VIDEO DISPLAY CORPORATION The following discussion should be read in conjunction with the attached unaudited interim condensed consolidated financial statements and with the Company's 2022 Annual Report to Shareholders, which included audited consolidated financial statements and notes thereto as of and for the fiscal year endedFebruary 28, 2022 , as well as Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The Company manufactures and distributes a wide range of display devices, encompassing, among others, industrial, military, medical, and simulation display solutions. The Company is comprised of one segment-the manufacturing and distribution of displays and display components. The Company is organized into four interrelated operations aggregated into one reportable segment.
• Simulation and Training Products
- offers a wide range of projection display systems for use in training and
simulation, military, medical, entertainment and industrial applications.
• Cyber Secure Products -
offers advanced TEMPEST technology, and EMSEC products. This business also
provides various contract services including the design and testing solutions
for defense and niche commercial uses worldwide.
• Data Display
CRTs-offers a wide range of CRTs for use in data display screens, including
computer terminal monitors and medical monitoring equipment.
• Other Computer Products -
offers a variety of keyboard products.
During fiscal 2023, management of the Company is focusing key resources on
strategic efforts to grow its business through internal sales of the Company's
more profitable product lines and reduce expenses in all areas of the business
to bring its cost structure in line with the current size of the business.
Challenges facing the Company during these efforts include:
Liquidity -
The accompanying unaudited interim condensed consolidated financial statements
were prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company reported a net loss and a decrease in working capital for the
three-month period ending May 31, 2022 primarily due to insufficient revenues in
the Company. The Company also had a decrease in liquid assets for the
three-month period primarily as a result of the lack of revenue. The Company has
sustained losses for the last three of five fiscal years and has seen overall a
decline in working capital and liquid assets during this five-year period.
Annual losses over this time are due to a combination of decreasing revenues
across the divisions without a commensurate reduction of expenses. The Company's
working capital and liquid asset position are presented below (in thousands) as
of May 31, 2022 and February 28, 2022 :
May 31,
February 28,
2022 2022
Working capital $ 348 $ 509
Liquid assets $ 153 $ 245
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Video Display Corporation and Subsidiaries
May 31, 2022
The Company has increased marketing efforts in its ruggedized displays, TEMPEST
products and services and small specialty displays in an effort to increase
revenue. New products in the ruggedized and TEMPEST areas have been developed
and are now being evaluated by potential customers. In addition, the Company has
continued to streamline its operations and is focusing on increasing revenues by
executing initiatives such as upgrading its sales and marketing efforts
including targeting efforts towards repeatable business, the hiring of an
experienced Rugged Display Business Development Manager, increased customer
visits, trade shows and
e-mail
blasts to market all the product lines it sells. The Company was able to
increase its fiscal revenue over the prior fiscal year and has been implementing
a plan to increase revenues at all the divisions, each structured to the
particular division. The Company is restructuring its cyber security services
business by adding a dedicated sales person for the service business to increase
the business in cyber testing services and developing new products to supplement
the product side of the business. The Lexel Imaging facility in Lexington, KY is
working with some customers on last time buys for certain types of CRTs while
also exploring new opportunities that are a fit for the division. The Company
moved the corporate accounting functions to the Cocoa, Florida location which
allows the Company to become more efficient and save money on reducing redundant
operations. The former headquarters and distribution center in Tucker, Georgia
closed as of March 31, 2022 . In order to assist funding operating activity, the
Company's CEO loaned an additional $326,000 to the Company during the first
quarter of fiscal year 2023. There is no line of credit outstanding or other
financing currently in place other than the note payable with the Company CEO
with a balance of $784,000 . There are no repayment terms related to the loan;
however, the Company plans to repay the note within the next twelve months and
therefore has classified the loan as a current liability on the condensed
consolidated balance sheets as of May 31, 2022 .
The ability of the Company to continue as a going concern is dependent upon the
success of management's plans to improve revenues, the operational effectiveness
of continuing operations, the procurement of suitable financing, or a
combination of these. The uncertainty regarding the potential success of
management's plan create substantial doubt about the ability of the Company to
continue as a going concern.
Inventory valuation
- Management regularly reviews the Company's investment in inventories for
declines in value and writes down the cost when it is apparent that the expected
net realizable value of the inventory falls below its carrying amount. The
Company operates in an environment of constantly changing technologies and
retains a certain amount of inventory for legacy products for maintenance and
replacement capabilities for its customers. The Company maintains inventory on
certain products to ensure it has adequate inventory to fulfill orders for
transitioning product lines. Management reviews inventory levels on a quarterly
basis. Such reviews include observations of product development trends of the
original equipment manufacturers, new products being marketed, and technological
advances relative to the product capabilities of the Company's existing
inventories.
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 ended May 31, 2022
and 2021 have been
impacted by COVID-19 due to
delayed orders and/or the fulfillment of the related orders. However, the
Company currently does not expect any material impact on our financial results
for the remainder of fiscal 2023. Management continues to operate normally with
the exception of enabling employees to work from home and abiding by travel
restrictions issued by federal and local governments.
If the COVID-19 pandemic continues,
the Company may experience other disruptions that could severely impact the
business, results of operations and prospects.
Results of Operations
The following table sets forth, for the three months ended
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Video Display Corporation and Subsidiaries
May 31, 2022
Three Months
Ended May 31
2022 2021
Amount % Amount %
Net Sales
Simulation and Training (VDC Display Systems) 2,052 72.2 % 1,011 54.4 %
Data Display CRT (Lexel and Data Display) 476 16.8 232 12.5
Cyber Secure Products (AYON Cyber Security) 72 2.5 204 11.0
Other Computer Products (Unicomp) 241 8.5 410 22.1
Total net sales 2,841 100.0 % 1,857 100.0 %
Costs and expenses
Cost of goods sold 2,130 75.0 % 1,490 80.2 %
Selling and delivery 149 5.2 158 8.5
General and administrative 870 30.6 993 53.5
3,149 110.8 % 2,641 142.2 %
Operating loss (308 ) (10.8 )% (784 ) (42.2 )%
Interest (expense), net (5 ) (0.2 )% (10 ) (0.5 )%
Other income, net 18 0.6 49 2.6
Loss before income taxes (295 ) (10.4 )% (745 ) (40.1 )%
Income tax expense - - - -
Net loss (295 ) (10.4 )% (745 ) (40.1 )%
Net sales
Consolidated net sales increased 53.0% for the three months ended May 31, 2022
compared to the three months ended May 31, 2021 . The Display Systems division
increased 102.9% for the quarter or $1.0 million , due primarily to overall
increase in activity on installations for simulators for two customers ($1.2
million ). The Company's AYON Cyber Security division decreased 64.7% for the
quarter or $0.1 million compared to last year's same quarter. The division is
going through some changes to increase its TEMPEST service business and on the
product side of the business, the division's engineers are working on new
products certain government agencies have requested and have submitted a new
TEMPEST phone for approval. The Data Display division had an increase of 104.8%
due to increased orders from its CRT customers. The Data division is working
closely with the customers to place orders before some materials become
unavailable prompting some customers to place additional orders. Lexel is
working with customers in Asia for their needs on direct view storage tubes
(DVST) and should have steady business driven by replacement CRTs for
simulators, medical CRTs and phosphor coating business improvements. The
keyboard division had a decrease in sales of 41.2%, the business has slowed this
year after the launch of their new line up of keyboards last year produced
strong last year's first quarter. All divisions have experienced some form of
delay in new orders from customers due to the pandemic, and supply chain issues
but there are signs that businesses are finding ways to move forward.
Gross margins
Consolidated gross margins increased both as a percentage to sales (25.0% to 19.8%) and actual dollars ($711 thousand to$367 thousand ) for the three months endedMay 31, 2022 compared to the three months endedMay 31, 2021 . The Display Systems division showed increases in both their gross margin percentage to sales and in actual dollars. VDC Display Systems gross margin percentage was 34.0% compared to 26.7% and the gross margin dollars were$697 thousand compared to$270 thousand for the three months endedMay 31, 2022 compared to the three months endedMay 31, 2021 , an increase of 158.2%. AYON Cyber Security gross margin percentage was a negative 5.4% compared to 11.8% and the gross margin dollars were negative$4 thousand compared to$24 thousand for the three months endedMay 31, 2022 compared to the three months endedMay 31, 2021 . AYON Cyber Security has seen very little product business, but is developing a TEMPEST video wall which customers have shown interest in and is marketing the service side of the business for testing other companies' products which is expected to grow. 16
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Video Display Corporation and Subsidiaries
May 31, 2022
The Data Display division had a negative gross margin of $1 thousand or a
negative 0.3% compared to a negative gross margin of $103 thousand and a
negative gross margin of 44.3% for the three months ended May 31, 2022 and May
31, 2021 respectively. The keyboard division, Unicomp, had $20 thousand of gross
margin dollars or 8.2% to sales for the three months ending May 31, 2022
compared to $176 thousand or 43.0% for the three months ending May 31, 2021 .
Operating expenses
Operating expenses decreased by 11.5% or$132 thousand for the three months endedMay 31, 2022 compared to the three months endedMay 31, 2021 . The decrease was due primarily to the decreased costs in administration expenses. The Company reduced costs primarily in salaries, by not replacing staff when they resigned while business was slow. The Company expects to continue to control costs while increasing revenues in tempest services, specialized displays and ruggedized displays. When business increases we will look to fill some of the vacant positions.
Interest expense
Interest expense was$5 thousand for the quarter endedMay 31, 2022 compared to$10 thousand for the quarter endedMay 31, 2021 . The interest expense was on the lease of TEMPEST equipment.
Other Income/ expense
For the three months endedMay 31, 2022 , the Company had$15 thousand in rental income and$3 thousand on the sale of assets. For the three months endedMay 31, 2021 , the Company earned$51 thousand in rental income with$2 thousand in other expense for commissions on the rentals.
Income taxes
Due to the Company's overall and historical net loss position, no income tax expense was reported for the three- month period endingMay 31, 2022 andMay 31, 2021 . Due to continued losses reported by the Company, a full valuation allowance was allocated to the deferred tax asset created by these losses.
Liquidity and Capital Resources
The accompanying unaudited interim condensed consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company reported a net loss and a decrease in working capital for the three-month period endingMay 31, 2022 primarily due to insufficient revenues in the Company. The Company did have a decrease in liquid assets for the three-month period primarily as a result of the lack of revenue. The Company has sustained losses for the last three of five fiscal years and has seen overall a decline in working capital and liquid assets during this five-year period. Annual losses over this time are due to a combination of decreasing revenues across the divisions without a commensurate reduction of expenses. The Company's working capital and liquid asset position are presented below (in thousands) as ofMay 31, 2022 andFebruary 28, 2022 : May 31, February 28, 2022 2022 Working capital$ 348 $ 509 Liquid assets$ 153 $ 245 17
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Video Display Corporation and Subsidiaries
May 31, 2022
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 quarter ended May 31, 2022 was $0.4 million .
Deductions to net loss of $0.3 million were $0.1 million for depreciation and
amortization. Changes in working capital were $0.3 million , primarily change in
contract assets of $0.8 million and a change in accounts receivable of
$0.7 million offset by a change in accounts payable of $0.6 million , a change in
inventory of $0.4 million and a change in employee retention credit receivables
of $0.2 million . Cash provided by operations for the three months ended May 31,
2021 was $0.6 million . Adjustments to net loss of $0.7 million were $0.1 million
for depreciation and amortization. Changes in working capital provided
$1.2 million , primarily $0.9 million from accounts receivable and $0.5 million
from the change in contract assets offset by $0.2 million change in accounts
payable and accrued liabilities.
Investing activities used
Financing activities provided$0.3 million for the period endedMay 31, 2022 from proceeds from additional borrowing from the Company's CEO. Financing activities used$32 thousand in the period endedMay 31, 2021 for payment of debt and lease payments. 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 endingMay 31, 2022 andMay 31, 2021 , the Company did not purchase any shares of theVideo Display Corporation stock. Under the Company's stock repurchase program, an additional 490,186 shares remain authorized to be repurchased by the Company atMay 31, 2022 .
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company's interim condensed consolidated financial statements. These interim condensed consolidated financial statements have been prepared in accordance withU.S. GAAP. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the interim condensed consolidated financial statements and related notes. The accounting policies that may involve a higher degree of judgments, estimates, and complexity include reserves on inventories, revenue recognition, and the sufficiency of the valuation reserve related to deferred tax assets. The Company uses the following methods and assumptions in determining its estimates:
Inventory Valuation
Management regularly reviews the Company's investment in inventories for
declines in value and writes down the cost when it is apparent that the expected
net realizable value of the inventory falls below its carrying amount. The
Company operates in an environment of constantly changing technologies and
retains a certain amount of inventory for legacy products for maintenance and
replacement capabilities for its customers. The Company maintains inventory on
certain products to ensure it has adequate inventory to fulfill orders for
transitioning product lines. Management reviews inventory levels on a quarterly
basis. Such reviews include observations of product development trends of the
original equipment manufacturers, new products being marketed, and technological
advances relative to the product capabilities of the Company's existing
inventories.
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Video Display Corporation and Subsidiaries
May 31, 2022 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, 2022 , 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. AtMay 31, 2022 , the Company did not record any liabilities for uncertain tax positions. 19
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May 31, 2022 Forward-Looking Information and Risk Factors
This report contains forward-looking statements and information that is based on management's beliefs, as well as assumptions made by, and information currently available to management. When used in this document, the words "anticipate," "believe," "estimate," "intends," "will," and "expect" and similar expressions are intended to identify forward-looking statements. Such statements involve a number of risks and uncertainties. These risks and uncertainties, which are included under Part I, Item 1A. Risk Factors in the Company's Annual Report on Form 10-K for the year endedFebruary 28, 2022 could cause actual results to differ materially.
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