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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended May 31, 2024

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 0-28839

 

VOXX International Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

13-1964841

(IRS Employer Identification No.)

2351 J Lawson Blvd., Orlando, Florida

(Address of principal executive offices)

 

32824

(Zip Code)

 

 

 

(800) 645-7750

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

Trading Symbol:

Name of Each Exchange on which Registered

Class A Common Stock $.01 par value

VOXX

The Nasdaq Stock Market LLC

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesNo

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YesNo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

Number of shares of each class of the issuer's common stock outstanding as of the latest practicable date.

 

Class

 

As of July 8, 2024

Class A Common Stock

 

20,217,001 Shares

Class B Common Stock

 

2,260,954 Shares

 


 

VOXX International Corporation and Subsidiaries

Table of Contents

 

 

 

 

 

Page

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1

 

FINANCIAL STATEMENTS

 

 

 

 

Consolidated Balance Sheets at May 31, 2024 (unaudited) and February 29, 2024

 

3

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended May 31, 2024 and 2023

 

5

 

 

Unaudited Consolidated Statements of Stockholders’ Equity for the Three Months Ended May 31, 2024 and 2023

 

6

 

 

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended May 31, 2024 and 2023

 

7

 

 

Notes to Unaudited Consolidated Financial Statements

 

8

Item 2

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

33

Item 3

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

44

Item 4

 

CONTROLS AND PROCEDURES

 

44

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1

 

LEGAL PROCEEDINGS

 

46

Item 1A

 

RISK FACTORS

 

46

Item 2

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

46

Item 6

 

EXHIBITS

 

47

SIGNATURES

 

48

 

2


 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VOXX International Corporation and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

 

May 31,
2024

 

 

February 29,
2024

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,160

 

 

$

10,986

 

Accounts receivable, net of allowances of $2,758 and $3,041 at May 31, 2024 and February 29, 2024, respectively

 

 

64,787

 

 

 

71,066

 

Inventory

 

 

116,230

 

 

 

128,471

 

Receivables from vendors

 

 

1,190

 

 

 

1,192

 

Due from GalvanEyes LLC, current (Note 21)

 

 

-

 

 

 

1,238

 

Prepaid expenses and other current assets

 

 

16,759

 

 

 

20,820

 

Income tax receivable

 

 

4,273

 

 

 

2,095

 

Total current assets

 

 

207,399

 

 

 

235,868

 

Investment securities

 

 

761

 

 

 

828

 

Equity investments

 

 

23,762

 

 

 

21,380

 

Property, plant and equipment, net

 

 

44,420

 

 

 

45,070

 

Operating lease, right of use assets

 

 

3,053

 

 

 

2,577

 

Goodwill

 

 

63,283

 

 

 

63,931

 

Intangible assets, net

 

 

65,265

 

 

 

68,766

 

Due from GalvanEyes LLC, less current portion (Note 21)

 

 

-

 

 

 

1,340

 

Deferred income tax assets

 

 

1,461

 

 

 

1,452

 

Other assets

 

 

2,798

 

 

 

2,794

 

Total assets

 

$

412,202

 

 

$

444,006

 

Liabilities, Redeemable Equity, Redeemable Non-Controlling Interest, and Stockholders' Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

25,895

 

 

$

35,076

 

Accrued expenses and other current liabilities

 

 

36,601

 

 

 

38,238

 

Income taxes payable

 

 

834

 

 

 

1,123

 

Accrued sales incentives

 

 

15,160

 

 

 

18,236

 

Contract liabilities, current

 

 

3,574

 

 

 

3,810

 

Current portion of long-term debt

 

 

4,162

 

 

 

500

 

Total current liabilities

 

 

86,226

 

 

 

96,983

 

Long-term debt, net of debt issuance costs

 

 

63,684

 

 

 

71,881

 

Finance lease liabilities, less current portion

 

 

559

 

 

 

644

 

Operating lease liabilities, less current portion

 

 

2,127

 

 

 

1,884

 

Deferred compensation

 

 

761

 

 

 

828

 

Deferred income tax liabilities

 

 

2,604

 

 

 

2,690

 

Other tax liabilities

 

 

706

 

 

 

809

 

Prepaid ownership interest in EyeLock LLC due to GalvanEyes LLC (Note 21)

 

 

-

 

 

 

9,817

 

Other long-term liabilities

 

 

2,147

 

 

 

2,170

 

Total liabilities

 

 

158,814

 

 

 

187,706

 

Commitments and contingencies (Note 24)

 

 

 

 

 

 

Redeemable equity: Class A, $.01 par value; 577,581 shares at both May 31, 2024 and February 29, 2024 (Note 8)

 

 

4,110

 

 

 

4,110

 

Redeemable non-controlling interest (Note 2)

 

 

(3,158

)

 

 

(3,203

)

Stockholders' equity:

 

 

 

 

 

 

Preferred stock:

 

 

 

 

 

 

No shares issued or outstanding (Note 20)

 

 

-

 

 

 

-

 

Common stock:

 

 

 

 

 

 

Class A, $.01 par value, 60,000,000 shares authorized, 23,990,603 and 23,985,603 shares issued and 19,639,420 and 19,698,562 shares outstanding at May 31, 2024 and February 29, 2024, respectively

 

 

240

 

 

 

240

 

Class B Convertible, $.01 par value, 10,000,000 shares authorized, 2,260,954 shares issued and outstanding at both May 31, 2024 and February 29, 2024

 

 

22

 

 

 

22

 

Paid-in capital

 

 

296,044

 

 

 

293,272

 

Retained earnings

 

 

49,003

 

 

 

58,272

 

Accumulated other comprehensive loss

 

 

(16,784

)

 

 

(17,366

)

Less: Treasury stock, at cost, 4,351,183 and 4,287,041 shares of Class A Common Stock at May 31, 2024 and February 29, 2024, respectively

 

 

(39,821

)

 

 

(39,573

)

Total VOXX International Corporation stockholders' equity

 

 

288,704

 

 

 

294,867

 

Non-controlling interest

 

 

(36,268

)

 

 

(39,474

)

Total stockholders' equity

 

 

252,436

 

 

 

255,393

 

Total liabilities, redeemable equity, redeemable non-controlling interest, and stockholders' equity

 

$

412,202

 

 

$

444,006

 

 

3


 

See accompanying notes to unaudited consolidated financial statements.

4


 

VOXX International Corporation and Subsidiaries

Unaudited Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

 

 

 

Three months ended
May 31,

 

 

 

2024

 

 

2023

 

Net sales

 

$

91,661

 

 

$

111,926

 

Cost of sales

 

 

66,252

 

 

 

84,346

 

Gross profit

 

 

25,409

 

 

 

27,580

 

Operating expenses:

 

 

 

 

 

 

Selling

 

 

9,590

 

 

 

11,166

 

General and administrative

 

 

16,457

 

 

 

19,427

 

Engineering and technical support

 

 

6,244

 

 

 

8,337

 

Restructuring expenses

 

 

231

 

 

 

59

 

Total operating expenses

 

 

32,522

 

 

 

38,989

 

Operating loss

 

 

(7,113

)

 

 

(11,409

)

Other (expense) income:

 

 

 

 

 

 

Interest and bank charges

 

 

(2,138

)

 

 

(1,546

)

Equity in income of equity investees

 

 

351

 

 

 

1,616

 

Final arbitration award

 

 

-

 

 

 

(986

)

Other, net

 

 

(1,871

)

 

 

(701

)

Total other expense, net

 

 

(3,658

)

 

 

(1,617

)

Loss before income taxes

 

 

(10,771

)

 

 

(13,026

)

Income tax benefit

 

 

(594

)

 

 

(1,321

)

Net loss

 

 

(10,177

)

 

 

(11,705

)

Less: net loss attributable to non-controlling interest

 

 

(908

)

 

 

(967

)

Net loss attributable to VOXX International Corporation and Subsidiaries

 

$

(9,269

)

 

$

(10,738

)

Other comprehensive income (loss):

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

595

 

 

 

238

 

Derivatives designated for hedging

 

 

(13

)

 

 

(60

)

Pension plan adjustments

 

 

-

 

 

 

(1

)

Other comprehensive income, net of tax

 

 

582

 

 

 

177

 

Comprehensive loss attributable to VOXX International Corporation and Subsidiaries

 

$

(8,687

)

 

$

(10,561

)

Loss per share - basic: Attributable to VOXX International Corporation and Subsidiaries

 

$

(0.40

)

 

$

(0.45

)

Loss per share - diluted: Attributable to VOXX International Corporation and Subsidiaries

 

$

(0.40

)

 

$

(0.45

)

Weighted-average common shares outstanding (basic)

 

 

23,139,876

 

 

 

23,795,718

 

Weighted-average common shares outstanding (diluted)

 

 

23,139,876

 

 

 

23,795,718

 

 

See accompanying notes to unaudited consolidated financial statements.

5


 

VOXX International Corporation and Subsidiaries

Unaudited Consolidated Statements of Stockholders' Equity

For the three months ended May 31, 2024 and 2023

(In thousands, except share and per share data)

 

 

 

Class A
and Class B
Common
Stock

 

 

Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
(Loss) Income

 

 

Non-
controlling
Interest

 

 

Treasury
Stock

 

 

Total
Stock-
holders'
Equity

 

Balances at February 29, 2024

 

$

262

 

 

$

293,272

 

 

$

58,272

 

 

$

(17,366

)

 

$

(39,474

)

 

$

(39,573

)

 

$

255,393

 

Net (loss) income

 

 

 

 

 

 

 

 

(9,269

)

 

 

 

 

 

(623

)

 

 

 

 

 

(9,892

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

582

 

 

 

 

 

 

 

 

 

582

 

Cancellation of EyeLock LLC ownership put option, net of shareholder receivable (see Note 21)

 

 

 

 

 

3,710

 

 

 

 

 

 

 

 

 

3,829

 

 

 

 

 

 

7,539

 

Cash settlement of market stock units upon vesting of remaining award

 

 

 

 

 

(1,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,000

)

Repurchase of 64,142 shares of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(248

)

 

 

(248

)

Stock-based compensation expense

 

 

 

 

 

62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

62

 

Balances at May 31, 2024

 

$

262

 

 

$

296,044

 

 

$

49,003

 

 

$

(16,784

)

 

$

(36,268

)

 

$

(39,821

)

 

$

252,436

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at February 28, 2023

 

$

262

 

 

$

292,565

 

 

$

99,122

 

 

$

(18,680

)

 

$

(37,268

)

 

$

(30,285

)

 

$

305,716

 

Net loss

 

 

 

 

 

 

 

 

(10,738

)

 

 

 

 

 

(649

)

 

 

 

 

 

(11,387

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

177

 

 

 

 

 

 

 

 

 

177

 

Repurchase of 371,087 shares of Class A common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,113

)

 

 

(4,113

)

Stock-based compensation expense

 

 

 

 

 

235

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

235

 

Balances at May 31, 2023

 

$

262

 

 

$

292,800

 

 

$

88,384

 

 

$

(18,503

)

 

$

(37,917

)

 

$

(34,398

)

 

$

290,628

 

 

See accompanying notes to unaudited consolidated financial statements.

6


 

VOXX International Corporation and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

 

 

 

 

Three months ended
May 31,

 

 

 

 

2024

 

 

 

2023

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

 

$

(10,177

)

 

 

$

(11,705

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

2,864

 

 

 

 

3,247

 

Amortization of debt discount

 

 

 

103

 

 

 

 

96

 

Bad debt (recovery) expense

 

 

 

(9

)

 

 

 

16

 

Reduction in the carrying amount of the right of use asset

 

 

 

313

 

 

 

 

365

 

Loss on contribution of assets to joint venture

 

 

 

413

 

 

 

 

-

 

Equity in income of equity investees

 

 

 

(351

)

 

 

 

(1,616

)

Distribution of income from equity investees

 

 

 

958

 

 

 

 

1,596

 

Deferred income tax benefit

 

 

 

(80

)

 

 

 

(232

)

Non-cash compensation adjustment

 

 

 

(67

)

 

 

 

(154

)

Stock based compensation expense

 

 

 

146

 

 

 

 

258

 

(Gain) loss on disposal of property, plant, and equipment

 

 

 

-

 

 

 

 

(33

)

Gain on sale of intangible asset

 

 

 

-

 

 

 

 

(450

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

6,247

 

 

 

 

17,401

 

Inventory

 

 

 

10,442

 

 

 

 

(9,321

)

Receivables from vendors

 

 

 

2

 

 

 

 

(23

)

Prepaid expenses and other

 

 

 

4,315

 

 

 

 

(1,086

)

Investment securities-trading

 

 

 

67

 

 

 

 

154

 

Accounts payable, accrued expenses, accrued sales incentives, contract liabilities, and other liabilities

 

 

 

(14,715

)

 

 

 

8,220

 

Income taxes payable

 

 

 

(2,554

)

 

 

 

(1,480

)

Net cash (used in) provided by operating activities

 

 

 

(2,083

)

 

 

 

5,253

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant, and equipment

 

 

 

(648

)

 

 

 

(817

)

Proceeds from sale of property, plant, and equipment

 

 

 

-

 

 

 

 

33

 

Net cash used in investing activities

 

 

 

(648

)

 

 

 

(784

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Principal payments on finance lease obligation

 

 

 

(105

)

 

 

 

(70

)

Repayment of bank obligations

 

 

 

(43,749

)

 

 

 

(39,546

)

Borrowings on bank obligations

 

 

 

39,261

 

 

 

 

37,089

 

Deferred financing costs

 

 

 

-

 

 

 

 

(55

)

Settlement of market stock unit awards

 

 

 

(1,000

)

 

 

 

-

 

Purchase of treasury stock

 

 

 

(246

)

 

 

 

(4,113

)

Net cash used in financing activities

 

 

 

(5,839

)

 

 

 

(6,695

)

Effect of exchange rate changes on cash

 

 

 

1,744

 

 

 

 

1,327

 

Net decrease in cash and cash equivalents

 

 

 

(6,826

)

 

 

 

(899

)

Cash and cash equivalents at beginning of period

 

 

 

10,986

 

 

 

 

6,134

 

Cash and cash equivalents at end of period

 

 

$

4,160

 

 

 

$

5,235

 

 

See accompanying notes to unaudited consolidated financial statements.

7


 

VOXX International Corporation and Subsidiaries

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 due to seasonal variations in operating results and other factors. These unaudited consolidated financial statements do not include all disclosures associated with audited consolidated financial statements prepared in accordance with GAAP. 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, 2024. 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 22 for the Company's segment reporting disclosures.

(2) Redeemable Non-Controlling Interest

On September 8, 2021, Onkyo Technology KK ("Onkyo"), a joint venture between the Company's subsidiary, Premium Audio Company LLC ("PAC"), and its partner Sharp Corporation ("Sharp"), completed a transaction to acquire certain assets of the home audio/video business of Onkyo Home Entertainment Corporation (“OHEC”). PAC owns 77.2% of the joint venture and has an 85.1% voting interest and Sharp owns 22.8% of the joint venture and has a 14.9% voting interest. The joint venture agreement between PAC and Sharp contains a put/call option, whereby Sharp has the right to put its interest in the joint venture back to Voxx and Voxx has the right to call Sharp’s ownership interest in the joint venture at any time after the approval of Onkyo’s annual financial statements for the year ending February 28, 2025 at a purchase price equal to the higher of (a) the assets of Onkyo minus the liabilities of Onkyo, or (b) five times the EBITDA of Onkyo, in either case (a) or (b), less any amounts distributed to Sharp at any time (provided all shareholder loans are repaid) multiplied by the percentage of votes attached to such shares and other interests, free from all encumbrances, and with the benefit of all rights attaching to them as at the date of the relevant notice.

The Company has consolidated the financial results of Onkyo since the acquisition date for financial reporting purposes. The non-controlling interest has been classified as redeemable non-controlling interest outside of equity on the accompanying Consolidated Balance Sheets as the exercise of the put/call option is not within the Company’s control. The carrying value of the redeemable non-controlling interest of Onkyo cannot be less than the redemption amount, which is the amount Sharp will settle the put option for if exercised. Based upon the terms of the put/call option, the option remains exercisable in the event there is no redemption price, or if the redemption price is a negative amount, as determined by the redemption formula. In periods where the specific formula results in a negative amount, and thus no redemption value exists, no amounts would be paid to or received from the counterparty upon the exercise of the option. Adjustments to reconcile the carrying value to the redemption amount are recorded immediately to retained earnings and included in earnings per share. No adjustment was made to the carrying amount of the redeemable non-controlling interest at May 31, 2024 as the excess of the redemption amount over the carrying amount was minimal, or a negative amount. In the event the formulaic redemption price is positive and greater than the carrying amount of the redeemable non-controlling interest balance, an adjustment to the carrying amount of the non-controlling interest would be recorded. The following table provides the rollforward of the redeemable non-controlling interest for the three months ended May 31, 2024:

 

8


 

 

 

Redeemable Non-controlling Interest

 

Balance at February 29, 2024

 

$

(3,203

)

Net loss attributable to non-controlling interest

 

 

(286

)

Comprehensive income attributable to non-controlling interest

 

 

179

 

Foreign currency translation

 

 

152

 

Balance at May 31, 2024

 

$

(3,158

)

 

(3) Net Loss Per Common Share

Basic net loss per common share attributable to VOXX International Corporation is calculated by dividing net income attributable to Voxx, adjusted to reflect changes in the redemption value of redeemable non-controlling interest, by the weighted-average common shares outstanding during the period. The diluted net loss per common share computation 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.

A reconciliation between the denominator of basic and diluted net loss per common share is as follows:

 

 

 

Three months ended
May 31,

 

 

 

2024

 

 

2023

 

Weighted-average common shares outstanding (basic)

 

 

23,139,876

 

 

 

23,795,718

 

Effect of dilutive securities:

 

 

 

 

 

 

Restricted stock units, market stock units, and stock grants

 

 

-

 

 

 

-

 

Weighted-average common shares and potential common shares outstanding (diluted)

 

 

23,139,876

 

 

 

23,795,718

 

 

Restricted stock units, market stock units, and stock grants of 267,209 and 295,582 for the three months ended May 31, 2024 and 2023, respectively, were not included in the net loss per diluted share calculation because the grant prices of the restricted stock units, market stock units, and stock grants were 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.

 

(4) Investment Securities

As of May 31, 2024, and February 29, 2024, the Company had the following investments:

 

 

 

May 31, 2024

 

 

 

Fair Value

 

Investment Securities

 

 

 

Marketable Equity Securities

 

 

 

Mutual funds

 

$

761

 

Total Marketable Equity Securities

 

 

761

 

Total Investment Securities

 

$

761

 

 

 

 

February 29, 2024

 

 

 

Fair Value

 

Investment Securities

 

 

 

Marketable Equity Securities

 

 

 

Mutual funds

 

$

828

 

Total Marketable Securities

 

 

828

 

Total Investment Securities

 

$

828

 

 

9


 

Equity Securities

Mutual Funds

The Company’s mutual funds are held in connection with its deferred compensation plan, which was terminated on May 1, 2023, with payments of the remaining balance to be made to participating employees on June 1, 2024 and March 1, 2025. 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 these assets and liabilities at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the assets and liabilities.

Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 - Quoted market prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable.

Level 3 - Unobservable inputs developed using the Company's estimates and assumptions, which reflect those that market participants would use.

The following table presents financial assets and liabilities measured at fair value on a recurring basis at May 31, 2024:

 

 

 

 

 

 

Fair Value Measurements at
Reporting Date Using

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

4,160

 

 

$

4,160

 

 

$

-

 

 

$

-

 

Mutual funds

 

 

761

 

 

 

761

 

 

 

-

 

 

 

-

 

Derivatives designated for hedging

 

 

244

 

 

 

-

 

 

 

244

 

 

 

-

 

 

The following table presents financial assets and liabilities measured at fair value on a recurring basis at February 29, 2024:

 

 

 

 

 

 

Fair Value Measurements at
Reporting Date Using

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

10,986

 

 

$

10,986

 

 

$

-

 

 

$

-

 

Mutual funds

 

 

828

 

 

$

828

 

 

$

-

 

 

$

-

 

Derivatives designated for hedging

 

 

263

 

 

 

-

 

 

 

263

 

 

 

-

 

 

The carrying value of our other financial instruments did not differ materially from their estimated fair values at May 31, 2024 and February 29, 2024.

10


 

Derivative Instruments

The Company’s derivative instruments include an interest rate swap agreement and foreign currency contracts.

The Company’s interest rate swap agreement hedges interest rate exposure related to the outstanding balance of its Florida Industrial Revenue Bonds ("the Florida Mortgage"), with monthly payments due through March 2026. The swap agreement locks the interest rate on the debt at 3.43% (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. The current outstanding notional value of the Company's interest rate swap at May 31, 2024 is $5,490.

Foreign currency contracts are utilized by our German subsidiary to hedge a portion of their U.S. Dollar company’s inventory purchases when management views them to be advantageous. The valuation of our foreign currency options is performed based on foreign exchange rates and yield curves built from observable market parameters and, where applicable, on Black Scholes or local volatility models calibrated to available volatility quotes (Level 2). During Fiscal 2024, the Company entered into forward foreign currency contracts which have notional U.S. Dollar equivalent amounts aggregating $10,350 at May 31, 2024, and that have been designated as cash flow hedges. The remaining maturities of these option contracts are less than one year. During the three months ended May 31, 2023, the Company had no open forward foreign currency contracts.

Financial Statement Classification

The following table discloses the fair value as of May 31, 2024 and February 29, 2024 of the Company’s derivative instruments:

 

 

 

Derivative Assets and Liabilities

 

 

 

 

 

Fair Value

 

 

 

Account

 

May 31, 2024

 

 

February 29, 2024

 

Derivative instruments

 

 

 

 

 

 

 

 

Foreign currency contracts designated as cash flow hedges

 

Prepaid expenses and other current assets

 

$

102

 

 

$

121

 

Interest rate swap agreements designated as cash flow hedges

 

Other assets

 

 

142

 

 

 

142

 

Total derivatives

 

 

 

$

244

 

 

$

263

 

 

Cash Flow Hedges

The change in the fair value of hedging derivative instruments that are expected to be highly effective and have been designated and qualify as cash flow hedges are recorded to Other comprehensive loss. During the same period or periods during which the hedged transaction affects earnings, the amounts recorded in Other comprehensive loss are reclassified to earnings and presented in the same income statement line item as the effect of the hedged item. The change in fair value of the derivative instruments that do not qualify for hedge accounting and have not been designated as cash flow hedges are included in other (expense) income on the accompanying Unaudited Consolidated Statements of Operations and Comprehensive Loss immediately.

The gain or loss on the Company’s interest rate swap is recorded in Other comprehensive loss and subsequently reclassified into Interest and bank charges in the period in which the hedged transaction affects earnings. As of May 31, 2024, no interest rate swaps originally designated for hedge accounting were de-designated or terminated.

The net income (loss) recognized in Other comprehensive income (loss) for foreign currency contracts is expected to be recognized in Cost of sales during the next twelve months. No amounts were excluded from the assessment of hedge effectiveness during the respective periods.

11


 

Activity related to cash flow hedges recorded during the three months ended May 31, 2024 and 2023 was as follows:

 

 

 

Three months ended

 

 

 

May 31, 2024

 

 

 

Pretax Gain
Recognized in
Other
Comprehensive
Income

 

 

Pretax Loss
Reclassified from
Accumulated Other
Comprehensive
Income

 

Cash flow hedges

 

 

 

 

 

 

Foreign currency contracts

 

$

8

 

 

$

(21

)

Interest rate swaps

 

 

-

 

 

 

-

 

 

 

 

Three months ended

 

 

 

May 31, 2023

 

 

 

Pretax Loss
Recognized in
Other
Comprehensive
Income

 

 

Pretax Gain (Loss)
Reclassified
from
Accumulated Other
Comprehensive
Income

 

Cash flow hedges

 

 

 

 

 

 

Foreign currency contracts

 

$

-

 

 

$

-

 

Interest rate swaps

 

 

(60

)

 

 

-

 

 

(6) Accumulated Other Comprehensive Loss

The Company’s accumulated other comprehensive 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, 2024

 

$

(17,192

)

 

$

(398

)

 

$

224

 

 

$

(17,366

)

Other comprehensive income before reclassifications

 

 

595

 

 

 

-

 

 

 

8

 

 

 

603

 

Reclassified from accumulated other comprehensive loss

 

 

-

 

 

 

-

 

 

 

(21

)

 

 

(21

)

Net current-period other comprehensive income (loss)

 

 

595

 

 

 

-

 

 

 

(13

)

 

 

582

 

Balance at May 31, 2024

 

$

(16,597

)

 

$

(398

)

 

$

211

 

 

$

(16,784

)

 

For the three months ended May 31, 2024, the Company recorded other comprehensive (loss) income, net of associated tax impact of $(6) related to derivatives designated in a hedging relationship. There were no taxes recorded related to pension plan adjustments during the three months ended May 31, 2024.

The other comprehensive (loss) income before reclassification related to foreign currency translation gains of $595 includes the remeasurement of intercompany transactions of a long-term investment nature of $78 with certain subsidiaries whose functional currency is not the U.S. dollar, and $517 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.

12


 

(7) Supplemental Cash Flow Information

The following is supplemental information relating to the Unaudited Consolidated Statements of Cash Flows:

 

 

 

Three months ended
May 31,

 

 

 

2024

 

 

2023

 

Non-cash investing and financing activities:

 

 

 

 

 

 

Recording of redeemable equity

 

$

-

 

 

$

(23

)

Investment in BioCenturion LLC

 

 

2,989

 

 

 

-

 

Cancellation of EyeLock LLC ownership put option

 

 

9,817

 

 

 

-

 

Reclassification of shareholder receivable to equity

 

 

2,278

 

 

 

-

 

Recording of excise tax attributable to treasury stock repurchases

 

 

2

 

 

 

-

 

Right of use assets obtained in exchange for operating lease obligations

 

 

466

 

 

 

209

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

296

 

 

$

312

 

Operating cash flows from finance leases

 

 

12

 

 

 

1

 

Finance cash flows from finance leases

 

 

105

 

 

 

70

 

Cash paid during the period:

 

 

 

 

 

 

Interest (excluding bank charges)

 

$

1,635

 

 

$

994

 

Income taxes (net of refunds)

 

 

2,029

 

 

 

364

 

 

(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, 2024.

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 Class A 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 2023, the Company granted 18,116 RSU awards to employees 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 2023 was $9.89.

Grant of Shares to President and 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 was granted the right to receive certain stock-based compensation as discussed below:

13


 

-
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 issued on each of March 1, 2020, March 1, 2021, and March 1, 2022 under the 2012 Plan.
-
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 increased 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 equaled or exceeded $15.00. The award may be settled in shares or in cash upon mutual agreement between the Company and Mr. Lavelle. Actual results may differ based upon when the high average stock price is achieved and settled. We recognized stock-based compensation expense $23 during the three months ended May 31, 2023 related to these MSU’s using the graded vesting attribution method over the performance period. For the three months ended May 31, 2024, no remaining compensation expense was recognized related to the MSU's, as the remaining 20% of this award vested on March 1, 2024 and was settled in cash, resulting in a payment made to Mr. Lavelle in the amount of $1,000 during the first quarter of Fiscal 2025.

On September 28, 2023, the term of Mr. Lavelle's employment agreement was extended for one year through February 28, 2025 under which his annual salary will be $750 and he will receive a $250 cash equivalent share grant to be awarded in quarterly increments calculated on the fair market value of the Company's Class A Common Stock on each of June 30, 2024, September 30, 2024, December 31, 2024, and March 31, 2025. We recognized stock-based compensation expense of $59 during the three months ended May 31, 2024 related to this stock grant, which has been recorded using the graded vesting attribution method.

All stock grants under the Employment Agreement are subject to a hold requirement as specified in the Employment Agreement. The Employment Agreement gives Mr. Lavelle the right to require the Company to redeem his shares if a specific contingent change in control event occurs. The contingent event under which Mr. Lavelle may exercise his right to redemption includes a change of control transaction wherein the Shalam Group would become a 40% or less holder of the total combined voting power of all outstanding voting securities of the Company. Accordingly, the stock awards issued in connection with the Employment Agreement are presented as redeemable equity on the Consolidated Balance Sheets at grant-date fair value. Shares previously held by Mr. Lavelle under the 2014 Plan and those 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.

A rollforward of redeemable equity related to stock awards and shares held by Mr. Lavelle for the three months ended May 31, 2024 is as follows:

 

 

 

Redeemable Equity

 

Balance at February 29, 2024

 

$

4,110

 

Stock based compensation expense

 

 

-

 

Balance at May 31, 2024

 

$

4,110

 

Grant of Shares to Chief Financial Officer and Chief Operating Officer

On July 8, 2019, the Board of Directors approved a five-year Employment Agreement, effective March 1, 2019, by and between the Company and Loriann Shelton, the Company’s Chief Financial Officer and Chief Operating Officer. On September 28, 2023, the term of the agreement was extended for one year through February 28, 2025 under which Ms. Shelton will receive, in addition to her annual salary, a $100 cash equivalent share grant to be awarded in quarterly increments calculated on the fair market value of the Company's Class A Common Stock on each of June 30, 2024, September 30, 2024, December 31, 2024, and March 31, 2025. We recognized stock-based compensation expense of $