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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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 ending November 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 of
November 30, 2022 and February 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. 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 $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 of November 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.
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November 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 ended November 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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November 30, 2022
specialty displays. For the three months ended November 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 ending November 30, 2022 compared to the nine 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 November 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 ended November 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 ended November 30, 2022 and down 33.8% for three months ended
November 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 ended November 30, 2022 compared to the nine months ended
November 30, 2021 . For the three months ended November 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 ended November 30, 2022 compared to the nine
months ended November 30, 2021 . VDC Display Systems gross margin percentage also
increased from 14.8% to 33.3% for the nine months ended November 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 ended
November 30, 2022 compared to the nine months ended November 30, 2021 . AYON
Cyber Security gross margin percentage decreased to 21.0% from 28.7% for the
nine months ended November 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 ended November 30,
2022 and November 30, 2021 respectively. The keyboard division, Unicomp , had
$129 thousand of gross margin dollars or 18.7% to sales for the nine months
ending November 30, 2022 compared to $315 thousand or 31.4% for the nine months
ending November 30, 2021 .
For the three months ended November 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 .
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Video Display Corporation and Subsidiaries
November 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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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 ended November 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 ended November 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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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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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. At November 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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