VIDEO DISPLAY CORP - Quarter Report: 2017 November (Form 10-Q)

VIDEO DISPLAY CORP - Quarter Report: 2017 November (Form 10-Q)

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10-Q

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 November 30, 2017.

☐	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

incorporation or organization)

(I.R.S. Employer

Identification No.)

1868 TUCKER INDUSTRIAL ROAD, TUCKER, GEORGIA 30084

(Address of principal executive offices)

770-938-2080

(Registrant’s telephone number including area code)

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 is a large accelerated filer, and accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” 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 Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 30, 2017, the registrant had 5,890,748 shares of Common Stock outstanding.

Video Display Corporation and Subsidiaries

Index


PART I.	FINANCIAL INFORMATION		Page

	Item 1.	Financial Statements.

		Interim Condensed Consolidated Balance Sheets – November 30, 2017 (unaudited) and February 28, 2017	3

		Interim Condensed Consolidated Income Statements - Three and nine months ended November 30, 2017 and 2016 (unaudited)	5

		Interim Condensed Consolidated Statement of Shareholders’ Equity - Nine months ended November 30, 2017 (unaudited)	6

		Interim Condensed Consolidated Statements of Cash Flows – Nine months ended November 30, 2017 and 2016 (unaudited)	7

		Notes to Interim Condensed Consolidated Financial Statements - (unaudited)	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	15

	Item 3.	Quantitative and Qualitative Disclosure About Market Risk.	21

	Item 4.	Controls and Procedures.	21

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings.	23

	Item 1A.	Risk Factors.	23

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	23

	Item 3.	Defaults upon Senior Securities.	23

	Item 4.	Submission of Matters to a Vote of Security Holders.	23

	Item 5.	Other Information.	23

	Item 6.	Exhibits.	23

	SIGNATURES		24

	31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

ITEM 1

– FINANCIAL STATEMENTS

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Balance Sheets (unaudited)

(in thousands)


	November 30, 2017			February 28, 2017
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	115		$	135
Trading investments, at fair value		270			368
Accounts receivable, less allowance for doubtful accounts of $13 and $20		597			2,771
Note receivable owed from officers and directors		187			175
Inventories, net		5,555			5,838
Prepaid expenses and other		79			246

Total current assets		6,803			9,533

Property, plant, and equipment
Land		154			154
Buildings		2,626			2,712
Machinery and equipment		5,898			5,539

		8,678			8,405
Accumulated depreciation and amortization		(7,186	)		(7,124	)

Net property, plant, and equipment		1,492			1,281


Note receivable		448			590
Investment in real estate partnership - related party		375			—
Other assets		26			26

Total assets	$	9,144		$	11,430

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)


	November 30, 2017			February 28, 2017
	(unaudited)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	1,010		$	1,397
Accrued liabilities		815			834
Current maturities of long-term debt		56			54
Customer deposits		103			418
Notes payable to officers and directors		187			175
Notes payable		100			—
Line of credit		473			237
Income taxes payable		—			10

Total current liabilities		2,744			3,125

Long-term debt, less current maturities		36			77
Notes payable to officers and directors		448			590
Deferred rent		90			180

Total liabilities		3,318			3,972

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 5,891 outstanding at November 30, 2017 and February 28, 2017		7,293			7,293
Additional paid-in capital		244			186
Retained earnings		14,557			16,247
Treasury stock, shares at cost; 3,841 at November 30, 2017 and February 28, 2017		(16,268	)		(16,268	)

Total shareholders’ equity		5,826			7,458

Total liabilities and shareholders’ equity	$	9,144		$	11,430

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

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Income Statements (unaudited)

(in thousands, except per share data)


	Three Months Ended November 30,						Nine Months Ended November 30,
	2017			2016			2017			2016
Net sales	$	1,666		$	5,300		$	8,725		$	12,642
Cost of goods sold		1,810			4,402			7,794			10,738

Gross profit (loss)		(144	)		898			931			1,904

Operating expenses
Selling and delivery		250			254			719			702
General and administrative		869			760			2,546			2,468

		1,119			1,014			3,265			3,170

Operating loss		(1,263	)		(116	)		(2,334	)		(1,266	)

Other income (expense)
Interest income/ (expense)		(4	)		(3	)		(12	)		(3	)
Investment income/(loss)		8			31			2			219
Other, net		51			44			654			250

		55			72			644			466


Income (loss) before income taxes		(1,208	)		(44	)		(1,690	)		(800	)
Income tax expense (benefit)		(5	)		1			—			15


Net income (loss)	$	(1,203	)	$	(45	)	$	(1,690	)	$	(815	)

Net income (loss) per share:
Net loss per share-basic	$	(0.20	)	$	(0.01	)	$	(0.29	)	$	(0.14	)
Net loss per share-diluted	$	(0.20	)	$	(0.01	)		(0.29	)	$	(0.14	)

Basic weighted average shares outstanding		5,891			5,891			5,891			5,891

Diluted weighted average shares outstanding		5,891			5,891			5,891			5,891

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

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Statement of Shareholders’ Equity

Nine Months Ended November 30, 2017 (unaudited)

(in thousands)


	Common Shares*		Share Amount		Additional Paid-in Capital		Retained Earnings			Treasury Stock			Total Shareholders Equity
Balance, February 28, 2017		5,891	$	7,293	$	186	$	16,247		$	(16,268	)	$	7,458
Net loss		—		—		—		(1,690	)		—			(1,690	)
Share based compensation		—		—		58		—			—			58

Balance, November 30, 2017		5,891	$	7,293	$	244	$	14,557		$	(16,268	)	$	5,826

*	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)


	Nine Months Ended November 30,
	2017			2016
Operating Activities
Net loss	$	(1,690	)	$	(815	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		175			181
Provision for doubtful accounts		(7	)		11
Provision for inventory reserve		193			311
Share based compensation		58			3
Deferred rental income		(90	)		(90	)
Realized/Unrealized gain/(loss) on investments		2			(206	)
Other		7			1
Changes in working capital items:
Accounts receivable		2,181			(745	)
Note receivable		130			122
Inventories		290			229
Prepaid expenses and other assets		167			(533	)
Customer deposits		(315	)		1,114
Accounts payable and accrued liabilities		(417	)		(252	)
Cost, estimated earnings and billings on uncompleted contracts		—			(160	)
Income taxes refundable/payable		—			(7	)

Net cash provided by (used in) operating activities		684			(836	)

Investing Activities
Capital expenditures		(396	)		(198	)
Purchases of investments		(1,805	)		(617	)
Acquisition of business, net of cash acquired		(200	)		—
Investment in real estate partnership - related party		(375	)		—
Sales of investments		1,552			793

Net cash provided by (used in) investing activities		(1,224	)		(22	)

Financing Activities
Proceeds from related party loans		100			806
Repayment of loans from related parties		(130	)		(85	)
Proceeds/ repayments of line of credit and long-term debt		197			(39	)
Proceeds on marginal float		353			(183	)

Net cash provided by (used in) financing activities		520			499

Net change in cash and cash equivalents		(20	)		(359	)
Cash and cash equivalents, beginning of year		135			595

Cash and cash equivalents, end of period	$	115		$	236

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

Video Display Corporation and Subsidiaries

November 30, 2017

Notes to Interim Condensed Consolidated Financial Statements

Note 1. – Summary of Significant Accounting Policies

The interim condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after elimination of all significant intercompany accounts and transactions.

As contemplated by the Securities and Exchange Commission (the “SEC” or “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual consolidated financial statements. Reference should be made to the Company’s year-end consolidated financial statements and notes thereto, including a description of the accounting policies followed by the Company, contained in its Annual Report on Form 10-K as of and for the fiscal year ended February 28, 2017, as filed with the Commission. There are no material changes in accounting policy during the nine months ended November 30, 2017.

The condensed consolidated financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the interim condensed consolidated financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The February 28, 2017 condensed consolidated balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S. GAAP).

Note 2. – Financial Condition and Going Concern

The accompanying 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 has sustained losses for each of the last three years and has seen a decline in both its working capital and liquid assets during this time. Losses over this time are due to a combination of decreasing revenues across all divisions without a commensurate reduction of expenses. The Company’s working capital and liquid asset position are presented below (in thousands) as of November 30, 2017 and February 28, 2017:


	November 30, 2017		February 28, 2017
Working capital	$	4,059	$	6,408
Liquid assets	$	385	$	503

Management has implemented a plan to improve the liquidity of the Company. The Company has been fulfilling a plan to increase revenues at all the divisions, each structured to the particular division which has resulted with an increase in the current backlog to over $8 million. The Company has reduced expenses at the divisions, as well as at the corporate location with the expectation that further decreases can be achieved. The completion of the merger of the two Florida businesses into one facility and the relocation of Lexel Imaging into a new facility have projected annual savings of approximately $500 thousand per year. Management continues to explore options to monetize certain long-term assets of the business. 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.

Video Display Corporation and Subsidiaries

November 30, 2017

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 November 30, 2017 and February 28, 2017 (in thousands):


	November 30, 2017			Level 1 Assets and Liabilities			Level 2 Assets and Liabilities		Level 3 Assets and Liabilities
Current trading investments:
Stocks, options and ETF (long)		745			745			—		—
Stocks, options and ETF (short)		(7	)		(7	)		—		—

Total value of investments	$	738		$	738			—		—

Current Liabilities:
Margin balance		(468	)		(468	)

Total value of liabilities		(468	)		(468	)

Total	$	270		$	270			—		—


	February 28, 2017			Level 1 Assets and Liabilities			Level 2 Assets and Liabilities		Level 3 Assets and Liabilities
Current trading investments:
Stocks, options and ETF (long)		484			484			—		—
Stocks, options and ETF (short)		(2	)		(2	)

Total value of investments	$	482		$	482			—		—
Current Liabilities:
Margin balance		(114	)		(114	)

Total value of liabilities		(114	)		(114	)

Total	$	368		$	368			—		—

Video Display Corporation and Subsidiaries

November 30, 2017

The Company’s financial instruments which are not measured at fair value on the consolidated balance sheets include cash, accounts receivable, short-term liabilities, and debt. The estimated fair value of these financial instruments were determined using Level 2 inputs and 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 interest rates that fluctuate with the market or are otherwise commensurate with the current market.

Note 4. – Recent Accounting Pronouncements

In May, 2014, the FASB issued Accounting Standards Update No. (ASU) 2014-09 “Revenue with Contracts from Customers”. ASU 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”) . The new guidance (i) removes inconsistencies, and weaknesses in revenue requirements, (ii) provides a more robust framework for addressing revenue issues, (iii) improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (iv) provides more useful information to users of financial statements through improved disclosure requirements, and (v) simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The guidance is effective for annual reporting periods beginning after December 15, 2016 including interim periods within that reporting period; however, a one year delay has been approved with the issuance of ASU 2015-14 “Revenue with Contracts from Customers”. The Company is still evaluating the effects that the adoption of this update will have on the Company’s consolidated financial position or results of operations.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”. ASU 2015-11 requires an entity to measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The guidance is effective for annual reporting periods beginning after December 15, 2016 and related interim periods. Early adoption is permitted. The adoption of this standard did not have a material effect on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”. ASU 2015-17 requires deferred tax assets and liabilities, along with related valuation allowances, to be classified as noncurrent on the balance sheet. Each tax jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. The adoption of this standard did not have a material effect on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases”. ASU 2016-02 increases transparency and comparability among organizations by requiring entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about the lease arrangements. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. The Company is in the process of evaluating the impact of this guidance on the Company’s consolidated financial statements.

Video Display Corporation and Subsidiaries

November 30, 2017

Note 5. – Inventories

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


	November 30, 2017			February 28, 2017
Raw materials	$	5,664		$	5,217
Work-in-process		665			1,001
Finished goods		1,291			1,519

		7,620			7,737
Reserves for obsolescence		(2,065	)		(1,899	)

	$	5,555		$	5,838

Note 6. – Long-Term Debt and Other Obligations

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


	November 30, 2017			February 28, 2017
Mortgage payable to bank; interest rate at BB&T Bank base rate plus 0.5% (4.75% as of November 30, 2017); monthly principal and interest payments of $5 thousand payable through October 2021; collateralized by land and building of Teltron Technologies, Inc.	$	92		$	131

		92			131
Less current maturities		(56	)		(54	)

	$	36		$	77

The Company had outstanding margin account borrowing of $0.5 million as of November 30, 2017 and $0.1 million as of February 28, 2017. 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 $0.8 million leaving $0.3 million after the margin account borrowings of $0.5 million as of November 30, 2017 and $0.5 million leaving net investments of $0.4 million after the margin account borrowings of $0.1 million February 28, 2017. The margin interest rate is 2%.

Video Display Corporation and Subsidiaries

November 30, 2017

Note 7. – 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 secured borrowing in accordance with the provisions of ASC 860-10. The $0.9 million, 9% interest rate, note originated on March 30, 2016, with payments beginning on April 16, 2016 and continuing for 56 months thereafter. The balance of the note was $635 thousand and $765 thousand as of November 30, 2017 and February 28, 2017, respectively.

On July 3, 2017, the Company and Ordway Properties, LLC purchased Honeyhill Properties, LLC which is the owner of the building at 510 Henry Clay Blvd. in Lexington, KY for $1,500,000. Video Display Corporation invested $500,000 towards the purchase price and is accounting for the investment under the cost method since Ordway Properties, LLC is the majority owner. During the period ending November 30, 2017 the Company reduced its share in the LLC by $125,000, selling to Ordway Properties, LLC. There was no gain or loss on the sale. The Company is a one fourth owner in Honeyhill Properties, LLC with Ordway Properties, LLC being a three fourths owner. The building is the new facility for the Company’s Lexel Imaging subsidiary, which had previously signed a five (5) year lease agreement with Honeyhill Properties, LLC on June 15, 2017 before the sale took place.

Note 8. – Supplemental Cash Flow Information

Supplemental cash flow information is as follows (in thousands):


	Nine Months Ended November 30,
	2017			2016
Cash paid for:
Interest	$	13		$	9

Income taxes, net of refunds	$	23		$	6

Non-cash activity:
Note receivable paid directly to officer	$	130		$	65

Note payable to officer	$	(130	)	$	(65	)

Imputed interest expense	$	48		$	42

Imputed interest income	$	(48	)	$	(42	)

Capital additions transferred from inventory	$	113			—

Video Display Corporation and Subsidiaries

November 30, 2017

Note 9. – Shareholder’s 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.

Diluted earnings (loss) per share is not presented separately because there are no adjustments to the numerator in calculating dilutive net loss per share and all potentially dilutive common stock equivalents would be antidilutive. The following table presents a reconciliation of all the shares used in the calculation of basic and dilutive earnings (loss) per share for the three and nine month periods ended November 30, 2017 and 2016 (in thousands, except per share data):


	Net Income (Loss)			Weighted Average Common Shares Outstanding		Earnings (Loss) Per Share
Nine months ended November 30, 2017
Basic	$	(1,690	)		5,891	$	(0.29	)
Effect of dilution:
Options		—			—		—

Diluted	$	(1,690	)		5,891	$	(0.29	)

Nine months ended November 30, 2016
Basic	$	(815	)		5,891	$	(0.14	)
Effect of dilution:
Options		—			—		—

Diluted	$	(815	)		5,891	$	(0.14	)

Three months ended November 30, 2017
Basic	$	(1,203	)		5,891	$	(0.20	)
Effect of dilution:
Options		—			—		—

Diluted	$	(1,203	)		5,891	$	(0.20	)

Three months ended November 30, 2016
Basic	$	(45	)		5,891	$	(0.01	)
Effect of dilution:
Options		—			—		—

Diluted	$	(45	)		5,891	$	(0.01	)

Video Display Corporation and Subsidiaries

November 30, 2017

Stock-Based Compensation Plans

For the nine-month period ended November 30, 2017 and 2016, the Company recognized general and administrative expenses of $58 thousand and $3 thousand, respectively, related to share-based compensation. As of November 30, 2017, and November 30, 2016 total unrecognized compensation costs related to stock options granted was $35 thousand and $2 thousand, respectively. The unrecognized stock option compensation cost is expected to be recognized over a period of approximately 3 years.

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.

140,000 new options and 60,000 replacement options were granted during the nine month period ended November 31, 2017 and no options were granted for the nine month period ending November 30, 2016.

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 nine months ending November 30, 2017 and November 30, 2016, the Company did not purchase any shares of the Video Display Corporation stock. Under the Company’s stock repurchase program, an additional 502,644 shares remain authorized to be repurchased by the Company at November 30, 2017.

Note 10. – Income Taxes

The effective tax rate for the nine months ended November 30, 2017 and 2016 was 0% and (1.9%) respectively. The Company lost $1.7 and $0.8 million dollars for the nine months ending November 30, 2017 and November 30, 2016, respectively. Income tax expense of $15 thousand was reported for the nine months ended November 30, 2016, and pertains to state taxes owed related to the Lexel Imaging subsidiary which is located in Kentucky, due to profitability reported related to Lexel with no offsetting state net operating losses. There was no income tax expense reported for the nine months ended November 30, 2017 due to net losses generated. Due to the consolidated losses by the Company, a full valuation allowance was allocated to the deferred tax asset created by the loss.

Note 11. – Legal Proceedings

The Company is involved in various legal proceedings related to claims arising in the ordinary course of business.

On May 19, 2017, Lexel Imaging’s Chapter 11 Bankruptcy case was dismissed upon approval of a settlement agreement between Lexel Imaging (Lexel) and its landlord, Alidade Bull Lea, LLC (Alidade). The settlement agreement required Lexel to surrender possession of the rental property on or before September 30, 2017 and remit to Alidade all past due rent of approximately $232 thousand. Lexel was also required to make payments totaling $100 thousand into an escrow account by July 28, 2017. These funds were held by Alidade’s counsel until full and timely compliance with the settlement agreement was met, at which time the funds were returned to Lexel.

The Company complied with all of the stipulations and successfully vacated the building on September 15, 2017.

Video Display Corporation and Subsidiaries

November 30, 2017

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 interim condensed consolidated financial statements and with the Company’s 2017 Annual Report to Shareholders, which included audited condensed consolidated financial statements and notes thereto as of and for the fiscal year ended February 28, 2017, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The Company manufactures and distributes a wide range of display devices, encompassing, among others, industrial, military, medical, and simulation display solutions. The Company is comprised of one segment—the manufacturing and distribution of displays and display components. The Company purchased a manufacturer of keyboards on October 23, 2017, for a nominal amount and the acquisition did not materially impact the Company’s financial results for the period ending November 30, 2017 The Company’s plans are to produce cyber secure keyboards. The business is expected to be less than ten percent (10%) of the Company’s revenues. The Company is organized into four interrelated operations aggregated into one reportable segment.

•

Simulation and Training Products – offers a wide range of projection display systems for use in training and simulation, military, medical, entertainment and industrial applications.

•

Cyber Secure Products – offers advanced TEMPEST technology, and (EMSEC) products. This business also provides various contract services including the design and testing solutions for defense and niche commercial uses worldwide.

•

Data Display CRTs– offers a wide range of CRTs for use in data display screens, including computer terminal monitors and medical monitoring equipment.

•

Broadcast and Control Center Products – offers high-end visual display products for use in video walls and command and control centers.

During fiscal 2018, 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. During the quarter ended November 30, 2017, the expenses of the Company did increase over last year. See below in “Liquidity”. Challenges facing the Company during these efforts include:

Liquidity- The accompanying 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 has sustained losses for each of the last three years and has seen a decline in both its working capital and liquid assets during this time. Losses over this time are due to a combination of decreasing revenues across all divisions without a commensurate reduction of expenses. The Company’s working capital and liquid asset position are presented below (in thousands) as of November 30, 2017 and February 28, 2017:


	November 30, 2017		February 28, 2017
Working capital	$	4,059	$	6,408
Liquid assets	$	385	$	503

Video Display Corporation and Subsidiaries

November 30, 2017

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, to liquidate the subsidiary noted above, 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 monthly 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 November 30, 2017 and February 28, 2017 are adequate.

Results of Operations

The following table sets forth, for the three and nine months ended November 30, 2017 and 2016, the percentages that selected items in the Interim Condensed Consolidated Income Statements bear to total sales:


	Three Months Ended November 30,							Nine Months Ended November 30,
	2017				2016					2017				2016
Sales
Simulation and Training (VDC Display Systems)		48.8		%		37.4			%		28.0		%		30.4
Data Display CRT (Lexel and Data Display)		15.0				32.3					35.6				46.5
Broadcast and Control Centers (AYON Visual)		1.2				21.8					10.0				12.0
Cyber Secure Products (AYON Cyber Security)		35.0				8.5					26.4				11.1

Total Company		100.0		%		100.0			%		100.0		%		100.0
Costs and expenses
Cost of goods sold		108.7		%		83.1			%		89.3		%		84.9
Selling and delivery		15.0				4.8					8.2				5.6
General and administrative		52.1				14.3					29.2				19.5

		175.8		%		102.2			%		126.7		%		110.0
Operating loss		(75.8	)	%		(2.2	)		%		(26.7	)	%		(10.0	)
Interest income/expense		(0.3	)	%		(0.1	)		%		(0.1	)	%		—
Other income, net		3.6				1.4					7.5				3.7

Loss before income taxes		(72.5	)	%		(0.9	)		%		(19.4	)	%		(6.3	)
Income tax benefit/expense		0.3				—					—				0.1

Net loss		(72.2	)	%		(0.9	)		%		(19.4	)	%		(6.4	)

Video Display Corporation and Subsidiaries

November 30, 2017

Net sales

Consolidated net sales decreased 31.0% for the nine months ended November 30, 2017 and 58.9% for the three months ended November 30, 2017 compared to the nine months and three months ended November 30, 2016. The Company’s AYON Cyber Security division is up 50.7% for the nine months ending November 30, 2017, but down 60.3% for the three months ending November 30, 2017 compared to the comparable quarters last year. Their business has been steadily growing over the past year and their backlog was $2.2 million at November 30, 2017 and they were the recipient of another $0.9 million order in December, 2017. Sales were off in the quarter due to waiting for final approval to begin releases against a$1.4 million order. AYON Visual Solutions sales decreased 42.7% for the nine months ended November 30, 2017, and decreased 98.2% for the three months ended November 30, 2017 compared to the same quarters last year. AYON Visual Solutions business is project driven and they completed a couple of projects in the first quarter. They have completed all of their current projects and presently are bidding and seeking new projects. They do have smaller orders between the larger projects. The Display Systems division was down by 36.4% and 47.8% for the nine months and three months ended November 30, 2017 compared to the comparable periods last year. The division is working with customers with projects expected to begin shipping in fourth quarter this year, similar to last year. The Data Display division showed a decrease of 47.1% and 48.9% for the nine months and three months ended November 30, 2017 compared to the same periods last year due to the move of the Lexel facility and the completion of a large long term order with a foreign customer by the Lexel division. The Lexel division will expect less revenues going forward as certain assets and business were sold in June, 2017. The Data division should have steady business driven by their number one customer’s orders for replacement CRTs for their simulators.

Gross margins

Consolidated gross margins decreased both as a percentage to sales (10.7% to 15.1%) and actual dollars ($931 thousand to $1,904 thousand) for the nine months ended November 30, 2017 compared to the nine months ended November 30, 2016. Gross margins decreased for the three months ended November 30, 2017 compared to the three months ended November 30, 2016, both as a percentage to sales, (8.7%) to 16.9% and actual dollars, ($144) thousand to $898 thousand.

Gross margins for the three months ended November 30, 2017 were impacted by the move of Lexel Imaging from one facility to another, shutting down production for most of the quarter, the sale of some of Lexel’s business to a competitor and the delay in getting approval to release $1.4 million order at AYON Cyber Security. Lexel is expected to be up and running in the next quarter and is expected to be profitable with the reduction in overhead expenses as a result of the move and AYON Cyber Security is expected to get approval to release the order. Gross margins are expected to improve in the next quarter as Lexel will be producing product and the two Florida divisions will be shipping against their $7 million backlogs.

Operating expenses

Operating expenses increased by 3.0% or $95 thousand for the nine months ended November 30, 2017 compared to the nine months ended November 30, 2016. The expenses increased due to legal expenses of $165 thousand associated with the bankruptcy proceedings with Lexel Imaging and the legal expenses for the sale of certain assets of Lexel Imaging and changes in classifications of workers at AYON Cyber Security during the third quarter after they merged with VDC Display Systems. Operating expenses increased by 10.4% or $105 thousand for the three months ended November 30, 2017 compared to the three months ended November 30, 2016. The Company expects to reduce costs while increasing revenues with the completion of the consolidation of its two Florida businesses to one location and the move of Lexel Imaging to a much lower cost facility.

Video Display Corporation and Subsidiaries

November 30, 2017

Interest expense

Interest expense was $12 thousand for the nine months ending November 30, 2017and $4 thousand for the three months ending November 30, 2017 and $3 thousand for the nine months ending November 30, 2016 and $3 for the three months ending November 30, 2016. The interest expense is related to the balance owed on a building the Company owns in Pennsylvania, the line of credit at the Company’s bank and the interest on the margin balance in the Company’s investment account, which is a 2% rate.

Other Income/ expense

For the nine months ended November 30, 2017, the Company earned $294 thousand on the sale of certain assets to a competitor, $208 thousand on royalties, $129 thousand in rental income and another net of $26 thousand on other income and expenses. For the nine months ended November 30, 2016, the Company had $274 thousand in investment gains, $160 thousand in royalty income, $101 thousand in rental income, $17 thousand in scrap sales and $9 thousand in dividend income offset by $92 thousand in asset disposals

Income taxes

The effective tax rate for the nine months ended November 30, 2017 and 2016 was 0% and (1.9%) respectively. The Company lost $1.7 and $0.8 million dollars for the nine months ended November 30, 2017 and November 30, 2016, respectively. Income tax expense of $15 thousand was reported for the nine months ended November 30, 2016 and pertains to state taxes owed related to the Lexel Imaging subsidiary which is located in Kentucky, due to profitability reported for the related time period with no offsetting state net operating losses. There was no income tax expense reported for the nine months ended November 30, 2017 due to net operating losses generated. Due to the losses by the Company, a full valuation allowance was allocated to the deferred tax asset created by the loss.

Liquidity and Capital Resources


	November 30, 2017		February 28, 2017
Working capital	$	4,059	$	6,408
Liquid assets	$	385	$	503

Video Display Corporation and Subsidiaries

November 30, 2017

Cash provided by operations for the nine months ended November 30, 2017 was $0.7 million. The net loss from operations was $1.7 million and adjustments to reconcile net loss to net cash were $0.3 million including inventory reserves, depreciation and non-cash charges for share based compensation. Changes in working capital provided $2.0 million, primarily due to a decrease in accounts receivable of $2.1 million, smaller adjustments totaling $0.6 million, offset by a increase in accounts payable of $0.4 million, a decrease in customer deposits of $0.3 million. Cash used by operations for the nine months ended November 30, 2016 was $0.8 million.

Investing activities used $1.2 million. $1.8 million was used for the purchase of investment securities, $0.4 million for the purchase of a one third interest in an LLC (owns building rented by Lexel Imaging), $2.0 million for acquisition of a business and $0.4 million for capital improvements offset by $1.6 million for the sale of investment securities for the nine months ended November 30, 2017. Investing activities provided a negligible amount of cash during the nine months ended November 30, 2016.

Financing activities provided $0.5 million for the nine months ended November 30, 2017. Marginal float in the investment account provided $0.4 million, the line of credit provided $0.2 million offset by $0.1 repayment of loans from related parties. Financing activities provided $0.5 million primarily due to the proceeds from related party loan of $0.8 million offset by the repayment of $0.1 million to the CEO and $0.2 million for the repayment of margin dollars in the investment account for the nine months ended November 30, 2016.

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 nine months ended November 30, 2017 and November 30, 2016, the Company did not repurchase any shares. Under the Company’s stock repurchase program, an additional 502,644 shares remain authorized to be repurchased by the Company at November 30, 2017.

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:

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 November 30, 2017 and February 28, 2017 are adequate.

Video Display Corporation and Subsidiaries

November 30, 2017

Revenue Recognition

Revenue is recognized on the sale of products when the products are shipped, all significant contractual obligations have been satisfied, and the collection of the resulting receivable is reasonably assured. The Company’s delivery term typically is F.O.B. shipping point.

In accordance with ASC 605-45 “Revenue Recognition: Principal Agent Considerations”, shipping and handling fees billed to customers are classified in net sales in the consolidated income statements. Shipping and handling costs incurred are classified in selling and delivery in the consolidated income statements.

Other Loss Contingencies

Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple factors that often depend on judgments about potential actions by third parties.

Income Taxes

Deferred income taxes are provided to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of November 30, 2017 and February 28, 2017 the Company has established a valuation allowance of $7.6 million and $7.4 million, respectively on the Company’s current and non-current deferred tax assets.

The Company accounts for uncertain tax positions under the provisions of ASC 740, which contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company’s tax positions and tax benefits, which may require periodic adjustments. At November 30, 2017, the Company did not record any liabilities for uncertain tax positions.

Recent Accounting Pronouncements

Video Display Corporation and Subsidiaries

November 30, 2017

In November 2015, the FASB issued Accounting Standards Update No. (ASU 2015-17), “Balance Sheet Classification of Deferred Taxes”. ASU 2015-17 requires deferred tax assets and liabilities, along with related valuation allowances, to be classified as noncurrent on the balance sheet. Each tax jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. The adoption of this standard did not have a material effect on its consolidated financial statements.

Forward-Looking Information and Risk Factors

This report contains forward-looking statements and information that is based on management’s beliefs, as well as assumptions made by, and information currently available to management. When used in this document, the words “anticipate,” “believe,” “estimate,” “intends,” “will,” and “expect” and similar expressions are intended to identify forward-looking statements. Such statements involve a number of risks and uncertainties. These risks and uncertainties, which are included under Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended February 28, 2017 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.

ITEM 4.

CONTROLS AND PROCEDURES

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.

Video Display Corporation and Subsidiaries

November 30, 2017

Our chief executive officer and chief financial officer have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of November 30, 2017. 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 November 30, 2017.

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

November 30, 2017

PART II

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 28, 2017. 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


Exhibit Number		Exhibit Description

3(a)		Articles of Incorporation of the Company (incorporated by reference to Exhibit 3A to the Company’s Registration Statement on Form S-18 filed January 15, 1985).(P)

3(b)		By-Laws of the Company (incorporated by reference to Exhibit 3B to the Company’s Registration Statement on Form S-18 filed January 15, 1985).(P)

10(a)		Lease dated April 1, 2015 by and between Registrant (Lessee) and Ronald D. Ordway (Lessor) with respect to premises located at 1868 Tucker Industrial Road, Tucker, Georgia. (incorporated by reference to Exhibit 10(c) to the Company’s 2015 Annual Report on Form 10-K.)

10(b)		Lease dated February 19, 2015 by and between Registrant (Lessee) and Ordway Properties LLC (Lessor) with respect to premises located at 5155 King Street, Cocoa, FL. (incorporated by reference to Exhibit 10(g) to the Company’s 2015 Annual Report on Form 10-K.)

10(c)		Video Display Corporation 2006 Stock Incentive Plan. (incorporated by reference to Appendix A to the Company’s 2006 Proxy Statement on Schedule 14A)

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

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.

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