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 2021 Annual Report to Shareholders, which included audited consolidated financial statements and notes thereto as of and for the fiscal year endedFebruary 28, 2021 , as well as Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview The Company manufactures and distributes a wide range of display devices, encompassing, among others, industrial, military, medical, and simulation display solutions. The Company is comprised of one segment-the manufacturing and distribution of displays and display components. The Company is organized into four interrelated operations aggregated into one reportable segment.
• Simulation and Training Products
- offers a wide range of projection display systems for use in training
and simulation, military, medical, entertainment and industrial
applications.
• Cyber Secure Products -offers advanced TEMPEST technology, and EMSEC products. This business
also provides various contract services including the design and testing
solutions for defense and niche commercial uses worldwide.
• Data Display
CRTs-offers a wide range of CRTs for use in data display screens, including
computer terminal monitors and medical monitoring equipment.
• Other Computer Products -
offers a variety of keyboard products.
During fiscal 2022, management of the Company is focusing key resources on
strategic efforts to grow its business through internal sales of the Company's
more profitable product lines and reduce expenses in all areas of the business
to bring its cost structure in line with the current size of the business.
Challenges facing the Company during these efforts include:
Liquidity -
The accompanying unaudited interim condensed consolidated financial statements
were prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company reported a net loss and a decrease in working capital and liquid assets
for the nine month period ending November 30, 2021 primarily due to a decrease
in revenues in three of four divisions along with a decrease in accounts
receivables and inventory. The Company has sustained losses for the last three
of five fiscal years and has seen overall a decline in working capital and
liquid assets during this five year period due to a combination of decreasing
revenues across certain divisions without a commensurate reduction of expenses.
The Company's working capital and liquid asset position are presented below (in
thousands) as of November 30, 2021 and February 28, 2021 :
November 30,
February 28,
2021 2021
Working capital $ 1,527 $ 3,601
Liquid assets $ 215 $ 293
The Company has increased marketing efforts in its ruggedized displays, TEMPEST
products and services and small specialty displays. In addition, the Company has
streamlined its operations and is focusing on increasing revenues by executing
initiatives such as upgrading its sales and marketing efforts including a more
user friendly website, the hiring of an experienced Rugged Display Business
Development Manager, increasing the number of customer visits and trade shows
post pandemic in order to market the Company's product lines. These efforts have
not increased revenues to date as the Company's business typically has a longer
lead time from initial contact to a sale. The pandemic has also slowed down the
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Video Display Corporation and Subsidiaries
November 30, 2021
process of obtaining new business as many of our customers and potential
customers are still working from home. The Company has expanded its cyber
security business by adding an additional test chamber and test equipment to
provide additional TEMPEST service capabilities and for qualifying TEMPEST
products allowing it to increase the business in cyber testing services to
supplement the product side of the business. The Company just completed and had
accredited its new AIS system which will allow for the opportunity to increase
the service business. The Company also completed the transfer of the remaining
CRT operations in Florida to its Lexel Imaging facility in Lexington, KY in
order to make room for 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 which allows the Company to become more efficient and save money on
reducing redundant operations.
In order to assist funding operating activity, the Company's CEO has loaned
$457,568 in aggregate to the Company during the second and third quarters of
fiscal 2022. There are no repayment terms related to the loan; however, the
Company plans to repay the note within the next twelve months and therefore has
classified the loan as a current liability on the condensed consolidated balance
sheets as of November 30, 2021 .
The ability of the Company to continue as a going concern is dependent upon the
success of management's plans to improve revenues, the operational effectiveness
of continuing operations, the procurement of suitable financing, or a
combination of these. The uncertainty regarding the potential success of
management's plan create substantial doubt about the ability of the Company to
continue as a going concern.
Inventory management
- Management regularly reviews the Company's investment in inventories for
declines in value and writes down the cost when it is apparent that the expected
net realizable value of the inventory falls below its carrying amount. The
Company operates in an environment of constantly changing technologies and
retains a certain amount of inventory for legacy products for maintenance and
replacement capabilities for its customers. The Company also inventories product
to ensure it has adequate inventory to fulfill orders for transitioning product
lines. Management reviews inventory levels on a quarterly basis. Such reviews
include observations of product development trends of the original equipment
manufacturers, new products being marketed, and technological advances relative
to the product capabilities of the Company's existing inventories.
Impact of
COVID-19
- The Company has been actively monitoring the novel
coronavirus, or COVID-19, situation and
its impact globally. Financial results for the three months and nine months
ended November 30, 2021 and 2020 have been
impacted by COVID-19 due to
delayed orders and/or the fulfillment of the related orders. However, the
Company currently does not expect any material impact on our financial results
for the remainder of fiscal 2022. Management continues to operate normally with
the exception of enabling employees to work from home and abiding by travel
restrictions issued by federal and local governments.
If the COVID-19 pandemic continues,
the Company may experience other disruptions that could severely impact the
business, results of operations and prospects.
Results of Operations
The following table sets forth, for the three and nine months ended November 30,
2021 and 2020, the percentages that selected items in the Interim Condensed
Consolidated Statements of Operations bear to total sales:
Three Months Nine Months
Ended November 30, Ended November 30,
2021 2020 2021 2020
Net Sales
Simulation and Training (VDC Display Systems) 63.8 % 77.9 % 57.9 % 58.4
Data Display CRT (Lexel and Data Display) 15.9 7.1 13.2 14.7
Broadcast and Control Centers (AYON Visual) - - - -
Cyber Secure Products (AYON Cyber Security) 1.7 2.6 10.3 16.3
Other Computer Products (Unicomp) 18.6 12.4 18.6 10.6
Total net sales 100.0 % 100.0 % 100.0 % 100.0
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Video Display Corporation and Subsidiaries
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Costs and expenses
Cost of goods sold 134.3 % 66.9 % 102.6 % 76.2
Selling and delivery 7.8 4.4 7.6 7.0
General and administrative 60.5 33.1 53.4 33.0
202.6 % 104.4 % 163.6 % 116.2
Operating loss (102.6 )% (4.4 )% (63.6 )% (16.2 )
Interest expense, net (0.4 )% (0.1 )% (0.3 )% (0.4 )
Other income (expense), net 53.2 70.2 38.2 26.4
Income (loss) before income taxes (49.9 )% 65.7 % (25.8 )%
9.8
Income tax expense - - - -
Net income (loss) (49.9 )% 65.7 % (25.8 )% 9.8
Net sales
Consolidated net sales decreased 39.3% for the nine months ended November 30,
2021 , and decreased 43.5% for the three months ended November 30, 2021 compared
to the nine months and three months ended November 30, 2020 . The Company's AYON
Cyber Security (ACS) division is down 61.8% for the nine months ending
November 30, 2021 compared to the nine months last year. The business decreased
due to lack of product orders for the Department of the State and Canada . The
Company is developing new products for customers in this area and expects to
have them reviewed by customers in the early part of next year. The Company's
service side of the cyber business (testing other company's products for
compliance) is the primary revenue source. For the three months ending
November 30, 2021 , ACS business decreased 64.0%. The Display Systems division
was down 39.8% for the nine months ended November 30, 2021 compared to the
comparable period last year. 33.1% of the division's business has been in the
new specialized displays area. The other approximate two thirds is mixed between
different programs including ruggedized displays, simulation and video walls.
For the three months ended November 30, 2021 , the Display System division was
down 53.8% compared to the same three months last year. The Company is focused
on the ruggedized displays and simulation sectors of the business, having
recently received an order for simulation and pursuing opportunities in both the
ruggedized displays and simulation business. The Data Display division decreased
45.7% for the nine months ended November 30, 2021 due to decreases in the sales
of a specialty product know as a DVST (Direct view storage tube) because of
delays caused by
Covid-19,
but increased 27.2% for three months ended November 30, 2021 due to increased
CRT sales. The division expects to sell the DVST products for at least the next
five to seven years. The Company's keyboard division was up 6.8% for the nine
months ended November 30, 2021 and down 15.2% for three months ended
November 30, 2021 respectively compared to the same periods last year. This
division experienced increased sales with the new product line introduced last
year, but sales have now leveled off. This division is expected to continue at
this level of sales each quarter.
Gross margins
Consolidated gross margins decreased both as a percentage to sales (2.6%) to
23.8% and actual dollars ($137) thousand to $2,111 thousand for the nine months
ended November 30, 2021 compared to the nine months ended November 30, 2020 .
VDC Display Systems gross margin dollars were $461 thousand compared to
$1,683 thousand for the nine months ended November 30, 2021 compared to the nine
months ended November 30, 2020 . VDC Display Systems gross margin percentage also
decreased from 32.5% to 14.8% for the nine months ended November 30, 2021
compared to the same nine months in 2020. AYON Cyber Security gross margin
dollars were $158 thousand compared to $210 thousand for the nine months ended
November 30, 2021 compared to the nine months ended November 30, 2020 . AYON
Cyber Security gross margin percentage increased to 28.7% from 14.6% for the
nine months ended November 30, 2021 compared to the same nine month period in
2020 due to the sales mix of primarily service jobs as the material costs were
lower.
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Video Display Corporation and Subsidiaries
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The Data Display division had a negative gross margin of $1,072 thousand or a
negative 151.4% compared to a negative gross margin of $147 thousand and a
negative gross margin of 11.3% for the nine months ended November 30, 2021 and
November 30, 2020 respectively. The negative gross margins were driven by
$532 thousand of inventory write offs and fixed overhead. The keyboard division,
Unicomp, had $315 thousand of gross margin dollars or 31.4% to sales for the
nine months ending November 30, 2021 compared to $364 thousand or 38.7% for the
nine months ending November 30, 2020 .
For the three months ended November 30, 2021 compared to the same period last
year, all four divisions reported lower gross margin dollars than last year.
Overall gross margins for the quarter were down to the low sales volume caused
by delays in receiving raw materials and other factors caused by Covid.
Operating expenses
Operating expenses decreased 7.4% or $261 thousand for the nine months ended
November 30, 2021 compared to the nine months ended November 30, 2020 . The
decrease was due primarily to the reduction of salaries and contractor expenses
including commissions.
Operating expenses increased by 2.8% or $30 thousand for the three months ended
November 30, 2021 compared to the three months ended November 30, 2020 . The
Company is focusing on reducing costs while increasing the sales effort. The
Company expects to continue to control costs while increasing revenues in
tempest services, specialized displays and ruggedized displays.
Interest expense, net
Interest expense was $20 thousand for the nine months ended November 30, 2021
compared to $35 thousand for the nine months ended November 30, 2020 . Interest
expense was $6 thousand for the three months ended November 30, 2021 compared to
$4 thousand for the three months ended November 30, 2020 . Interest expense in
fiscal 2022 relates primarily to interest expense on the lease of TEMPEST
equipment. Interest in fiscal 2021 primarily related to interest expense on
notes owed to the CEO and the TEMPEST equipment lease.
Other income (expense), net
For the nine months ended November 30, 2021 , the Company had $1.1 million in
gains on the extinguishment of PPP loans, $796 thousand in employee retention
credit income, $172 thousand in rental income, and $4 thousand in debt recovery
offset by $5.4 thousand in commissions on the rental income. For the nine months
ended November 30, 2020 , the Company had $1,724 thousand in a gain on the sale
of assets, $148 thousand in royalty income, $237 thousand in rental income,
$216 thousand in gain on extinguishment of debt, $9 thousand in discontinued
scrap items, and $5 thousand in investment gains.
For the three months ended November 30, 2021 , the Company had $796 thousand in
employee retention credit income, $64.4 thousand in rental income offset by
$1.8 thousand in rental commissions. For the three months ended November 30,
2020 the Company had $1,724 thousand in a gain on the sale of assets,
$216 thousand in gain on extinguishment of debt, $56 thousand in rental income,
$11 thousand in investment gains and $3 thousand in scrap sales.
Income taxes
Due to the Company's overall and historical net loss position, no income tax
benefit has been reported and instead a full valuation allowance has been
allocated to the deferred tax asset created by these losses.
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Video Display Corporation and Subsidiaries
November 30, 2021
Liquidity and Capital Resources
The accompanying unaudited interim condensed consolidated financial statements
were prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company reported a net loss and a decrease in working capital and liquid assets
for the nine month period ending November 30, 2021 primarily due to a decrease
in revenues in three of four divisions along with a decrease in accounts
receivables and inventory. The Company has sustained losses for the last three
of five fiscal years and has seen overall a decline in working capital and
liquid assets during this five year period due to a combination of decreasing
revenues across certain divisions without a commensurate reduction of expenses.
The Company's working capital and liquid asset position are presented below (in
thousands) as of November 30, 2021 and February 28, 2021 :
November 30,
February 28,
2021 2021
Working capital $ 1,527 $ 3,601
Liquid assets $ 215 $ 293
Management continues to implement plans to improve liquidity and to increase
revenues at all divisions. The ability of the Company to continue as a going
concern is dependent upon the success of management's plans to improve revenues,
the operational effectiveness of continuing operations, the procurement of
suitable financing, or a combination of these. The uncertainty regarding the
potential success of management's plan create substantial doubt about the
ability of the Company to continue as a going concern.
Cash used in operations for the nine months 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. Cash used by operations for the nine months ended November 30, 2020
was $2.7 million . Significant adjustments to net income included $1.9 million in
gains resulting from the sale of a building and forgiveness of a PPP loan.
Changes in working capital used $2.0 million , primarily due to an increase in
contract assets of $0.9 million , an increase in custom deposits of $0.6 million
and an increase in inventories $0.8 million , offset by a decrease in prepaid
expenses of $0.2 million and accounts payable and accrued liabilities of
$0.1 million .
Investing activities used $56 thousand for the nine months ended November 30,
2021 all related to capital asset expenditures. For the nine months ended
November 30, 2020 , cash provided by investing activities was $2 million and
resulted primarily from the sale of a building in third quarter fiscal 2021.
Financing activities provided $0.3 million for the nine months ended
November 30, 2021 compared to $0.2 million for the comparable period in the
prior year. For the nine months ended November 30, 2021 , $458 thousand was
provided resulting from borrowings from the CEO offset by the repayment of notes
of $74 thousand and lease financing of $57 thousand . Financing activities
provided $0.2 million for the nine months ended November 30, 2020 resulting from
$1.0 million in proceeds received from the PPP loans, $0.4 million in proceeds
borrowed from the CEO offset by repayments of $1.2 million in related party
loans.
The Company has a stock repurchase program, pursuant to which it has been
authorized to repurchase up to 2,632,500 shares of the Company's common stock in
the open market. On January 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.
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Video Display Corporation and Subsidiaries
November 30, 2021
For the nine months ending November 30, 2021 and November 30, 2020 , 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 November 30, 2021 .
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon the Company's interim condensed consolidated financial
statements. These interim condensed consolidated financial statements have been
prepared in accordance 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:
Inventory Valuation
Management regularly reviews the Company's investment in inventories for
declines in value and writes down the cost when it is apparent that the expected
net realizable value of the inventory falls below its carrying amount. The
Company operates in an environment of constantly changing technologies and
retains a certain amount of inventory for legacy products for maintenance and
replacement capabilities for its customers. The Company also inventories product
it acquires on a last-time buy basis to ensure it has adequate inventory to
fulfill orders for transitioning product lines. Management reviews inventory
levels on a quarterly basis. Such reviews include observations of product
development trends of the original equipment manufacturers, new products being
marketed, and technological advances relative to the product capabilities of the
Company's existing inventories. Management believes its inventory values at
November 30, 2021 and February 28, 2021 are adequate.
Revenue Recognition
We recognize revenue when we transfer control of the promised products or
services to our customers, in an amount that reflects the consideration we
expect to be entitled to in exchange for those products or services. We derive
our revenue primarily from sales of simulation and video wall systems, cyber
secure products, data displays, and keyboards. We exclude sales and usage-based
taxes from revenue.
Our simulation and video wall systems are custom-built (using commercial
off-the-shelf
products) to customer specifications under fixed price contracts. Judgment is
required to determine whether each product and service is considered to be a
distinct performance obligation that should be accounted for separately under
the contract. Generally, these contracts contain one performance obligation (the
installation of a fully functional system). We recognize revenue for these
systems over time as control is transferred based on labor hours incurred on
each project.
We recognize revenue related to our cyber secure products, data displays, and
keyboards at a point in time when control is transferred to the customer
(generally upon shipment of the product to the customer).
Timing of invoicing to customers may differ from timing of revenue recognition;
however, our contracts do not include a significant financing component as
substantially all of our invoices have terms of 30 days or less. We are applying
the practical expedient to exclude from consideration any contracts with payment
terms of one year or less and we never offer terms extending beyond one year.
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Video Display Corporation and Subsidiaries
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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 of November 30,
2021 , the Company has established a valuation allowance of $5.6 million on the
Company's deferred tax assets.
The Company accounts for uncertain tax positions under the provisions of ASC
740, which contains a
two-step
approach to recognizing and measuring uncertain tax positions. The first step is
to evaluate the tax position for recognition by determining if the weight of
available evidence indicates it is more likely than not, that the position will
be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest
amount, which is more than 50% likely of being realized upon ultimate
settlement. The Company considers many factors when evaluating and estimating
the Company's tax positions and tax benefits, which may require periodic
adjustments. At November 30, 2021 , the Company did not record any liabilities
for uncertain tax positions.
Forward-Looking Information and Risk Factors
This report contains forward-looking statements and information that is based on
management's beliefs, as well as assumptions made by, and information currently
available to management. When used in this document, the words "anticipate,"
"believe," "estimate," "intends," "will," and "expect" and similar expressions
are intended to identify forward-looking statements. Such statements involve a
number of risks and uncertainties. These risks and uncertainties, which are
included under Part I, Item 1A. Risk Factors in the Company's Annual Report on
Form
10-K
for the year ended February 28, 2021 could cause actual results to differ
materially.
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