UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
| ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended MayAugust 31, 2020.
or
| ☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period From to
Commission File Number 0-13394
VIDEO DISPLAY CORPORATION
(Exact name of registrant as specified on its charter)
| GEORGIA | 58-1217564 | |
(State or other jurisdiction of
| (I.R.S. Employer
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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:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, no par value | VIDE | OTCMKTS |
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.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |||
| Emerging growth company | ☐ | |||||
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 Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of MayAugust 31, 2020, the registrant had 5,878,290 shares of Common Stock outstanding.
Video Display Corporation and Subsidiaries
Video Display Corporation and Subsidiaries
Interim Condensed Consolidated Balance Sheets (unaudited)
(in thousands)
| May 31, | February 29, | |||||||
| 2020 | 2020 | |||||||
| (unaudited) | ||||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 1,225 | $ | 844 | ||||
Trading investments, at fair value | 12 | — | ||||||
Accounts receivable, less allowance for doubtful accounts of $5 and $9 | 654 | 1,305 | ||||||
Notes receivable due from officers and directors (Note 8) | 134 | 189 | ||||||
Inventories, net | 4,009 | 4,480 | ||||||
Contract assets | 655 | — | ||||||
Prepaid expenses and other current assets | 478 | 411 | ||||||
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Total current assets | 7,167 | 7,229 | ||||||
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Property, plant, and equipment | ||||||||
Land | 154 | 154 | ||||||
Buildings | 2,756 | 2,756 | ||||||
Construction in progress | 110 | 106 | ||||||
Machinery and equipment | 4,875 | 4,861 | ||||||
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| 7,895 | 7,877 | |||||||
Accumulated depreciation | (6,666 | ) | (6,607 | ) | ||||
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Net property, plant, and equipment | 1,229 | 1,270 | ||||||
Right of use assets under operating leases | 1,508 | 1,631 | ||||||
Intangible assets, net | 344 | 387 | ||||||
Other noncurrent assets | 2 | 2 | ||||||
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Total assets | $ | 10,250 | $ | 10,519 | ||||
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| August 31, 2020 | February 29, 2020 | |||||||
| (unaudited) | ||||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 414 | $ | 844 | ||||
Trading investments, at fair value | 15 | — | ||||||
Accounts receivable, less allowance for doubtful accounts of $6 and $9 | 1,449 | 1,305 | ||||||
Notes receivable due from officers and directors (Note 8) | 77 | 189 | ||||||
Inventories, net | 4,373 | 4,480 | ||||||
Contract assets | 206 | — | ||||||
Prepaid expenses and other current assets | 189 | 411 | ||||||
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Total current assets | 6,723 | 7,229 | ||||||
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Property, plant, and equipment | ||||||||
Land | 154 | 154 | ||||||
Buildings | 2,766 | 2,756 | ||||||
Construction in progress | 110 | 106 | ||||||
Machinery and equipment | 4,878 | 4,861 | ||||||
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| 7,908 | 7,877 | |||||||
Accumulated depreciation | (6,724 | ) | (6,607 | ) | ||||
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Net property, plant, and equipment | 1,184 | 1,270 | ||||||
Right of use assets under operating leases | 1,383 | 1,631 | ||||||
Intangible assets, net | 312 | 387 | ||||||
Other noncurrent assets | 2 | 2 | ||||||
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Total assets | $ | 9,604 | $ | 10,519 | ||||
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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)
| May 31, | February 29, | |||||||||||||||
| 2020 | 2020 | August 31, 2020 | February 29, 2020 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 895 | $ | 1,256 | $ | 1,415 | $ | 1,256 | ||||||||
Accrued liabilities | 440 | 499 | 647 | 499 | ||||||||||||
Customer deposits | 1,719 | 2,338 | 1,325 | 2,338 | ||||||||||||
Notes payable to officers and directors (Note 8) | 1,126 | 1,216 | 1,269 | 1,216 | ||||||||||||
Note payable | 100 | 100 | 100 | 100 | ||||||||||||
PPP related loans, current | 385 | — | 550 | — | ||||||||||||
Current operating lease liabilities | 557 | 557 | 557 | 557 | ||||||||||||
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Total current liabilities | 5,222 | 5,966 | 5,863 | 5,966 | ||||||||||||
PPP related loans, noncurrent | 603 | — | 438 | — | ||||||||||||
Long-term operating lease liabilities | 971 | 1,091 | 849 | 1,091 | ||||||||||||
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Total liabilities | 6,796 | 7,057 | 7,150 | 7,057 | ||||||||||||
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Shareholders’ Equity | ||||||||||||||||
Preferred stock, no par value – 10,000 shares authorized; none issued and outstanding | — | — | — | — | ||||||||||||
Common stock, no par value – 50,000 shares authorized; 9,732 issued and 5,878 outstanding at May 31, 2020, and at February 29, 2020 | 7,293 | 7,293 | ||||||||||||||
Common stock, no par value – 50,000 shares authorized; 9,732 issued and 5,878 outstanding at August 31, 2020 and at February 29, 2020 | 7,293 | 7,293 | ||||||||||||||
Additional paid-in capital | 281 | 281 | 281 | 281 | ||||||||||||
Retained earnings | 12,162 | 12,170 | 11,162 | 12,170 | ||||||||||||
Treasury stock, shares at cost; 3,854 at May 31, 2020 and February 29, 2020 | (16,282 | ) | (16,282 | ) | ||||||||||||
Treasury stock, shares at cost; 3,854 at August 31, 2020 and February 29, 2020 | (16,282 | ) | (16,282 | ) | ||||||||||||
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Total shareholders’ equity | 3,454 | 3,462 | 2,454 | 3,462 | ||||||||||||
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Total liabilities and shareholders’ equity | $ | 10,250 | $ | 10,519 | $ | 9,604 | $ | 10,519 | ||||||||
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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)
| Three Months Ended May 31, | Three Months Ended August 31, | Six Months Ended August 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Net sales | $ | 3,705 | $ | 2,709 | $ | 2,292 | $ | 3,228 | $ | 5,997 | $ | 5,937 | ||||||||||||
Cost of goods sold | 2,727 | 2,284 | 2,107 | 2,730 | 4,834 | 5,014 | ||||||||||||||||||
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Gross profit | 978 | 425 | 185 | 498 | 1,163 | 923 | ||||||||||||||||||
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Operating expenses | ||||||||||||||||||||||||
Selling and delivery | 206 | 165 | 290 | 147 | 496 | 312 | ||||||||||||||||||
General and administrative | 997 | 869 | 976 | 893 | 1,973 | 1,762 | ||||||||||||||||||
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| 1,203 | 1,034 | 1,266 | 1,040 | 2,469 | 2,074 | |||||||||||||||||||
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Operating loss | (225 | ) | (609 | ) | (1,081 | ) | (542 | ) | (1,306 | ) | (1,151 | ) | ||||||||||||
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Other income (expense) | ||||||||||||||||||||||||
Interest (expense) income, net | (15 | ) | — | |||||||||||||||||||||
Investment (loss) gains, net | (10 | ) | 2 | |||||||||||||||||||||
Interest income (expense), net | (16 | ) | (1 | ) | (31 | ) | (1 | ) | ||||||||||||||||
Investment gains (losses), net | 4 | (1 | ) | (6 | ) | 1 | ||||||||||||||||||
Other, net | 242 | 281 | 92 | 109 | 335 | 390 | ||||||||||||||||||
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| 217 | 283 | 80 | 107 | 298 | 390 | |||||||||||||||||||
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Loss before income taxes | (8 | ) | (326 | ) | (1,001 | ) | (435 | ) | (1,008 | ) | (761 | ) | ||||||||||||
Income tax expense | — | — | — | — | — | — | ||||||||||||||||||
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Net loss | $ | (8 | ) | $ | (326 | ) | $ | (1,001 | ) | $ | (435 | ) | $ | (1,008 | ) | $ | (761 | ) | ||||||
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Net loss per share: | ||||||||||||||||||||||||
Net loss per share-basic | $ | (0.00 | ) | $ | (0.06 | ) | ||||||||||||||||||
Net loss per share basic | $ | (0.17 | ) | $ | (0.07 | ) | $ | (0.17 | ) | $ | (0.13 | ) | ||||||||||||
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Net loss per share-diluted | $ | (0.00 | ) | $ | (0.06 | ) | ||||||||||||||||||
Net loss per share diluted | $ | (0.17 | ) | $ | (0.07 | ) | $ | (0.17 | ) | $ | (0.13 | ) | ||||||||||||
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Basic weighted average shares outstanding | 5,878 | 5,878 | 5,878 | 5,878 | 5,878 | 5,878 | ||||||||||||||||||
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Diluted weighted average shares outstanding | 5,878 | 5,878 | 5,878 | 5,878 | 5,878 | 5,878 | ||||||||||||||||||
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The accompanying notes are an integral part of these interim condensed consolidated statements.
Video Display Corporation and Subsidiaries
Interim Condensed Consolidated Statements of Shareholders’ Equity
Three and Six Months Ended MayAugust 31, 2020 and 2019 (unaudited)
(in thousands)
| Common Shares | Share Amount | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Total Shareholders’ Equity | Common Shares* | Share Amount | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||
Balance, February 29, 2020 | 5,878 | $ | 7,293 | $ | 281 | $ | 12,170 | $ | (16,282 | ) | $ | 3,462 | ||||||||||||||||||||||||||||||||||||
For the Three Months Ended August 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, May 31, 2020 (unaudited) | 5,878 | $ | 7,293 | $ | 281 | $ | 12,163 | $ | (16,282 | ) | $ | 3,455 | ||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | (8 | ) | — | (8 | ) | — | — | — | (1,001 | ) | — | (1,001 | ) | ||||||||||||||||||||||||||||||||
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Balance, May 31, 2020 (unaudited) | 5,878 | $ | 7,293 | $ | 281 | $ | 12,162 | $ | (16,282 | ) | $ | 3,454 | ||||||||||||||||||||||||||||||||||||
Balance, August 31, 2020 (unaudited) | 5,878 | $ | 7,293 | $ | 281 | $ | 11,162 | $ | (16,282 | ) | $ | 2,454 | ||||||||||||||||||||||||||||||||||||
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For the Six Months Ended August 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, February 29, 2020 (audited) | 5,878 | $ | 7,293 | $ | 281 | $ | 12,170 | $ | (16,282 | ) | $ | 3,462 | ||||||||||||||||||||||||||||||||||||
Net loss | — | — | (1,008 | ) | — | (1,008 | ) | |||||||||||||||||||||||||||||||||||||||||
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Balance, August 31, 2020 (unaudited) | 5,878 | $ | 7,293 | $ | 281 | $ | 11,162 | $ | (16,282 | ) | $ | 2,454 | ||||||||||||||||||||||||||||||||||||
| Common Shares | Share Amount | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Total Shareholders’ Equity |
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Balance, February 28, 2019 | 5,878 | $ | 7,293 | $ | 274 | $ | 13,376 | $ | (16,282 | ) | $ | 4,661 | ||||||||||||||||||||||||||||||||||||
For the Three Months Ended August 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, May 31, 2019 (unaudited) | 5,878 | $ | 7,293 | $ | 276 | $ | 13,050 | $ | (16,282 | ) | $ | 4,337 | ||||||||||||||||||||||||||||||||||||
Net loss | — | — | (326 | ) | — | (326 | ) | — | — | — | (435 | ) | — | (435 | ) | |||||||||||||||||||||||||||||||||
Share based compensation | — | — | 2 | — | — | 2 | — | — | 1 | — | — | 1 | ||||||||||||||||||||||||||||||||||||
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Balance, May 31, 2019 (unaudited) | 5,878 | $ | 7,293 | $ | 276 | $ | 13,050 | $ | (16,282 | ) | $ | 4,337 | ||||||||||||||||||||||||||||||||||||
Balance, August 31, 2019 (unaudited) | 5,878 | $ | 7,293 | $ | 277 | $ | 12,615 | $ | (16,282 | ) | $ | 3,903 | ||||||||||||||||||||||||||||||||||||
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For the Six Months Ended August 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, February 28, 2019 (audited) | 5,878 | $ | 7,293 | $ | 274 | $ | 13,376 | $ | (16,282 | ) | $ | 4,661 | ||||||||||||||||||||||||||||||||||||
Net loss | — | — | (761 | ) | — | (761 | ) | |||||||||||||||||||||||||||||||||||||||||
Share based compensation | — | — | 3 | — | — | 3 | ||||||||||||||||||||||||||||||||||||||||||
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Balance, August 31, 2019 (unaudited) | 5,878 | $ | 7,293 | $ | 277 | $ | 12,615 | $ | (16,282 | ) | $ | 3,903 | ||||||||||||||||||||||||||||||||||||
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| * | Common shares are shown net of Treasury Shares |
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)
| Three Months Ended May 31, | Six Months Ended August 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
Operating Activities | ||||||||||||||||
Net loss | $ | (8 | ) | $ | (326 | ) | $ | (1,008 | ) | $ | (761 | ) | ||||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||||||||||
Depreciation expense | 60 | 56 | 117 | 112 | ||||||||||||
Amortization of intangible assets | 43 | — | 75 | — | ||||||||||||
Provision for doubtful accounts | (4 | ) | (9 | ) | (3 | ) | (11 | ) | ||||||||
Provision for inventory reserve | 15 | 15 | 30 | 25 | ||||||||||||
Non-cash charge for share based compensation | — | 2 | — | 3 | ||||||||||||
Realized/unrealized loss (gain) on investments | 10 | (2 | ) | 6 | (1 | ) | ||||||||||
Other | 4 | (2 | ) | 11 | (3 | ) | ||||||||||
Changes in working capital items: | ||||||||||||||||
Accounts receivable | 655 | 398 | (141 | ) | 1,091 | |||||||||||
Inventories | 456 | 179 | 77 | 187 | ||||||||||||
Prepaid expenses and other assets | (68 | ) | (395 | ) | 222 | 381 | ||||||||||
Contract assets | (655 | ) | — | (206 | ) | — | ||||||||||
Customer deposits | (619 | ) | 335 | (1,013 | ) | (759 | ) | |||||||||
Accounts payable and accrued liabilities | (420 | ) | 68 | 307 | 190 | |||||||||||
Unbilled revenue | — | (31 | ) | |||||||||||||
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Net cash (used in) provided by operating activities | (531 | ) | 319 | (1,526 | ) | 423 | ||||||||||
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Investing Activities | ||||||||||||||||
Capital expenditures | (19 | ) | (88 | ) | (31 | ) | (134 | ) | ||||||||
Purchases of investments | (43 | ) | (9 | ) | (47 | ) | (17 | ) | ||||||||
Proceeds from sale of investments | 18 | — | 24 | — | ||||||||||||
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Net cash used in investing activities | (44 | ) | (97 | ) | (54 | ) | (151 | ) | ||||||||
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Financing Activities | ||||||||||||||||
Repayments of notes payable to officers and directors | (35 | ) | — | (35 | ) | — | ||||||||||
Proceeds from loans with officers and directors | 200 | — | ||||||||||||||
Repayments of long-term debt | — | (23 | ) | — | (123 | ) | ||||||||||
Proceeds from PPP related loans | 988 | — | 988 | — | ||||||||||||
Marginal float borrowings | 3 | — | ||||||||||||||
Marginal float net changes | (3 | ) | — | |||||||||||||
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Net cash provided by (used in) financing activities | 956 | (23 | ) | 1,150 | (123 | ) | ||||||||||
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Net change in cash and cash equivalents | 381 | 199 | (430 | ) | 149 | |||||||||||
Cash and cash equivalents, beginning of year | 844 | 410 | 844 | 410 | ||||||||||||
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Cash and cash equivalents, end of period | $ | 1,225 | $ | 609 | $ | 414 | $ | 559 | ||||||||
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The accompanying notes are an integral part of these interim condensed consolidated statements.
Video Display Corporation and Subsidiaries
MayAugust 31, 2020
Note 1. – Basis of Presentation 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 29, 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, MayAugust 31, 2020 and 2019 have been prepared in accordance with (i) accounting principles generally accepted in the U.S. for interim financial information and (ii) the instructions to Form 10-Q and Rule 10-01 of Regulation S-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 MayAugust 31, 2020 are not necessarily indicative of the results that may be expected for the year ending February 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 Form 10-K for the year ended February 29, 2020 filed with the SEC on May 29, 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 MayAugust 31, 2020 butand had an increasea decrease in working capital and liquid assets for the threesix month period primarily as a result of $988 thousand$1.0 million loss in Paycheck Protection Promissory related funds received in April 2020.the second quarter. The Company has sustained losses for the last four of five fiscal years and has seen overall a decline in working capital and liquid assets during this five year period. Annual losses over this time are due to a combination of decreasing revenues across certain divisions without a commensurate reduction of expenses. The Company has seen a rise in 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 MayAugust 31, 2020 and February 29, 2020:
| May 31, 2020 | February 29, 2020 | August 31, 2020 | February 29, 2020 | |||||||||||||
Working capital | $ | 1,945 | $ | 1,263 | $ | 860 | $ | 1,263 | ||||||||
Liquid assets | $ | 1,237 | $ | 844 | $ | 429 | $ | 844 | ||||||||
Management has implemented a plan to improve the liquidity of the Company. The Company has been implementing a plan to increase revenues at all the divisions, each structured to the particular division. The fiscal year ended February 29, 2020 was a transition year for the Company. Many of the legacy programs the Company serviced were heading into new phases or the next generation of the product line. This caused delays in the normal flow of the orders for these programs. The Company is working with these customers and expects these programs to be placing orders to be fulfilled in this fiscal year. For example, the Company received a $2.8 million order for one of these legacy programs in the current quarter. The Company has expanded its cyber security business by adding a second testing chamber for testing tempest products in fiscal 2020 allowing it to increase the business in cyber testing services to supplement the product side of the business. The Company is also now involved in ruggedized displays, recently bringing on engineering familiar with these products and acquiring a small specialized display company in January 2020. The Company did $648 thousand in specialized displays in the quarter with an additional backlog of $1.2 million in these products. With the acquisition of the display company,Also, the Company completed the transfer of theits remaining CRT operations to its Lexel Imaging facility in Lexington, KY in order to make room for the new business in its Cocoa facility. Thisfiscal 2021 which 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 in fiscal 2020 which allows the Company to become more efficient and save money on reducing redundant operations. The plant move of its subsidiary in Lexington, Kentucky is completed and inventory from Tucker, Georgia and Cocoa, Florida have been moved to the Kentucky operation. This subsidiary saw a turn -around in the recently completed fiscal year, being the only division to have a profitable year. The plant move at the Florida operations was successful as the Company completed the merger of its two Florida businesses and absorbed the acquisition of the specialized display company. Management continues to explore options to monetize certain long-term assetsincrease the liquidity of the business, including the possible sale of a building in Pennsylvania.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
May 31, 2020
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.
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:
| Level 1 | Quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. | |
| Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. | |
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 MayAugust 31, 2020 (in thousands):
| May 31, 2020 | Level 1 Assets and Liabilities | Level 2 Assets and Liabilities | Level 3 Assets and Liabilities | August 31, 2020 | Level 1 Assets and Liabilities | Level 2 Assets and Liabilities | Level 3 Assets and Liabilities | |||||||||||||||||||||||||
Current trading investments: | ||||||||||||||||||||||||||||||||
Stocks, options and ETF (long) | $ | 15 | $ | 15 | $ | 15 | $ | 15 | ||||||||||||||||||||||||
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Total value of investments | 15 | 15 | — | — | 15 | 15 | — | — | ||||||||||||||||||||||||
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Margin balance | (3 | ) | (3 | ) | — | — | ||||||||||||||||||||||||||
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Total value of liabilities | (3 | ) | (3 | ) | — | — | ||||||||||||||||||||||||||
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Total | $ | 12 | $ | 12 | — | — | $ | 15 | $ | 15 | — | — | ||||||||||||||||||||
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The Company had $2.9 thousandzero balance on outstanding margin account borrowing as of MayAugust 31, 2020 and none as of February 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 $14.6$15.0 thousand leaving net investments of $11.7$15.0 thousand after theno margin account borrowings of $2.9 thousand at MayAugust 31, 2020. The margin interest rate is 4.25%1.50% at MayAugust 31, 2020.
Video Display Corporation and Subsidiaries
May 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.
Video Display Corporation and Subsidiaries
August 31, 2020
Note 4. – Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
Effective March 1, 2020 we adopted Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820-10): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), 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 or 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 ASU 2018-13 did not have a material impact on the Company’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 Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions related to the approach 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 accounting 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 disclosures. The guidance is effective for the Company beginning on March 1, 2021 and prescribes different transition methods for the various provisions. The Company does not expect the adoption of ASU 2019-12 to have 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 measurement and recognition of expected credit losses for financial assets held 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 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 ASU 2016-13 to have a material impact on its financial statements 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):
| May 31, 2020 | February 29, 2020 | August 31, 2020 | February 29, 2020 | |||||||||||||
Raw materials | $ | 3,536 | $ | 3,497 | $ | 3,675 | $ | 3,497 | ||||||||
Work-in-process | 363 | 773 | 627 | 773 | ||||||||||||
Finished goods | 921 | 1,006 | 897 | 1,006 | ||||||||||||
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Reserves for obsolescence | (811 | ) | (796 | ) | (826 | ) | (796 | ) | ||||||||
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Video Display Corporation and Subsidiaries
MayAugust 31, 2020
Note 6. – Paycheck 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, the PPP which was established under the CARES Act and 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 favorable 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 MayAugust 31, 2020, $385$550 thousand of the total $988 thousand in PPP related loans is classified as a current liability on the condensed consolidated balances sheets.
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):
| May 31, 2020 | August 31, 2020 | |||||||
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Operating lease right-of-use assets | $ | 1,508 | $ | 1,383 | ||||
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Current portion of operating lease liabilities | $ | 557 | $ | 557 | ||||
Noncurrent portion of operating lease liabilities | 971 | 849 | ||||||
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Total operating lease liabilities | $ | 1,528 | $ | 1,406 | ||||
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Operating lease costs are included in Costcost of goods sold in the Company’s condensed consolidated statements of operations and totaled approximately $157$147 thousand for the three months ended MayAugust 31, 2020 and $293 thousand for the six months ended August 31, 2020. The Company did have $10had $7 thousand of short term lease costs for the threesix months ended MayAugust 31, 2020. Operating lease costs were $147 thousand for the three months ended MayAugust 31, 2019 and $293 thousand for the six months ended August 31, 2019.
Cash paid for amounts included in the measurement of operating lease liabilities was approximately $143 thousand and $286 thousand during the three months and six months ended MayAugust 31, 2020 and 2019. The Company did not modify any existing leases or execute any new leases during the threesix months ended MayAugust 31, 2020.
Video Display Corporation and Subsidiaries
August 31, 2020
Weighted average information associated with the measurement of the Company’s remaining operating lease obligations is as follows:
2020 | ||||
Weighted average remaining lease term | ||||
Weighted average discount rate | ||||
Video Display Corporation and Subsidiaries
May 31, 2020
The following table summarizes the maturity of the Company’s operating lease liabilities as of MayAugust 31, 2020 (in thousands):
FY2021 | $ | 430 | $ | 295 | ||||
FY2022 | 618 | 618 | ||||||
FY2023 | 263 | 263 | ||||||
FY2024 | 190 | 190 | ||||||
FY2025 | 185 | 185 | ||||||
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Total operating lease payments | 1,685 | 1,551 | ||||||
Less imputed interest | (157 | ) | (145 | ) | ||||
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Total operating lease liabilities | $ | 1,528 | $ | 1,406 | ||||
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Included above are leases for manufacturing and warehouse facilities leased from the Company’s chief executive officer and Ordway Properties, LLC (an entity in which the chief executive 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 and $194 thousand for the six months ended MayAugust 31, 2020 (which is included in the total lease costs of $157$293 thousand noted above). Lease costs were also $97 thousand for the three months and $194 thousand for the six months ended MayAugust 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 lease expiresbuilding was sold in August 2023.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 and $181 thousand for the six months ended MayAugust 31, 2020 and $90 thousand $180 thousand for the comparable periods in 2019. Future remaining lease payments expected to be received as of MayAugust 31, 2020 are as follows (in thousands):
FY2021 | $ | 274 | $ | 91 | ||||
FY2022 | 370 | 144 | ||||||
FY2023 | 238 | 12 | ||||||
FY2024 | 113 | |||||||
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Note 8. – Notes Receivable and Payable to Officers and Directors (Related Party Transactions)
On March 30, 2016, the Company entered into an assignment with recourse of the note receivable from Z-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 of Z-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 by Z-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 $134$77 thousand, all classified as current (related party note receivable and related party note payable) as of MayAugust 31, 2020 and $189 thousand, all classified as current as of February 29, 2020, respectively.
In January 2020, to assist the Company in funding the debt assumed resulting from the acquisition of Jaco Displays, LLC, the Company borrowed $505,180 from Ronald D. Ordway, CEO, comprised of cash proceeds received of $148,330 with the remaining $356,850 in debt assumed as the CEO personally funded certain liabilities resulting from the acquisition. The Company combined this amount borrowed with another $438,832 owed to Mr. Ordway in back rent along with $82,838 from previous borrowings, and signed a promissory note for the aggregate balance of $1,026,850 at a six percent interest rate due on or before July 24, 2020 with Mr. Ordway. The Company made a $35,000 payment to Mr. Ordway in March, 2020, and borrowed another $200,000 in August, 2020 leaving a balance of $991,850.$1,191,850 at August 31, 2020. This note balance is therefore classified as a current liability on the consolidated balance sheet.
Video Display Corporation and Subsidiaries
May 31, 2020
As disclosed in Note 13, this note with Mr. Ordway was paid in full by the Company in September 2020.
See Note 7 for a discussion of leases with related parties.
Note 9. – Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
| Three Months Ended May 31, | Six Months Ended August 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
Cash paid for interest | $ | 1 | $ | 1 | ||||||||||||
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Note receivable paid directly to officer (Z-Axis; Note 8) | $ | 55 | $ | 51 | ||||||||||||
Note receivable paid directly to officer (Z- Axis; Note 8) | $ | 112 | $ | 102 | ||||||||||||
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Note 10. – Shareholders’ Equity
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding during each period. Shares issued during the period are weighted for the portion of the period that they were outstanding. Diluted earnings (loss) per share is calculated in a manner consistent with that of basic earnings (loss) per share while giving effect to all potentially dilutive common shares that were outstanding during the period.
Video Display Corporation and Subsidiaries
August 31, 2020
The following table sets forth the computation of basic and diluted earnings (loss) per share for the three-month and six month periods ended MayAugust 31, 2020 and 2019 (in thousands, except per share data):
| Net Loss | Weighted Average Common Shares Outstanding | Loss Per Share | ||||||||||
Three months ended May 31, 2020 | ||||||||||||
Basic | $ | (8 | ) | 5,878 | $ | (0.00 | ) | |||||
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Diluted | $ | (8 | ) | 5,878 | $ | (0.00 | ) | |||||
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Basic | $ | (326 | ) | 5,878 | $ | (0.06 | ) | |||||
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Video Display Corporation and Subsidiaries
May 31, 2020
| Net Loss | Weighted Average Common Shares Outstanding | Loss Per Share | ||||||||||
Three months ended August 31, 2020 | ||||||||||||
Basic | $ | (1,001 | ) | 5,878 | $ | (0.17 | ) | |||||
Effect of dilution: | ||||||||||||
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Diluted | $ | (1,001 | ) | 5,878 | $ | (0.17 | ) | |||||
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Basic | $ | (435 | ) | 5,878 | $ | (0.07 | ) | |||||
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Six months ended August 31, 2020 | ||||||||||||
Basic | $ | (1,008 | ) | 5,878 | $ | (0.17 | ) | |||||
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Diluted | $ | (1,008 | ) | 5,878 | $ | (0.17 | ) | |||||
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Basic | $ | (761 | ) | 5,878 | $ | (0.13 | ) | |||||
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Diluted | $ | (761 | ) | 5,878 | $ | (0.13 | ) | |||||
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Stock options, debentures, and other liabilities convertible into 200,000 shares, of the Company’s common stock were anti-dilutive and, therefore, were excluded from the MayAugust 31, 2020 and 2019 diluted earnings (loss) per share calculations.
Stock-Based Compensation Plans
For the three-monthsix-month period ended MayAugust 31, 2020, there was no expense related to share-based compensation as all options were fully vested. For the period ended MayAugust 31, 2019, the Company recognized general and administrative expenses of $2$3 thousand related to share-based compensation.
Video Display Corporation and Subsidiaries
August 31, 2020
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock option grants and expected future stock price volatility over the term. The term represents the expected period of time the Company believes the options will remain outstanding based on historical information. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s common stock, which represents the standard deviation of the differences in the weekly stock closing price, adjusted for dividends and stock splits.
No options were granted for the threesix month period ending MayAugust 31, 2020 or for the threesix month period ended MayAugust 31, 2019.
Stock Repurchase Program
The Company has a stock repurchase program, pursuant to which it had 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 in the open market. There is no minimum number of shares required to be repurchased under the program.
For the quartersix months ending MayAugust 31, 2020 and MayAugust 31, 2019, 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 MayAugust 31, 2020.
Note 11. – Income Taxes
Due to the Company’s overall and historical net loss position, no income tax expense was reported for the threesix month period ending MayAugust 31, 2020 and MayAugust 31, 2019. Due to continued losses reported by the Company, a full valuation allowance washas been allocated to the deferred tax asset created by these losses.
Note 12. – Legal Proceedings
The Company is involved in various legal proceedings related to claims arising in the ordinary course of business.
Note 13. – Subsequent Events
The Company sold its Pennsylvania owned building in September 2020 with net proceeds of $2.028 million after commissions and closing costs. The funds were used to pay back the note payable with the CEO as disclosed in Note 8 and for working capital needs.
Video Display Corporation and Subsidiaries
MayAugust 31, 2020
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with the attached unaudited interim condensed consolidated financial statements and with the Company’s 2020 Annual Report to Shareholders, which included audited consolidated financial statements and notes thereto as of and for the fiscal year ended February 29, 2020, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The Company manufactures and distributes a wide range of display devices, encompassing, among others, industrial, military, medical, and simulation display solutions. The Company is comprised of one segment—segment - the manufacturing and distribution of displays and display components. The Company is organized into fivefour 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 –CRTs– offers a wide range of CRTs for use in data display screens, including computer terminal monitors and medical monitoring equipment.
Other Computer Products – offers a variety of keyboard products.
During fiscal 2021, management of the Company is focusing key resources on strategic efforts to grow its business through internal sales of the Company’s more profitable product lines and reduce expenses in all areas of the business to bring its cost structure in line with the current size of the business. Challenges facing the Company during these efforts include:
Liquidity - The accompanying unaudited interim condensed consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company reported a net loss for the period ending MayAugust 31, 2020 butand had an increasea decrease in working capital and liquid assets for the threesix month period primarily as a result of $988 thousand$1.0 million loss in Paycheck Protection Promissory related funds received in April 2020.the second quarter. The Company has sustained losses for the last four of five fiscal years and has seen overall a decline in working capital and liquid assets during this 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 MayAugust 31, 2020 and February 29, 2020:
| May 31, 2020 | February 29, 2020 | August 31, 2020 | February 29, 2020 | |||||||||||||
Working capital | $ | 1,945 | $ | 1,263 | $ | 860 | $ | 1,263 | ||||||||
Liquid assets | $ | 1,237 | $ | 844 | $ | 429 | $ | 844 | ||||||||
Management has implemented a plan to improve the liquidity of the Company. The Company has been implementing a plan to increase revenues at all the divisions, each structured to the particular division. The fiscal year ended February 29, 2020 was a transition year for the Company. Many of the legacy programs the Company serviced were heading into new phases or the next generation of the product line. This caused delays in the normal flow of the orders for these programs. The Company is working with these customers and expects these programs to be placing orders to be fulfilled
Video Display Corporation and Subsidiaries
August 31, 2020
in this fiscal year. For example, the Company received a $2.8 million order for one of these legacy programs in the current quarter.fiscal 2021. The Company has expanded its cyber security business by adding a second testing chamber for testing tempest products in fiscal 2020 allowing it to increase the business in cyber testing services to supplement the product side of the business. The Company is also now involved in ruggedized displays, recently bringing on engineering familiar with these products and acquiring a small specialized display company in January 2020. The Company did $648 thousand$1.1 million in specialized displays in the quarterfiscal 2021 with an additional backlog of $1.2$0.9 million infor these products. With the acquisition
Video Display Corporation and Subsidiaries
May 31, 2020
of the display company,Also, the Company completed the transfer of theits remaining CRT operations to its Lexel Imaging facility in Lexington, KY in order to make room for the new business in its Cocoa facility. Thisfiscal 2021 which 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 in fiscal 2020 which allows the Company to become more efficient and save money on reducing redundant operations. The plant move of its subsidiary in Lexington, Kentucky is completed and inventory from Tucker, Georgia and Cocoa, Florida have been moved to the Kentucky operation. This subsidiary saw a turn -around in the recently completed fiscal year, being the only division to have a profitable year. The plant move at the Florida operations was successful asIn addition, the Company completedsold its Pennsylvania owned building in September 2020 with net proceeds of $2.028 million after commissions and closing costs. These net proceeds were used to pay back the merger of its two Florida businesses and absorbednote payable with the acquisition of the specialized display company. CEO with remaining funds allocated for working capital needs.
Management continues to explore options to monetize certain long-term assetsincrease the liquidity of the business, including the possible sale of a building in Pennsylvania.Company. If additional and more permanent capital is required to fund the operations of the Company, no assurance can be given that the Company will be able to obtain the capital on terms favorable to the Company, if at all.
The ability of the Company to continue as a going concern is dependent upon the success of management’s plans to improve revenues, the operational effectiveness of continuing operations, the procurement of suitable financing, or a combination of these. The uncertainty regarding the potential success of management’s plan create substantial doubt about the ability of the Company to continue as a going concern.
Inventory management – The Company’s business units utilize different inventory components than the divisions had in the past. The Company has a reserve at each of its divisions to offset any obsolescence although most purchases are for current orders, which should reduce the amount of obsolescence in the future. The Company still has CRT inventory in stock and component parts for legacy products, although it believes the inventory will be sold in the future, will continue to reserve for any additional obsolescence. Management believes its inventory reserves at MayAugust 31, 2020 and February 29, 2020 are adequate.
Impact of COVID-19– The Company has been actively monitoring the novel coronavirus, or COVID-19, situation and its impact globally. Financial results for the three and six months ended August 31, 2020 have been impacted by COVID-19 due to delayed orders and/or the fulfillment of the related orders. However, the Company currently does not expect any material impact on our financial results for the remainder of fiscal 2021. Management continues to operate normally with the exception of enabling employees to work from home and abiding by travel restrictions issued by federal and local governments. If the COVID-19 pandemic continues, the Company may experience other disruptions that could severely impact the business, results of operations and prospects.
Results of Operations
The following table sets forth, for the three and six months ended MayAugust 31, 20192020 and 2018,2019, the percentages that selected items in the Interim Condensed Consolidated Statements of Operations bear to total sales (amounts in thousands):
| Three Months Ended May 31 | ||||||||||||||||
| 2020 | 2019 | |||||||||||||||
| Net Sales | Amount | % | Amount | % | ||||||||||||
Simulation and Training (VDC Display Systems) | 1,801 | 48.6 | % | 944 | 34.9 | % | ||||||||||
Data Display CRT (Lexel and Data Display) | 762 | 20.6 | 643 | 23.7 | ||||||||||||
Cyber Secure Products (AYON Cyber Security) | 865 | 23.3 | 866 | 32.0 | ||||||||||||
Other Computer Products (Unicomp) | 277 | 7.5 | 256 | 9.4 | ||||||||||||
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Total net sales | 3,705 | 100.0 | % | 2,709 | 100.0 | % | ||||||||||
Costs and expenses | ||||||||||||||||
Cost of goods sold | 2,727 | 73.6 | % | 2,284 | 84.3 | % | ||||||||||
Selling and delivery | 206 | 5.6 | 165 | 6.1 | ||||||||||||
General and administrative | 997 | 26.9 | 869 | 32.1 | ||||||||||||
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| 3,930 | 106.1 | % | 3,318 | 122.5 | % | |||||||||||
Operating loss | (225 | ) | (6.1 | )% | (609 | ) | (22.5 | )% | ||||||||
Interest (expense) income, net | (15 | ) | (0.4 | )% | — | — | % | |||||||||
Investment (loss) gains, net | (10 | ) | (0.3 | ) | 2 | 0.1 | ||||||||||
Other income, net | 242 | 6.6 | 281 | 10.4 | ||||||||||||
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Loss before income taxes | (8 | ) | (0.2 | )% | (326 | ) | (12.0 | )% | ||||||||
Income tax expense | — | — | — | — | ||||||||||||
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Net loss | (8 | ) | (0.2 | )% | (326 | ) | (12.0 | )% | ||||||||
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| Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
Sales | ||||||||||||||||
Simulation and Training (VDC Display Systems) | 49.8 | % | 66.8 | % | 49.1 | % | 52.3 | |||||||||
Data Display CRT (Lexel and Data Display) | 14.8 | 17.1 | 18.4 | 20.1 | ||||||||||||
Broadcast and Control Centers (AYON Visual) | — | — | — | — | ||||||||||||
Cyber Secure Products (AYON Cyber Security) | 22.0 | 6.3 | 22.8 | 18.0 | ||||||||||||
Video Display Corporation and Subsidiaries
MayAugust 31, 2020
Other Computer Products (Unicomp) | 13.4 | 9.8 | 9.7 | 9.6 | ||||||||||||
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Total Company | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | |||||||||
Costs and expenses | ||||||||||||||||
Cost of goods sold | 91.9 | % | 84.6 | % | 80.6 | % | 84.5 | |||||||||
Selling and delivery | 12.7 | 4.5 | 8.3 | 5.2 | ||||||||||||
General and administrative | 42.6 | 27.7 | 32.9 | 29.7 | ||||||||||||
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| 147.2 | % | 116.8 | % | 121.8 | % | 119.4 | ||||||||||
Operating loss | (47.2 | )% | (16.8 | )% | (21.8 | )% | (19.4 | ) | ||||||||
Interest income (expense), net | (0.7 | )% | (0.0 | )% | (0.5 | )% | (0.0 | ) | ||||||||
Other income, net | 4.2 | 3.3 | 5.5 | 6.6 | ||||||||||||
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Loss before income taxes | (43.7 | )% | (13.5 | )% | (16.8 | )% | (12.8 | ) | ||||||||
Income tax expense | — | — | — | — | ||||||||||||
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Net loss | (43.7 | )% | (13.5 | )% | (16.8 | )% | (12.8 | ) | ||||||||
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Net sales
Consolidated net sales increased 36.8%1.0% for the six months ended August 31, 2020, but decreased 29.0% for the three months ended MayAugust 31, 2020 compared to the six months and three months ended August 31, 2019. The Company’s AYON Cyber Security (ACS) division is up 27.9% for the six months ending August 31, 2020 compared to the six months last year. Their business increased due to the completion of orders for the Department of the State. The activity in the cyber security market place has begun to pick up with the Department of State beginning to release bids for numerous large orders and the Company also has bids with Canada. The Company is developing new products for customers in this area and expects to have them be reviewed by customers by the end of this year. The Company has also ramped up the service side of the cyber business by testing other company’s products for compliance. To accommodate this additional business, the Company added a second testing chamber. For the three months ending August 31, 2020, ACS business increased 146.3%. The Display Systems division was down 5.1% for the six months ended August 31, 2020 compared to the comparable period last year. 36.2% 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, 2020, the Display System division was down 47.0% compared to the same three months last year due to the sale for the video wall for $1.2 million in the second quarter last year. The Company is focused on the video wall business with a recent order for a video wall for a major company’s executive conference room. The Company is also focused on the ruggedized displays and simulation sectors of the business, having recently received a good order for simulation and pursuing opportunities in both the ruggedized displays and simulation business. The Data Display division decreased 7.8% and 38.6% for the six months and three months ended August 31, 2020 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 2.3% for the six months ended August 31, 2020 and down 2.5% for three months ended August 31, 2020 respectively compared to the same periods last year. The Company acquired this company in October of 2017. This division is expected to continue at this level of sales each quarter.
Gross margins
Consolidated gross margins increased both as a percentage to sales (19.4% from 15.6%) and actual dollars ($1,163 thousand from $923 thousand) for the six months ended August 31, 2020 compared to the six months ended August 31, 2019. Gross margins decreased for the three months ended August 31, 2020 compared to the three months ended MayAugust 31, 2019. The Display Systems division increased 90.7% for the quarter or $0.9 million, due primarily to shipments of product for video walls and projectors for a simulator upgrade for a customer in Texas and the increased sales from our acquisition of the specialized display company in January of late fiscal year. The Company’s AYON Cyber Security division was flat for the quarter compared to last year’s same quarter, $0.9 million each year. The division has completed a new test chamber for tempest services and will supplement its product line with this new business. The other two divisions both had increases in sales. The Data Display division showed an increase of 18.6% due to increases in a specialty product sold through its distribution channels, ultimately going to overseas customers. The Data division is expecting additional orders for the specialty product and should have steady business driven by their number one customer’s orders for replacement CRTs for their simulators. The keyboard division had an increase in sale of 8.1%, and is expecting to continue at this level for the remaining three quarters of the year. All divisions have experienced some form of delay in new orders from customers due to the pandemic, but there are signs that businesses are finding ways to move forward.
Gross margins
Consolidated gross margins were increased2019, both as a percentage to sales (26.4% to 15.7%(8.1% from 15.5%) and actual dollars, ($978185 thousand from $498 thousand).
Video Display Corporation and Subsidiaries
August 31, 2020
Two of the four divisions (Display and Keyboard divisions) saw increases in gross margin percentages and gross margin dollars for the six months ended August 31, 2020 compared to $425 thousand)the same period last year. The Cyber Security division saw an increase in gross margin dollars due to higher sales volume but had a lower gross margin percentage as much of their revenue was from a competitive bid contract. The only division with a lower gross margin percentage and dollars was the Data Displays CRT division.
For the three months ended August 31, 2020 compared to the same period last year, three of the four divisions made less gross margin dollars than last year. The cyber division did slightly better than last year. Overall gross margins for the quarter were down to the low sales volume as the display and cyber divisions had higher gross margin percentages than last year.
Operating expenses
Operating expenses increased $394 thousand for the six months ended August 31, 2020 compared to the six months ended August 31, 2019. The increase was due primarily to the addition of certain expenses associated with the acquisition of Jaco Displays in January, 2020 and commission expense at the Lexel Imaging (CRT) operation on the sales of the specialty direct view storage tubes.
Operating expenses increased by 21.7% or $226 thousand for the three months ended MayAugust 31, 2020 compared to the three months ended May 31, 2019.
The two Florida divisions showed increases in both their gross margin percentage to sales and in actual dollars. AYON Cyber Security gross margin percentage was 20.6% compared to 19.0% and the gross margin dollars were $178 thousand compared to $164 thousand for the three months ended May 31, 2020 compared to the three months ended May 31, 2019. VDC Display Systems gross margin percentage was 31.8% compared 24.9% and the gross margin dollars were $573 thousand compared to $235 thousand for the three months ended May 31, 2020 compared to the three months ended May 31, 2019.
The keyboard division, Unicomp, had $120 thousand of gross margin dollars or 43.5% to sales for the three months ending May 31, 2020 compared to $61 thousand or 23.8% for the three months ending May 31, 2019. The Data Display division showed improvement in its margins of $106 thousand or 14.0% for the three months ended May 31, 2020, compared to a negative gross margin of $35 thousand or a negative 5.5% for here months ending May 31, 2019.
Operating expenses
Operating expenses increased by 16.3% or $168 thousand for the three months ended May 31, 2020 compared to the three months ended MayAugust 31, 2019. The increase was due primarily to the increased costs of three employees that joined the Company resulting from the acquisition of the display company in January of this year, two in engineering, one in sales and the amortization costs of the intangibles ($43k)30k) related to this acquisition. The Company expects to continue to control costs while increasing revenues with the completion of the new tempest testing chamber and new revenue streams of tempest services, specialized displays and ruggedized displays.
Video Display Corporation and Subsidiaries
May 31, 2020
Interest expenseincome (expense), net
Interest expense was $15$31 thousand for the quarter ended Maysix months ending August 31, 2020. The interest expense was $1 thousand for the six months ending August 31, 2019. There was $16 thousand for the three months ending August 31, 2020 and was negligible for the three months ending August 31, 2019. The interest expense is on the note payable to the CEO. This noteCEO and the PPP loan. These notes payable isare discussed in NoteNotes 6 and 8 of the financial statements. Interest expense was negligible for the quarter ending May 31, 2019 as the Company completed the payoff of a building it owns in Pennsylvania and did not borrow against its line of credit during the quarter.
Other Income/ expenseincome (expense), net
For the threesix months ended MayAugust 31, 2020, the Company earnedhad $148 thousand in royalty income, $90$181 thousand in rental income, $4$6 thousand in the sale of discontinued scrap items, and had an$6 thousand in investment loss of $10 thousand.losses. For the threesix months ended MayAugust 31, 2019, the Company earned $191 thousand in royalty income, $183 in rental income, of $90$15 thousand in scrap sales, and $1 thousand investment income.
For the three months ended August 31, 2020 the Company had $91 thousand in rental income, of $2 thousand.$1 thousand in scrap items, and $4 thousand in investment gains. For the three months ended August 31, 2019, the Company earned $93 thousand in rental income, $15 thousand in scrap income and a $1 thousand loss in investment income.
Income taxes
Due to the Company’s overall and historical net loss position, no income tax expense was reported for the threesix month period ending MayAugust 31, 2020 and MayAugust 31, 2019. Due to continued losses reported by the Company, a full valuation allowance was allocated to the deferred tax asset created by these losses.
Video Display Corporation and Subsidiaries
August 31, 2020
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 for the period ending MayAugust 31, 2020 butand had an increasea decrease in working capital and liquid assets for the threesix month period primarily as a result of $988 thousand$1.0 million loss in Paycheck Protection Promissory related funds received in April 2020.the second quarter. The Company has sustained losses for the last four of five fiscal years and has seen overall a decline in working capital and liquid assets during this 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 MayAugust 31, 2020 and February 29, 2020:
| May 31, 2020 | February 29, 2020 | August 31, 2020 | February 29, 2020 | |||||||||||||
Working capital | $ | 1,945 | $ | 1,263 | $ | 860 | $ | 1,263 | ||||||||
Liquid assets | $ | 1,237 | $ | 844 | $ | 429 | $ | 844 | ||||||||
Management has implemented a plan to improve the liquidity of the Company. The Company has been implementing a planand 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 serviced were heading into new phases or the next generation of the product line. This caused delays in the normal flow of the orders for these programs. The Company is working with these customers and expects these programs to be placing orders to be fulfilled this fiscal year. For example, the Company received a $2.8 million order for one of these legacy programs in the current quarter. The Company has expanded its cyber security business by adding a second testing chamber for testing tempest products in fiscal 2020 allowing it to increase the business in cyber testing services to supplement the product side of the business. The Company is also now involved in ruggedized displays, recently bringing on engineering familiar with these products and acquiring a small specialized display company in January 2020. The Company did $648 thousand in
Video Display Corporation and Subsidiaries
May 31, 2020
specialized displays in the quarter with an additional backlog of $1.2 million in these products. With the acquisition of the display company, the Company completed the transfer of the remaining CRT operations 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 also moved the corporate accounting functions to the Cocoa, Florida location in fiscal 2020 which allows the Company to become more efficient and save money on reducing redundant operations. The plant move of its subsidiary in Lexington, Kentucky is completed and inventory from Tucker, Georgia and Cocoa, Florida have been moved to the Kentucky operation. This subsidiary saw a turn -around in the recently completed fiscal year, being the only division to have a profitable year. The plant move at the Florida operations was successful as the Company completed the merger of its two Florida businesses and absorbed the acquisition of the specialized display company. Management continues to explore options to monetize certain long-term assets of the business, including the possible sale of a building in Pennsylvania. If additional and more permanent capital is required to fund the operations of the Company, no assurance can be given that the Company will be able to obtain the capital on terms favorable to the Company, if at all.
The ability of the Company to continue as a going concern is dependent upon the success of management’s plans to improve revenues, the operational effectiveness of continuing operations, the procurement of suitable financing, or a combination of these. The uncertainty regarding the potential success of management’s plan create substantial doubt about the ability of the Company to continue as a going concern.
Cash used by operations for the threesix months ended MayAugust 31, 2020 was $0.5$1.5 million. Adjustments to net loss were $0.1$0.2 million for non-cash depreciation and amortization charges. Changes in working capital used $0.6$0.8 million, primarily due to cash provideda decrease in custom deposits of $1.0 million and an increase in contract assets by decreases in accounts receivable and inventories of $1.1$0.2 million, in aggregate offset by an increase in contract assets ($655 thousand) and a decrease in customer deposits and accounts payable and accrued liabilities aggregatingof $0.3 million and a usedecrease in prepaid expenses and other assets of $1.0$0.2 million. Cash provided by operations for the threesix months ended MayAugust 31, 2019 was $0.3$0.4 million.
There was minimal investing activities for the threesix months ended MayAugust 31, 2020. The Company used $19$31 thousand on capital assets expenditures and $43$47 thousand on trading security purchases offset with $18$24 thousand received from sale of investments. Investing activities used cash of $0.1$0.2 million during the threesix months ended MayAugust 31, 2019 resulting primarily from the purchase of capital assets.
Financing activities provided $1.0$1.1 million for the threesix months ended MayAugust 31, 2020 resulting from $1.0 million proceeds received from the PPP Loan discussed in Note 6 of the interim condensed consolidated financial statements, $0.2 million borrowed from the CEO marginally offset by repayment of $35 thousand in related party loans. Financing activities used $23 thousand$0.1 million for the quarter ended MayAugust 31, 2019 related to the final debt payments made on the Teltron Building.
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 quarter ending MayAugust 31, 2020 and MayAugust 31, 2019, 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 MayAugust 31, 2020.
Video Display Corporation and Subsidiaries
August 31, 2020
Critical Accounting Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company’s interim condensed consolidated financial statements. These interim condensed consolidated financial statements have been prepared in accordance 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:
Video Display Corporation and Subsidiaries
May 31, 2020
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 MayAugust 31, 2020 and February 29, 2020 are adequate.
Revenue Recognition
We recognize revenue when we transfer control of the promised products or services to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services. We derive our revenue primarily from sales of simulation and video wall systems, cyber secure products, data displays, and keyboards. We exclude sales and usage-based taxes from revenue.
Our simulation and video wall systems are custom-built (using commercial off-the-shelf products) to customer specifications under fixed price contracts. Judgment is required to determine whether each product and service is considered to be a distinct performance obligation that should be accounted for separately under the contract. Generally, these contracts contain one performance obligation (the installation of a fully functional system). We recognize revenue for these systems over time as control is transferred based on labor hours incurred on each project.
We recognize revenue related to our cyber secure products, data displays, and keyboards at a point in time when control is transferred to the customer (generally upon shipment of the product to the customer).
Timing of invoicing to customers may differ from timing of revenue recognition; however, our contracts do not include a significant financing component as substantially all of our invoices have terms of 30 days or less. We are applying the practical expedient to exclude from consideration any contracts with payment terms of one year or less and we never offer terms extending beyond one year.
Other Loss Contingencies
Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple factors that often depend on judgments about potential actions by third parties.
Video Display Corporation and Subsidiaries
August 31, 2020
Income Taxes
Deferred income taxes are provided to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of MayAugust 31, 2020, the Company has established a valuation allowance of $6.1$6.3 million on the Company’s deferred tax assets.
Video Display Corporation and Subsidiaries
May 31, 2020
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 MayAugust 31, 2020, the Company did not record any liabilities for uncertain tax positions.
Forward-Looking Information and Risk Factors
This report contains forward-looking statements and information that is based on management’s beliefs, as well as assumptions made by, and information currently available to management. When used in this document, the words “anticipate,” “believe,” “estimate,” “intends,” “will,” and “expect” and similar expressions are intended to identify forward-looking statements. Such statements involve a number of risks and uncertainties. These risks and uncertainties, which are included under Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended February 29, 2020 could cause actual results to differ materially.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
The Company’s primary market risks include changes in technology. The Company operates in an industry which is continuously changing. Failure to adapt to the changes could have a detrimental effect on the Company.
Our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, such as this quarterly report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
Our chief executive officer and chief financial officer have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of MayAugust 31, 2020. We perform this evaluation on a quarterly basis so that the conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our annual report on Form 10-K and quarterly reports on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of MayAugust 31, 2020.
Changes in Internal Controls
There have not been any changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Video Display Corporation and Subsidiaries
MayAugust 31, 2020
| Item 1. | Legal Proceedings |
None.
| Item 1A. | Risk Factors |
Information regarding risk factors appears under the caption Forward-Looking Statements and Risk Factors in Part I, Item 2 of this Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 29, 2020. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults upon Senior Securities |
None.
| Item 4. | Submission of Matters to a Vote of Security Holders |
None.
| Item 5. | Other information |
None.
| Item 6. | Exhibits |
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| VIDEO DISPLAY CORPORATION | ||||||||
| By: | /s/ Ronald D. Ordway | |||||||
| Ronald D. Ordway | ||||||||
| Chief Executive Officer | ||||||||
| By: | /s/ Gregory L. Osborn | |||||||
| Gregory L. Osborn | ||||||||
| Chief Financial Officer | ||||||||
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