UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM10-Q

For the Quarterly Period Ended August 31, 2019.2020.

or

For the Transition Period From                    to                     

Commission File Number0-13394

VIDEO DISPLAY CORPORATION

(Exact name of registrant as specified on its charter)

1868 TUCKER INDUSTRIAL ROAD, TUCKER, GEORGIA 30084

(Address of principal executive offices)

770-938-2080

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of August 31, 2019,2020, the registrant had 5,878,290 shares of Common Stock outstanding.

Video Display Corporation and Subsidiaries

Index

ITEM 1 – FINANCIAL STATEMENTS

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Balance Sheets (unaudited)

(in thousands)

The accompanying notes are an integral part of these interim condensed consolidated statements.

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Balance Sheets (unaudited) (continued)

(in thousands)

The accompanying notes are an integral part of these interim condensed consolidated statements.

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Statements of Operations (unaudited)

(in thousands, except per share data)

The accompanying notes are an integral part of these interim condensed consolidated statements.

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated StatementStatements of Shareholders’ Equity

Three and Six Months Ended August 31, 2020 and 2019 (unaudited)

(in thousands)

The accompanying notes are an integral part of these interim condensed consolidated statements.

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)

The accompanying notes are an integral part of these interim condensed consolidated statements.

Video Display Corporation and Subsidiaries

August 31, 20192020

Note 1. – SummaryBasis of Significant Accounting PoliciesPresentation of Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements include the accounts of Video Display Corporation, Inc. and its subsidiaries (“Video Display,” the “Company,” “we,” or “us”). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated balance sheet as of February 28, 201929, 2020 has been derived from audited financial statements. The accompanying unaudited condensed consolidated financial statements as of August 31, 2020, and for the three and six months ended, August 31, 20192020 and 20182019 have been prepared in accordance with (i) accounting principles generally accepted in the U.S. for interim financial information and (ii) the instructions to Form10-Q and Rule10-01 of RegulationS-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, such statements do not include all of the information and disclosures required by accounting principles generally accepted in the U.S. for a complete presentation of financial statements. In the opinion of management, all adjustments (including those of a normal, recurring nature) considered necessary for a fair presentation have been included. Operating results for the three and six months ended August 31, 20192020 are not necessarily indicative of the results that may be expected for the year ending February 29, 2020.28, 2021. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Video Display’s Annual Report on Form10-K for the year ended February 28, 201929, 2020 filed with the SEC on May 29, 2019.2020.

Note 2. – Banking & Liquidity

The accompanying unaudited interim condensed consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company reported a net loss for the period ending August 31, 2019 but2020 and had an increasea decrease in working capital and liquid assets for the comparable six month fiscal 2020 period. Working capital decreased due toperiod primarily as a result of $1.0 million loss in the adoption of Topic 842 (see discussion in Note 4) whereby lease liabilities were recognized for lease obligations. While the liabilities are reflected in both current andnon-current liabilities, the corresponding leaseright-of-use assets are solely reflected innon-current assets. The current lease liability recognized as of August 31, 2019 was approximately $557 thousand.second quarter. The Company has sustained losses for the last threefour of fourfive fiscal years and has seen overall a decline in working capital and liquid assets during this fourfive year period. Annual losses over this time are due to a combination of decreasing revenues across certain divisions without a commensurate reduction of expenses. The Company has seen a rise in the backlog for customer orders and increased activity within the markets it serves. The Company’s working capital and liquid asset position are presented below (in thousands) as of August 31, 20192020 and February 28, 2019:29, 2020:

Management has implemented a plan to improve the liquidity of the Company. The Company has been fulfillingimplementing a plan to increase revenues at all the divisions, each structured to the particular division. The fiscal year ended February 29, 2020 was a transition year for the Company. Many of the legacy programs the Company has expanded its cyber security business by adding a second testing chamber for testing tempest products allowing it to increaseserviced were heading into new phases or the business in cyber testing services to supplementnext generation of the product sideline. This caused delays in the normal flow of the business. The Company received its first orderorders for these services in its second quarter of fiscal 2020 and expects this business to grow as the year progresses.programs. The Company is also now involvedworking with these customers and expects these programs to be placing orders to be fulfilled in ruggedized displays. Each division is exploring opportunities structuredthis fiscal year. Also, the Company completed the transfer of its remaining CRT operations to their particular divisionits Lexel Imaging facility in Lexington, KY in fiscal 2021 which has resulted in an increasewill reduce expenses in the growth in revenues for the last fiscal year and is expected to increase revenues this year.CRT operation by having that business all under one roof. The Company has reduced other expenses at the divisions, as well as atalso moved the corporate accounting functions to the Cocoa, Florida location within fiscal 2020 which allows the expectation that further decreases can be achieved. The Company has completed the merger of the two Florida businesses into one facilityto become more efficient and the relocation of Lexel Imaging into a new facility. These changes are projected to realize annual savings through reduced expenses.save money on reducing redundant operations. Management continues to explore options to monetize certain long-term assetsincrease the liquidity of the business.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.

Video Display Corporation and Subsidiaries

August 31, 2020

Note 3. – Fair Value Measurements and Financial Instruments

The Financial Accounting Standards Board’s (FASB’s) fair value measurement guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

Assets measured at fair value on a recurring basis by the Company consist of investment securities held for trading using Level 1 inputs. The following table sets forth financial assets and liabilities that were accounted for at fair value on a recurring basis as of August 31, 20192020 (in thousands):

As presented in the table above, theThe Company had $10 thousandzero balance on outstanding margin account borrowing as of August 31, 2019. No amounts were outstanding2020 and none as of February 28, 2019.29, 2020. The margin account borrowings are used to purchase marketable equity securities and are netted against the investments in the balance sheet to show net trading investments. The gross investments were $28$15.0 thousand leaving net investments of $18$15.0 thousand after theno margin account borrowings of $10 thousand at August 31, 2019.2020. The margin interest rate is 4.25%.1.50% at August 31, 2020. No investments were held at February 29, 2020.

The Company’s financial instruments which are not measured at fair value on the condensed consolidated balance sheets include cash, accounts receivable, short-term liabilities, and debt. The estimated fair value of these financial instruments approximate cost due to the short period of time to maturity. Recorded amounts of long-term debt are considered to approximate fair value due to either rates that fluctuate with the market or are otherwise commensurate with the current market.

Video Display Corporation and Subsidiaries

August 31, 20192020

Note 4. – Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

Effective March 1, 2019,2020 we adopted Accounting Standards Update (“ASU”)No. 2016-02,2018-13,Leases Fair Value Measurement. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 842)820-10): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”),as which changes the fair value measurement disclosure requirements of ASC Topic 820, Fair Value Measurements and Disclosures. Under this ASU, certain disclosure requirements for fair value measurements are eliminated, amended byor added. These changes aim to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. The guidance is effective for the Company beginning on March 1, 2020 and prescribes different transition methods for the various provisions. The adoption of ASU2018-01,Leases (Topic 842) – Land Easement Practical Expedient for Transition to Topic 842, ASU2018-10, Codification Improvements to Topic 842, ASU2018-11,Leases (Topic 842) – Targeted Improvements,ASU2018-20,Leases (Topic 842) – Narrow-Scope Improvements for Lessors, andASU2019-01,Leases (Topic 842) – Codification Improvements, (collectively, the new leases standard or Topic 842). The new standard established aright-of-use2018-13 (“ROU”) model that required lessees to record ROU assets and lease obligationsdid not have a material impact on the balance sheetCompany’s financial statements and disclosures.

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for all leases with terms longer than 12 months.

We adopted Topic 842 in first quarter fiscal 2020 usingIncome Taxes (“ASU 2019-12”), which simplifies the modified retrospective method and utilized the optional transition method under which we continue to apply the legacy guidance in ASC 840,Leases, including its disclosure requirements, in the comparative period presented. Therefore, the adjustment to recognize the Company’s leases on the balance sheetaccounting for income taxes by removing certain exceptions related to the adoptionapproach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new ASU also simplifies aspects of the new standard was recorded asaccounting for franchise taxes and enacted changes in tax laws or rates. These changes aim to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing the adoption datedisclosures. The guidance is effective for the Company beginning on March 1, 2021 and prior periods wereprescribes different transition methods for the various provisions. The Company does not restated.

As part ofexpect the adoption of Topic 842, we electedASU 2019-12 to adopt certainhave a material impact on its financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the optional practical expedients, including the package of practical expedients, which, among other things, gives us the option to not reassess: 1) whether expired or existing contracts are or contain leases; 2) the lease classification for expired or existing leases;measurement and 3) initial direct costs for existing leases. We also elected the practical expedient to not separate lease andnon-lease components, which allows us to account for lease andnon-lease components as a single lease component. We did not elect the hindsight practical expedient in our determination of the lease term for existing leases; therefore, the original lease terms, as determined under ASC 840, were used in the calculation of the Company’s initial Topic 842 lease liabilities.

Adoption of the new standard resulted in the recognition of operating leaseexpected credit losses for financial assets and operating lease liabilitiesheld at amortized cost, including trade receivables. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of approximately $2.1 million as of March 1, 2019.forward-looking information to calculate credit loss estimates. This guidance is effective for annual reporting periods beginning after December 15, 2022 for smaller reporting companies, with early adoption permitted. Entities will apply the amendments using a modified retrospective approach. The Company does not expect the adoption of this standard did notASU 2016-13 to have ana material impact on retained earnings, the consolidatedits financial statements of operations or the consolidated statements of cash flows.and related disclosures.

Note 5. – Inventories

Inventories are stated at the lower of cost (first in, first out) or market and consisted of the following (in thousands):

Video Display Corporation and Subsidiaries

August 31, 20192020

Note 6. – LinePaycheck Protection Promissory (“PPP”) Related Loans

On April 13, 2020 our Lexel Imaging subsidiary entered into a $216,200 Paycheck Protection Promissory Note (the “PPP Loan”) with the Central Bank and on April 23, 2020, Video Display Corporation entered into a $772,000 PPP Loan with the Renasant Bank. The PPP Loans were made under, and are subject to the terms and conditions of, Creditthe PPP which was established under the CARES Act and Long-Term Debt

is administered by the U.S. Small Business Administration. The current terms of the loans are two years with maturity dates of April 13, 2022 and April 23, 2022 and they contain a fixed annual interest rate of 1.00%. Payments of principle and interest on the PPP Loans will be deferred for the first six months of the term of the PPP Loans until October 13, 2020 and October 23, 2020, respectively. Principle and interest are payable monthly and may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Under the terms of the CARES Act, recipients can apply for and receive forgiveness for all, or a portion of the loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs, mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”), and on the maintenance of employee and compensation levels during a certain time period following the funding of the PPP Loans. The Company has been using the proceeds of the PPP Loans for Qualifying Expenses. However, no assurance is provided that the Company will be able to obtain forgiveness of the PPP Loans in whole or in part. As of August 31, 2020, $550 thousand of the total $988 thousand in PPP related loans is classified as a $0.5 million line of credit with the Brand Banking Company with no balance outstandingcurrent liability on the line at August 31, 2019. The line matures on October 15, 2019, is personally guaranteed by the Chief Executive Officer and has an interest rate of LIBOR plus 3.75%. The loan has no financial covenants.condensed consolidated balances sheets.

Long-term debt consisted of the following (in thousands):

Note 7. – Leases

The Company leases its office space and manufacturing facilities under operating lease agreements. The base lease terms expire at various dates from 2022 to 2025. While each of the leases include renewal options, the Company has only included the base lease term in its calculation of lease assets and liabilities. The Company does not have any finance leases.

Balance sheet information related to operating leases is as follows (in thousands):

Operating lease costs are included in Costcost of goods sold in the Company’s condensed consolidated statements of operations and totaled approximately $147 thousand for the three months ended August 31, 20192020 and $294$293 thousand for the six months ended August 31, 2019.2020. The Company did not have any variable lease costs orhad $7 thousand of short term lease costs for the three and six months ended August 31, 2019.2020. Operating lease costcosts were $157$147 thousand for the three months ended August 31, 20182019 and $329$293 thousand for the six months ended August 31, 2018.2019.

Cash paid for amounts included in the measurement of operating lease liabilities was approximately $143 thousand and $286 thousand during the three months ended August 31, 2019 and $286 thousand for the six months ended August 31, 2020 and 2019. The Company did not modify any existing leases or execute any new leases during the six months ended August 31, 2019.2020.

Video Display Corporation and Subsidiaries

August 31, 20192020

Weighted average information associated with the measurement of the Company’s remaining operating lease obligations is as follows:

The following table summarizes the maturity of the Company’s operating lease liabilities as of August 31, 20192020 (in thousands):

Included above are leases for manufacturing and warehouse facilities leased from Southeast Metro Savings, LLCthe Company’s chief executive officer and HoneyhillOrdway Properties, LLC (entities(an entity in which are controlled by ourthe chief executive officer)officer has an ownership interest in) under operating leases expiring at various dates through 2025. Lease costs under these leases totaled approximately $97 thousand for the three months ended August 31, 2019 and $194 thousand for the six months ended August 31, 20192020 (which is included in the total lease costs of $293 thousand noted above). Lease costs were also $97 thousand for the three months and $194 thousand for the six months ended August 31, 2019.

The Company subleases certain of its warehousing space and also leases a building that it owns in Pennsylvania. The sublease expires concurrently with the head lease in March 2022. The Pennsylvania building was sold in September 2020 as disclosed in Note 13. The chart below was modified due to this sale.

Sublease income and lease income are included in Other income, net in the Company’s condensed consolidated statements of operations and totaled approximately $90,000$91 thousand for the three months ended August 31, 2019 and $180,000$181 thousand for the six months ended August 31, 2020 and $90 thousand $180 thousand for the comparable periods in 2019. Future remaining lease payments expected to be received as of August 31, 20192020 are as follows (in thousands):

Note 8. – RelatedNotes Receivable and Payable to Officers and Directors (Related Party TransactionsTransactions)

On March 30, 2016, the Company entered into an assignment with recourse of the note receivable fromZ-Axis Inc.(Z-Axis) with Ronald D. Ordway, CEO, and Jonathan R. Ordway, related parties, for the sum of $912 thousand. The note receivable is collateralized by a security interest in the shares ofZ-Axis as well as a personal guaranty of its majority shareholder.Z-Axis is current on all scheduled payments regarding this note. The Company retains the right to repurchase the note at any time for 80% of the outstanding principle balance. Also, in the event of default byZ-Axis, the Company is obligated to repurchase the note for 80% of the remaining principle balance plus any accrued interest. Accordingly, the Company has recognized this transaction as a secured borrowing. The $ 0.9 million, 9% interest rate, note originated on

Video Display Corporation and Subsidiaries

August 31, 2020

March 30, 2016, with payments beginning on April 16, 2016 and continuing for 56 months thereafter. The balance of the note was $296$77 thousand, with $219 thousandall classified as current (related party note receivable and related party note payable) as of August 31, 20192020 and $398$189 thousand, with $209 thousandall classified as current as of February 28, 2019,29, 2020, respectively.

Video Display Corporation and Subsidiaries

August 31, 20192020

The following table sets forth the computation of basic and diluted earnings (loss) per share for the three-month and six month periods ended August 31, 20192020 and 20182019 (in thousands, except per share data):