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

☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

GEORGIA		58-1217564
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, no par value		VIDE		OTCMKTS

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☒
				Emerging growth company		☐

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PART I.		FINANCIAL INFORMATION
		Item 1.		Financial Statements
				Interim Condensed Consolidated Balance Sheets – May 31, 2022 (unaudited) and February 28, 2022			3
				Interim Condensed Consolidated Statements of Operations – Three months ended May 31, 2022 and 2021 (unaudited)			5
				Interim Condensed Consolidated Statements of Shareholders’ Equity - Three months ended May 31, 2022 and 2021 (unaudited)			6
				Interim Condensed Consolidated Statements of Cash Flows – Three months ended May 31, 2022 and 2021 (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			14
		Item 3.		Quantitative and Qualitative Disclosure About Market Risk			20
		Item 4.		Controls and Procedures			20
PART II.		OTHER INFORMATION
		Item 1.		Legal Proceedings			22
		Item 1A.		Risk Factors			22
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.			22
		Item 3.		Defaults upon Senior Securities.			22
		Item 4.		Submission of Matters to a Vote of Security Holders.			22
		Item 5.		Other Information.			22
		Item 6.		Exhibits			22
SIGNATURES							23
		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

		May 31, 2022				February 28, 2022
		(unaudited)
Assets
Current assets
Cash and cash equivalents		$	153			$	245
Accounts receivable, less allowance for doubtful accounts of $3 and $3			1,073				390
Employee retention credit refund receivable			611				796
Inventories, net			2,983				3,342
Contract assets			1,236				444
Prepaid expenses and other current assets			204				297
Total current assets			6,260				5,514
Property, plant, and equipment
Buildings			778				778
Machinery and equipment			5,364				5,359
			6,142				6,137
Accumulated depreciation			(5,316	)			(5,247	)
Net property, plant, and equipment			826				890
Right of use assets under operating leases			493				592
Intangible assets, net			86				118
Other noncurrent assets			2				2
Total assets		$	7,667			$	7,116

		May 31, 2022				February 28, 2022
		(unaudited)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable		$	1,945			$	1,465
Accrued liabilities			975				855
Contract liabilities			1,910				1,872
Note payable to officers and directors, current (Note 6)			784				458
Current maturities of financing lease obligations			98				98
Current operating lease liabilities			200				257
Total current liabilities			5,912				5,005
Finance lease obligations less current maturities			43				64
Long-term operating lease liabilities			293				333
Total liabilities			6,248				5,402
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, 2022, and February 28, 2022			7,293				7,293
Additional paid-in capital			281				281
Retained earnings			10,127				10,422
Treasury stock, shares at cost; 3,854 at May 31, 2022 and February 28, 2022			(16,282	)			(16,282	)
Total shareholders’ equity			1,419				1,714
Total liabilities and shareholders’ equity		$	7,667			$	7,116

		Three Months Ended May 31,
		2022				2021
Net sales		$	2,841			$	1,857
Cost of goods sold			2,130				1,490
Gross profit			711				367
Operating expenses
Selling and delivery			149				158
General and administrative			870				993
		1,019				1,151
Operating loss			(308	)			(784	)
Other income (expense)
Interest expense, net			(5	)			(10	)
Gain on disposal of equipment, net			3				—
Other, net			15				49
			13				39
Loss before income taxes			(295	)			(745	)
Income tax expense			—				—
Net loss		$	(295	)		$	(745	)
Net loss per share:
Net loss per share-basic		$	(0.05	)		$	(0.13	)
Net loss per share-diluted		$	(0.05	)		$	(0.13	)
Basic weighted average shares outstanding			5,878				5,878
Diluted weighted average shares outstanding			5,878				5,878

		Common Shares*				Share Amount				Additional Paid-in Capital				Retained Earnings				Treasury Stock				Total Shareholders’ Equity
Balance, February 28, 2022			5,878			$	7,293			$	281			$	10,422			$	(16,282	)		$	1,714
Net loss			—				—				—				(295	)			—				(295	)
Balance, May 31, 2022 (unaudited)			5,878			$	7,293			$	281			$	10,127			$	(16,282	)		$	1,419

		Common Shares*				Share Amount				Additional Paid-in Capital				Retained Earnings				Treasury Stock				Total Shareholders’ Equity
Balance, February 28, 2021			5,878			$	7,293			$	281			$	12,982			$	(16,282	)		$	4,274
Net loss			—				—				—				(745	)			—				(745	)
Balance, May 31, 2021 (unaudited)			5,878			$	7,293			$	281			$	12,237			$	(16,282	)		$	3,529

*	Common Shares are shown net of Treasury Shares

		Three Months Ended May 31,
		2022				2021
Operating Activities
Net loss		$	(295	)		$	(745	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation expense			67				63
Amortization of intangible assets			32				32
Provision for doubtful accounts			—				(6	)
Provision for inventory reserve			—				15
Gain on disposal of equipment			(3	)			—
Other			7				4
Changes in working capital items:
Accounts receivable			(683	)			886
Inventories			359				83
Prepaid expenses and other assets			93				(41	)
Contract assets			(792	)			513
Employee retention credit refund receivable			185				—
Customer deposits			38				(50	)
Accounts payable and accrued liabilities			600				(150	)
Net cash (used in) provided by operating activities			(392	)			604
Investing Activities
Capital expenditures			(3	)			(23	)
Proceeds from disposal of equipment			3				—
Net cash used in investing activities			—				(23	)
Financing Activities
Repayments of long-term debt			—				(14	)
Repayments on lease financing			(26	)			(18	)
Proceeds from loans with officers and directors			326				—
Net cash provided by (used in) financing activities			300				(32	)
Net change in cash and cash equivalents			(92	)			549
Cash and cash equivalents, beginning of year			245				293
Cash and cash equivalents, end of period		$	153			$	842

		May 31, 2022				February 28, 2022
Working capital		$	348			$	509
Liquid assets		$	153			$	245

		May 31, 2022				February 28, 2022
Raw materials		$	1,571			$	2,037
Work-in-process			1,085				846
Finished goods			327				459
		$	2,983			$	3,342

		May 31, 2022
Assets
Operating lease right-of-use assets		$	493
Liabilities
Current portion of operating lease liabilities		$	200
Noncurrent portion of operating lease liabilities			293
Total operating lease liabilities		$	493

		May 31, 2022
Weighted average remaining lease term			2.8 years
Weighted average discount rate			6	%

FY2023		$	159
FY2024			190
FY2025			190
Total operating lease payments			539
Less imputed interest			(46	)
Total operating lease liabilities		$	493

		May 31, 2022
Financing lease right-of-use assets		$	151
Current portion of financing lease liabilities		$	98
Noncurrent portion of financing lease liabilities			43
Total financing lease liabilities		$	141

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 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 three-month period ending May 31, 2022 primarily due to insufficient revenues in the Company. The Company also had a decrease in liquid assets for the three-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 May 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 order to assist funding operating activity, the Company’s CEO loaned an additional $326,000 to the Company during the first quarter of fiscal year 2023. There is no line of credit outstanding or other financing currently in place other than the note payable with the Company CEO with a balance of $784,000. There are no repayment terms related to the loan; however, the Company plans to repay the note within the next twelve months and therefore has classified the loan as a current liability on the condensed consolidated balance sheets as of May 31, 2022.

– 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.

– The Company has been actively monitoring the novel its impact globally. Financial results for the three months ended May 31, 2022 and 2021 have been 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 2023. 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. the Company may experience other disruptions that could severely impact the business, results of operations and prospects.

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 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.

Our simulation and video wall systems are custom-built (using commercial 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.

The Company accounts for uncertain tax positions under the provisions of ASC 740, which contains a 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 May 31, 2022, the Company did not record any liabilities for uncertain tax positions.

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 for the year ended February 28, 2022 could cause actual results to differ materially.

Our disclosure controls and procedures (as defined in Exchange Act 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 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 May 31, 2022. 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 and quarterly reports on Form Based on this evaluation, our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were not effective due to an unremediated material weakness in our internal control over financial reporting as set forth below.

There have not been any changes in our internal controls over financial reporting (as such term is defined in 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.

Information regarding risk factors appears under the caption Forward-Looking Information and Risk Factors in Part I, Item 2 of this Form and in Part I, Item 1A of our Annual Report on Form for the fiscal year ended February 28, 2022. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form