
|
(66,500
|
)
|
|
|
(62,349
|
)
|
Total liabilities and partners' deficit
|
|
$
|
5,248
|
|
|
$
|
5,257
|
|
26
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
Revenue 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 Income (Loss) for the three and six months ended August 31, 2020, respectively:
|
|
For the three months
ended August 31,
|
|
|
For the six months
ended August 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
$
|
263
|
|
|
$
|
253
|
|
|
$
|
360
|
|
|
$
|
274
|
|
Cost of sales
|
|
|
262
|
|
|
|
343
|
|
|
|
381
|
|
|
|
414
|
|
Gross profit
|
|
|
1
|
|
|
|
(90
|
)
|
|
|
(21
|
)
|
|
|
(140
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
125
|
|
|
|
161
|
|
|
|
302
|
|
|
|
362
|
|
General and administrative
|
|
|
428
|
|
|
|
1,157
|
|
|
|
857
|
|
|
|
2,377
|
|
Engineering and technical support
|
|
|
1,094
|
|
|
|
1,354
|
|
|
|
2,249
|
|
|
|
2,719
|
|
Total operating expenses
|
|
|
1,647
|
|
|
|
2,672
|
|
|
|
3,408
|
|
|
|
5,458
|
|
Operating loss
|
|
|
(1,646
|
)
|
|
|
(2,762
|
)
|
|
|
(3,429
|
)
|
|
|
(5,598
|
)
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and bank charges
|
|
|
(368
|
)
|
|
|
(315
|
)
|
|
|
(722
|
)
|
|
|
(615
|
)
|
Total other expense, net
|
|
|
(368
|
)
|
|
|
(315
|
)
|
|
|
(722
|
)
|
|
|
(615
|
)
|
Loss before income taxes
|
|
|
(2,014
|
)
|
|
|
(3,077
|
)
|
|
|
(4,151
|
)
|
|
|
(6,213
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(2,014
|
)
|
|
$
|
(3,077
|
)
|
|
$
|
(4,151
|
)
|
|
$
|
(6,213
|
)
|
The Company operates in three distinct segments based on our products and our internal organizational structure. The three operating segments, which are also the Company’s reportable segments, are Automotive Electronics, Consumer Electronics, and Biometrics.
Our Automotive Electronics segment designs, manufactures, markets and distributes rear-seat entertainment devices, satellite radio products, automotive security, vehicle access systems, remote start systems, mobile interface modules, mobile multimedia devices, aftermarket/OE-styled radios, car link-smartphone telematics applications, driver distraction products, collision avoidance systems, location-based services, turn signal switches, automotive lighting products, automotive sensing and camera systems, USB ports, cruise control systems, and heated seats.
Our Consumer Electronics segment designs, manufactures, markets and distributes home theater systems, high-end loudspeakers, outdoor speakers, business music systems, cinema speakers, flat panel speakers, wireless and Bluetooth speakers, soundbars, wired and wireless headphones and ear buds, DLNA (Digital Living Network Alliance) compatible devices, remote controls, karaoke products, personal sound amplifiers, infant/nursery products, activity tracking bands, healthcare wearables, smart-home security and safety products, as well as A/V connectivity, portable/home charging, reception, and digital consumer products.
Our Biometrics segment designs, manufactures, markets, and distributes iris identification and biometric security related 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.
27
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
Segment data for each of the Company's segments is presented below:
|
|
Automotive
Electronics
|
|
|
Consumer
Electronics
|
|
|
Biometrics
|
|
|
Corporate/
Eliminations
|
|
|
Total
|
|
Three Months Ended August 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
32,633
|
|
|
$
|
94,992
|
|
|
$
|
263
|
|
|
$
|
144
|
|
|
$
|
128,032
|
|
Equity in income of equity investees
|
|
|
1,883
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,883
|
|
Interest expense and bank charges
|
|
|
353
|
|
|
|
2,106
|
|
|
|
367
|
|
|
|
(1,816
|
)
|
|
|
1,010
|
|
Depreciation and amortization expense
|
|
|
708
|
|
|
|
954
|
|
|
|
86
|
|
|
|
999
|
|
|
|
2,747
|
|
Income (loss) before income taxes
|
|
|
239
|
|
|
|
12,789
|
|
|
|
(2,014
|
)
|
|
|
(1,850
|
)
|
|
|
9,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
26,845
|
|
|
$
|
63,034
|
|
|
$
|
254
|
|
|
$
|
113
|
|
|
$
|
90,246
|
|
Equity in income of equity investees
|
|
|
1,265
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,265
|
|
Interest expense and bank charges
|
|
|
118
|
|
|
|
2,469
|
|
|
|
313
|
|
|
|
(2,013
|
)
|
|
|
887
|
|
Depreciation and amortization expense
|
|
|
193
|
|
|
|
1,122
|
|
|
|
784
|
|
|
|
963
|
|
|
|
3,062
|
|
Income (loss) before income taxes
|
|
|
316
|
|
|
|
(1,067
|
)
|
|
|
(3,042
|
)
|
|
|
(2,256
|
)
|
|
|
(6,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
49,909
|
|
|
$
|
149,506
|
|
|
$
|
360
|
|
|
$
|
244
|
|
|
$
|
200,019
|
|
Equity in income of equity investees
|
|
|
2,745
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,745
|
|
Interest expense and bank charges
|
|
|
521
|
|
|
|
4,294
|
|
|
|
722
|
|
|
|
(3,674
|
)
|
|
|
1,863
|
|
Depreciation and amortization expense
|
|
|
1,174
|
|
|
|
1,919
|
|
|
|
172
|
|
|
|
2,025
|
|
|
|
5,290
|
|
(Loss) income before income taxes
|
|
|
(2,871
|
)
|
|
|
12,736
|
|
|
|
(4,151
|
)
|
|
|
(3,874
|
)
|
|
|
1,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
56,487
|
|
|
$
|
126,687
|
|
|
$
|
260
|
|
|
$
|
266
|
|
|
$
|
183,700
|
|
Equity in income of equity investees
|
|
|
2,705
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,705
|
|
Interest expense and bank charges
|
|
|
217
|
|
|
|
4,867
|
|
|
|
615
|
|
|
|
(3,815
|
)
|
|
|
1,884
|
|
Depreciation and amortization expense
|
|
|
380
|
|
|
|
2,263
|
|
|
|
1,569
|
|
|
|
1,916
|
|
|
|
6,128
|
|
Income (loss) before income taxes
|
|
|
777
|
|
|
|
(607
|
)
|
|
|
(6,022
|
)
|
|
|
(5,214
|
)
|
|
|
(11,066
|
)
|
(24)
|
Revenue from Contracts with Customers
|
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer of promised goods and 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. We apply the FASB’s guidance on revenue recognition, which requires us to recognize the amount of revenue and consideration that we expect to receive in exchange for goods and services transferred to our customers. To do this, the Company applies the five-step model prescribed by the FASB, which requires us to: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, we satisfy a performance obligation. No performance obligation related amounts were deferred as of August 31, 2020 or August 31, 2019.
Within our Automotive Electronics segment, while the majority of the contracts we enter into with Original Equipment Manufacturers (“OEM”) are long-term supply arrangements, the performance obligations are established by the enforceable contract, which is generally considered to be the purchase order. The purchase orders are of durations less than one year. As such, the Company applies the practical expedient in ASC paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, for which work has not yet been performed.
Performance Obligations
The Company’s primary source of revenue is derived from the manufacture and distribution of consumer electronic, automotive electronic, and biometric products. Our consumer electronic products primarily consist of finished goods sold to retail and commercial customers, consisting of premium audio products and other consumer electronic
28
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
products. Our automotive electronic products are sold both to OEM and aftermarket customers. Our biometrics products are primarily sold to retail and commercial customers. We recognize revenue for sales to our customers when transfer of control of the related good or service has occurred. The majority of our revenue was recognized under the point in time approach for the three and six months ended August 31, 2020. Certain telematic subscription revenues generated by our Automotive Electronics segment are recognized over time. Contract terms with certain of our OEM customers could result in products and services being transferred over time as a result of the customized nature of some of our products, together with contractual provisions in the customer contracts that provide us with an enforceable right to payment for performance completed to date; however, under typical terms, we do not have the right to consideration until the time of shipment from our manufacturing facilities or distribution centers, or until the time of delivery to our customers. If certain contracts in the future provide the Company with this enforceable right of payment, the timing of revenue recognition from products transferred to customers over time may be slightly accelerated compared to our right to consideration at the time of shipment or delivery.
Under ASC 606, we are required to present a refund liability and a return asset within the Consolidated Balance Sheets. The changes in the refund liability are reported in Net sales, and the changes in the return asset are reported in Cost of sales in the Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss). As of August 31, 2020 and February 29, 2020, the balance of the return asset was $1,218 and $1,544, respectively, and the balance of the refund liability was $2,926 and $3,779, respectively, and are presented within Prepaid expenses and other current assets and Accrued expenses and other current liabilities, respectively, on the Consolidated Balance Sheets.
We warrant our products against certain defects in material and workmanship when used as designed, which primarily range from 30 days to 3 years. We offer limited lifetime warranties on certain products, which limit the customer’s remedy to the repair or replacement of the defective product or part for the designated lifetime of the product, or for the life of the vehicle for the original owner, if it is an automotive product. We do not sell extended warranties.
Contract Balances
Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date on contracts with customers. Contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been met, and therefore, revenue has not been recognized. The Company had current and non-current liability balances totaling $5,556 at August 31, 2020 related to telematic subscription services of the Company’s DEI subsidiary. There were no contract liability balances at February 29, 2020. The Company had no contract asset balances at August 31, 2020 or February 29, 2020.
Disaggregation of Revenue
The Company operates in three reportable segments: Automotive Electronics, Consumer Electronics, and Biometrics. ASC 606 requires further disaggregation of an entity’s revenue. In the following table, the Company's net sales are disaggregated by segment and product type for the three and six months ended August 31, 2020 and 2019:
|
|
Three months ended
August 31,
|
|
|
Six months ended
August 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Automotive Electronics Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OEM Products
|
|
$
|
10,714
|
|
|
$
|
11,810
|
|
|
$
|
18,373
|
|
|
$
|
26,763
|
|
Aftermarket Products
|
|
|
21,919
|
|
|
|
15,035
|
|
|
|
31,536
|
|
|
|
29,724
|
|
Total Automotive Segment
|
|
|
32,633
|
|
|
|
26,845
|
|
|
|
49,909
|
|
|
|
56,487
|
|
Consumer Electronics Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium Audio Products
|
|
|
69,282
|
|
|
|
38,108
|
|
|
|
103,820
|
|
|
|
74,806
|
|
Other Consumer Electronic Products
|
|
|
25,710
|
|
|
|
24,926
|
|
|
|
45,686
|
|
|
|
51,881
|
|
Total Consumer Electronics Segment
|
|
|
94,992
|
|
|
|
63,034
|
|
|
|
149,506
|
|
|
|
126,687
|
|
Biometrics Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biometric Products
|
|
|
263
|
|
|
|
254
|
|
|
|
360
|
|
|
|
260
|
|
Total Biometrics Segment
|
|
|
263
|
|
|
|
254
|
|
|
|
360
|
|
|
|
260
|
|
Corporate/Eliminations
|
|
|
144
|
|
|
|
113
|
|
|
|
244
|
|
|
|
266
|
|
Total Net Sales
|
|
$
|
128,032
|
|
|
$
|
90,246
|
|
|
$
|
200,019
|
|
|
$
|
183,700
|
|
29
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
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 of each matter, 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 does not believe that any current outstanding litigation matters will have a material adverse effect on the Company's financial statements, individually, or in the aggregate.
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 that are not advantageous to the Company, or pay material amounts of damages.
(26)
|
New Accounting Pronouncements
|
In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." ASU 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and added additional disclosures. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2020. The amendments in ASU 2018-14 must be applied on a retrospective basis. The Company is currently assessing the effect, if any, that ASU 2018-14 will have on the disclosures in its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes.” This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This guidance is effective for fiscal years beginning after December 15, 2020. The guidance in this update has various elements, some of which are applied on a prospective basis and others on a retrospective basis with earlier application permitted. The Company is currently evaluating the effect of this ASU on the Company’s consolidated financial statements and related disclosures.
In January 2020, the FASB issued ASU No. 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions by clarifying the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting under Topic 323, and the accounting for certain forward contracts and purchased options accounted for under Topic 815. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.
30