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 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 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 August 31,
2020 and had a decrease in working capital and liquid assets for the six month
period primarily as a result of $1.0 million loss in the second quarter. 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 five 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 August 31, 2020 and
February 29, 2020 :
August 31, February 29,
2020 2020
Working capital $ 860 $ 1,263
Liquid assets $ 429 $ 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
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August 31, 2020
in this fiscal year. For example, the Company received a $2.8 million order for
one of these legacy programs in fiscal 2021. 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 $1.1 million in specialized displays in fiscal 2021 with
an additional backlog of $0.9 million for these products. Also, the Company
completed the transfer of its remaining CRT operations to its Lexel Imaging
facility in Lexington, KY in fiscal 2021 which will 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. In addition, the Company sold its Pennsylvania owned
building in September 2020 with net proceeds of $2.028 million after commissions
and closing costs. These net proceeds were used to pay back the note payable
with the CEO with remaining funds allocated for working capital needs.
Management continues to explore options to increase the liquidity of the Company. 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 atAugust 31, 2020 andFebruary 29, 2020 are adequate. 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 and six months endedAugust 31, 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 2021. 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-19pandemic 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 six months endedAugust 31, 2020 and 2019, the percentages that selected items in the Interim Condensed Consolidated Statements of Operations bear to total sales (amounts in thousands): Three Months Six Months Ended August 31, Ended August 31, 2020 2019 2020 2019 Sales
Simulation and Training (VDC Display Systems) 49.8 % 66.8 %
49.1 % 52.3
Data Display CRT (Lexel and Data Display) 14.8 17.1 18.4 20.1
Broadcast and Control Centers (AYON Visual) - - - -
Cyber Secure Products (AYON Cyber Security) 22.0 6.3 22.8 18.0
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Video Display Corporation and SubsidiariesAugust 31, 2020
Other Computer Products (Unicomp) 13.4 9.8 9.7
9.6
Total Company 100.0 % 100.0 % 100.0 % 100.0
Costs and expenses
Cost of goods sold 91.9 % 84.6 % 80.6 % 84.5
Selling and delivery 12.7 4.5 8.3 5.2
General and administrative 42.6 27.7 32.9
29.7
147.2 % 116.8 % 121.8 % 119.4
Operating loss (47.2 )% (16.8 )% (21.8 )% (19.4 )
Interest income (expense), net (0.7 )% (0.0 )% (0.5 )% (0.0 )
Other income, net 4.2 3.3 5.5 6.6
Loss before income taxes (43.7 )% (13.5 )% (16.8 )% (12.8 )
Income tax expense - - - -
Net loss (43.7 )% (13.5 )% (16.8 )% (12.8 )
Net sales
Consolidated net sales increased 1.0% for the six months ended August 31, 2020 ,
but decreased 29.0% for the three months ended August 31, 2020 compared to the
six months and three months ended August 31, 2019 . The Company's AYON Cyber
Security (ACS) division is up 27.9% for the six months ending August 31, 2020
compared to the six months last year. Their business increased due to the
completion of orders for the Department of the State . The activity in the cyber
security market place has begun to pick up with the Department of State
beginning to release bids for numerous large orders and the Company also has
bids with Canada . The Company is developing new products for customers in this
area and expects to have them be reviewed by customers by the end of this year.
The Company has also ramped up the service side of the cyber business by testing
other company's products for compliance. To accommodate this additional
business, the Company added a second testing chamber. For the three months
ending August 31, 2020 , ACS business increased 146.3%. The Display Systems
division was down 5.1% for the six months ended August 31, 2020 compared to the
comparable period last year. 36.2% of the division's business has been in the
new specialized displays segment of the division. The other approximate two
thirds has been mixed between different programs including ruggedized displays,
simulation and video walls. For the three months ended August 31, 2020 , the
Display System division was down 47.0% compared to the same three months last
year due to the sale for the video wall for $1.2 million in the second quarter
last year. 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 and 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 decreased 7.8% and 38.6% for the six months and three months ended
August 31, 2020 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. The Data
Display division is also seeing reduced sales for replacement CRTs for flight
simulator customers due to the decrease in flights right now. The division
expects to sell the DVST products for at least the next five to seven years. The
Company's keyboard division was up 2.3% for the six months ended August 31, 2020
and down 2.5% for three months ended August 31, 2020 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 increased both as a percentage to sales (19.4% from 15.6%) and actual dollars ($1,163 thousand from$923 thousand ) for the six months endedAugust 31, 2020 compared to the six months endedAugust 31, 2019 . Gross margins decreased for the three months endedAugust 31, 2020 compared to the three months endedAugust 31, 2019 , both as a percentage to sales (8.1% from 15.5%) and actual dollars, ($185 thousand from$498 thousand ). 18
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August 31, 2020
Two of the four divisions (Display and Keyboard divisions) saw increases in
gross margin percentages and gross margin dollars for the six months ended
August 31, 2020 compared to the same period last year. The Cyber Security
division saw an increase in gross margin dollars due to higher sales volume but
had a lower gross margin percentage as much of their revenue was from a
competitive bid contract. The only division with a lower gross margin percentage
and dollars was the Data Displays CRT division.
For the three months ended August 31, 2020 compared to the same period last
year, three of the four divisions made less gross margin dollars than last year.
The cyber division did slightly better than last year. Overall gross margins for
the quarter were down to the low sales volume as the display and cyber divisions
had higher gross margin percentages than last year.
Operating expenses
Operating expenses increased$394 thousand for the six months endedAugust 31, 2020 compared to the six months endedAugust 31, 2019 . The increase was due primarily to the addition of certain expenses associated with the acquisition of Jaco Displays in January, 2020 and commission expense at the Lexel Imaging (CRT) operation on the sales of the specialty direct view storage tubes. Operating expenses increased by 21.7% or$226 thousand for the three months endedAugust 31, 2020 compared to the three months endedAugust 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 ($30k ) 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.
Interest income (expense), net
Interest expense was$31 thousand for the six months endingAugust 31, 2020 . The interest expense was$1 thousand for the six months endingAugust 31, 2019 . There was$16 thousand for the three months endingAugust 31, 2020 and was negligible for the three months endingAugust 31, 2019 . The interest expense is on the note payable to the CEO and the PPP loan. These notes payable are discussed in Notes 6 and 8 of the financial statements.
Other income (expense), net
For the six months ended
For the three months endedAugust 31, 2020 the Company had$91 thousand in rental income,$1 thousand in scrap items, and$4 thousand in investment gains. For the three months endedAugust 31, 2019 , the Company earned$93 thousand in rental income,$15 thousand in scrap income and a$1 thousand loss in investment income. Income taxes Due to the Company's overall and historical net loss position, no income tax expense was reported for the six month period endingAugust 31, 2020 andAugust 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. 19
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Video Display Corporation and Subsidiaries
August 31, 2020 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 endingAugust 31, 2020 and had a decrease in working capital and liquid assets for the six month period primarily as a result of$1.0 million loss in the second quarter. The Company has sustained losses for the last four of five fiscal years and has seen overall a decline in working capital and liquid assets during this five year period. Annual losses over this time are due to a combination of decreasing revenues across certain divisions without a commensurate reduction of expenses. The Company has seen a rise in the backlog for customer orders and increased activity within the markets it serves. The Company's working capital and liquid asset position are presented below (in thousands) as ofAugust 31, 2020 andFebruary 29, 2020 : August 31, February 29, 2020 2020 Working capital$ 860 $ 1,263 Liquid assets$ 429 $ 844 Management has implemented a plan to improve the liquidity of the Company and to increase revenues at all the divisions, each structured to the particular division. 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 six months endedAugust 31, 2020 was$1.5 million . Adjustments to net loss were$0.2 million for non-cash depreciation and amortization charges. Changes in working capital used$0.8 million , primarily due to a decrease in custom deposits of$1.0 million and an increase in contract assets by$0.2 million , offset by an increase in accounts payable and accrued liabilities of$0.3 million and a decrease in prepaid expenses and other assets of$0.2 million . Cash provided by operations for the six months endedAugust 31, 2019 was$0.4 million . There was minimal investing activities for the six months endedAugust 31, 2020 . The Company used$31 thousand on capital assets expenditures and$47 thousand on trading security purchases offset with$24 thousand received from sale of investments. Investing activities used cash of$0.2 million during the six months endedAugust 31, 2019 resulting primarily from the purchase of capital assets. Financing activities provided$1.1 million for the six months endedAugust 31, 2020 resulting from$1.0 million proceeds received from the PPP Loan discussed in Note 6 of the interim condensed consolidated financial statements,$0.2 million borrowed from the CEO marginally offset by repayment of$35 thousand in related party loans. Financing activities used$0.1 million for the quarter endedAugust 31, 2019 related to the final debt payments made on theTeltron 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. 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 quarter endingAugust 31, 2020 andAugust 31, 2019 , 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 atAugust 31, 2020 . 20
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August 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 with U.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 atAugust 31, 2020 andFebruary 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.
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August 31, 2020
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 of August 31,
2020 , the Company has established a valuation allowance of $6.3 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. At August 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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