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.

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. In connection with the acquisition, the Company entered into a Loan Agreement with EyeLock LLC. The terms of the Loan Agreement allowed EyeLock LLC to borrow up to $12,000, at an interest rate of 10%. During Fiscal 2017, as well as during the first and second quarters of Fiscal 2018, the Company issued four convertible promissory notes to EyeLock LLC, allowing the entity to borrow up to a total of $21,000 in additional funds. The outstanding principal balance of these promissory notes are convertible at the sole option of Voxx into units of EyeLock LLC. The convertible promissory notes bear interest at 10% and can be used only for working capital purposes related to new business opportunities. If Voxx chooses not to convert into equity, the outstanding loan principal will be repaid at a multiple ranging from 1.35 to 1.50 based on the repayment date. Amounts outstanding under the initial loan agreement are due on November 1, 2017, while the four convertible promissory notes executed during Fiscal 2017 and Fiscal 2018 are due on November 1, 2017, April 24, 2018 and September 1, 2018, respectively. All four agreements include customary events of default and are 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 agreements with EyeLock LLC, executed in conjunction with the acquisition, as well as during Fiscal 2017 and Fiscal 2018. The total outstanding balance of these loans as of August 31, 2017 was $28,456.

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.

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 Sheet as of August 31, 2017 and February 28, 2017:



	August 31, 2017			February 28, 2017
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	(24	)	$	11
Accounts receivable, net	108			295
Inventory, net	118			135
Receivables from vendors	106			—
Prepaid expenses and other current assets	109			189
Total current assets	417			630
Property, plant and equipment, net	232			276
Intangible assets, net	37,657			39,187
Other assets	90			96
Total assets	$	38,396		$	40,189
Liabilities and Partners' Equity
Current liabilities:
Accounts payable	$	381		$	710
Accrued expenses and other current liabilities	5,154			3,506
Current portion of debt	27,000			22,098
Total current liabilities	32,535			26,314
Long-term debt	1,456			—
Other long-term liabilities	1,200			1,200
Total liabilities	35,191			27,514
Commitments and contingencies
Partners' equity:
Capital	41,416			40,891
Retained earnings	(38,211		)	(28,216		)
Total partners' equity	3,205			12,675
Total liabilities and partners' equity	$	38,396		$	40,189

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, 2017 and 2016, respectively:



	Three Months Ended August 31,						Six Months Ended August 31,
	2017			2016			2017			2016
Net sales	$	150		$	64		$	214		$	111
Cost of sales	79			21			57			30
Gross profit	71			43			157			81
Operating expenses:
Selling	762			416			1,355			1,086
General and administrative	2,019			1,611			3,677			3,297
Engineering and technical support	1,785			2,038			3,818			4,094
Total operating expenses	4,566			4,065			8,850			8,477
Operating loss	(4,495		)	(4,022		)	(8,693		)	(8,396		)
Interest and bank charges	(694		)	(376		)	(1,303		)	(651		)
Loss before income taxes	(5,189		)	(4,398		)	(9,996		)	(9,047		)
Income tax expense	—			—			—			—
Net loss	$	(5,189	)	$	(4,398	)	$	(9,996	)	$	(9,047	)