The following discussion should be read in conjunction with the attached interim condensed consolidated financial statements and with the Company's 2019 Annual Report to Shareholders, which included audited condensed consolidated financial statements and notes thereto as of and for the fiscal year endedFebruary 28, 2019 , 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 five 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. • Broadcast and Control Center Products - offers high-endvisual display products for use in video walls and command and control centers. • Other Computer Products - offers a variety of keyboard products. During fiscal 2020, 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: Liquidity- The accompanying 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 for the period endingNovember 30, 2019 and a decrease in liquid assets for the comparable nine month fiscal 2020 period. Working capital decreased due to the adoption of Topic 842 (see discussion in Note 3) whereby lease liabilities were recognized for lease obligations. While the liabilities are reflected in both current and non-current liabilities, the corresponding lease right-of-use assets are solely reflected in non-current assets. The current lease liability recognized as ofNovember 30, 2019 was approximately$557 thousand . The Company has sustained losses for the last three of four fiscal years and has seen overall a decline in working capital and liquid assets during this four year period. Annual losses over this time are due to a combination of decreasing revenues across certain divisions without a commensurate reduction of expenses. The Company's working capital and liquid asset position are presented below (in thousands) as ofNovember 30, 2019 andFebruary 28, 2019 : November 30, February 28, 2019 2019 Working capital$ 1,444 $ 3,354 Liquid assets $ 73 $ 410 16
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Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2019 Management has implemented a plan to improve the liquidity of the Company. The Company has been fulfilling a plan to increase revenues at all the divisions, the Company has expanded its cyber security business by adding a second testing chamber for testing tempest products allowing it to increase the business in cyber testing services to supplement the product side of the business. The Company received its first order for these services in its second quarter of fiscal 2020 and expects this business to grow as the year progresses. The Company is also now involved in ruggedized displays. Each division is exploring opportunities structured to their particular division which has resulted in an increase in the growth in revenues for the last fiscal year and is expected to increase revenues this year. The Company has reduced other expenses at the divisions, as well as at the corporate location with the expectation that further decreases can be achieved. The Company has completed the merger of the twoFlorida businesses into one facility and the relocation of Lexel Imaging into a new facility. These changes are projected to realize annual savings through reduced expenses. Management continues to explore options to monetize certain long-term assets of the business. If additional and more permanent capital is required to fund the operations of the Company, no assurance can be given that the Company will be able to obtain the capital on terms favorable to the Company, if at all. 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 management - The Company's business units utilize different inventory components than the divisions had in the past. The Company has a monthly reserve at each of its divisions to offset any obsolescence although most purchases are for current orders, which should reduce the amount of obsolescence in the future. The Company still has CRT inventory in stock and component parts for legacy products, although it believes the inventory will be sold in the future, will continue to reserve for any additional obsolescence. Management believes its inventory reserves atNovember 30, 2019 andFebruary 28, 2019 are adequate.
Results of Operations
The following table sets forth, for the three and nine months ended
Three Months Nine Months Ended November 30, Ended November 30, 2019 2018 2019 2018 Sales
Simulation and Training (VDC Display Systems) 19.0 % 31.4 %
45.6 % 38.6 Data Display CRT (Lexel and Data Display) 34.1 13.8 22.9 13.1 Broadcast and Control Centers (AYON Visual) - 0.3 - 1.6 Cyber Secure Products (AYON Cyber Security) 29.5 45.2 20.3 37.4 Other Computer Products (Unicomp) 17.4 9.3 11.2 9.3Total Company 100.0 % 100.0 % 100.0 % 100.0 Costs and expenses Cost of goods sold 82.0 % 73.7 % 84.0 % 74.2 Selling and delivery 9.2 4.5 6.0 5.4 General and administrative 59.5 21.2
35.6 22.4
150.7 % 99.4 % 125.6 % 102.0 Operating (loss) income (50.7 )% 0.6 % (25.6 )% (2.0 ) Interest expense, net (0.0 )% (0.1 )% (0.0 )% (0.2 ) Other income, net 7.9 1.2 6.8 3.2 Loss (income) before income taxes (42.8 )% 1.7 % (18.8 )% 1.0 Income tax expense - - - - Net (loss) income (42.8 )% 1.7 % (18.8 )% 1.0 17
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Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2019 Net sales Consolidated net sales decreased 35.7% for the nine months endedNovember 30, 2019 and 64.8% for the three months endedNovember 30, 2019 compared to the nine months and three months endedNovember 30, 2018 . The Company's AYON Cyber Security (ACS) division is down 65.0% for the nine months endingNovember 30, 2019 compared to the nine months last year. ACS had a record year with its top customer, which continues to do well, but not at the level of last year. ACS is down$1.3 million with that customer. ACS was completing a large order for theDepartment of State last year and is down$0.9 million with theState Department this year. ACS has been awarded a new contract with theState Department which will make up this shortfall and is expected to ship in the Company's fourth quarter. For the three months endingNovember 30, 2019 , ACS was down 77.1% because of our customers waiting for funding to be approved before they could place orders with us. The Display Systems division was down 24.0% for the nine months endedNovember 30, 2019 compared to the comparable period last year. The division's business is down$1.1 million with its largest customer due to a rebidding situation which has slowed the orders from this customer until resolved. For the three months endedNovember 30, 2019 , the Display System division was down 78.8% compared to the same three months last year. Last year the Company was completing a simulation project for theAir Force during the quarter. Business has been slow for this division, but they have received approximately$2.0 million in new orders. The Company is focused on the video wall business with a recent order for a video wall for a major company's executive conference room. The Company is also focused on the ruggedized displays (displays specifically designed to operate reliably in harsh usage environments and conditions) and the simulation sectors of the business, having recently received a good order for simulation and pursuing opportunities in both the ruggedized displays and simulation business. The Data Display division showed an increase of 12.2% for the nine months endedNovember 30, 2019 due to increases in the sales of a specialty product know as a DVST (Direct view storage tube), with a majority of their sales in this product year to date. The Data Display division is also doing well with a long time customer, supplying them with CRTs (Cathode Ray Tubes) for their simulators. The Company's keyboard division was down 22.7% for the nine months endedNovember 30, 2019 and 34.1% for three months endedNovember 30, 2019 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 decreased both as a percentage to sales (16.1% to 25.8%) and actual dollars ($1,188 thousand to$2,971 thousand ) for the nine months endedNovember 30, 2019 compared to the nine months endedNovember 30, 2018 . Gross margins decreased for the three months endedNovember 30, 2019 compared to the three months endedNovember 30, 2018 , both as a percentage to sales (18.1% to 26.3%) and actual dollars, ($265 thousand to$1,096 thousand ). AYON Cyber Security gross margin percentage was 29.1% compared to 48.1% and the gross margin dollars were$437 thousand compared to$2,068 thousand for the nine months endedNovember 30, 2019 andNovember 30, 2018 and 61.5% compared to 45.0% and$266 thousand compared to$848 thousand for the three months endedNovember 30, 2019 andNovember 30, 2018 . The decrease in sales and the change in product mix causing an increase in material costs contributed to the decrease in gross margins for the nine months endedNovember 30, 2019 . The margins improved as a percent to sales for the quarter endedNovember 30, 2019 due to a change in the mix with more service revenue. 18
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Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2019 VDC Display Systems gross margin percentage was 15.0% compared 10.9% and the gross margin dollars were$507 thousand compared to$485 thousand for the nine months endedNovember 30, 2019 andNovember 30, 2018 and (33.9%) compared to 5.7% and($94) thousand compared to$74 thousand for the three months endedNovember 30, 2019 andNovember 30, 2018 . VDC Display Systems gross margins improved for the year due to lower labor costs as approximately 50% of the revenue was from two video wall installations. This was partially offset by higher material costs. Gross margins for the quarter were negative as there was not enough revenue to offset the fixed costs. The recent orders received should improve gross margins in the fourth quarter. The keyboard division, Unicomp, had$286 thousand of gross margin dollars or 34.7% to sales for the nine months endingNovember 30, 2019 compared to$467 thousand or 43.7% for the nine months endingNovember 30, 2018 . Their gross margin percentage improved to 38.8% for the three months endedNovember 30, 2019 , but not up to last year's three months endedNovember 30, 2018 at 40.1%. Actual gross margin dollars were$99 thousand compared to$155 thousand last year for the comparable quarter endedNovember 30, 2019 . The Data Display division had a negative gross margin of$42 thousand or a negative 2.5% for nine months endingNovember 30, 2019 . The Lexel Imaging facility, which manufactures the cathode ray tubes had gross margin dollars of$228 thousand and a gross margin percentage of 13.5% for the nine months endedNovember 30, 2019 compared to a negative$68 thousand for the nine months endedNovember 30, 2018 . Lexel Imaging had a strong quarter in gross margins with$264 thousand or 52.7% for the three months endedNovember 30, 2019 compared to$107 thousand or 18.8% for the comparable three months endedNovember 30, 2018 .
Operating expenses
Operating expenses decreased$122 thousand for the nine months endedNovember 30, 2019 compared to the nine months endedNovember 30, 2018 . The decrease was due primarily to the reduction of corporate salaries and benefits by the layoff of two accounting personnel. This was facilitated by the move of the corporate accounting functions to the Company'sCocoa, Florida location. Operating expenses decreased$65 for the three months endedNovember 30, 2019 compared to the three months endedNovember 30, 2018 . The decrease is attributed to the reduction of corporate expenses and sales commissions.
Interest expense, net
Interest expense was$1 thousand for the nine months endingNovember 30, 2019 . The interest expense was negligible for the three months endingNovember 30, 2019 . There was$18 thousand for the nine months endingNovember 30, 2018 and$4 for the three months endingNovember 30, 2018 . The interest expense is related to the line of credit at the Company's bank and the interest on the margin balance in the Company's investment account, which is a 3.75% rate. Last year's interest included interest on a mortgage on a building the Company owns inPennsylvania . The mortgage is paid, thus no related interest this year.
Other income, net
For the nine months endedNovember 30, 2019 , the Company earned$191 thousand in royalty income,$270 thousand in rental income,$27 thousand in scrap sales, and$12 thousand investment income. For the three months endedNovember 30, 2019 , the Company earned$90 thousand in rental income,$9 thousand in scrap income and$11 thousand in investment income. For the nine months endedNovember 30, 2018 , the Company had$129 thousand in royalty income,$128 thousand in rental income,$33 thousand on the gain on the sale of equipment and$29 thousand in other, and$52 in investment gains including dividends. For the three months endedNovember 30, 2018 the Company had$40 thousand in rental income,$16 thousand in royalty income,$18 thousand in investment losses and$14 thousand in other. 19
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Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2019 Income taxes Due to the Company's overall and historical net loss position, no income tax expense was reported for the nine month period endingNovember 30, 2019 andNovember 30, 2018 . Due to continued losses reported by the Company, a full valuation allowance was allocated to the deferred tax asset created by these losses.
Liquidity and Capital Resources
The accompanying 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 for the period endingNovember 30, 2019 and a decrease in liquid assets for the comparable nine month fiscal 2020 period. Working capital decreased due to the adoption of Topic 842 (see discussion in Note 3) whereby lease liabilities were recognized for lease obligations. While the liabilities are reflected in both current and non-current liabilities, the corresponding lease right-of-use assets are solely reflected in non-current assets. The current lease liability recognized as ofNovember 30, 2019 was approximately$557 thousand . The Company has sustained losses for the last three of four fiscal years and has seen overall a decline in working capital and liquid assets during this four year period. Annual losses over this time are due to a combination of decreasing revenues across certain divisions without a commensurate reduction of expenses. The Company's working capital and liquid asset position are presented below (in thousands) as ofNovember 30, 2019 andFebruary 28, 2019 : November 30, February 28, 2019 2019 Working capital$ 1,444 $ 3,354 Liquid assets $ 73 $ 410 Management has implemented a plan to improve the liquidity of the Company. The Company has been fulfilling a plan to increase revenues at all the divisions, the Company has expanded its cyber security business by adding a second testing chamber for testing tempest products allowing it to increase the business in cyber testing services to supplement the product side of the business. The Company received its first order for these services in its second quarter of fiscal 2020 and expects this business to grow as the year progresses. The Company is also now involved in ruggedized displays. Each division is exploring opportunities structured to their particular division which has resulted in an increase in the growth in revenues for the last fiscal year and is expected to increase revenues this year. The Company has reduced other expenses at the divisions, as well as at the corporate location with the expectation that further decreases can be achieved. The Company has completed the merger of the twoFlorida businesses into one facility and the relocation of Lexel Imaging into a new facility. These changes are projected to realize annual savings through reduced expenses. Management continues to explore options to monetize certain long-term assets of the business. If additional and more permanent capital is required to fund the operations of the Company, no assurance can be given that the Company will be able to obtain the capital on terms favorable to the Company, if at all. 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 by operations for the nine months endedNovember 30, 2019 was$0.3 million . The net loss from operations was$1.4 million . Adjustments to reconcile net loss to net cash were$0.2 , primarily depreciation. Changes in working capital provided$0.9 million , primarily due to a decrease in accounts receivable of$1.3 million , an increase in accounts payable and accrued liabilities of$0.6 million and a decrease in prepaid expenses and other assets of$0.3 million , offset by an increase in inventory of$0.4 million and a decrease in customer deposits of$0.9 million . Cash used by operations for the nine months endedNovember 30, 2018 was$0.7 million . 20
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Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2019 Investing activities used$0.1 million for the nine months endedNovember 30, 2019 relating primarily to capital expenditures. Investing activities provided$0.5 million for the nine months endedNovember 30, 2018 primarily resulting from net cash proceeds received from the sale of investments and investment in real estate partnership. Financing activities provided$0.1 million for the nine months endedNovember 30, 2019 . This was primarily from the net borrowing from the line of credit at the Company's bank of$0.1 million . Financing activities provided$0.2 million for the nine months endedNovember 30, 2018 . Loans, net of repayment, from the Company's CEO provided$0.2 million and net borrowings from the line of credit provided$0.2 million . These were offset by repayment of margin borrowings of$0.1 million and repayment of other debt. 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, 2019 , the Company did not purchase any shares of theVideo Display Corporation stock. The Company repurchased 8,858 shares at an average cost of$1.12 per share for the nine months endingNovember 30, 2018 . Under the Company's stock repurchase program, an additional 490,186 shares remain authorized to be repurchased by the Company atNovember 30, 2019 . 21
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Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2019 Critical Accounting 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:
Reserves on Inventories
Reserves on inventories result in a charge to operations when the estimated net realizable value declines below cost. Management regularly reviews the Company's investment in inventories for declines in value and establishes reserves when it is apparent that the expected net realizable value of the inventory falls below its carrying amount. 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. Management believes its inventory reserves atNovember 30, 2019 andFebruary 28, 2019 are adequate. 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. 22
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Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2019 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, 2019 andFebruary 28, 2019 , the Company has established a valuation allowance of$6.1 million and$5.8 million , respectively, on the Company's current and non-current 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. AtNovember 30, 2019 , 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, 2019 could cause actual results to differ materially. 23
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Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2019
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