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: 12
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Table of Contents Video Display Corporation and Subsidiaries November 30, 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 nine-month period endingNovember 30, 2022 primarily due to insufficient revenues in the Company. The Company had an increase in liquid assets for the nine- month period. 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 ofNovember 30, 2022 andFebruary 28, 2022 : November 30, February 28, 2022 2022 Working capital $ (403 ) $ 509 Liquid assets $ 283 $ 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. TheLexel Imaging facility inLexington, 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 theCocoa, Florida location which allows the Company to become more efficient and save money on reducing redundant operations. The former headquarters and distribution center inTucker, Georgia closed as ofMarch 31, 2022 . In order to assist funding operating activity, the Company's CEO loaned an additional$826,000 to the company during the first nine 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$1,284,000 . 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 ofNovember 30, 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 creates 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. 13
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Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 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 nine months endedNovember 30, 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 nine months endedNovember 30, 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 Nine Months Ended November 30, Ended November 30, 2022 2021 2022 2021Net Sales Simulation and Training (VDC Display Systems) 64.2 % 63.8 % 65.4 % 57.9 Data Display CRT (Lexel and Data Display) 19.7 15.9 18.7 13.2 Cyber Secure Products (AYON Cyber Security) 4.3 1.7 5.3 10.3 Other Computer Products (Unicomp) 11.8 18.6 10.6 18.6 Total net sales 100.0 % 100.0 % 100.0 % 100.0 Costs and expenses Cost of goods sold 82.5 % 134.3 % 76.7 % 102.6 Selling and delivery 5.5 7.8 5.7 7.6 General and administrative 52.4 60.5 40.0 53.4 140.4 % 202.6 % 122.4 % 163.6 Operating loss (40.4 )% (102.6 )% (22.4 )% (63.6 ) Interest income (expense), net (0.2 )% (0.4 )% (0.2 )% (0.3 ) Other income (expense), net (1.6 ) 53.2
8.1 38.2
Income (loss) before income taxes (42.2 )% (49.8 )% (14.5 )% (25.7 ) Income tax expense - - - - Net income (loss) (42.2 )% (49.8 )% (14.5 )% (25.7 ) Net sales Consolidated net sales increased 20.8% for the nine months endedNovember 30, 2022 , and increased 4.4% for the three months endedNovember 30, 2022 compared to the nine months and three months endedNovember 30, 2021 . The Display Systems division was up 36.3% for the nine months endedNovember 30, 2022 compared to the comparable period last year. The division has a varied mix of products including ruggedized displays, simulation, projector systems and 14
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Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2022 specialty displays. For the three months endedNovember 30, 2022 , the Display System division was up 5.1% compared to the same three months last year. The Company is focused on the ruggedized displays sector of the business, having delivered approximately$1.7 million of rugged displays to three customers this year and recently received orders for ruggedized displays of approximately$5.6 million . The Company's AYON Cyber Security (ACS) division is down 37.7% for the nine months endingNovember 30, 2022 compared to the nine months last year. Their business decreased due to lack of product orders for theDepartment of the State andCanada . 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 endingNovember 30, 2022 ACS business increased 172.3% compared to the comparable three-month period from last year on negligible sales. The Data Display division increased 71.8% and 29.1% for the nine months and three months endedNovember 30, 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 next fiscal year. 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 31.2% for the nine months endedNovember 30, 2022 and down 33.8% for three months endedNovember 30, 2022 respectively compared to the same periods last year. The primary reason for the decrease was a micro controller used in production became unavailable and certain of the products had to be redesigned with a new micro controller. This redesign is nearly complete. 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 (23.3% from (2.6)%) and actual dollars ($1,514 thousand from$(137) thousand ) for the nine months endedNovember 30, 2022 compared to the nine months endedNovember 30, 2021 . For the three months endedNovember 30, 2022 , consolidated gross margins increased as a percentage to sales (17.5% from (34.4)%) and actual dollars ($295 thousand from$(555) thousand ). VDC Display Systems gross margin dollars were$1,412 thousand compared to$461 thousand for the nine months endedNovember 30, 2022 compared to the nine months endedNovember 30, 2021 . VDC Display Systems gross margin percentage also increased from 14.8% to 33.3% for the nine months endedNovember 30, 2022 compared to the same nine months in 2021. AYON Cyber Security gross margin dollars were$72 thousand compared to$158 thousand for the nine months endedNovember 30, 2022 compared to the nine months endedNovember 30, 2021 . AYON Cyber Security gross margin percentage decreased to 21.0% from 28.7% for the nine months endedNovember 30, 2022 compared to the same nine 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 negative gross margin of$99 compared to a negative gross margin of$1,072 thousand for the nine months endedNovember 30, 2022 andNovember 30, 2021 respectively. The keyboard division,Unicomp , had$129 thousand of gross margin dollars or 18.7% to sales for the nine months endingNovember 30, 2022 compared to$315 thousand or 31.4% for the nine months endingNovember 30, 2021 . For the three months endedNovember 30, 2022 , the display division (rugged displays, specialty displays, simulators and video walls) produced 115% of gross margins. The division had an increase in gross margin percentage to sales from 10.6% last year to 31.1% this year. The Data division saw an increase in gross margins of$580 thousand from a negative$679 thousand the prior year quarter to a negative$99 thousand this quarter.Unicomp gross margin dollars decreased by$32 thousand due to a decrease in sales. The cyber division had an increase in gross margin dollars of$71 thousand . 15
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Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2022
Operating expenses
Operating expenses decreased 9.5% or$311 thousand for the nine months endedNovember 30, 2022 compared to the nine months endedNovember 30, 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. As business increases we will look to fill some of the vacant positions in the engineering and production areas in the fourth quarter of this fiscal year.
Operating expenses decreased by 11.5% or
Interest expense
Interest expense was$13 thousand for the nine months endedNovember 30, 2022 compared to$20 thousand for the nine months endedNovember 30, 2021 . Interest expense was$4 thousand for the three months endedNovember 30, 2022 and$6 thousand for the three months endedNovember 30, 2021 . Interest expense in fiscal 2023 relates primarily to interest expense on the lease of TEMPEST equipment.
Other Income/ expense
For the nine months endedNovember 30, 2022 , the Company received$498 thousand in proceeds from a class action lawsuit,$19 thousand in rental income,$32 thousand in retention credit revenue,$3 thousand on the sale of assets and$4 in interest income. Other expense netted against other income was$31 thousand for the payout of a lawsuit. For the nine months endedNovember 30, 2021 , the Company had$1.1 million in gains on the extinguishment of PPP loans,$796 thousand in employee retention credit income,$172 thousand in rental income, and$4 thousand in debt recovery offset by$5.4 thousand in commissions on the rental income. For the three months endedNovember 30, 2022 the Company had$2 thousand in rental income and$2 thousand in interest income offset by$31 thousand for the payout of a lawsuit. For the three months endedNovember 30, 2021 , the Company had$796 thousand in employee retention credit income,$64.4 thousand in rental income, offset by$1.8 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 nine-month period endingNovember 30, 2022 primarily due to insufficient revenues in the Company. The Company had an increase in liquid assets for the nine- month period. 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 ofNovember 30, 2022 andFebruary 28, 2022 : 16
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Table of Contents Video Display Corporation and Subsidiaries November 30, 2022 November 30, February 28, 2022 2022 Working capital $ (403 ) $ 509 Liquid assets $ 283 $ 245 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 nine months endedNovember 30, 2022 was$0.7 million . Deductions to net loss were$0.3 million for depreciation and amortization. Changes in working capital were negligible, primarily change in contract assets of$0.2 million , a change in accounts payables of$0.2 million , a change in accounts receivable of$0.3 million and a change in prepaid expenses and other assets of 0.1 million, offset by a change in inventories of$0.6 million , a change in employee retention credit receivables of$0.3 million . Cash used in operations for the nine months endedNovember 30, 2021 was$0.3 million . Adjustments to net loss were non cash operating items of$0.3 million for depreciation and amortization,$0.8 million for inventory related charges and$1.1 million related to the gain recorded on the extinguishment of the remaining PPP loans. Changes in working capital provided$1.0 million , primarily from$0.6 million in accounts receivable,$0.1 million from the decrease in inventory,$0.7 million from the change in contract assets and$0.4 million from the change in accounts payable and accrued liabilities partially offset by a$0.8 million in employee retention credit refund receivable.
Investing activities used
Financing activities provided$0.7 million for the nine months endedNovember 30, 2022 primarily from proceeds from additional borrowing from the Company's CEO. For the nine months endedNovember 30, 2021 , financing activities provided$0.3 million resulting primarily from$458 thousand of additional borrowings from the CEO offset by the repayment of notes of$74 thousand and lease financing of$57 thousand . 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 nine months endingNovember 30, 2022 andNovember 30, 2021 , the Company did not purchase any shares of theVideo Display Corporation stock. Under the Company's stock repurchase program, an additional 490,186 shares remain authorized to be repurchased by the Company atNovember 30, 2022 .
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 17
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Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2022 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.
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 ofNovember 30, 2022 , the Company has established a valuation allowance of$5.9 million on the Company's deferred tax assets. 18
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Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2022 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. AtNovember 30, 2022 , the Company did not record any liabilities for uncertain tax positions.
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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