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 2020 Annual Report to Shareholders, which included audited consolidated financial statements and notes thereto as of and for the fiscal year endedFebruary 29, 2020 , 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.
• Other Computer Products - offers a variety of keyboard products.
During fiscal 2021, 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 for the period ending May 31, 2020
but had an increase in working capital and liquid assets for the three month
period primarily as a result of $988 thousand in Paycheck Protection Promissory
related funds received in April 2020 . The Company has sustained losses for the
last four of five 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 has seen a rise in the backlog
for customer orders and increased activity within the markets it serves. The
Company's working capital and liquid asset position are presented below (in
thousands) as of May 31, 2020 and February 29, 2020 :
May 31, February 29,
2020 2020
Working capital $ 1,945 $ 1,263
Liquid assets $ 1,237 $ 844
Management has implemented a plan to improve the liquidity of the Company. The
Company has been implementing a plan to increase revenues at all the divisions,
each structured to the particular division. The fiscal year ended February 29,
2020 was a transition year for the Company. Many of the legacy programs the
Company serviced were heading into new phases or the next generation of the
product line. This caused delays in the normal flow of the orders for these
programs. The Company is working with these customers and expects these programs
to be placing orders to be fulfilled in this fiscal year. For example, the
Company received a $2.8 million order for one of these legacy programs in the
current quarter. The Company has expanded its cyber security business by adding
a second testing chamber for testing tempest products in fiscal 2020 allowing it
to increase the business in cyber testing services to supplement the product
side of the business. The Company is also now involved in ruggedized displays,
recently bringing on engineering familiar with these products and acquiring a
small specialized display company in January 2020 . The Company did $648 thousand
in specialized displays in the quarter with an additional backlog of
$1.2 million in these products. With the acquisition
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May 31, 2020
of the display company, the Company completed the transfer of the remaining CRT
operations to its Lexel Imaging facility in Lexington, KY in order to make room
for the new business in its Cocoa 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 the Cocoa, Florida location in
fiscal 2020 which allows the Company to become more efficient and save money on
reducing redundant operations. The plant move of its subsidiary in Lexington,
Kentucky is completed and inventory from Tucker, Georgia and Cocoa, Florida have
been moved to the Kentucky operation. This subsidiary saw a turn -around in the
recently completed fiscal year, being the only division to have a profitable
year. The plant move at the Florida operations was successful as the Company
completed the merger of its two Florida businesses and absorbed the acquisition
of the specialized display company. Management continues to explore options to
monetize certain long-term assets of the business, including the possible sale
of a building in Pennsylvania . 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 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 at May 31, 2020 and February 29, 2020 are adequate.
Results of Operations
The following table sets forth, for the three months ended
Three Months Ended May 31
2020 2019
Net Sales Amount % Amount %Simulation and Training (VDC Display Systems) 1,801 48.6 %
944 34.9 %
Data Display CRT (Lexel and Data Display) 762 20.6 643 23.7
Cyber Secure Products (AYON Cyber Security) 865 23.3 866 32.0
Other Computer Products (Unicomp) 277 7.5 256 9.4
Total net sales 3,705 100.0 % 2,709 100.0 %
Costs and expenses
Cost of goods sold 2,727 73.6 % 2,284 84.3 %
Selling and delivery 206 5.6 165 6.1
General and administrative 997 26.9 869 32.1
3,930 106.1 % 3,318 122.5 %
Operating loss (225 ) (6.1 )% (609 ) (22.5 )%
Interest (expense) income, net (15 ) (0.4 )% - - %
Investment (loss) gains, net (10 ) (0.3 ) 2 0.1
Other income, net 242 6.6 281 10.4
Loss before income taxes (8 ) (0.2 )% (326 ) (12.0 )%
Income tax expense - - - -
Net loss (8 ) (0.2 )% (326 ) (12.0 )%
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May 31, 2020
Net sales
Consolidated net sales increased 36.8% for the three months ended May 31, 2020
compared to the three months ended May 31, 2019 . The Display Systems division
increased 90.7% for the quarter or $0.9 million , due primarily to shipments of
product for video walls and projectors for a simulator upgrade for a customer in
Texas and the increased sales from our acquisition of the specialized display
company in January of late fiscal year. The Company's AYON Cyber Security
division was flat for the quarter compared to last year's same quarter,
$0.9 million each year. The division has completed a new test chamber for
tempest services and will supplement its product line with this new business.
The other two divisions both had increases in sales. The Data Display division
showed an increase of 18.6% due to increases in a specialty product sold through
its distribution channels, ultimately going to overseas customers. The Data
division is expecting additional orders for the specialty product and should
have steady business driven by their number one customer's orders for
replacement CRTs for their simulators. The keyboard division had an increase in
sale of 8.1%, and is expecting to continue at this level for the remaining three
quarters of the year. All divisions have experienced some form of delay in new
orders from customers due to the pandemic, but there are signs that businesses
are finding ways to move forward.
Gross margins
Consolidated gross margins were increased both as a percentage to sales (26.4%
to 15.7%) and actual dollars (
The twoFlorida divisions showed increases in both their gross margin percentage to sales and in actual dollars. AYON Cyber Security gross margin percentage was 20.6% compared to 19.0% and the gross margin dollars were$178 thousand compared to$164 thousand for the three months endedMay 31, 2020 compared to the three months endedMay 31, 2019 . VDC Display Systems gross margin percentage was 31.8% compared 24.9% and the gross margin dollars were$573 thousand compared to$235 thousand for the three months endedMay 31, 2020 compared to the three months endedMay 31, 2019 . The keyboard division, Unicomp, had$120 thousand of gross margin dollars or 43.5% to sales for the three months endingMay 31, 2020 compared to$61 thousand or 23.8% for the three months endingMay 31, 2019 . The Data Display division showed improvement in its margins of$106 thousand or 14.0% for the three months endedMay 31, 2020 , compared to a negative gross margin of$35 thousand or a negative 5.5% for here months endingMay 31, 2019 .
Operating expenses
Operating expenses increased by 16.3% or$168 thousand for the three months endedMay 31, 2020 compared to the three months endedMay 31, 2019 . The increase was due primarily to the increased costs of three employees that joined the Company resulting from the acquisition of the display company in January of this year, two in engineering, one in sales and the amortization costs of the intangibles ($43k ) related to this acquisition. The Company expects to continue to control costs while increasing revenues with the completion of the new tempest testing chamber and new revenue streams of tempest services, specialized displays and ruggedized displays. 17
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Interest expense
Interest expense was $15 thousand for the quarter ended May 31, 2020 . The
interest expense is on the note payable to the CEO. This note payable is
discussed in Note 8 of the financial statements. Interest expense was negligible
for the quarter ending May 31, 2019 as the Company completed the payoff of a
building it owns in Pennsylvania and did not borrow against its line of credit
during the quarter.
Other Income/ expense
For the three months ended May 31, 2020 , the Company earned $148 thousand in
royalty income, $90 in rental income, $4 thousand in the sale of discontinued
scrap items and had an investment loss of $10 thousand . For the three months
ended May 31, 2019 , the Company earned $191 thousand in royalty income, rental
income of $90 thousand and investment income of $2 thousand .
Income taxes
Due to the Company's overall and historical net loss position, no income tax expense was reported for the three month period endingMay 31, 2020 andMay 31, 2019 . 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 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 for the period endingMay 31, 2020 but had an increase in working capital and liquid assets for the three month period primarily as a result of$988 thousand in Paycheck Protection Promissory related funds received inApril 2020 . The Company has sustained losses for the last four of five fiscal years and has seen overall a decline in working capital and liquid assets during this four year period. Annual losses over this time are due to a combination of decreasing revenues across certain divisions without a commensurate reduction of expenses. The Company has seen a rise in the backlog for customer orders and increased activity within the markets it serves. The Company's working capital and liquid asset position are presented below (in thousands) as ofMay 31, 2020 andFebruary 29, 2020 : May 31, February 29, 2020 2020 Working capital$ 1,945 $ 1,263 Liquid assets$ 1,237 $ 844 Management has implemented a plan to improve the liquidity of the Company. The Company has been implementing a plan to increase revenues at all the divisions, each structured to the particular division. The fiscal year endedFebruary 29, 2020 was a transition year for the Company. Many of the legacy programs the Company serviced were heading into new phases or the next generation of the product line. This caused delays in the normal flow of the orders for these programs. The Company is working with these customers and expects these programs to be placing orders to be fulfilled this fiscal year. For example, the Company received a$2.8 million order for one of these legacy programs in the current quarter. The Company has expanded its cyber security business by adding a second testing chamber for testing tempest products in fiscal 2020 allowing it to increase the business in cyber testing services to supplement the product side of the business. The Company is also now involved in ruggedized displays, recently bringing on engineering familiar with these products and acquiring a small specialized display company inJanuary 2020 . The Company did$648 thousand in 18
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May 31, 2020
specialized displays in the quarter with an additional backlog of $1.2 million
in these products. With the acquisition of the display company, the Company
completed the transfer of the remaining CRT operations to its Lexel Imaging
facility in Lexington, KY in order to make room for the new business in its
Cocoa 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 the Cocoa, Florida location in fiscal 2020 which allows
the Company to become more efficient and save money on reducing redundant
operations. The plant move of its subsidiary in Lexington, Kentucky is completed
and inventory from Tucker, Georgia and Cocoa, Florida have been moved to the
Kentucky operation. This subsidiary saw a turn -around in the recently completed
fiscal year, being the only division to have a profitable year. The plant move
at the Florida operations was successful as the Company completed the merger of
its two Florida businesses and absorbed the acquisition of the specialized
display company. Management continues to explore options to monetize certain
long-term assets of the business, including the possible sale of a building in
Pennsylvania . 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 three months ended May 31, 2020 was
$0.5 million . Adjustments to net loss were $0.1 million for non-cash
depreciation and amortization charges. Changes in working capital used
$0.6 million , primarily due to cash provided by decreases in accounts receivable
and inventories of $1.1 million in aggregate offset by an increase in contract
assets ($655 thousand ) and a decrease in customer deposits and accounts payable
and accrued liabilities aggregating a use of $1.0 million . Cash provided by
operations for the three months ended May 31, 2019 was $0.3 million .
There was minimal investing activities for the three months ended May 31, 2020 .
The Company used $19 thousand on capital assets expenditures and $43 thousand on
trading security purchases offset with $18 received from sale of investments.
Investing activities used cash of $0.1 million during the three months ended
May 31, 2019 resulting primarily from the purchase of capital assets.
Financing activities provided $1.0 million for the three months ended May 31,
2020 resulting from $1.0 million proceeds received from the PPP Loan discussed
in Note 6 of the interim condensed consolidated financial statements marginally
offset by repayment of $35 thousand in related party loans. Financing activities
used $23 thousand for the quarter ended May 31, 2019 related to the final debt
payments made on the Teltron Building .
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. On January 20, 2014 , the Board of Directors of the Company
approved a one-timecontinuation 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 quarter ending May 31, 2020 and May 31, 2019 , the Company did not
purchase any shares of the Video Display Corporation stock. Under the Company's
stock repurchase program, an additional 490,186 shares remain authorized to be
repurchased by the Company at May 31, 2020 .
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: 19
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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 at May 31, 2020 and February 29, 2020
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. 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 ofMay 31, 2020 , the Company has established a valuation allowance of$6.1 million on the Company's deferred tax assets. 20
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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 May 31, 2020 , 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 29, 2020 could cause actual results to differ materially.
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