VIDEO DISPLAY CORPORATION The following discussion should be read in conjunction with the attached unaudited interim condensed consolidated financial statements and with the Company's 2022 Annual Report to Shareholders, which included audited consolidated financial statements and notes thereto as of and for the fiscal year endedFebruary 28, 2022 , as well as Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The Company manufactures and distributes a wide range of display devices, encompassing, among others, industrial, military, medical, and simulation display solutions. The Company is comprised of one segment - the manufacturing and distribution of displays and display components. The Company is organized into four interrelated operations aggregated into one reportable segment.
• Simulation and Training Products
-
offers a wide range of projection display systems for use in training and
simulation, military, medical, entertainment and industrial applications.
• Cyber Secure Products -
offers advanced TEMPEST technology, and EMSEC products. This business also
provides various contract services including the design and testing solutions
for defense and niche commercial uses worldwide.
• Data Display
CRTs -offers a wide range of CRTs for use in data display screens, including
computer terminal monitors and medical monitoring equipment.
• Other Computer Products -
offers a variety of keyboard products.
During fiscal 2023, management of the Company is focusing key resources on
strategic efforts to grow its business through internal sales of the Company's
more profitable product lines and reduce expenses in all areas of the business
to bring its cost structure in line with the current size of the business.
Challenges facing the Company during these efforts include:
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August 31, 2022
Liquidity -
The accompanying unaudited interim condensed consolidated financial statements
were prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company reported a net loss and a decrease in working capital for the
six-month
period ending August 31, 2022 primarily due to insufficient revenues in the
Company. The Company also had a decrease in liquid assets for the six month
period primarily as a result of the lack of revenue. The Company has sustained
losses for the last three of five fiscal years and has seen overall a decline in
working capital and liquid assets during this five -year period. Annual losses
over this time are due to a combination of decreasing revenues across the
divisions without a commensurate reduction of expenses. The Company's working
capital and liquid asset position are presented below (in thousands) as of
August 31, 2022 and February 28, 2022 :
August 31,
February 28,
2022 2022
Working capital $ 194 $ 509
Liquid assets $ 241 $ 245
The Company has increased marketing efforts in its ruggedized displays, TEMPEST
products and services and small specialty displays in an effort to increase
revenue. New products in the ruggedized and TEMPEST areas have been developed
and are now being evaluated by potential customers. In addition, the Company has
continued to streamline its operations and is focusing on increasing revenues by
executing initiatives such as upgrading its sales and marketing efforts
including targeting efforts towards repeatable business, the hiring of an
experienced Rugged Display Business Development Manager, increased customer
visits, trade shows and
e-mail
blasts to market all the product lines it sells. The Company was able to
increase its fiscal revenue over the prior fiscal year and has been implementing
a plan to increase revenues at all the divisions, each structured to the
particular division. The Company is restructuring its cyber security services
business by adding a dedicated sales person for the service business to increase
the business in cyber testing services and developing new products to supplement
the product side of the business. The Lexel Imaging facility in Lexington, KY is
working with some customers on last time buys for certain types of CRTs while
also exploring new opportunities that are a fit for the division. The Company
moved the corporate accounting functions to the Cocoa, Florida location which
allows the Company to become more efficient and save money on reducing redundant
operations. The former headquarters and distribution center in Tucker, Georgia
closed as of March 31, 2022 .
In order to assist funding operating activity, the Company's CEO loaned an
additional $426,000 to the company during the first six months of fiscal year
2023. There is no line of credit outstanding or other financing currently in
place other than the note payable with the Company CEO with a balance of
$884,000 . There are no repayment terms related to the loan, however, the Company
plans to repay the note within the next twelve months and therefore has
classified the loan as a current liability on the condensed consolidated balance
sheets as of August 31, 2022 .
The ability of the Company to continue as a going concern is dependent upon the
success of management's plans to improve revenues, the operational effectiveness
of continuing operations, the procurement of suitable financing, or a
combination of these. The uncertainty regarding the potential success of
management's plan create substantial doubt about the ability of the Company to
continue as a going concern.
Inventory valuation
- Management regularly reviews the Company's investment in inventories for
declines in value and writes down the cost when it is apparent that the expected
net realizable value of the inventory falls below its carrying amount. The
Company operates in an environment of constantly changing technologies and
retains a certain amount of inventory for legacy products for maintenance and
replacement capabilities for its customers. The Company maintains inventory on
certain products to ensure it has adequate inventory to fulfill orders for
transitioning product lines. Management reviews inventory levels on a quarterly
basis. Such reviews include observations of product development trends of the
original equipment manufacturers, new products being marketed, and technological
advances relative to the product capabilities of the Company's existing
inventories.
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Video Display Corporation and Subsidiaries
August 31, 2022
Impact of
COVID-19
- The Company has been actively monitoring the novel
coronavirus, or COVID-19, situation and
its impact globally. Financial results for the six months ended August 31, 2022
and 2021 have been
impacted by COVID-19 due to
delayed orders and/or the fulfillment of the related orders. However, the
Company currently does not expect any material impact on our financial results
for the remainder of fiscal 2023. Management continues to operate normally with
the exception of enabling employees to work from home and abiding by travel
restrictions issued by federal and local governments.
If the COVID-19 pandemic continues,
the Company may experience other disruptions that could severely impact the
business, results of operations and prospects.
Results of Operations
The following table sets forth, for the three and six months endedAugust 31, 2022 and 2021, the percentages that selected items in the Interim Condensed Consolidated Statements of Operations bear to total sales (amounts in thousands): Three Months Six Months Ended August 31, Ended August 31, 2022 2021 2022 2021Net Sales Simulation and Training (VDC Display Systems) 56.5 % 56.4 % 65.8 % 55.4 Data Display CRT (Lexel and Data Display) 20.7 11.4 18.4 12.0 Cyber Secure Products (AYON Cyber Security) 10.1 16.9 5.6 13.9 Other Computer Products (Unicomp) 12.7 15.3 10.2 18.7 Total net sales 100.0 % 100.0 % 100.0 % 100.0 Costs and expenses Cost of goods sold 74.0 % 97.3 % 74.6 % 88.9 Selling and delivery 6.6 6.5 5.8 7.5 General and administrative 43.1 47.4 35.7 50.4 123.7 % 151.2 % 116.1 % 146.8 Operating loss (23.7 )% (51.2 )% (16.1 )% (46.8 ) Interest income (expense), net (0.2 )% (0.2 )% (0.2 )% (0.4 ) Other income (expense), net 27.2 60.0
11.5 31.7
Income (loss) before income taxes 3.3 % 8.6 % (4.8 )% (15.5 ) Income tax expense - - - - Net income (loss) 3.3 % 8.6 % (4.8 )% (15.5 ) Net sales Consolidated net sales increased 27.8% for the six months endedAugust 31, 2022 , and increased 3.2% for the three months endedAugust 31, 2022 compared to the six months and three months endedAugust 31, 2021 . The Display Systems division was up 51.7% for the six months endedAugust 31, 2022 compared to the comparable period last year. The division has a varied mix of products including ruggedized displays, simulation, projector systems and specialty displays. For the three months endedAugust 31, 2022 , the Display System division was up 3.5% compared to the same three months last 16
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Video Display Corporation and Subsidiaries
August 31, 2022
year. The Company is focused on the ruggedized displays sector of the business,
having delivered approximately $0.8 million of rugged displays to two customers
in the quarter and recently received orders for ruggedized displays of
approximately $1.8 million from two other customers. The Company's AYON Cyber
Security (ACS) division is down 48.5% for the six months ending August 31, 2022
compared to the six months last year. Their business decreased due to lack of
product orders for the Department of the State and Canada . The Company's service
side of the cyber business (testing other company's products for compliance) was
their primary revenue source. For the three months ending August 31, 2022 ACS
business decreased 72.5% compared to the comparable three-month period from last
year. The Data Display division increased 96.2% and 87% for the six months and
three months ended August 31, 2022 compared to the same period in the prior year
due to increases in the sales of CRTs to a large customer. The Company is
expecting order(s) for a specialty product, a direct view storage tube (DVST)
which should help revenues in the third quarter. Sales for this product have
been slow due to the pandemic. The division expects to sell the DVST products
for at least the next five to seven years. The Company's keyboard division was
down 30.1% for the six months ended August 31, 2022 and down 14.5% for three
months ended August 31, 2022 respectively compared to the same periods last
year. The Company acquired this company in October of 2017. This division is
expected to continue at this level of sales each quarter.
Gross margins
Consolidated gross margins were increased both as a percentage to sales (26% from 11.1%) and actual dollars ($1,219 thousand from$418 thousand ) for the six months endedAugust 31, 2022 compared to the six months endedAugust 31, 2021 . For the three months endedAugust 31, 2022 , consolidated gross margins increased as a percentage to sales (26.0% from 2.7%) and actual dollars ($512 thousand from$51 thousand ). VDC Display Systems gross margin dollars were$1,076 thousand compared to$352 thousand for the six months endedAugust 31, 2022 compared to the six months endedAugust 31, 2021 . VDC Display Systems gross margin percentage also increased from 16.9% to 34.0% for the six months endedAugust 31, 2022 compared to the same six months in 2021. AYON Cyber Security gross margin dollars were$60 thousand compared to$217 thousand for the six months endedAugust 31, 2022 compared to the six months endedAugust 31, 2021 . AYON Cyber Security gross margin percentage decreased to 22.1% from 41.4% for the six months endedAugust 31, 2022 compared to the same six month period in 2021 due to the sales mix of primarily service jobs as the material costs were lower. The Data Display division had a gross margin of$0 compared to a negative gross margin of$392 thousand for the six months endedAugust 31, 2022 andAugust 31, 2021 respectively. The keyboard division, Unicomp, had$87 thousand of gross margin dollars or 17.8% to sales for the six months endingAugust 31, 2022 compared to$241 thousand or 34.3% for the six months endingAugust 31, 2021 . For the three months endedAugust 31, 2022 , the display division (rugged displays, specialty displays, simulators and video walls) produced 74% of the Company's gross margins. The division had an increase in gross margin percentage to sales from 7.7% last year to 34.2% this year. The Data division saw an increase in gross margins of$290 thousand from a negative$289 thousand the prior year quarter to$1 thousand this quarter. Unicomp gross margin dollars were flat with an increase in the percentage to sales. The cyber division had a decline in gross margin dollars of 67.1%.
Operating expenses
Operating expenses decreased 8.3% or$180 thousand for the six months endedAugust 31, 2022 compared to the six months endedAugust 31, 2021 . The decrease was due primarily to the decreased costs in administration expenses. The Company reduced costs primarily in salaries, by not replacing staff when they resigned while business was slow. The Company expects to continue to control costs while increasing revenues in tempest services, specialized displays and ruggedized displays. When business increases we will look to fill some of the vacant positions. 17
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Video Display Corporation and Subsidiaries
August 31, 2022
Operating expenses decreased by 4.7% or $48 thousand for the three months ended
August 31, 2022 compared to the three months ended August 31, 2021 . The decrease
was due primarily to the reduction of salaries and contractor expenses including
commissions.
Interest expense
Interest expense was
Other Income/ expense
For the six months endedAugust 31, 2022 , the Company received$498 thousand in proceeds from a class action lawsuit,$18 thousand in rental income,$32 thousand in retention credit revenue,$3 thousand on the sale of assets and$2 in interest income. For the six months endedAugust 31, 2021 , the Company had$1.1 million in gains on the extinguishment of PPP loans,$107 thousand in rental income, and$4 thousand in debt recovery offset by$4 thousand in commissions on the rental income. For the three months endedAugust 31, 2022 the Company received$498 thousand in proceeds from a class action lawsuit, had$3 thousand in rental income,$32 thousand in retention credit revenue and$2 in interest income. For the three months endedAugust 31, 2021 , the Company had$1.1 million in gains on extinguishment of PPP loans,$56 thousand in rental income,$4 thousand in bad debt recovery, offset by$2 thousand in rental commissions.
Income taxes
Due to the Company's overall and historical net loss position, no income tax has been reported and a full valuation allowance has been allocated to the deferred tax asset created by these losses.
Liquidity and Capital Resources
The accompanying unaudited interim condensed consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company reported a net loss and a decrease in working capital for the six-month period endingAugust 31, 2022 primarily due to insufficient revenues in the Company. The Company also had a decrease in liquid assets for the six month period primarily as a result of the lack of revenue. The Company has sustained losses for the last three of five fiscal years and has seen overall a decline in working capital and liquid assets during this five -year period. Annual losses over this time are due to a combination of decreasing revenues across the divisions without a commensurate reduction of expenses. The Company's working capital and liquid asset position are presented below (in thousands) as ofAugust 31, 2022 andFebruary 28, 2022 : August 31, February 28, 2022 2022 Working capital$ 194 $ 509 Liquid assets$ 241 $ 245 18
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Management continues to implement plans to improve liquidity and to increase
revenues at all divisions. The ability of the Company to continue as a going
concern is dependent upon the success of management's plans to improve revenues,
the operational effectiveness of continuing operations, the procurement of
suitable financing, or a combination of these. The uncertainty regarding the
potential success of management's plan create substantial doubt about the
ability of the Company to continue as a going concern.
Cash used in operations for the six months ended August 31, 2022 was
$0.4 million . Deductions to net loss of $0.2 million were $0.2 million for
depreciation and amortization. Changes in working capital were $0.3 million ,
primarily change in contract assets of $0.8 million and a change in accounts
receivable of $0.5 million , offset by a change in inventories of $0.5 million , a
change in employee retention credit receivables of $0.3 million and a change in
prepaid expenses and other assets of 0.2 million. Cash used in operations for
the six months ended August 31, 2021 was $0.2 million . Adjustments to net loss
of $0.6 million were $0.2 million for depreciation and amortization offset by
$0.1 million for a change in inventory reserves and $1.1 million related to gain
recorded on the extinguishment of the remaining PPP loans. Changes in working
capital provided $1.4 million , primarily $0.2 million from accounts receivable
and $0.5 million from the change in contract assets, by $0.2 million change in
accounts payable and $0.5 million in inventories.
Investing activities used
Financing activities provided$0.4 million for the six months endedAugust 31, 2022 primarily from proceeds from additional borrowing from the Company's CEO. Financing activities provided$183 thousand for the six months endedAugust 31, 2021 as the result of borrowings from the CEO of$250 thousand offset by payment of debt and lease payments. The Company has a stock repurchase program, pursuant to which it has been authorized to repurchase up to 2,632,500 shares of the Company's common stock in the open market. OnJanuary 20, 2014 , the Board of Directors of the Company approved a one-time continuation of the stock repurchase program, and authorized the Company to repurchase up to 1,500,000 additional shares of the Company's common stock on the open market, depending on the market price of the shares. There is no minimum number of shares required to be repurchased under the program.
For the six months ending
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company's interim condensed consolidated financial statements. These interim condensed consolidated financial statements have been prepared in accordance withU.S. GAAP. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the interim condensed consolidated financial statements and related notes. The accounting policies that may involve a higher degree of judgments, estimates, and complexity include reserves on inventories, revenue recognition, and the sufficiency of the valuation reserve related to deferred tax assets. The Company uses the following methods and assumptions in determining its estimates:
Inventory Valuation
Management regularly reviews the Company's investment in inventories for
declines in value and writes down the cost when it is apparent that the expected
net realizable value of the inventory falls below its carrying amount. The
Company operates in an environment of constantly changing technologies and
retains a certain amount of inventory for legacy products for maintenance and
replacement capabilities for its customers. The Company maintains inventory on
certain products to ensure it has adequate inventory to fulfill orders for
transitioning product lines. Management reviews inventory levels on a quarterly
basis. Such reviews include observations of product development trends of the
original equipment manufacturers, new products being marketed, and technological
advances relative to the product capabilities of the Company's existing
inventories.
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Video Display Corporation and Subsidiaries
August 31, 2022 Revenue Recognition
We recognize revenue when we transfer control of the promised products or services to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services. We derive our revenue primarily from sales of simulation and video wall systems, cyber secure products, data displays, and keyboards. We exclude sales and usage-based taxes from revenue. Our simulation and video wall systems are custom-built (using commercial off-the-shelf products) to customer specifications under fixed price contracts. Judgment is required to determine whether each product and service is considered to be a distinct performance obligation that should be accounted for separately under the contract. Generally, these contracts contain one performance obligation (the installation of a fully functional system). We recognize revenue for these systems over time as control is transferred based on labor hours incurred on each project.
We recognize revenue related to our cyber secure products, data displays, and keyboards at a point in time when control is transferred to the customer (generally upon shipment of the product to the customer).
Timing of invoicing to customers may differ from timing of revenue recognition; however, our contracts do not include a significant financing component as substantially all of our invoices have terms of 30 days or less. We are applying the practical expedient to exclude from consideration any contracts with payment terms of one year or less and we never offer terms extending beyond one year.
Other Loss Contingencies
Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple factors that often depend on judgments about potential actions by third parties. Income Taxes Deferred income taxes are provided to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As ofAugust 31, 2022 , the Company has established a valuation allowance of$5.6 million on the Company's deferred tax assets. The Company accounts for uncertain tax positions under the provisions of ASC 740, which contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company's tax positions and tax benefits, which may require periodic adjustments. AtAugust 31, 2022 , the Company did not record any liabilities for uncertain tax positions. 20
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August 31, 2022 Forward-
Looking Information and Risk Factors
This report contains forward-looking statements and information that is based on management's beliefs, as well as assumptions made by, and information currently available to management. When used in this document, the words "anticipate," "believe," "estimate," "intends," "will," and "expect" and similar expressions are intended to identify forward-looking statements. Such statements involve a number of risks and uncertainties. These risks and uncertainties, which are included under Part I, Item 1A. Risk Factors in the Company's Annual Report on Form 10-K for the year endedFebruary 28, 2022 could cause actual results to differ materially.
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