Variable Interest Entities

A variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support, or (ii) has equity investors who lack the characteristics of a controlling financial interest. Under ASC 810, an entity that holds a variable interest in a VIE and meets certain requirements would be considered to be the primary beneficiary of the VIE and required to consolidate the VIE in its consolidated financial statements. In order to be considered the primary beneficiary of a VIE, an entity must hold a variable interest in the VIE and have both:

•the power to direct the activities that most significantly impact the economic performance of the VIE; and

•the right to receive benefits from, or the obligation to absorb losses of, the VIE that could be potentially significant to the VIE.

Effective September 1, 2015, Voxx acquired a majority voting interest in substantially all of the assets and certain specified liabilities of Eyelock, Inc. and Eyelock Corporation, a market leader of iris-based identity authentication solutions, through a newly-formed entity, Eyelock LLC (See Note 2). We have determined that we hold a variable interest in EyeLock LLC as a result of:

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

•a loan agreement with EyeLock LLC, executed in conjunction with the acquisition, as well as two convertible promissory notes executed in the second and third quarters of Fiscal 2017, in which the subsidiary may borrow funds from Voxx for working capital purposes (see Note 2). The total outstanding balance of these loans as of November 30, 2016 was $18,947.

We concluded that we became the primary beneficiary of EyeLock LLC on September 1, 2015 in conjunction with the acquisition. This was the first date on which we had the power to direct the activities that most significantly impact the economic performance of the entity because we acquired a majority interest in substantially all of the assets and certain liabilities of EyeLock, Inc. and EyeLock Corporation on this date, as well as obtained a majority voting interest as a result of this transaction. Although we are considered to have control over EyeLock LLC under ASC 810, due to our majority ownership interest, the assets of EyeLock LLC can only be used to satisfy the obligations of EyeLock LLC. As a result of our majority ownership interest in the entity and our primary beneficiary conclusion, we consolidated EyeLock LLC within our consolidated financial statements beginning on September 1, 2015. Prior to September 1, 2015, EyeLock, Inc. and EyeLock Corporation were not required to be consolidated within our consolidated financial statements because we concluded that we were not the primary beneficiary of the entities prior to that time.

Assets and Liabilities of EyeLock LLC

In accordance with ASC 810, the consolidation of EyeLock LLC was treated as an acquisition of assets and liabilities and, therefore, the assets and liabilities of EyeLock LLC were included in our consolidated financial statements at their fair value beginning on September 1, 2015. Refer to Note 2 for the fair value of the assets and liabilities of EyeLock LLC on the acquisition date and the discussion of purchase accounting considerations.

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



	November 30, 2016			February 29, 2016
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	21		$	20
Accounts receivable, net	340			195
Inventory, net	395			304
Prepaid expenses and other current assets	208			256
Total current assets	964			775
Property, plant and equipment, net	286			302
Intangible assets, net	39,953			42,249
Other assets	108			—
Total assets	$	41,311		$	43,326
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	527		$	746
Accrued expenses and other current liabilities	2,570			1,103
Total current liabilities	3,097			1,849
Long-term debt	18,947			9,104
Other long-term liabilities	1,200			1,200
Total liabilities	23,244			12,153
Commitments and contingencies
Partners' equity:
Capital	40,628			39,841
Retained earnings	(22,561		)	(8,668		)
Total partners' equity	18,067			31,173
Total liabilities and stockholders' equity	$	41,311		$	43,326

Revenue and Expenses of EyeLock LLC

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



	Three months ended			Nine months ended
	November 30, 2016			November 30, 2016
Net sales	$	100		$	211
Cost of sales	37			67
Gross profit	63			144
Operating expenses:
Selling	553			1,639
General and administrative	1,759			5,056
Engineering and technical support	2,154			6,248
Total operating expenses	4,466			12,943
Operating loss	(4,403		)	(12,799		)
Interest and bank charges	(441		)	(1,092		)
Loss before income taxes	(4,844		)	(13,891		)
Income tax expense	—			—
Net loss	$	(4,844	)	$	(13,891	)



		Three months ended			Nine months ended
		November 30, 2015			November 30, 2015
Net sales		72			72
Cost of sales		11			11
Gross profit		61			61
Operating expenses:
Selling		359			359
General and administrative		1,779			1,779
Engineering and technical support		2,142			2,142
Total operating expenses		4,280			4,280
Operating loss		(4,219	)		(4,219	)
Interest and bank charges		(117	)		(117	)
Loss before income taxes		(4,336	)		(4,336	)
Income tax expense		—			—
Net loss	—	(4,336	)	—	(4,336	)