The following discussion should be read in conjunction with the attached unaudited interim condensed consolidated financial statements and with the Company's 2021 Annual Report to Shareholders, which included audited consolidated financial statements and notes thereto as of and for the fiscal year endedFebruary 28, 2021 , 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 2022, 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 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 and liquid assets for the nine month period endingNovember 30, 2021 primarily due to a decrease in revenues in three of four divisions along with a decrease in accounts receivables and inventory. 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 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, 2021 andFebruary 28, 2021 : November 30, February 28, 2021 2021 Working capital$ 1,527 $ 3,601 Liquid assets $ 215 $ 293 The Company has increased marketing efforts in its ruggedized displays, TEMPEST products and services and small specialty displays. In addition, the Company has streamlined its operations and is focusing on increasing revenues by executing initiatives such as upgrading its sales and marketing efforts including a more user friendly website, the hiring of an experienced Rugged Display Business Development Manager, increasing the number of customer visits and trade shows post pandemic in order to market the Company's product lines. These efforts have not increased revenues to date as the Company's business typically has a longer lead time from initial contact to a sale. The pandemic has also slowed down the 15 -------------------------------------------------------------------------------- Video Display Corporation and Subsidiaries November 30, 2021 process of obtaining new business as many of our customers and potential customers are still working from home. The Company has expanded its cyber security business by adding an additional test chamber and test equipment to provide additional TEMPEST service capabilities and for qualifying TEMPEST products allowing it to increase the business in cyber testing services to supplement the product side of the business. The Company just completed and had accredited its new AIS system which will allow for the opportunity to increase the service business. The Company also completed the transfer of the remaining CRT operations inFlorida to itsLexel Imaging facility inLexington, KY in order to make room for new business in itsCocoa facility. This will also reduce expenses in the CRT operation by having that business all under one roof. The Company also moved the corporate accounting functions to theCocoa, Florida location which allows the Company to become more efficient and save money on reducing redundant operations. In order to assist funding operating activity, the Company's CEO has loaned$457,568 in aggregate to the Company during the second and third quarters of fiscal 2022. 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, 2021 . 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 - 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 also inventories product 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. 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 three months and nine months endedNovember 30, 2021 and 2020 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 2022. 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, 2021 and 2020, the percentages that selected items in the Interim Condensed Consolidated Statements of Operations bear to total sales: Three Months Nine Months Ended November 30, Ended November 30, 2021 2020 2021 2020 Net Sales Simulation and Training (VDC Display Systems) 63.8 % 77.9 % 57.9 % 58.4 Data Display CRT (Lexel and Data Display) 15.9 7.1 13.2 14.7 Broadcast and Control Centers (AYON Visual) - - - - Cyber Secure Products (AYON Cyber Security) 1.7 2.6 10.3 16.3 Other Computer Products (Unicomp) 18.6 12.4 18.6 10.6 Total net sales 100.0 % 100.0 % 100.0 % 100.0 16
--------------------------------------------------------------------------------Video Display Corporation and Subsidiaries
November 30, 2021 Costs and expenses Cost of goods sold 134.3 % 66.9 % 102.6 % 76.2 Selling and delivery 7.8 4.4 7.6 7.0 General and administrative 60.5 33.1 53.4 33.0 202.6 % 104.4 % 163.6 % 116.2 Operating loss (102.6 )% (4.4 )% (63.6 )% (16.2 ) Interest expense, net (0.4 )% (0.1 )% (0.3 )% (0.4 ) Other income (expense), net 53.2 70.2 38.2 26.4
Income (loss) before income taxes (49.9 )% 65.7 % (25.8 )%
9.8 Income tax expense - - - - Net income (loss) (49.9 )% 65.7 % (25.8 )% 9.8 Net sales Consolidated net sales decreased 39.3% for the nine months endedNovember 30, 2021 , and decreased 43.5% for the three months endedNovember 30, 2021 compared to the nine months and three months endedNovember 30, 2020 . The Company's AYON Cyber Security (ACS) division is down 61.8% for the nine months endingNovember 30, 2021 compared to the nine months last year. The business decreased due to lack of product orders for theDepartment of the State andCanada . The Company is developing new products for customers in this area and expects to have them reviewed by customers in the early part of next year. The Company's service side of the cyber business (testing other company's products for compliance) is the primary revenue source. For the three months endingNovember 30, 2021 , ACS business decreased 64.0%. The Display Systems division was down 39.8% for the nine months endedNovember 30, 2021 compared to the comparable period last year. 33.1% of the division's business has been in the new specialized displays area. The other approximate two thirds is mixed between different programs including ruggedized displays, simulation and video walls. For the three months endedNovember 30, 2021 , the Display System division was down 53.8% compared to the same three months last year. The Company is focused on the ruggedized displays and simulation sectors of the business, having recently received an order for simulation and pursuing opportunities in both the ruggedized displays and simulation business. The Data Display division decreased 45.7% for the nine months endedNovember 30, 2021 due to decreases in the sales of a specialty product know as a DVST (Direct view storage tube) because of delays caused by Covid-19, but increased 27.2% for three months endedNovember 30, 2021 due to increased CRT sales. The division expects to sell the DVST products for at least the next five to seven years. The Company's keyboard division was up 6.8% for the nine months endedNovember 30, 2021 and down 15.2% for three months endedNovember 30, 2021 respectively compared to the same periods last year. This division experienced increased sales with the new product line introduced last year, but sales have now leveled off. 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 (2.6%) to 23.8% and actual dollars($137) thousand to$2,111 thousand for the nine months endedNovember 30, 2021 compared to the nine months endedNovember 30, 2020 . VDC Display Systems gross margin dollars were$461 thousand compared to$1,683 thousand for the nine months endedNovember 30, 2021 compared to the nine months endedNovember 30, 2020 . VDC Display Systems gross margin percentage also decreased from 32.5% to 14.8% for the nine months endedNovember 30, 2021 compared to the same nine months in 2020. AYON Cyber Security gross margin dollars were$158 thousand compared to$210 thousand for the nine months endedNovember 30, 2021 compared to the nine months endedNovember 30, 2020 . AYON Cyber Security gross margin percentage increased to 28.7% from 14.6% for the nine months endedNovember 30, 2021 compared to the same nine month period in 2020 due to the sales mix of primarily service jobs as the material costs were lower. 17 -------------------------------------------------------------------------------- Video Display Corporation and Subsidiaries November 30, 2021 The Data Display division had a negative gross margin of$1,072 thousand or a negative 151.4% compared to a negative gross margin of$147 thousand and a negative gross margin of 11.3% for the nine months endedNovember 30, 2021 andNovember 30, 2020 respectively. The negative gross margins were driven by$532 thousand of inventory write offs and fixed overhead. The keyboard division, Unicomp, had$315 thousand of gross margin dollars or 31.4% to sales for the nine months endingNovember 30, 2021 compared to$364 thousand or 38.7% for the nine months endingNovember 30, 2020 . For the three months endedNovember 30, 2021 compared to the same period last year, all four divisions reported lower gross margin dollars than last year. Overall gross margins for the quarter were down to the low sales volume caused by delays in receiving raw materials and other factors caused by Covid. Operating expenses Operating expenses decreased 7.4% or$261 thousand for the nine months endedNovember 30, 2021 compared to the nine months endedNovember 30, 2020 . The decrease was due primarily to the reduction of salaries and contractor expenses including commissions. Operating expenses increased by 2.8% or$30 thousand for the three months endedNovember 30, 2021 compared to the three months endedNovember 30, 2020 . The Company is focusing on reducing costs while increasing the sales effort. The Company expects to continue to control costs while increasing revenues in tempest services, specialized displays and ruggedized displays. Interest expense, net Interest expense was$20 thousand for the nine months endedNovember 30, 2021 compared to$35 thousand for the nine months endedNovember 30, 2020 . Interest expense was$6 thousand for the three months endedNovember 30, 2021 compared to$4 thousand for the three months endedNovember 30, 2020 . Interest expense in fiscal 2022 relates primarily to interest expense on the lease of TEMPEST equipment. Interest in fiscal 2021 primarily related to interest expense on notes owed to the CEO and the TEMPEST equipment lease. Other income (expense), net 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 nine months endedNovember 30, 2020 , the Company had$1,724 thousand in a gain on the sale of assets,$148 thousand in royalty income,$237 thousand in rental income,$216 thousand in gain on extinguishment of debt,$9 thousand in discontinued scrap items, and$5 thousand in investment gains. 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. For the three months endedNovember 30, 2020 the Company had$1,724 thousand in a gain on the sale of assets,$216 thousand in gain on extinguishment of debt,$56 thousand in rental income,$11 thousand in investment gains and$3 thousand in scrap sales. Income taxes Due to the Company's overall and historical net loss position, no income tax benefit has been reported and instead a full valuation allowance has been allocated to the deferred tax asset created by these losses. 18 -------------------------------------------------------------------------------- Video Display Corporation and Subsidiaries November 30, 2021 Liquidity and Capital Resources The accompanying unaudited interim condensed consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company reported a net loss and a decrease in working capital and liquid assets for the nine month period endingNovember 30, 2021 primarily due to a decrease in revenues in three of four divisions along with a decrease in accounts receivables and inventory. The Company has sustained losses for the last three of five fiscal years and has seen overall a decline in working capital and liquid assets during this five year period due to a combination of decreasing revenues across certain divisions without a commensurate reduction of expenses. The Company's working capital and liquid asset position are presented below (in thousands) as ofNovember 30, 2021 andFebruary 28, 2021 : November 30, February 28, 2021 2021 Working capital$ 1,527 $ 3,601 Liquid assets $ 215 $ 293 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, 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. Cash used by operations for the nine months endedNovember 30, 2020 was$2.7 million . Significant adjustments to net income included$1.9 million in gains resulting from the sale of a building and forgiveness of a PPP loan. Changes in working capital used$2.0 million , primarily due to an increase in contract assets of$0.9 million , an increase in custom deposits of$0.6 million and an increase in inventories$0.8 million , offset by a decrease in prepaid expenses of$0.2 million and accounts payable and accrued liabilities of$0.1 million . Investing activities used$56 thousand for the nine months endedNovember 30, 2021 all related to capital asset expenditures. For the nine months endedNovember 30, 2020 , cash provided by investing activities was$2 million and resulted primarily from the sale of a building in third quarter fiscal 2021. Financing activities provided$0.3 million for the nine months endedNovember 30, 2021 compared to$0.2 million for the comparable period in the prior year. For the nine months endedNovember 30, 2021 ,$458 thousand was provided resulting from borrowings from the CEO offset by the repayment of notes of$74 thousand and lease financing of$57 thousand . Financing activities provided$0.2 million for the nine months endedNovember 30, 2020 resulting from$1.0 million in proceeds received from the PPP loans,$0.4 million in proceeds borrowed from the CEO offset by repayments of$1.2 million in related party loans. 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. 19 -------------------------------------------------------------------------------- Video Display Corporation and Subsidiaries November 30, 2021 For the nine months endingNovember 30, 2021 andNovember 30, 2020 , 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, 2021 . 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 also inventories product it acquires on a last-time buy basis 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. Management believes its inventory values atNovember 30, 2021 andFebruary 28, 2021 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. 20 -------------------------------------------------------------------------------- Video Display Corporation and Subsidiaries November 30, 2021 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, 2021 , 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. AtNovember 30, 2021 , 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, 2021 could cause actual results to differ materially.
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