VIDEO DISPLAY CORP - Quarter Report: 2022 August (Form 10-Q)

 

 

 

FORM

 

 

 

Commission File Number

 

 

 

 

 

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

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

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

 

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

12b-2

As of August 31, 2022, the registrant had 5,878,290 shares of Common Stock outstanding.

 

 

 

The accompanying unaudited interim condensed consolidated financial statements include the accounts of Video Display Corporation and its subsidiaries (“Video Display,” the “Company,” “we,” or “us”). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated balance sheet as of February 28, 2022 has been derived from audited financial statements. The accompanying unaudited condensed consolidated financial statements as of, and for the three and six months ended, August 31, 2022 and 2021 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 and Rule of Regulation of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, such statements do not include all of the information and disclosures required by accounting principles generally accepted in the U.S. for a complete presentation of financial statements. In the opinion of management, all adjustments (including those of a normal, recurring nature) considered necessary for a fair presentation have been included. Operating results for the three and six months ended August 31, 2022 are not necessarily indicative of the results that may be expected for the year ending February 28, 2023. 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 for the year ended February 28, 2022 filed with the SEC on May 31, 2022.

The accompanying unaudited interim condensed consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company reported a net loss and a decrease in working capital for the period ending August 31, 2022 primarily due to insufficient revenues in the Company. The Company also had a decrease in liquid assets for the six month period primarily as a result of the lack of revenue. The Company has sustained losses for the last three of five fiscal years and has seen overall a decline in working capital and liquid assets during this five -year period. Annual losses over this time are due to a combination of decreasing revenues across the divisions without a commensurate reduction of expenses. The Company’s working capital and liquid asset position are presented below (in thousands) as of August 31, 2022 and February 28, 2022:

The Company has increased marketing efforts in its ruggedized displays, TEMPEST products and services and small specialty displays in an effort to increase revenue. New products in the ruggedized and TEMPEST areas have been developed and are now being evaluated by potential customers. In addition, the Company has continued to streamline its operations and is focusing on increasing revenues by executing initiatives such as upgrading its sales and marketing efforts including targeting efforts towards repeatable business, the hiring of an experienced Rugged Display Business Development Manager, increased customer visits, trade shows and blasts to market all the product lines it sells. The Company was able to increase its fiscal revenue over the prior fiscal year and has been implementing a plan to increase revenues at all the divisions, each structured to the particular division. The Company is restructuring its cyber security services business by adding a dedicated sales person for the service business to increase the business in cyber testing services and developing new products to supplement the product side of the business. The Lexel Imaging facility in Lexington, KY is working with some customers on last time buys for certain types of CRTs while also exploring new opportunities that are a fit for the division. The Company moved the corporate accounting functions to the Cocoa, Florida location which allows the Company to become more efficient and save money on reducing redundant operations. The former headquarters and distribution center in Tucker, Georgia closed as of March 31, 2022.

In December 2019, the FASB issued ASU Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 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. Effective March 1, 2021, we adopted ASU with no material impact on the Company’s financial statements or related disclosures.

In June 2016, the FASB issued ASU 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 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 to have a material impact on its financial statements and related disclosures.

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paid for amounts included in the measurement of operating lease liabilities was approximately $90 thousand and $204 for the three months and six months ended August 31, 2022. The Company paid $143 thousand and $286 thousand for the three months and six months ended August 31, 2021. The Company executed a new lease on the facility in Lexington, KY in July with a new building owner unrelated to the Company. The annual rent on the lease is $311 thousand.

 

Stock options, debentures, and other liabilities convertible into 200,000 shares of the Company’s common stock were anti-dilutive and, therefore, were excluded for the six months ended August 31, 2022 and 2021 diluted loss per share calculations. For the three-month and six-month periods ended August 31, 2022 and August 31, 2021, there was no expense related to share-based compensation as all options were fully vested. No options were granted for the period ending August 31, 2022 or for the six-month period ended August 31, 2021

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 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.

the ending August 31, 2022 and August 31, 2021, the Company did not purchase any shares of the Video Display Corporation stock. Under the Company’s stock repurchase program, an additional 490,186 shares remain authorized to be repurchased by the Company at August 31, 2022.

Due to the Company’s overall and historical net loss position, no income tax expense was reported for the month period ending August 31, 2022 and August 31, 2021. Due to continued losses reported by the Company, a full valuation allowance was allocated to the deferred tax asset created by these losses.

 

coronavirus, or COVID-19, situation and

impacted by COVID-19 due to

If the COVID-19 pandemic continues,

The following table sets forth, for the three and six months ended August 31, 2022 and 2021, the percentages that selected items in the Interim Condensed Consolidated Statements of Operations bear to total sales (amounts in thousands):

 

Net sales

Consolidated net sales increased 27.8% for the six months ended August 31, 2022, and increased 3.2% for the three months ended August 31, 2022 compared to the six months and three months ended August 31, 2021. The Display Systems division was up 51.7% for the six months ended August 31, 2022 compared to the comparable period last year. The division has a varied mix of products including ruggedized displays, simulation, projector systems and specialty displays. For the three months ended August 31, 2022, the Display System division was up 3.5% compared to the same three months last

 

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year. The Company is focused on the ruggedized displays sector of the business, having delivered approximately $0.8 million of rugged displays to two customers in the quarter and recently received orders for ruggedized displays of approximately $1.8 million from two other customers. The Company’s AYON Cyber Security (ACS) division is down 48.5% for the six months ending August 31, 2022 compared to the six months last year. Their business decreased due to lack of product orders for the Department of the State and Canada. The Company’s service side of the cyber business (testing other company’s products for compliance) was their primary revenue source. For the three months ending August 31, 2022 ACS business decreased 72.5% compared to the comparable three-month period from last year. The Data Display division increased 96.2% and 87% for the six months and three months ended August 31, 2022 compared to the same period in the prior year due to increases in the sales of CRTs to a large customer. The Company is expecting order(s) for a specialty product, a direct view storage tube (DVST) which should help revenues in the third quarter. Sales for this product have been slow due to the pandemic. The division expects to sell the DVST products for at least the next five to seven years. The Company’s keyboard division was down 30.1% for the six months ended August 31, 2022 and down 14.5% for three months ended August 31, 2022 respectively compared to the same periods last year. The Company acquired this company in October of 2017. This division is expected to continue at this level of sales each quarter.

Gross margins

Consolidated gross margins were increased both as a percentage to sales (26% from 11.1%) and actual dollars ($1,219 thousand from $418 thousand) for the six months ended August 31, 2022 compared to the six months ended August 31, 2021. For the three months ended August 31, 2022, consolidated gross margins increased as a percentage to sales (26.0% from 2.7%) and actual dollars ($512 thousand from $51 thousand).

VDC Display Systems gross margin dollars were $1,076 thousand compared to $352 thousand for the six months ended August 31, 2022 compared to the six months ended August 31, 2021. VDC Display Systems gross margin percentage also increased from 16.9% to 34.0% for the six months ended August 31, 2022 compared to the same six months in 2021. AYON Cyber Security gross margin dollars were $60 thousand compared to $217 thousand for the six months ended August 31, 2022 compared to the six months ended August 31, 2021. AYON Cyber Security gross margin percentage decreased to 22.1% from 41.4% for the six months ended August 31, 2022 compared to the same six month period in 2021 due to the sales mix of primarily service jobs as the material costs were lower.

The Data Display division had a gross margin of $0 compared to a negative gross margin of $392 thousand for the six months ended August 31, 2022 and August 31, 2021 respectively. The keyboard division, Unicomp, had $87 thousand of gross margin dollars or 17.8% to sales for the six months ending August 31, 2022 compared to $241 thousand or 34.3% for the six months ending August 31, 2021.

For the three months ended August 31, 2022, the display division (rugged displays, specialty displays, simulators and video walls) produced 74% of the Company’s gross margins. The division had an increase in gross margin percentage to sales from 7.7% last year to 34.2% this year. The Data division saw an increase in gross margins of $290 thousand from a negative $289 thousand the prior year quarter to $1 thousand this quarter. Unicomp gross margin dollars were flat with an increase in the percentage to sales. The cyber division had a decline in gross margin dollars of 67.1%.

Operating expenses

Operating expenses decreased 8.3% or $180 thousand for the six months ended August 31, 2022 compared to the six months ended August 31, 2021. The decrease was due primarily to the decreased costs in administration expenses. The Company reduced costs primarily in salaries, by not replacing staff when they resigned while business was slow. The Company expects to continue to control costs while increasing revenues in tempest services, specialized displays and ruggedized displays. When business increases we will look to fill some of the vacant positions.

 

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Operating expenses decreased by 4.7% or $48 thousand for the three months ended August 31, 2022 compared to the three months ended August 31, 2021. The decrease was due primarily to the reduction of salaries and contractor expenses including commissions.

Interest expense

Interest expense was $9 thousand for the six months ended August 31, 2022 compared to $14 thousand for the six months ended August 31, 2021. Interest expense was $4 thousand for the three months ended August 31, 2022 and August 31, 2021. Interest expense in fiscal 2023 relates primarily to interest expense on the lease of TEMPEST equipment.

Other Income/ expense

For the six months ended August 31, 2022, the Company received $498 thousand in proceeds from a class action lawsuit, $18 thousand in rental income, $32 thousand in retention credit revenue, $3 thousand on the sale of assets and $2 in interest income. For the six months ended August 31, 2021, the Company had $1.1 million in gains on the extinguishment of PPP loans, $107 thousand in rental income, and $4 thousand in debt recovery offset by $4 thousand in commissions on the rental income.

For the three months ended August 31, 2022 the Company received $498 thousand in proceeds from a class action lawsuit, had $3 thousand in rental income, $32 thousand in retention credit revenue and $2 in interest income. For the three months ended August 31, 2021, the Company had $1.1 million in gains on extinguishment of PPP loans, $56 thousand in rental income, $4 thousand in bad debt recovery, offset by $2 thousand in rental commissions.

Income taxes

Due to the Company’s overall and historical net loss position, no income tax has been reported and a full valuation allowance has been allocated to the deferred tax asset created by these losses.

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Management continues to implement plans to improve liquidity and to increase revenues at all divisions. The ability of the Company to continue as a going concern is dependent upon the success of management’s plans to improve revenues, the operational effectiveness of continuing operations, the procurement of suitable financing, or a combination of these. The uncertainty regarding the potential success of management’s plan create substantial doubt about the ability of the Company to continue as a going concern.

Cash used in operations for the six months ended August 31, 2022 was $0.4 million. Deductions to net loss of $0.2 million were $0.2 million for depreciation and amortization. Changes in working capital were $0.3 million, primarily change in contract assets of $0.8 million and a change in accounts receivable of $0.5 million, offset by a change in inventories of $0.5 million, a change in employee retention credit receivables of $0.3 million and a change in prepaid expenses and other assets of 0.2 million. Cash used in operations for the six months ended August 31, 2021 was $0.2 million. Adjustments to net loss of $0.6 million were $0.2 million for depreciation and amortization offset by $0.1 million for a change in inventory reserves and $1.1 million related to gain recorded on the extinguishment of the remaining PPP loans. Changes in working capital provided $1.4 million, primarily $0.2 million from accounts receivable and $0.5 million from the change in contract assets, by $0.2 million change in accounts payable and $0.5 million in inventories.

Investing activities used $10 thousand and $47 thousand for the six months ended August 31, 2022 and August 31, 2021 respectively for capital equipment.

Financing activities provided $0.4 million for the six months ended August 31, 2022 primarily from proceeds from additional borrowing from the Company’s CEO. Financing activities provided $183 thousand for the six months ended August 31, 2021 as the result of borrowings from the CEO of $250 thousand offset by payment of debt and lease payments.

one-time

For the six months ending August 31, 2022 and August 31, 2021, the Company did not purchase any shares of the Video Display Corporation stock. Under the Company’s stock repurchase program, an additional 490,186 shares remain authorized to be repurchased by the Company at August 31, 2022.

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:

Management regularly reviews the Company’s investment in inventories for declines in value and writes down the cost when it is apparent that the expected net realizable value of the inventory falls below its carrying amount. The Company operates in an environment of constantly changing technologies and retains a certain amount of inventory for legacy products for maintenance and replacement capabilities for its customers. The Company maintains inventory on certain products to ensure it has adequate inventory to fulfill orders for transitioning product lines. Management reviews inventory levels on a quarterly basis. Such reviews include observations of product development trends of the original equipment manufacturers, new products being marketed, and technological advances relative to the product capabilities of the Company’s existing inventories.     

 

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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.

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 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.

Deferred income taxes are provided to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of August 31, 2022, the Company has established a valuation allowance of $5.6 million on the Company’s deferred tax assets.

two-step

 

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10-K

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.

Rule 13a-15(e))

Form 10-Q,

10-K

10-Q.

As we continue to evaluate our internal control over financial reporting, we may determine that additional measures should be taken to address the identified control deficiency or other deficiencies, and/or that we should modify the remediation plan described below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis. In connection with management’s assessment of our internal control over financial reporting described above, management concluded that, as of August 31, 2022, a material weakness existed in our internal control over financial reporting.

Our material weakness related to the following control deficiency:

We did not design and maintain effective controls over inventory. Specifically, controls confirming that inventory received was recorded in the correct reporting period. In addition, controls pertaining to timely assessing and valuing inventory at the lower of cost or net realizable value while considering changes in technology and market conditions that may impact the valuation of inventory were not operating effectively. These control deficiencies in the aggregate resulted in a material weakness in internal control over financial reporting pertaining to inventory. The control deficiencies identified resulted in errors in the Company’s books and records which led to audit adjustments for the year ended February 28, 2022. The errors noted were not material to the financial statements reported in any interim or annual period and did not result in a revision to previously filed financial statements. However, these control deficiencies could result in misstatements of the aforementioned accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected in a timely manner. Accordingly, we have determined that these control deficiencies when evaluated in the aggregate constitute a material weakness.