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 six month period ending August 31, 2021 primarily due to a decrease in
revenues in three of four divisions. 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 August 31, 2021 and February 28, 2021 :
August 31,
February 28,
2021 2021
Working capital $ 2,166 $ 3,601
Liquid assets $ 245 $ 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 customer visits and trade shows post pandemic to
market all the product lines it sells. 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
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Video Display Corporation and Subsidiaries
August 31, 2021
allowing it to increase the business in cyber testing services to supplement the
product side of the business. The Company completed the transfer of the
remaining CRT operations in Florida to its Lexel Imaging facility in Lexington,
KY in order to make room for the new business in its Cocoa facility. This will
also reduce expenses in the CRT operation by having that business all under one
roof. The Company 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 plan is to further reduce expenses by closing
the Tucker, Georgia facility as soon as the lease expires in March, 2022.
In order to assist funding operating activity, the Company's CEO loaned $250,000
to the Company during the second quarter 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 August 31, 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
- The Company's business units utilize different inventory components than the
divisions have in the past. The Company has a reserve at each of its divisions
to offset any obsolescence although most purchases are for current orders, which
should reduce the amount of obsolescence in the future. The Company still has
CRT inventory in stock and component parts for legacy products, although it
believes the inventory will be sold in the future, will continue to reserve for
any additional obsolescence. Management believes its inventory reserves at
August 31, 2021 and February 28, 2021 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 months and six months ended
August 31, 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 six months ended August 31,
2021 and 2020, 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,
2021 2020 2021 2020
Net Sales
Simulation and Training (VDC Display Systems) 56.4 % 49.8 % 55.4 % 49.1
Data Display CRT (Lexel and Data Display) 11.4 14.8 12.0 18.4
Broadcast and Control Centers (AYON Visual) - - - -
Cyber Secure Products (AYON Cyber Security) 16.9 22.0 13.9 22.8
Other Computer Products (Unicomp) 15.3 13.4 18.7 9.7
Total net sales 100.0 % 100.0 % 100.0 % 100.0
Costs and expenses
Cost of goods sold 97.3 % 91.9 % 88.9 % 80.6
Selling and delivery 6.5 12.7 7.5 8.3
General and administrative 47.4 42.6 50.4 32.9
151.2 % 147.2 % 146.8 % 121.8
Operating loss (51.2 )% (47.2 )% (46.8 )% (21.8 )
Interest income (expense), net (0.2 )% (0.7 )% (0.4 )% (0.5 )
Other income (expense), net 60.0 4.2 31.7 5.5
Income (loss) before income taxes 8.6 % (43.7 )% (15.5 )% (16.8 )
Income tax expense - - - -
Net income (loss) 8.6 % (43.7 )% (15.5 )% (16.8 )
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Video Display Corporation and Subsidiaries
August 31, 2021
Net sales
Consolidated net sales decreased 37.3% for the six months ended August 31, 2021 ,
and decreased 16.9% for the three months ended August 31, 2021 compared to the
six months and three months ended August 31, 2020 . The Company's AYON Cyber
Security (ACS) division is down 61.7% for the six months ending August 31, 2021
compared to the six months last year. Their 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 by the end of this year. The Company's service side of the
cyber business (testing other company's products for compliance) was their
primary revenue source. For the three months ending August 31, 2021 ACS business
decreased 36.3%. The Display Systems division was down 29.2% for the six months
ended August 31, 2021 compared to the comparable period last year. 26.8% 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, 2021 , the Display System division was down 6.1%
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
59.1% and 35.6% for the six months and three months ended August 31, 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.
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 20.1% for the six months ended
August 31, 2021 and down 5.0% for three months ended August 31, 2021
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 were decreased both as a percentage to sales (11.1%
to 19.4%) and actual dollars ($418 thousand to $1,163 thousand ) for the six
months ended August 31, 2021 compared to the six months ended August 31, 2020 .
VDC Display Systems gross margin dollars were $352 thousand compared to
$798 thousand for the six months ended August 31, 2021 compared to the six
months ended August 31, 2020 . VDC Display Systems gross margin percentage also
decreased from 27.1% to 16.9% for the six months ended August 31, 2021 compared
to the same six months in 2020. AYON Cyber Security gross margin dollars were
$217 thousand compared to $204 thousand for the six months ended August 31, 2021
compared to the six months ended August 31, 2020 . AYON Cyber Security gross
margin percentage increased to 41.4% from 14.9% for the six months ended
August 31, 2021 compared to the same six month period in 2020 due to the sales
mix of primarily service jobs as the material costs were lower.
The Data Display division had a negative gross margin of $392 thousand or a
negative 87.1% compared to a negative gross margin of $69 thousand and a
negative gross margin of 6.3% for the six months ended August 31, 2021 and
August 31, 2020 respectively. The keyboard division, Unicomp, had $241 thousand
of gross margin dollars or 34.3% to sales for the six months ending August 31,
2021 compared to $230 thousand or 39.4% for the six months ending August 31,
2020 .
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Video Display Corporation and Subsidiaries
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For the three months ended August 31, 2021 compared to the same period last
year, three of the four divisions reported lower gross margin dollars than last
year. The cyber division did better than last year in gross margin dollars and
gross margin percentage. The sales mix for the cyber division this year was
primarily service versus products which requires no material costs and as last
year the division completed a low margin product job. Overall gross margins for
the quarter were down to the low sales volume.
Operating expenses
Operating expenses decreased 12% or $292 thousand for the six months ended
August 31, 2021 compared to the six months ended August 31, 2020 . The decrease
was due primarily to the reduction of salaries and contractor expenses including
commissions.
Operating expenses decreased by 19.0% or $240 thousand for the three months
ended August 31, 2021 compared to the three months ended August 31, 2020 . The
decrease was due primarily to the decreased costs in selling expenses. 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 income (expense), net
Interest expense was $14 thousand for the six months ended August 31, 2021
compared to $31 thousand for the six months ended August 31, 2020 . Interest
expense was $4 thousand for the three months ended August 31, 2021 compared to
$16 thousand for the three months ended August 31, 2020 . Interest expense in
fiscal 2022 relates primarily to interest expense on the lease of TEMPEST
equipment along with interest related to the PPP loans that were outstanding.
Interest in fiscal 2021 primarily related to interest expense on notes owed to
the CEO.
Other income (expense), net
For the six months ended August 31, 2021 , the Company had $1.1 million in gains
on the extinguishment of PPP loans, $107 thousand in rental income, and
$4 thousand in debt recovery offset by $4 thousand in commissions on the rental
income. For the six months ended August 31, 2020 , the Company had $148 thousand
in royalty income, $181 thousand in rental income, $6 thousand in discontinued
scrap items, and $6 thousand in investment losses.
For the three months ended August 31, 2021 , the Company had $1.1 million in
gains on extinguishment of PPP loans, $56 thousand in rental income, $4 thousand
in bad debt recovery, offset by $2 thousand in rental commissions. For the three
months ended August 31, 2020 the Company had $91 thousand in rental income,
$1 thousand in scrap items, and $4 thousand in investment gains.
Income taxes
Due to the Company's overall and historical net loss position, no income tax has
been reported and a full valuation allowance has been 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 and liquid assets
for the six month period ending August 31, 2021 primarily due to a decrease in
revenues in three of four divisions. The Company has sustained losses for the
last
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Video Display Corporation and Subsidiaries
August 31, 2021
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 August 31, 2021 and February 28, 2021 :
August 31,
February 28,
2021 2021
Working capital $ 2,166 $ 3,601
Liquid assets $ 245 $ 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 six months ended August 31, 2021 was
$0.2 million . Adjustments to net loss of $0.6 million were $0.2 million for
depreciation and amortization offset by $0.1 million for a change in inventory
reserves and $1.1 million related to gain recorded on the extinguishment of the
remaining PPP loans. Changes in working capital provided $1.4 million , primarily
$0.2 million from accounts receivable and $0.5 million from the change in
contract assets, by $0.2 million change in accounts payable and $0.5 million in
inventories. Cash used by operations for the six months ended August 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 .
Investing activities used $47 thousand for the six months ended August 31, 2021
all related to capital asset expenditures compared to $54 thousand for the six
months ended August 31, 2020 of which $31 thousand related to capital
expenditures. In addition, for the six months ended August 31, 2020 ,
$47 thousand in cash was used for trading security purchases offset with
$24 thousand received from sale of investments. There has been no investing
activity to date in fiscal 2022.
Financing activities provided $183 thousand for the six months ended August 31,
2021 compared to $1,500 thousand for the comparable period in the prior year.
For the six months ended August 31, 2021 , $250 thousand was provided resulting
from borrowings from the CEO marginally offset by the repayment of notes and
lease financing. For the six months ended August 31, 2020 cash was provided
resulting from $1.0 million proceeds received from PPP Loans, $200 thousand
borrowed from the CEO marginally offset by repayment of $35 thousand 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.
For the six months ending August 31, 2021 and August 31, 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 August 31, 2021 .
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Video Display Corporation and Subsidiaries
August 31, 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:
Reserves on Inventories
Reserves on inventories result in a charge to operations when the estimated net
realizable value declines below cost. Management regularly reviews the Company's
investment in inventories for declines in value and establishes reserves when it
is apparent that the expected net realizable value of the inventory falls below
its carrying amount. Management reviews inventory levels on a quarterly basis.
Such reviews include observations of product development trends of the original
equipment manufacturers, new products being marketed, and technological advances
relative to the product capabilities of the Company's existing inventories.
Management believes its inventory reserves at August 31, 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.
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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Video Display Corporation and Subsidiaries
August 31, 2021
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,
2021 , the Company has established a valuation allowance of $5.3 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, 2021 , the Company did not record any liabilities for
uncertain tax positions.
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Video Display Corporation and Subsidiaries
August 31, 2021
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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