VIDEO DISPLAY CORP - Quarter Report: 2023 August (Form 10-Q)

ITEM 1 – FINANCIAL STATEMENTS

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Balance Sheets (unaudited)

(in thousands)

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

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Balance Sheets (unaudited) (continued)

(in thousands)

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

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Statements of Operations (unaudited) 

(in thousands, except per share data)

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

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Statements of Shareholders’ Equity (Deficit)

Three and Six Months Ended August 31, 2023 and 2022 (unaudited)

(in thousands)

*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)

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

Note 1. – Basis of Presentation of Principles of Consolidation

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, 2023 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, 2023 and 2022 have been prepared in accordance with (i) accounting principles generally accepted in the U.S. for interim financial information and (ii) the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, such statements do not include all of the information and disclosures required by accounting principles generally accepted in the U.S. for a complete presentation of financial statements. In the opinion of management, all adjustments (including those of a normal, recurring nature) considered necessary for a fair presentation have been included. Operating results for the three and six months ended August 31, 2023 are not necessarily indicative of the results that may be expected for the year ending February 28, 2024. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Video Display’s Annual Report on Form 10-K for the year ended February 28, 2023 filed with the SEC on May 30, 2023.

Note 2. – Going Concern, Banking & Liquidity

The accompanying unaudited interim condensed consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company reported a net loss and an increase in working capital for the six-month period ending August 31, 2023 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 four of five fiscal years and has seen overall a decline in working capital and liquid assets during this five -year period. Annual losses over this time are due to a combination of decreasing revenues across 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, 2023 and February 28, 2023:

The Company has focused on building the rugged and specialty display business at the Cocoa, Florida subsidiary. The Company has four primary display lines in production with two more expected to be added in calendar year 2024. There have been some unforeseen delays causing two of these product lines to be delayed in shipping, but these issues have been resolved and shipments are expected to commence in October. All of these current product lines are repeat business which should sustain the Company going forward. The Company is looking at ways to restructure its TEMPEST business by partnering with another company for the products side of the business while increasing the TEMPEST services 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 synergistic fit for the division. The keyboard subsidiary is also exploring ways to increase marketing efforts by targeting new and old customers and in industries it currently has other customers in. The Company relocated 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 $630 thousand to the company during the first six months of fiscal year 2024. 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 $2,014 thousand. 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 August 31, 2023.

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 creates substantial doubt about the ability of the Company to continue as a going concern.

Note 3. – Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. This guidance is effective for annual reporting periods beginning after December 15, 2022 for smaller reporting companies, with early adoption permitted. Entities will apply the amendments using a modified retrospective approach. The Company does not expect the adoption of ASU 2016-13 to have a material impact on its financial statements and related disclosures.

Note 4. - Inventories

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

Note 5. – Note Payable to Officers and Directors (Related Party Transactions)

The Company increased borrowings by $630 thousand to fund working capital needs and owes an additional $95 thousand in Company rent for the six months ending August 31, 2023, that is due to the CEO. The $2,014 thousand note contains no repayment terms and is expected to be repaid in fiscal 2024 along with the $711 thousand in rent owed. The note payable and rent owed are included in the Company’s condensed consolidated balance sheet as of August 31, 2023 as a note payable to officers and directors and within accounts payable, respectively.

Note 6. – Leases

Operating Leases

The Company leases its office space and manufacturing facilities under operating lease agreements. The base lease terms expire at various dates from 2022 to 2025. While each of the leases include renewal options, the Company has only included the base lease term in its calculation of lease assets and liabilities.

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

Operating lease costs are included in Cost of goods sold in the Company’s condensed consolidated statements of operations and totaled approximately $115 thousand for the three months ended August 31, 2023, and $240 thousand for the six months ended August 31, 2023. Operating lease costs were $90 thousand for the three months ended August 31, 2022 and $204 thousand for the six months ended August 31, 2022.

Cash paid for amounts included in the measurement of operating lease liabilities was approximately $115 thousand and $240 for the three months and six months ended August 31, 2023. The Company paid $90 thousand and $204 thousand for the three months and six months ended August 31, 2022. The Company executed an extension on the lease at the facility in Lexington, KY in August 2023. The Company is currently looking for a smaller location and will be vacating the current premises by January 31, 2024.

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

The following table summarizes the maturity of the Company’s operating lease liabilities as of August 31, 2023 (in thousands):

Included above are leases for manufacturing and warehouse facilities leased from Southeast Metro Savings, LLC and Honeyhill Properties, LLC (entities which are controlled by the Company’s chief executive officer) under operating leases expiring at various dates through 2025. Lease costs under these leases totaled approximately $47 thousand for the three months and $94 thousand for the six months ended August 31, 2023. Lease costs under these leases totaled approximately $64 thousand for the three months and $161 thousand for the six months ended August 31, 2022.

The Company subleases certain of its warehousing space at its Kentucky location. The amount of the sublease is negligible as of August 31, 2023 and totaled approximately $18,000 for the six months ended August 31, 2022.

Financing Leases

The Company has one financing lease entered into on November 23, 2020 for Tempest testing equipment for $277,000 and is included in machinery and equipment on the condensed consolidated balance sheets as of August 31, 2023 and February 28, 2023. The lease expires on December 1, 2023 and the incremental borrowing rate on the lease is 12.5%.

Balance sheet information related to financing lease is as follows (in thousands):

The following table summarizes the maturity of the Company’s finance lease liabilities as of August 31, 2023 (in thousands):

Note 7 . – Supplemental Cash Flow Information

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

Note 8. – Shareholders’ Equity

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding during each period. Shares issued during the period are weighted for the portion of the period that they were outstanding. Diluted earnings (loss) per share is calculated in a manner consistent with that of basic earnings (loss) per share while giving effect to all potentially dilutive common shares that were outstanding during the period.

The following table sets forth the computation of basic and diluted earnings (loss) per share for the three and six month periods ended August 31, 2023 and 2022 (in thousands, except per share data):

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, 2023 and 2022 diluted loss per share calculations. For the three-month and six -month periods ended August 31, 2023 and August 31, 2022, there was no expense related to share-based compensation as all options were fully vested. No options were granted for the six- month period ending August 31, 2023 or for the six -month period ended August 31, 2022.

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 six-months ending August 31, 2023 and August 31, 2022, 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, 2023.

Note 9. – Income Taxes

Due to the Company’s overall and historical net loss position, no income tax expense was reported for the six- month period ending August 31, 2023 and August 31, 2022. Due to continued losses reported by the Company, a full valuation allowance was allocated to the deferred tax asset created by these losses.

Note 10. – Legal Proceedings

The Company is involved in various legal proceedings related to claims arising in the ordinary course of business. The Company is not currently party to any legal proceedings the result of which management believes is likely to have a material adverse impact on its business, financial position, results of operations or cash flows.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the attached unaudited interim condensed consolidated financial statements and with the Company's 2023 Annual Report to Shareholders, which included audited consolidated financial statements and notes thereto as of and for the fiscal year ended February 28, 2023, 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 is organized into four interrelated operations aggregated into one reportable segment.

During fiscal 2024, management of the Company is focusing key resources on strategic efforts to grow its business through internal sales of the Company’s more profitable product lines and reduce expenses in all areas of the business to bring its cost structure in line with the current size of the business. Challenges facing the Company during these efforts include:

Liquidity –

The accompanying unaudited interim condensed consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company reported a net loss and an increase in working capital for the six-month period ending August 31, 2023 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 four of five fiscal years and has seen overall a decline in working capital and liquid assets during this five -year period. Annual losses over this time are due to a combination of decreasing revenues across 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, 2023 and February 28, 2023:

The Company has focused on building the rugged and specialty display business at the Cocoa, Florida subsidiary.  The Company has four primary display lines in production with two more expected to be added in calendar year 2024. There have been some unforeseen delays causing two of these product lines to be delayed in shipping, but these issues have been resolved and shipments are expected to commence in October. All of these current product lines are repeat business which should sustain the Company going forward. The Company is looking at ways to restructure its TEMPEST business by partnering with another company for the products side of the business while increasing the TEMPEST services 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 synergistic fit for the division. The keyboard subsidiary is also exploring ways to increase marketing efforts by targeting new and old customers in industries it currently has other customers in. The Company relocated 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 $630 thousand to the company during the first six months of fiscal year 2024. 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 $2,014 thousand. 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 August 31, 2023.

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

Inventory valuation – 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.

Results of Operations

The following table sets forth, for the three and six months ended August 31, 2023 and 2022, 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 2.5% for the six months ended August 31, 2023, and increased 20.3% for the three months ended August 31, 2023 compared to the six months and three months ended August 31, 2022. The Display Systems division was up 10.9% for the six months ended August 31, 2023 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, 2023, the Display System division was up 49.0% compared to the same three months last year. The Company is focused on the ruggedized displays sector of the business, having revenue of approximately $1.6 million of rugged displays in the year. Two other rugged displays have had delays in shipping, but will begin shipping in the Company’s third quarter. The Company’s AYON Cyber Security (ACS) division increased by 20.4% for the six months ending August 31, 2023 compared to the six months last year, $325 thousand this year, $270 thousand last year. 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, 2023 ACS business decreased 22.4% compared to the comparable three-month period from last year. The Data Display division decreased 39.1% and 43.5% for the six months and three months ended August 31, 2023 compared to the same period in the prior year due to decreases in the sales of CRTs. The demand for CRT products is diminishing as new technologies take its place. The division is exploring new opportunities in other industries. The Company’s keyboard division increased 13.5% for the six months ended August 31, 2023 and was down 4.4% for three months ended August 31, 2023 respectively compared to the same periods last year. The division has been slow, but is attempting to get a new marketing strategy in place in an effort to increase sales.

Gross margins

Consolidated gross margins were increased both as a percentage to sales (25.5% from 25.4%) and actual dollars ($1,257 thousand from $1,219 thousand) for the six months ended August 31, 2023 compared to the six months ended August 31, 2022. For the three months ended August 31, 2023, consolidated gross margins decreased as a percentage to sales (24.9% from 25.8%) and increased actual dollars ($588 thousand from $512 thousand).

VDC Display Systems gross margin dollars were $1,227 thousand compared to $1,072 thousand for the six months ended August 31, 2023 compared to the six months ended August 31, 2022. VDC Display Systems gross margin percentage also increased from 33.9% to 35.0% for the six months ended August 31, 2023 compared to the same six months in 2022. AYON Cyber Security gross margin dollars were $167 thousand compared to $60 thousand for the six months ended August 31, 2023 compared to the six months ended August 31, 2022. AYON Cyber Security gross margin percentage increased to 51.4% from 22.1% for the six months ended August 31, 2023 compared to the same six-month period in 2022 due to the sales mix of primarily service jobs as the material costs were lower.

The Data Display division had a negative gross margin of $276 thousand compared to a gross margin of $0 for the six months ended August 31, 2023 and August 31, 2022 respectively. The keyboard division, Unicomp, had $138 thousand of gross margin dollars or 24.9% to sales for the six months ending August 31, 2023 compared to $87 thousand or 17.8% for the six months ending August 31, 2022.

For the six months ended August 31, 2023, the display division (rugged displays, specialty displays, simulators and video walls) produced 97.6% of the Company’s gross margins. The division had an increase in gross margin percentage to sales from 33.9% last year to 35.0% this year. Unicomp and the cyber division increased gross margin dollars and the percentage to sales. The Data division saw a decrease in gross margins of $276 thousand from the prior year for the six months ended August 31, 2023.

Operating expenses

Operating expenses decreased 2.9% or $58 thousand for the six months ended August 31, 2023 compared to the six months ended August 31, 2022. The decrease was due primarily to the decreased costs in selling expenses. The reduction was in salaries, had a salesperson leave and his duties were covered by others in the department. The Company expects to continue to control costs while increasing revenues in tempest services, specialized displays and ruggedized displays. The Company has been filling vacancies that went unfilled following the pandemic as business conditions have changed. The Company expects costs will stay in line with the increase in business.

Operating expenses decreased by 1.5% or $15 thousand for the three months ended August 31, 2023 compared to the three months ended August 31, 2022. The decrease was due primarily to the reduction of salaries and contractor expenses including commissions.

Interest expense

Interest expense was $3 thousand for the six months ended August 31, 2023 compared to $9 thousand for the six months ended August 31, 2022. Interest expense was $1 thousand for the three months ended August 31, 2023 and August 31, 2022. Interest expense in fiscal 2024 relates primarily to interest expense on the lease of TEMPEST equipment.

Other Income/ expense

For the six months ended August 31, 2023, the Company had $238 thousand in retention credit income, $284 thousand in a write of prior year deferred salary of the Company CEO, $60 thousand in the sale of fully depreciated assets, $2 thousand for an insurance audit refund and $1 thousand rental income. 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 thousand in interest income.

For the three months ended August 31, 2023, the Company had $238 thousand in retention credit income, $284 thousand in a write off of prior year deferred salary of the Company CEO, and $50 thousand in the sale of fully depreciated assets and $1 thousand of miscellaneous. 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

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.

Liquidity and Capital Resources

The accompanying unaudited interim condensed consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company reported a net loss and an increase in working capital for the six-month period ending August 31, 2023 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 four of five fiscal years and has seen overall a decline in working capital and liquid assets during this five -year period. Annual losses over this time are due to a combination of decreasing revenues across 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, 2023 and February 28, 2023:

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, 2023 was $0.7 million. Adjustments to net loss of $0.2 million were $0.1 million for depreciation, $0.2 million for non-cash lease cost, offset by $0.1 million for gain on disposal of equipment. Changes in working capital used $0.8 million, primarily an increase in accounts receivable of $1.1 million, an increase in inventory of $0.6 million, offset by an increase in contract liabilities of $0.3 million, an increase in accounts payable of $0.3 million, a decrease in contract assets of $0.2 million and a decrease in prepaid expenses of $0.1 million. 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.

Investing activities included $60 thousand of proceeds from disposal of equipment, offset by $31 thousand of capital expenditures for the six months ended August 31, 2023. Investing activities included $3 thousand for proceeds of disposals of equipment offset by $13 thousand of capital expenditures for the six months ended August 31, 2022.

Financing activities provided $578 thousand for the six months ended August 31, 2023 as the result of borrowings from the CEO of $630 thousand offset by payment of debt and lease payments. 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.

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 six months ending August 31, 2023 and August 31, 2022, 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, 2023.

Critical Accounting Policies and 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:

Inventory Valuation

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.          

Revenue Recognition

We recognize revenue when we transfer control of the promised products or services to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services. We derive our revenue primarily from sales of simulation and video wall systems, cyber secure products, data displays, and keyboards. We exclude sales and usage-based taxes from revenue.

Our simulation and video wall systems are custom-built (using commercial off-the-shelf products) to customer specifications under fixed price contracts. Judgment is required to determine whether each product and service is considered to be a distinct performance obligation that should be accounted for separately under the contract. Generally, these contracts contain one performance obligation (the installation of a fully functional system). We recognize revenue for these systems over time as control is transferred based on labor hours incurred on each project.

We recognize revenue related to our cyber secure products, data displays, and keyboards at a point in time when control is transferred to the customer (generally upon shipment of the product to the customer).

Timing of invoicing to customers may differ from timing of revenue recognition; however, our contracts do not include a significant financing component as substantially all of our invoices have terms of 30 days or less. We are applying the practical expedient to exclude from consideration any contracts with payment terms of one year or less and we never offer terms extending beyond one year.

Other Loss Contingencies

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

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 August 31, 2023, the Company has established a valuation allowance of $6.2 million on the Company’s 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 August 31, 2023, the Company did not record any liabilities for uncertain tax positions.

Forward - Looking Information and Risk Factors

This report contains forward-looking statements and information that is based on management’s beliefs, as well as assumptions made by, and information currently available to management. When used in this document, the words “anticipate,” “believe,” “estimate,” “intends,” “will,” and “expect” and similar expressions are intended to identify forward-looking statements. Such statements involve a number of risks and uncertainties. These risks and uncertainties, which are included under Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended February 28, 2023 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.

Our chief executive officer and chief financial officer have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of August 31, 2023. 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 August 31, 2023.

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.

PART II

None.

Information regarding risk factors appears under the caption Forward-Looking Information 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, 2023. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

None.

None.

None.

None.

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.