The following discussion should be read in conjunction with the attached interim condensed consolidated financial statements and with the Company's 2020 Annual Report to Shareholders, which included audited condensed 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 as well as high-end visual display products for
use in video walls and command and control centers. 16
--------------------------------------------------------------------------------
Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2020
• 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 profit for the three and nine month period endingNovember 30, 2020 primarily resulting from a$216 thousand gain recorded resulting from the forgiveness and related extinguishment of the debt and a$1,724 gain recognized on the sale of a building. The Company had an increase in working capital, but had a decrease in liquid assets for the nine month period primarily as a result of a sale of a property it owned in the third quarter and using the proceeds to reduce current debt. The Company has sustained losses for the last four of five fiscal years and has seen overall a decline in working capital and liquid assets during this five year period. Annual losses over this time are due to a combination of decreasing revenues across certain divisions without a commensurate reduction of expenses. The Company has seen a rise in revenues this year and increased activity within the markets it serves. The Company expanded its revenues and markets with an acquisition in January, 2020 of a small display company. The Company's working capital and liquid asset position are presented below (in thousands) as ofNovember 30, 2020 andFebruary 29, 2020 : November 30, February 29, 2020 2020 Working capital$ 2,744 $ 1,263 Liquid assets $ 342 $ 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 has received orders for one of these programs and expects other programs to be placing orders to be fulfilled in the next fiscal year. Also, the Company completed the transfer of its remaining CRT operations to itsLexel Imaging facility inLexington, 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 theCocoa, Florida location in fiscal 2020 which allows the Company to become more efficient and save money on reducing redundant operations. 17
--------------------------------------------------------------------------------
Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2020
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 atNovember 30, 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 nine months endedNovember 20, 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-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 ended
Three Months Nine Months Ended November 30, Ended November 30, 2020 2019 2020 2019 Sales
Simulation and Training (VDC Display Systems) 77.9 % 19.0 %
58.4 % 45.6 Data Display CRT (Lexel and Data Display) 7.1 34.1 14.7 22.9 Broadcast and Control Centers (AYON Visual) - - - - Cyber Secure Products (AYON Cyber Security) 2.6 29.5 16.3 20.3 Other Computer Products (Unicomp) 12.4 17.4 10.6 11.2Total Company 100.0 % 100.0 % 100.0 % 100.0 Costs and expenses Cost of goods sold 66.9 % 82.0 % 76.2 % 84.0 Selling and delivery 4.4 9.2 7.0 6.0 General and administrative 33.1 59.5 33.0 35.6 104.4 % 150.7 % 116.2 % 125.6 Operating loss (4.4 )% (50.7 )% (16.2 )% (25.6 ) Interest expense, net (0.1 )% (0.0 )% (0.4 )% (0.0 ) Other income, net 70.2 7.9 26.4 6.8 Income (loss) before income taxes 65.7 % (42.8 )% 9.8 % (18.8 ) Income tax expense - - - - Net income (loss) 65.7 % (42.8 )% 9.8 % (18.8 ) 18
--------------------------------------------------------------------------------
Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2020 Net sales Consolidated net sales increased 19.7% for the nine months endedNovember 30, 2020 and 95.1% for the three months endedNovember 30, 2020 compared to the nine months and three months endedNovember 30, 2019 . The Display Systems division was up 53.0% for the nine months endedNovember 30, 2020 compared to the comparable periods last year. The completion of a video wall at a major customer and the completion of a significant portion of two simulators, along with new orders for a major contract have led the way to the increase. For the three months endedNovember 30, 2020 , the Display System division was up 702.0% compared to the same three months last year. Last year sales were slow for this division as they waited on rebid for one of their large product lines. This was resolved and orders began to ship in the third quarter. The acquisition of Jaco Displays in January, 2020 has added a significant amount of revenue not only in this quarter but for the fiscal year to date. The Company is focused on the video wall business with a recent order for a video wall for a major customer and is in talks with another major company for several video walls. The Company is also focused on the ruggedized displays (displays specifically designed to operate reliably in harsh usage environments and conditions) and the simulation sectors of the business, pursuing opportunities in both the ruggedized displays and simulation business. The Company's AYON Cyber Security (ACS) division is down 3.9% for the nine months endingNovember 30, 2020 compared to the nine months last year. ACS completed a large order for theDepartment of State that was awarded last year which has accounted for about two-thirds of its business this year. For the three months endingNovember 30, 2020 , ACS was down 82.7%. The division has not been able to secure any newU.S. government business and very little business fromCanada . Cyber service has been the primary revenue generator this quarter. The Data Display division showed an decrease of 23.1% for the nine months endedNovember 30, 2020 due to decreases in the sales of a specialty product know as a DVST (Direct view storage tube), and a decrease to airline simulator companies for replacement CRTs (Cathode Ray Tubes). The division is down 16.5% for the three months endedNovember 30, 2020 primarily due to the lack of DVST sales and replacement CRT sales, both hampered by COVID-19. The division expects to get new DVST orders and have the replacement CRT business pick up once COVID-19 is under control. The Company's keyboard division is up 13.6% for the nine months endedNovember 30, 2020 and 39.2% for three months endedNovember 30, 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 (23.8% to 16.1%) and actual dollars ($2,111 thousand to$1,188 thousand ) for the nine months endedNovember 30, 2020 compared to the nine months endedNovember 30, 2019 . Gross margins increased for the three months endedNovember 30, 2020 compared to the three months endedNovember 30, 2019 , both as a percentage to sales (33.1% to 18.1%) and actual dollars, ($948 thousand to$265 thousand ). VDC Display Systems gross margin percentage was 32.5% compared 15.0% and the gross margin dollars were$1,683 thousand compared to$507 thousand for the nine months endedNovember 30, 2020 andNovember 30, 2019 and 39.7% compared to (33.9)% and$885 thousand compared to($94) thousand for the three months endedNovember 30, 2020 andNovember 30, 2019 . VDC Display Systems gross margins improved for the year due to the product mix. The addition of the Jaco product line and the Multimedia Media Display (MMD) product line were the catalyst for the increase in margins. The improved gross margins should continue into the fourth quarter as the Company has additional orders for both of these product lines. 19
--------------------------------------------------------------------------------
Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2020 AYON Cyber Security gross margin percentage was 14.6% compared to 29.1% and the gross margin dollars were$210 thousand compared to$437 thousand for the nine months endedNovember 30, 2020 andNovember 30, 2019 and 8.3% compared to 61.5% and$6 thousand compared to$266 thousand for the three months endedNovember 30, 2020 andNovember 30, 2019 . The decrease in sales and the change in product mix caused an increase in material costs that contributed to the decrease in gross margins for the nine months endedNovember 30, 2020 . The margins decreased farther as a percent to sales for the quarter endedNovember 30, 2019 due to the low volume of sales to cover fixed costs. The keyboard division, Unicomp, had$364 thousand of gross margin dollars or 38.7% to sales for the nine months endingNovember 30, 2020 compared to$286 thousand or 34.7% for the nine months endingNovember 30, 2019 . Their gross margin percentage decreased slightly to 37.5% for the three months endedNovember 30, 2020 , but not up to last year's three months endedNovember 30, 2019 at 38.8%. Actual gross margin dollars were$133 thousand compared to$99 thousand last year for the comparable quarter endedNovember 30, 2020 . The Data Display division had a negative gross margin of$147 thousand or a negative 11.3% for nine months endingNovember 30, 2020 . The Data Display division, which manufactures the cathode ray tubes at theLexel Imaging facility had negative gross margin dollars of$42 thousand and a negative gross margin percentage of 2.5% for the nine months endedNovember 30, 2019 .Lexel Imaging had a negative$77 in gross margins or a negative 38.1% for the three months endedNovember 30, 2020 compared to a negative$6 thousand or negative 1.2% for the comparable three months endedNovember 30, 2019 .
Operating expenses
Operating expenses increased$460 thousand for the nine months endedNovember 30, 2020 compared to the nine months endedNovember 30, 2019 . The increase was due primarily to the addition of Jaco displays including two engineers, and one salesperson with all the expense associated with these employees. Another major increase with this acquisition is the amortization expense of the intangibles from the transaction. Operating expenses increased$66 for the three months endedNovember 30, 2020 compared to the three months endedNovember 30, 2019 . The increase is attributed to the acquisition also offset by fluctuations in other areas particularly turnover of employees and traveling expenses. Interest expense, net Interest expense was$35 thousand for the nine months endingNovember 30, 2020 . The interest expense was$1 thousand for the nine months endingNovember 30, 2019 . There was$4 thousand for the three months endingNovember 30, 2020 and was negligible for the three months endingNovember 30, 2019 . The interest expense is on the note payable to the CEO and the PPP loan. These notes payable are discussed in Notes 5 and 7 of the financial statements.
Other income, net
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 in gain on extinguishment of debt,$9 thousand in discontinued scrap items, and$5 thousand in investment gains. For the nine months endedNovember 30, 2019 , the Company earned$191 thousand in royalty income,$276 in rental income,$27 thousand in scrap sales, and$12 thousand investment income. 20
--------------------------------------------------------------------------------
Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2020 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. For the three months endedNovember 30, 2019 , the Company earned$96 thousand in rental income,$9 thousand in scrap income and$11 thousand in investment income. Income taxes Due to the Company's overall and historical net loss position, no income tax expense was reported for the nine month period endingNovember 30, 2020 andNovember 30, 2019 . Although the Company shows a net profit for the year, 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 profit for the three and nine month period endingNovember 30, 2020 primarily resulting from a$216 thousand gain recorded resulting from the forgiveness and related extinguishment of the debt and a$1,724 gain recognized on the sale of a building. The Company had an increase in working capital, but had a decrease in liquid assets for the nine month period primarily as a result of a sale of a property it owned in the third quarter and using the proceeds to reduce current debt. The Company has sustained losses for the last four of five fiscal years and has seen overall a decline in working capital and liquid assets during this five year period. Annual losses over this time are due to a combination of decreasing revenues across certain divisions without a commensurate reduction of expenses. The Company has seen a rise in revenues this year and increased activity within the markets it serves. The Company expanded its revenues and markets with an acquisition in January, 2020 of a small display company. The Company's working capital and liquid asset position are presented below (in thousands) as ofNovember 30, 2020 andFebruary 29, 2020 : November 30, February 29, 2020 2020 Working capital$ 2,744 $ 1,263 Liquid assets $ 342 $ 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 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 of$0.1 million . Cash used by operations for the nine months endedNovember 30, 2019 was$0.3 million . 21
--------------------------------------------------------------------------------
Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2020
For the nine months ended
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 as discussed in Note 5 of the interim condensed consolidated financial statements,$0.4 million in proceeds borrowed from the CEO offset by repayments of$1.2 million in related party loans. Financing activities provided$0.1 million for the nine months endedNovember 30, 2019 . 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-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
22
--------------------------------------------------------------------------------
Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 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:
Reserves on Inventories
Reserves on inventories result in a charge to operations when the estimated net realizable value declines below cost. Management regularly reviews the Company's investment in inventories for declines in value and establishes reserves when it is apparent that the expected net realizable value of the inventory falls below its carrying amount. Management reviews inventory levels on a quarterly basis. Such reviews include observations of product development trends of the original equipment manufacturers, new products being marketed, and technological advances relative to the product capabilities of the Company's existing inventories. Management believes its inventory reserves atNovember 30, 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. 23
--------------------------------------------------------------------------------
Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 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 ofNovember 30, 2020 , the Company has established a valuation allowance of$5.9 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, 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. 24
--------------------------------------------------------------------------------
Table of ContentsVideo Display Corporation and SubsidiariesNovember 30, 2020
© Edgar Online, source