Company Quick10K Filing
Video Display
Price1.14 EPS-0
Shares6 P/E-21
MCap7 P/FCF7
Net Debt-0 EBIT-0
TEV6 TEV/EBIT-20
TTM 2019-05-31, in MM, except price, ratios
10-K 2020-02-29 Filed 2020-05-29
10-Q 2019-11-30 Filed 2020-01-14
10-Q 2019-08-31 Filed 2019-10-15
10-Q 2019-05-31 Filed 2019-07-15
10-K 2019-02-28 Filed 2019-05-29
10-Q 2018-11-30 Filed 2019-01-18
10-Q 2018-08-31 Filed 2018-10-15
10-Q 2018-05-31 Filed 2018-07-16
10-K 2018-02-28 Filed 2018-05-29
10-Q 2017-11-30 Filed 2018-01-16
10-Q 2017-08-31 Filed 2017-10-16
10-Q 2017-05-31 Filed 2017-07-17
10-K 2017-02-28 Filed 2017-05-30
10-Q 2016-11-30 Filed 2017-01-13
10-Q 2016-08-31 Filed 2016-10-14
10-Q 2016-05-31 Filed 2016-07-15
10-K 2016-02-29 Filed 2016-05-26
10-Q 2015-11-30 Filed 2016-01-14
10-Q 2015-08-31 Filed 2015-10-15
10-Q 2015-05-31 Filed 2015-07-15
10-K 2015-02-28 Filed 2015-05-29
10-Q 2014-11-30 Filed 2015-01-14
10-Q 2014-08-31 Filed 2014-10-15
10-Q 2014-05-31 Filed 2014-07-15
10-K 2014-02-28 Filed 2014-05-29
10-Q 2013-11-30 Filed 2014-01-14
10-Q 2013-08-31 Filed 2013-10-15
10-Q 2013-05-31 Filed 2013-07-15
10-K 2013-02-28 Filed 2013-05-29
10-Q 2012-11-30 Filed 2013-01-14
10-Q 2012-08-31 Filed 2012-10-15
10-Q 2012-05-31 Filed 2012-07-13
10-K 2012-02-29 Filed 2012-05-29
10-Q 2011-11-30 Filed 2012-01-17
10-Q 2011-08-31 Filed 2011-10-14
10-Q 2011-05-31 Filed 2011-07-15
10-K 2011-02-28 Filed 2011-05-27
10-Q 2010-11-30 Filed 2011-01-14
10-Q 2010-08-31 Filed 2010-10-15
10-Q 2010-05-31 Filed 2010-07-19
10-K 2010-02-28 Filed 2010-05-28
10-Q 2009-11-30 Filed 2010-01-14

VIDE 10K Annual Report

Part I
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Submission of Matters To A Vote of Security Holders.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Note 1. Summary of Significant Accounting Policies
Note 2. Inventories
Note 3. Long - Term Debt
Note 4. Notes Receivable and Payable To Officers and Directors (Related Party Transactions)
Note 5. Accrued Expenses and Warranty Obligations
Note 6. Stock Options
Note 7. Income Taxes
Note 8. Benefit Plan
Note 9. Commitments and Contingencies
Note 10. Concentrations of Risk and Major Customers
Note 11. Supplemental Cash Flow Information
Note 12. Selected Quarterly Financial Data (Unaudited)
Note 13. - Acquisition of Jaco Displays
Note 14. - Subsequent Events
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A(T). Controls and Procedures.
Item 9B. Other Information.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accounting Fees and Services.
Part IV
Item 15. Exhibits, Financial Statement Schedules.
EX-21 d858720dex21.htm
EX-23.1 d858720dex231.htm
EX-31.1 d858720dex311.htm
EX-31.2 d858720dex312.htm
EX-32.1 d858720dex321.htm

Video Display Earnings 2020-02-29

Balance SheetIncome StatementCash Flow
554433221102012201420172020
Assets, Equity
1511730-32012201420172020
Rev, G Profit, Net Income
1593-3-9-152012201420172020
Ops, Inv, Fin

10-K 1 d858720d10k.htm 10-K 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-K

 

 

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 29, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-13394

 

 

VIDEO DISPLAY CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Georgia   58-1217564

(State of

Incorporation)

 

(IRS Employer

Identification No.)

1868 Tucker Industrial Road, Tucker Georgia   30084
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: (770) 938-2080

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock, no par value   VIDE   OTCMKTS

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ☐    NO  ☒

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ☐    NO  ☒

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

 

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    YES  ☐    NO  ☒

As of August 31, 2019, the aggregate market value of the voting and non-voting common equity held by non-affiliates based upon the closing sales price for the Registrant’s common stock as reported in the Over the Counter Markets “OTCMKTS” was $530,132.

The number of shares outstanding of the registrant’s Common Stock as of May 1, 2020 was 5,878,290.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be delivered to stockholders in connection with our 2020 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. In addition, certain exhibits previously filed with the registrant’s prior Forms 10-K, Forms 8-K, Form S-18 and Schedule 14A are incorporated by reference in Part IV of this Form 10-K.

 

 

 


Table of Contents

VIDEO DISPLAY CORPORATION

TABLE OF CONTENTS

 

ITEM

NUMBER

        PAGE
NUMBER
 
   PART I   

Item 1.

  

Business.

     2  

Item 1A.

  

Risk Factors.

     5  

Item 1B.

  

Unresolved Staff Comments.

     9  

Item 2.

  

Properties.

     9  

Item 3.

  

Legal Proceedings.

     9  

Item 4.

  

Submission of Matters to a Vote of Security Holders.

     9  
   PART II   

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

     10  

Item 6.

  

Selected Financial Data.

     10  

Item 7.

  

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

     11  

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk.

     16  

Item 8.

  

Financial Statements and Supplementary Data.

     17  

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

     39  

Item 9A(T).

  

Controls and Procedures.

     39  

Item 9B.

  

Other Information.

     40  
   PART III   

Item 10.

  

Directors, Executive Officers and Corporate Governance.

     41  

Item 11.

  

Executive Compensation.

     41  

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

     41  

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence.

     41  

Item 14.

  

Principal Accounting Fees and Services.

     41  
   PART IV   

Item 15.

  

Exhibits, Financial Statement Schedules.

     42  
  

Signatures

  


Table of Contents

PART I

Item 1. Business.

General

Video Display Corporation and subsidiaries (the “Company”, ”us” or “we”) is a provider and manufacturer of video products, components, and systems for visual display and presentation of electronic information media in a variety of requirements and environments. The Company designs, engineers, manufactures, markets, distributes and installs technologically advanced display products and systems, from basic components to turnkey systems, for government, military, aerospace, medical, industrial, and commercial organizations. The Company markets its products worldwide primarily from facilities located in the United States. Please read the comments under the caption “Forward looking statements and risk factors” in Item 1A Risk Factors of this Annual Report on Form 10-K.

Description of Principal Business

The Company generates revenues from the manufacturing and distribution of displays and display components. The Company operates primarily in four divisions: simulation, training and display products, cyber secure products and services, Data display CRTs, and other computer products.

Consolidated Net Sales by division for fiscal 2020 are comprised of the following:

Simulation, Training and Display Products (46%)

Cyber Secure Products (19%)

Data Display CRTs (24%)

Other Computer Products (11%)

A more detailed discussion of sales by category of product is included under the section entitled “Principal Products by Division.”

The Company’s manufacturing and distribution facilities are located in Kentucky and Florida.

The Company continues to explore opportunities to expand its product offerings in the display industry. The Company anticipates that this expansion will be achieved by adding new products or by acquiring existing companies that would enhance the Company’s position in the display industry. Management continually evaluates product trends externally in the industry and internally in the divisions in which the Company operates.

Segment Information

We operate and manage our business as one segment. The four divisions have similarities such as the types of products and markets served. Therefore, we believe they meet the criteria for aggregation under the applicable authoritative guidance and, as such, are reported as one segment within the Consolidated Financial Statements.

Principal Products by Division

Simulation, Training and Display Products

The Company’s simulation, training and display products operations are conducted in Cocoa, Florida’s AYON Cyber Security Inc. (dba VDC). VDC product lines include:

 

   

Dome Aircraft Simulator Display Systems

 

   

Multi-Faceted Aircraft Simulator Display Systems

 

   

Video Walls for Broadcast and Control Centers

 

   

Rugged Video Walls for Combat Information Center (CIC)

 

   

Rugged Flat Panel Displays and Computers

 

   

TEMPEST Products

 

   

TEMPEST Services

 

   

Projector and Monitor Upgrades

 

   

Projection Screens

 

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These product lines are used by the military branches such as the Navy and Air Force and various government agencies such as the Department of Defense and the Department of Energy. VDC also supplies direct view video walls into both the Command and Control and Broadcast markets

This portion of the Company’s operations, which contributed approximately 46% of fiscal 2020 consolidated net sales, involves the design, engineering, and manufacture of digital projector display units. The Company customizes these units for specific applications, including ruggedization for military uses or size reduction due to space limitations in industrial and medical applications. Because of the Company’s flexible and cost efficient manufacturing, it is able to handle low volume orders that generate higher margins.

This portion of the Company’s operations targets niche markets where competition from major multinational electronics companies tends to be lower. The prime customers for these products include defense, security, training, and simulation areas of the United States of America (U.S.) and foreign militaries as well as the major defense contractors such as the Boeing Company, L-3 Communications Corporation, Lockheed Martin Corporation, and others. Flight simulator displays are produced to provide a full range of flight training simulations for military and commercial applications.

Cyber Secure Products

The Company acquired the AYON Cyber Security (“ACS”) division in March 2012. ACS was formerly known as Hetra Products and most recently as StingRay56 before becoming part of Video Display Corporation. ACS specializes in advanced TEMPEST technology, also known as Emanation Security (EMSEC), products and custom engineering solutions to include extreme environmental performance and survivability technologies (MIL-STD-810 and DO-160) in support of military forces, intelligence agencies, prime contractors and niche commercial sectors worldwide. ACS has a long history of specializing in TEMPEST technology.    In addition to its TEMPEST products and services, the business also provides various contract services to government agencies and prime contractors. Services performed include design and testing solutions for defense and niche commercial uses worldwide. ACS has office in the U.S., a representative in Canada, a Reseller Relationship/Partner in Europe and technology partners around the globe. This division represented approximately 19% of fiscal 2020 consolidated net sales.

CRTs and Phosphor Products

Since its organization in 1975, the Company has been engaged in the distribution and original equipment manufacturers (OEMs) of Cathode ray tubes (CRTs) using new and recycled CRT glass bulbs, primarily in the replacement market, for use in data display screens, including computer terminal monitors, medical monitor equipment and various other data display applications and in television sets.

The Company’s CRT manufacturing operation of new and recycled CRTs is conducted at a facility located in Lexington, Kentucky (Lexel). The Company offers CRTs from other manufacturers at this facility as well. This division represented approximately 24% of fiscal 2020 consolidated net sales.

The Company maintains the capability of manufacturing and remanufacturing monochrome CRTs for Flight Simulators and Medical Monitors. In addition, our Lexel operation manufactures highly specialized CRTs called a Direct-View Storage Tubes (DVSTs) for military radar applications. All CRTs manufactured by the Company pass rigorous testing and quality requirements. The Medical Monitors are tested in accordance with standards from Underwriters Laboratories. Major customers for our CRT products include GE Healthcare, Leonardo DRS, Richardson Electronics, Flight Safety and many more.

The Company also distributes new CRTs and other electronic tubes purchased from OEMs. The Company sells CRTs into the replacement market which sometimes takes five to seven years to develop; these purchased inventories sometimes do not sell as quickly as other inventories. Bulk CRT purchases have declined over the past few years as the Company is managing current inventory levels against the anticipated reduction in future CRT demand due to the growth of flat panel technology.

The Company’s Lexel operation also provides a wide variety of products for the scientific community in the way of phosphor coated substrates. This is an area of potential growth for the Company as advances in the scientific community are made and the demand for phosphor coated substrates increase worldwide. These products are used in many applications including CCD imaging, RHEED/LEED view ports, Digital X-Ray Imaging, Electron Microscopy, Alpha detectors for Neutron generators, and Spectrometry to name a few. Some of our major customers for these products include Bruker, Photonis, and all the US National Laboratories.

 

3


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Other Computer Products

The Company acquired a small keyboard company on October 23, 2017. The Company long term plans are to use this as a platform to manufacture cyber-secure keyboards as part of the cyber security division. This division was 11% of the 2020 consolidated net sales.

Patents and Trademarks

The Company holds patents with respect to certain products and services. The Company also sells products under various trademarks and trade names. The Company believes that success in its industry primarily will be dependent upon incorporating emerging technology into new product line introductions, frequent product enhancements, and customer support and service.

Seasonal Variations in Business

Historically, there has not been seasonal variability in the Company’s business.

Working Capital Practices

Management has implemented a plan to improve the liquidity of the Company. The Company has been implementing a plan to increase revenues at all the divisions, each structured to the particular division. The fiscal year ended February 29, 2020 was a transition year for the Company. Many of the legacy programs the Company serviced were heading into new phases or the next generation of the product line. This caused delays in the normal flow of the orders for these programs. The Company is working with these customers and expects these programs to be placing orders to be fulfilled in the Company’s new fiscal year. The Company has expanded its cyber security business by adding a second testing chamber for testing tempest products allowing it to increase the business in cyber testing services to supplement the product side of the business. The Company is also now involved in ruggedized displays, recently bringing on engineering familiar with these products and acquiring a small specialized display company in January 2020. With the acquisition of the display company, the Company is in the process of completing the transfer of the remaining CRT operations to its Lexel Imaging facility in Lexington, KY in order to make room for the new business in its Cocoa facility. This will also reduce expenses in the CRT operation by having that business all under one roof. The Company also moved the corporate accounting functions to the Cocoa, Florida location which allows the Company to become more efficient and save money on reducing redundant operations. The plant move at its subsidiary in Lexington, Kentucky, took longer than anticipated and negatively affected cash flow. This subsidiary saw a turn -around in the fiscal year, being the only division to have a profitable year. The plant move at the Florida operations was successful as the Company merged two businesses and was able to keep production on schedule. Management continues to explore options to monetize certain long-term assets of the business, including the possible sale of a building in Pennsylvania. If additional and more permanent capital is required to fund the operations of the Company, no assurance can be given that the Company will be able to obtain the capital on terms favorable to the Company, if at all.

The Company is currently operating using cash from operations and investing activities. The Company has a $1.3 million working capital balance at February 29, 2020, including $0.8 million in liquid assets.

Concentration of Customers

The Company sells to a variety of domestic and international customers on an open-unsecured account basis. These customers principally operate in the medical, military, industrial and avionics industries. The Company had direct and indirect net sales to the U.S. government, primarily the Department of Defense for training and simulation programs that comprised approximately 52% and 53% of consolidated net sales for fiscal 2020 and 2019, respectively. Sales to foreign customers were approximately 11% of consolidated net sales for fiscal 2020 and 2019. The Company had two customers, One Diversified and E-Tel with 12% of the Company’s consolidated net sales in fiscal 2020. The Company attempts to minimize credit risk by reviewing customers’ credit history before extending credit, and by monitoring customers’ credit exposure on a daily basis. The Company establishes an allowance for doubtful accounts receivable based upon factors surrounding the credit risk of specific customers, historical trends and other information.

 

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Table of Contents

Backlog

The Company’s backlog is comprised of undelivered, firm customer orders, which are scheduled to ship within eighteen months. The Company’s backlog was approximately $ 6.9 million at February 29, 2020 and $5.5 million at February 28, 2019. It is anticipated that more than 90% of the February 29, 2020 backlog will ship during fiscal 2021.

Environmental Matters

The Company’s operations are subject to federal, state, and local laws and regulations relating to the generation, storage, handling, emission, transportation, and discharge of materials into the environment. The costs of complying with environmental protection laws and regulations have not had a material adverse impact on the Company’s consolidated financial condition, results of operations, or cash flow in the past and are not expected to have a material adverse impact in the foreseeable future.

Research and Development

The objectives of the Company’s research and development activities are to increase efficiency and quality in its manufacturing and assembly operations and to enhance its existing product line by developing alternative product applications to existing display systems and electron optic technology.

Employees

As of February 29, 2020, the Company employed 84 persons on a full-time basis. Of these, 19 were employed in executive, administrative, and clerical positions, 5 were employed in sales and distribution, 20 in engineering, and 40 were employed in manufacturing operations. The Company believes its employee relations to be satisfactory. No employees are under collective bargaining agreements.

Competition

The Company believes that it has a competitive advantage in the display industry due to its ability to engineer custom display solutions for a variety of industrial, military and commercial applications, its ability to provide internally produced component parts, and its manufacturing flexibility. As a result, the Company can offer more customization in the design and engineering of new products. With the operations of VDC Display Systems, Jaco Display Solutions and AYON Cyber Security, the Company believes it has become one of the leading suppliers within each of these specialty display markets.

The Company now operates in several markets in the areas of custom electronic solutions. The Company has reentered the ruggedized display business and is actively looking to grow this business. The Company’s VDC Display Systems division specializes in projector design and video solutions, and the Company’s AYON Cyber Security division specializes in making electronic devices cyber secure. The Company specializes in the design and installation of video walls focusing on configurable visual solutions for command and control and other large format visuals in the energy, utility, transportation, industrial and security markets.

The Company is a wholesale distributor and manufacturer of OEM CRTs. The Company believes it is the only company that offers complete service in replacement markets with its manufacturing and recycling capabilities. The Company’s ability to compete effectively in this market is dependent upon its continued ability to respond promptly to customer orders and to offer competitive pricing.

Item 1A. Risk Factors.

Forward looking statements and risk factors

All statements other than statements of historical facts included in this report, including, without limitation, those statements contained in Item 1, are statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934. The words “expect”, “estimate”, “anticipate”, “predict”, “believe” and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) trends affecting the Company’s consolidated financial condition, results of

 

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operations or cash flows; (ii) the Company’s financing plans; (iii) the Company’s business and growth strategies, including potential acquisitions; and (iv) other plans and objectives for future operations. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and actual results may differ materially from those predicted in the forward-looking statements or which may be anticipated from historical results or trends.

Our Company operates in technology-based markets that involve a number of risks, some of which are beyond our control. The following discussion highlights some risks and uncertainties that investors should consider, in conjunction with all other information in this Annual Report on Form 10-K. Additional risks and uncertainties not presently known to the Company may impair the Company’s business and operations. If any of the following risks actually occur, the Company’s business, consolidated financial condition, cash flows, or results of operations could be materially affected.

History of losses and declining liquidity

Declining liquidity and lack of credit availability could have important consequences, including:

 

   

generating insufficient cash flows from operating activities to meet our payment obligations;

 

   

increasing our vulnerability to general economic and industry conditions;

 

   

requiring a substantial portion of cash flow for operating activities and as a result reducing our ability to use our cash flow to fund capital expenditures, capitalize on future business opportunities and expand our business and execute our strategy;

 

   

causing us to make non-strategic divestitures;

 

   

limiting our ability to adjust to changing market conditions and to react to competitive pressure and placing us at a competitive disadvantage compared to our competitors who may have access to a line of credit.

Changes in government priorities may affect military spending, and our consolidated financial condition and results of operations or cash flows could suffer if their purchases decline.

We currently derive a portion of our net sales (52% in fiscal 2020) from direct and indirect sales to the U.S. government. If we are unable to replace expiring contracts, which are typically less than twelve months in duration, with contracts for new business, our sales could decline, which would have a material adverse effect on our business, consolidated financial condition, results of operations, or cash flows. We expect that direct and indirect sales to the U.S. government will continue to account for a substantial portion of our sales in the foreseeable future. We have no assurance that these government-related sales will continue to reach or exceed historical levels in future periods.

Our inability to secure financing could negatively affect the future of our business.

 

   

Our inability to secure financing with our current bank or others, if necessary, could expose us to the risk of losing business; and

 

   

Our inability to secure financing with a commercial bank could expose us to the risk of increased interest rates.

Our industry is highly competitive and competitive conditions may adversely affect our business.

Our success depends on our ability to compete in markets that are highly competitive, with rapid technological advances and products that require constant improvement in both price and performance. In most of our markets, we are experiencing increased competition, and we expect this trend to continue. This environment may result in changes in relationships with customers or vendors, the ability to develop new relationships, or the business failure of customers or vendors, which may negatively affect our business. If our competitors are more successful than we are in developing new technology and products, our business may be adversely affected.

Competitive pressures may increase or change through industry consolidation, entry of new competitors, marketing changes or otherwise. There can be no assurance that the Company will be able to continue to compete effectively with existing or potential competitors.

 

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Competitors or third-parties may infringe on our intellectual property.

The Company holds patents with respect to certain products and services. The Company also sells products under various trademarks and trade names. Should competitors or third-parties infringe on these rights, costly legal processes may be required to defend our intellectual property rights, which could adversely affect our business.

Migration to flat panel and other technology may negatively affect our CRT business.

The Company acquires CRT inventory when the replacement market appears to demonstrate adequate future demand and the purchase price allows a reasonable profit for the risk. Due to the extended time frame for the replacement market to develop (five to seven years), these purchased inventories may not sell as quickly as other inventories. If the Company is unable to manage CRT inventory levels in coordination with reduced future CRT demand due to the growth of flat panel technology, the marketability of inventory on hand may be affected and the Company may incur significant costs in the disposal of excess inventory.

The Company anticipates that flat panel and other technology products, due to their lower space and power requirements, has become the display of choice in many display applications. Given this shift, the Company has focused its efforts and its acquisition strategy toward flat panel technologies. If the Company is unable to replace any future declines in CRT sales with products based on other technologies, our business may be adversely affected.

Future acquisitions may not provide benefits to the Company.

The Company’s growth strategy includes expansion through acquisitions that enhance the profitability and shareholder value of the Company. The Company continues to seek new products through acquisitions and internal development that complement existing profitable product lines. There can be no assurance that the Company will be able to complete further acquisitions or that past or future acquisitions will not have a material adverse impact on the Company’s consolidated operations.

If we are unable to retain certain key personnel and hire new, highly-skilled personnel, we may not be able to execute our business plan.

Our future success depends on the skills, experience, and efforts of our senior managers. The loss of services of any of these individuals, or our inability to attract and retain qualified individuals for key management positions, could negatively affect our business.

Our business operations could be disrupted if our information technology systems fail to perform adequately.

We depend upon our information technology systems in the conduct of our operations and financial reporting. If our major information systems fail to perform as anticipated, we could experience difficulties in maintaining normal business operations. Such systems-related problems could adversely affect product development, sales, and profitability.

Our business operations could be adversely impacted by the effects of the novel Coronavirus (COVID-19) or any other related adverse public health developments.

The risk of the Coronavirus to our employees, customers and supply chain could negatively impact our ability to conduct our business due to threat of illness, quarantines, restrictions of movement and closures of key customers and suppliers.

We may not be entitled to forgiveness of our recently received PPP Loan, and our application for the PPP Loan could in the future be determined to have been impermissible or could result in damage to our reputation.

In April 2020, we received proceeds of approximately $1.0 million from a loan under the Paycheck Protection Program of the CARES Act, a portion of which may be forgiven, which we intend to use to retain employees, maintain payroll and make lease and utility payments. A portion of the PPP Loan may be forgiven by the SBA upon our application beginning 60 days but not later than 120 days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the eight week period beginning on the date of loan approval. Not more than 25% of the forgiven amount may be for non-

 

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payroll costs. The amount of the PPP Loan eligible to be forgiven is reduced if our full-time headcount declines or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, and we cannot provide any assurance that we will be eligible for loan forgiveness or that any amount of the PPP Loan will ultimately be forgiven by the SBA.

In order to apply for the PPP Loan, we were required to certify, among other things, that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria for the PPP Loan, and that our receipt of the PPP Loan is consistent with the broad objectives of the Paycheck Protection Program of the CARES Act. The certification described above does not contain any objective criteria and is subject to interpretation. However, on April 23, 2020, the SBA issued guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the Paycheck Protection Program has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good-faith belief that we satisfied all eligible requirements for the PPP Loan, we are later determined to have violated any of the laws or governmental regulations that apply to us in connection with the PPP Loan, such as the False Claims Act, or it is otherwise determined that we were ineligible to receive the PPP Loan, we may be subject to penalties, including significant civil, criminal and administrative penalties, and could be required to repay the PPP Loan in its entirety. In addition, our receipt of the PPP Loan may result in adverse publicity and damage to our reputation, and a review or audit by the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources.

Changes to accounting rules or regulations may adversely affect our results of operations.

New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. Future changes to accounting rules or regulations or the questioning of current accounting practices may adversely affect our consolidated financial condition or results of operations.

The Company’s stock price may be negatively affected by a variety of factors.

In addition to any impact the Company’s operating performance, potential future Company sales or repurchases of common stock, the Company’s dividend policies or possible anti-takeover measures available to the Company may have, changes in securities markets caused by general foreign or domestic economic, consumer or business trends, the impact of interest rate policies by the federal reserve board, and other factors outside the Company’s control may negatively affect our stock price.

Our stock may be traded infrequently and in low volumes, so you may be unable to sell your shares at or near the quoted bid price if you need to sell your shares.

Our stock is quoted on the OTC Markets and the shares of our common stock may trade infrequently and in low volumes, meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent. An investor may find it difficult to obtain accurate quotations as to the market value of our common stock or to sell his or her shares at or near bid prices, if at all.

Changes to estimates, or operating results that are lower than our current estimates, may cause us to incur impairment charges.

If the Company determines it is more likely than not that the fair value of a reporting unit is less than the carrying value, then it applies the processes prescribed in FASB ASC Topic 360 “Property, Plant, and Equipment.” We make certain estimates and projections in connection with our impairment analyses for other long-term assets. If these estimates or projections change or prove incorrect, we may be required to record impairment charges. If these impairment charges were significant, our consolidated financial position or results of operations would be adversely affected.

International factors could negatively affect our business.

A significant portion of our consolidated net sales (11% in fiscal 2020) is made to foreign customers. We also receive a significant amount of our raw materials from foreign vendors. We are subject to the risks inherent in conducting our business across national boundaries, many of which are outside of our control. These risks include the following:

 

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Economic downturns;

 

   

Currency exchange rate and interest rate fluctuations;

 

   

Changes in governmental policy or laws including, among others, those relating to taxation;

 

   

International military, political, diplomatic and terrorist incidents;

 

   

Government instability;

 

   

Nationalization of foreign assets;

 

   

Natural disasters; and

 

   

Tariffs and governmental trade policies.

We cannot ensure that one or more of these factors will not negatively affect our international customers and, as a result, our business and consolidated financial performance.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

The Company leases its corporate headquarters at 1868 Tucker Industrial Road in Tucker, Georgia (within the Atlanta metropolitan area). Its headquarters occupy approximately 10,000 square feet of the total 59,000 square feet at this location. The Company entered into an agreement to sublease approximately 45,000 square feet of the Tucker, Georgia facility beginning January, 2019. Two locations, Cocoa, Florida and Lexington, Kentucky are leased from a related party at current market rates. See Part III, Item 13 Certain Relationships and Related Transactions in this Annual Report on Form 10-K. Management believes the facilities to be adequate for its needs.

The following table details manufacturing, warehouse, and administrative facilities:

 

Location

   Square Feet    Lease Expires

Tucker, Georgia

   59,000    March 31, 2022

Birdsboro, Pennsylvania

   40,000    Company Owned

Lexington, Kentucky

   40,000    June 30, 2022

Cocoa, Florida

   34,500    February 19, 2025

Item 3. Legal Proceedings.

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

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

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Annual Report.

 

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Video Display Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands)

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

The Company’s common stock is traded on the Over the Counter Market (OTCMKTS) under the symbol VIDE. The Company had previously traded on National Association of Securities Dealers Automated Quotation System (“NASDAQ”) national market system under the symbol VIDE until April 30, 2015.

The following table shows the range of prices for the Company’s common stock as reported by NASDAQ and the OTCMKTS for each quarterly period beginning on March 1, 2018. The prices reflect inter-dealer prices, without mark-up, mark-down, or commission, and may not necessarily represent actual transactions.    

 

     For Fiscal Years Ended  
     February 29, 2020      February 28, 2019  

Quarter Ended

   High      Low      High      Low  

May

     1.50        1.00        1.03        .69  

August

     1.50        1.00        1.15        .93  

November

     1.50        1.01        1.07        .94  

February

     1.15        .90        1.00        .83  

There were approximately 120 holders of record of the Company’s common stock as of May 15, 2020.

Payment of cash dividends in the future will be dependent upon the consolidated earnings and financial condition of the Company and other factors that the Board of Directors may deem appropriate.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of February 29, 2020 regarding compensation plans (including individual compensation arrangements) under which common stock of the Company is authorized for issuance.

 

Stock Option Plan

   Number of
securities to be
issued upon exercise
of outstanding
options, warrants
and rights
     Weighted-average
exercise price of
outstanding options,
warrants and rights
     Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
first column)
 

Equity compensation plans approved by security holders

     200,000      $ 0.82        614,000  

Issuer Purchases of Equity Securities

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. During the fiscal year ended February 29, 2020, the Company did not repurchase any shares of the Company’s stock. Under this program, an additional 490,186 shares remain authorized to be repurchased by the Company at February 29, 2020. During the fiscal year ended February 28, 2019, the Company purchased 8,858 shares of Video Display Corporation stock.

Item 6. Selected Financial Data

N/A

 

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Item 7. 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 organized into the following four interrelated divisions that have similar products and markets served and therefore are aggregated into one reportable segment:

 

   

Simulation and Training Products – offers a wide range of projection display systems for use in training, simulation, military, medical, industrial applications, video walls and command and control centers including ruggedized displays.

 

   

Cyber Secure Products – provides 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.

 

   

Other Computer Products – offers keyboard products with a plan to manufacture and offer cyber-secure keyboards as part of the cyber secure products division.

During fiscal 2020, management of the Company focused key resources on strategic efforts to support the efforts of operations to increase market share. The Company also seeks to look for acquisition opportunities that enhance the profitability and shareholder value of the Company. The Company continues to seek new products through acquisitions and internal development that complement existing profitable product lines. Challenges facing the Company during these efforts include:

Inventory management – The Company monitors its inventory for obsolescence due to the rapid changes in display technology. The Company increased the inventory reserves $0.1 million in the fiscal year ending February 29, 2020 and disposed of $0.1 million in various raw material parts and demo equipment at its VDC Display division and AYON Cyber Security divisions.

The Company’s remaining business units utilize different inventory components than the divisions had in the past. The Company provides for an obsolescence 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, 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 February 29, 2020 to be adequate.

Operations

The following table sets forth, for the fiscal years indicated, the percentages that selected items in the Company’s consolidated statements of operations bear to total revenues (amounts in thousands):

(See Item 1. Business – Description of Principal Business and Principal Products for discussion about the Company’s Products and Divisions.)

 

     2020     2019  
     Amount      %     Amount      %  

Net Sales

          

Simulation and Training

     4,921        46.4     5,406        36.0

Data Display CRTs

     2,541        24.0       2,533        16.9  

Broadcast and Control Centers

     —          —         189        1.3  

Cyber Secure Products

     1,990        18.8       5,460        36.3  

Other Computer Products

     1,145        10.8       1,435        9.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total net sales

     10,597        100.0       15,023        100.0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Costs and expenses

          

Cost of goods sold

     8,220        77.6     10,983        73.1

Selling and delivery

     623        5.9       844        5.6  

General and administrative

     3,637        34.3       3,645        24.3  
  

 

 

    

 

 

   

 

 

    

 

 

 
     12,480        117.8       15,472        103.0  

Loss from operations

     (1,883      (17.8     (449      (3.0

Interest expense, net

     (8      (0.1     (19      (0.1

Investment gain

     12        0.1       42        0.2  

Other income, net

     673        6.4       493        3.4  
  

 

 

    

 

 

   

 

 

    

 

 

 

(Loss) income before income taxes

     (1,206      (11.4     67        0.5  

Income tax expense

     —          —         —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Net (loss) income

     (1,206      (11.4     67        0.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Fiscal 2020 Compared to Fiscal 2019

Net Sales

Consolidated net sales decreased 29.5% for year ended February 29, 2020 compared to the year ended February 28, 2019 and decreased 9.0% for the three months ended February 29, 2020 compared to the comparable three months last year. The Company’s AYON Cyber Security (ACS) division is down 63.5% for the year ending February 29, 2020 compared to fiscal year ended February 28, 2019 and decreased 58.0% for the three months ended February 29, 2020 compared to the same three months last year. Their business was down significantly with their two top customers from the prior year. E-Tel remained their top customer, but the business with them was down 56%. ACS’ orders with the State Department decreased by nearly 90%. This is partially due to not being able to ship a $0.9 million order due to delays. Their backlog was $1.5 million at February 29, 2020. ACS did 19% of the Company’s business. The Display Systems division was down by 9.0% for the year ended February 29, 2020 compared to last year, but was up 60.4% for the quarter ended February 29, 2020 compared to the same three months last year. The division had one large sale for a video wall of $1.3 million in the Company’s first quarter and ended the year with a strong quarter due to large sales of Multi Mission Display products to two customers. The division ended the year with a $4.5 million backlog aided by the acquisition of Jaco Displays on January 21, 2020, a small display company out of Tampa, Florida. The Data Display division sales were flat for the year ended February 29, 2020 due to decreases throughout their customer base, but augmented by sales of a specialty product, a direct view storage tube (DVST) to two customers. The Lexel division will be dependent on continued sales of the DVST products and steady sales of its cathode ray tube products (CRTs).    Lexel had a decrease of 17.2% for three months ended February 29, 2020 compared to the three months ended February 28, 2019 primarily due to a strong fourth quarter last year. The Company’s keyboard division, posted sales of $1.1 million and $0.3 million for the year and three months ended February 29, 2020 compared to $1.4 million and $0.4 million for the comparable periods last year, respectively. 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 decreased to 22.4% for fiscal 2020 from 26.9% for fiscal 2019. Overall gross margin dollars decreased by $1.7 million versus the prior fiscal year due to lower revenues.

The two Florida divisions both had down years in revenues, but the move to one facility enabled the display division to increase its margins due to the sharing of the fixed costs. The cyber division’s revenues were down too much to have an impact on gross margins. The display division showed an increase in both their gross margin percentage to sales and in actual gross margin dollars. ACS gross margin percentage was 33.5% compared to 46.7% and the gross margin dollars were $666 thousand compared to $2,551 thousand for the year ended February 29, 2020 compared to the year ended February 28, 2019. For the three months ended February 29, 2020 compared to the same period last year, ACS gross margin percentage was 47.0% compared to 41.7% and gross margin dollars were $229 thousand compared to $483 thousand. VDC Display Systems (VDCDS) gross margin percentage was 20.8% compared to 9.7% in the prior year and the gross margin dollars were $1,022 thousand compared to $522 thousand for the year ended February 29, 2020 compared to the year ended February 28, 2019. For the three months ended February 29, 2020 compared to the same period last year, VDCDS gross margin percentage was 33.4% compared to 3.91%. Gross margin dollars were $515 thousand compared to $38 thousand. The keyboard division, Unicomp, had $430 thousand of gross margin dollars or 37.6% to sales for the year ended February 29, 2020 and $558 thousand of gross margin dollars or 38.9% for the year ended February 28, 2019. For the quarter ended February 29, 2020, Unicomp had $143 thousand of gross profit or 45.1% compared to $91 thousand or 24.8%.

The Data Display division for Lexel had $259 thousand in gross margin dollars for the year ended February 29, 2020 compared to $352 thousand for the year ended February 28, 2019. The Data Display division for Lexel had $302 thousand in gross margin dollars for the three months ended February 29, 2020 compared to $457 thousand for the three months ended February 28, 2019. The Company is completing more consolidation of the operations and beginning April 1, 2020 all CRT shipments and products will be produced and shipped from the Lexel Imaging facility. Gross margins are expected to improve in fiscal 2021 due to these changes.

Operating Expenses

Operating expenses as a percentage of sales increased to 40.2% for fiscal 2020 from 29.9% in fiscal 2019 primarily reflecting a 29.5% decrease in sales with actual expenses decreasing 5.1% from $4.5 million in fiscal 2019 and $4.3 million in fiscal 2020.

The Company is working to reduce costs in all areas of the business to bring its cost structure in line with the current size of the business. The Company has made strategic cuts at the corporate level and has merged its two Florida locations, VDC Display Systems and AYON Cyber Security, which is saving considerable operating expenses. The Company is expanding its product offerings and in doing so, is adding costs strategically to support those businesses. The Florida operations are completely in the Cocoa location. The remaining business units are also making changes to maximize profitability.

 

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Interest Expense

Interest expense was $8 thousand for fiscal 2020 and $19 thousand for fiscal 2019 related to the Company’s obligations. The marginal decrease in interest expense results from a lower average in debt obligations outstanding.

Other Income, net

In fiscal 2020, the Company earned $0.7 million in other income, primarily due to $0.2 million in royalty income, $0.4 million in rental income and $0.1 million in investment income and scrap. In fiscal 2019, the Company earned $0.5 million in other income, primarily due to rental income of $191 thousand, $130 thousand in royalty income, scrap sales of $108 thousand and $33 thousand in gain on sale of assets.

Income Taxes

The Company had net loss before taxes of approximately $1.2 million in which a full valuation allowance is provided due to historical losses resulting in an effective tax rate of 0%. In fiscal 2019, the Company had a profit before taxes of $0.1 million with no income tax expense recorded due to the historical loss position of the Company.

Liquidity and Capital Resources

The accompanying 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 four of the last five years and has reported a decrease in its working capital during this current year. The historical losses resulted from a combination of low revenues at all divisions without a commensurate reduction of expenses. The Company has seen a rise in the backlog for customer orders and increased activity within the markets it serves. In the fourth quarter, the Company acquired a small display company to increase its presence in the ruggedized display market. The Company’s working capital and liquid asset position is presented as follows:

 

     February 29,
2020
     February 28,
2019
 

Working capital

   $ 1,263      $ 3,354  

Liquid assets

   $ 844      $ 410  

Management has implemented a plan to improve the liquidity of the Company. The Company has been implementing a plan to increase revenues at all the divisions, each structured to the particular division. The fiscal year ended February 29, 2020 was a transition year for the Company. Many of the legacy programs the Company serviced were heading into new phases or the next generation of the product line. This caused delays in the normal flow of the orders for these programs. The Company is working with these customers and expects these programs to be placing orders to be fulfilled in the Company’s new fiscal year. The Company has expanded its cyber security business by adding a second testing chamber for testing tempest products allowing it to increase the business in cyber testing services to supplement the product side of the business. The Company is also now involved in ruggedized displays, recently bringing on engineering familiar with these products and acquiring a small specialized display company in January 2020. With the acquisition of the display company, the Company is in the process of completing the transfer of the remaining CRT operations to its Lexel Imaging facility in Lexington, KY in order to make room for the new business in its Cocoa facility. This will also reduce expenses in the CRT operation by having that business all under one roof. The Company also moved the corporate accounting functions to the Cocoa, Florida location which allows the Company to become more efficient and save money on reducing redundant operations. The plant move at its subsidiary in Lexington, Kentucky, took longer than anticipated and negatively affected cash flow. This subsidiary saw a turn -around in the fiscal year, being the only division to have a profitable year. The plant move at the Florida operations was successful as the Company merged two businesses and was able to keep production on schedule. Management continues to explore options to monetize certain long-term assets of the business, including the possible sale of a building in Pennsylvania. If additional and more permanent capital is required to fund the operations of the Company, no assurance can be given that the Company will be able to obtain the capital on terms favorable to the Company, if at all.

The ability of the Company to continue as a going concern is dependent upon the success of management’s plans to improve the operational effectiveness of the operations, to sell strategic assets as 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.

 

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Cash provided by operations was $0.5 million in fiscal 2020 and $0.2 million in fiscal 2019. During fiscal 2020, the net loss from operations was $1.2 million and adjustments to reconcile net loss to net cash were $0.2 million with $0.1 million in inventory reserves, and by $0.2 million in depreciation. Working capital related accounts generated $1.5 million in cash with customer deposits adding $1.2 million, accounts receivables adding $0.7 million, and accounts payable and accrued liabilities adding $0.4 million, offset by an increase in inventories of $0.9 million.

During fiscal 2019, the net income from operations was $0.2 million and adjustments to reconcile net income to net cash were $0.5 million to reduce inventory reserves, by $0.1 in investment gains offset by $0.3 million in depreciation. Changes in working capital generated $0.4 million, primarily due to a decrease in inventories of $1.7 million, an increase in customer deposits of $0.6 million, offset by an increase in accounts receivable of $1.1 million, an increase in prepaid expenses of $0.4 million, and an decrease in accounts payable of $0.3 million.

Investing activities used $0.1 million in fiscal 2020 and provided $0.4 million of cash in fiscal 2019. For fiscal 2020, $0.1 million was used to purchase fixed assets. The Company is expected to invest an additional $0.2 million to upgrade the Cocoa, Florida and on equipment to support the business in fiscal 2021.

Investing activities in fiscal 2019 consisted of the sale of $1.3 million in investment securities, the purchase of $1.0 million of investment securities, capital expenditures of $0.2 million and proceeds from the sale of equipment of $0.1 million.

Financing activities provided $0.1 million for the year ended February 29, 2020 resulting primarily from proceeds received on related party notes.

Financing activities used $0.3 million for the year ended February 28, 2019. Proceeds from related party notes and from the line of credit provided cash of $1 million offset by related payments on these obligations approximating $1.2 million along with $0.1 in margin payments.

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, depending on the market price of the shares. There is no minimum number of shares required to be repurchased under the program. During the fiscal year ended February 29, 2020, the Company did not repurchase any of the Company’s stock and during the fiscal year ended February 28, 2019, the Company repurchased 8,858 shares of Company stock at an average price of $1.12 per share. Under this program, an additional 490,186 shares remain authorized to be repurchased by the Company at February 29, 2020.

Transactions with Related Parties, Contractual Obligations, and Commitments

The Company leases one building from the Company’s CEO in Lexington, KY (Honeyhill Properties) and one building owned by Ordway Properties LLC in Cocoa, Florida. The building in Lexington, KY serves as the manufacturing operations for the CRT division. The building in Cocoa, Florida is the new operational site for both VDC Display Systems and AYON Cyber Security. See Note 9.

The Company also borrows money from the Chief Executive Officer on a short term basis when funds are needed. See Note 4. On March 30, 2016 Video Display Corporation entered into an assignment with recourse of their note receivable from Z-Axis, Inc. with Ronald D. Ordway and Jonathan R. Ordway for the sum of $912 thousand. The Company also retains the right to repurchase the note at any time for 80% of the outstanding principle balance. In the event of default by Z-Axis, the Company is obligated to repurchase the note for 80% of the remaining balance plus any accrued interest.

In conjunction with the acquisition of Jaco Displays, LLC, the Company borrowed $505,180 from Ronald D Ordway, CEO to fund the acquisition, and combined the amount borrowed with another $438,832 owed to Mr. Ordway in back rent along with $82,838 from previous borrowings, and signed a promissory note for $1,026,850 at a six percent interest rate due on or before July 24, 2020 with Mr. Ordway.

Contractual Obligations

Future contractual maturities of long-term debt, future contractual obligations due under operating leases, and other obligations at February 29, 2020 are as follows (in thousands):

 

     Payments due by period  
     Total      Less than
1 year
     1 – 3
years
     3 – 5
years
     More than
5 years
 

Notes payable obligations

   $ 1,126      $ 1,126      $ —        $ —        $ —    

Interest obligations on long-term debt (a)

     25        25        —          —          —    

Operating lease obligations

     1,813        590        572        272        379  

Warranty reserve obligations

     51        51        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,015      $ 1,792      $ 572      $ 272      $ 379  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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(a)

This line item was calculated by utilizing the effective rate on note payable obligations outstanding as of February 29, 2020.

In addition, refer to Note 4 as it relates to the note receivable and corresponding related obligations pertaining to Z-Axis which are not included in the chart above.

Critical Accounting Estimates

Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations are based upon the Company’s consolidated financial statements. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and related notes. The accounting policies that may involve a higher degree of judgments, estimates, and complexity include reserves on inventories, contract revenue recognition as well as profitability or loss recognition estimates, and the sufficiency of the valuation reserve relating 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. In fiscal 2020, the Company increased the inventory reserves by less than $0.1 million which was offset by a $0.1 million write off of inventory against the reserve primarily at VDC Display Systems. The Company determined VDC Display Systems is the most vulnerable to inventory obsolescence due to the size and age of its inventory and the changes in its market segment. The Company did not have significant changes in inventory reserves as the inventory management has improved and the number of inventory items has stabilized. The Company cannot guarantee the accuracy of future forecasts since these estimates are subject to change based on market conditions. The reserve for inventory obsolescence was approximately $0.8 million and $0.9 million at February 29, 2020 and February 28, 2019, respectively.

The Company’s remaining business units utilize different inventory components than the divisions had in the past. The Company provides monthly for an obsolescence 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, although it believes the inventory will be sold in the future, will continue to reserve for any additional obsolescence.

Revenue recognition

The Company recognizes revenue upon transfer control of the promised products or services to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products or services. VDC derives revenue primarily from sales of simulation and video wall systems, cyber secure products, data displays, and keyboards. The Company excludes sales and usage-based taxes from revenue.

The Company’s 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). The Company recognizes revenue for these systems over time based on labor hours incurred on each project.

The Company recognizes revenue related to its 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, the Company’s contracts do not include a significant financing component as substantially all invoices have terms of 30 days or less. The Company is applying the practical expedient to exclude from consideration any contracts with payment terms of one year or less and does not offer terms extending beyond one year.

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. The Company has established a valuation allowance of $6.1 million on the Company’s deferred tax assets.

 

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The Company accounts for uncertain tax positions under the provisions of ASC Topic 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 February 29, 2020, the Company did not record any liabilities for uncertain tax positions.

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 can reasonably be estimated. 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.

Off-Balance Sheet Arrangements

The Company does not have during the periods presented, and the Company does not currently have, any off-balance sheet arrangements, as defined under SEC rules.

Recent Accounting Pronouncements

Refer to Note 1, Summary of Significant Accounting Policies” for a discussion of recent accounting pronouncements and their effect on the Company.

Impact of Inflation

Inflation has not had a material effect on the Company’s results of operations to date.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The Company’s primary market risks include changes in technology and government spending. The rapid advances in video and projection technology present a challenge for the Company’s management and engineers to be able to meet the ever-changing demands in the markets in which it operates. The Company did a significant amount of business with the government (52% of revenues) in fiscal 2020. Failure of the government to continue to fund programs in the Company’s markets could have a detrimental effect on the Company.

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors

Video Display Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Video Display Corporation and subsidiaries (the Company) as of February 29, 2020 and February 28, 2019, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended February 29, 2020, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 29, 2020 and February 28, 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended February 29, 2020, in conformity with accounting principles generally accepted in the United States of America.

The Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has historically reported net losses or breakeven results along with reporting low levels of working capital. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 1. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Adoption of ASU No. 2016-02

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in fiscal 2020 due to the adoption of ASU No. 2016-02, Leases (Topic 842).

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Hancock Askew & Co., LLP

We have served as the Company’s auditor since 2017.

Peachtree Corners, Georgia

May 29, 2020

 

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Video Display Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands)

 

     February 29,
2020
    February 28,
2019
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 844     $ 410  

Accounts receivable, less allowance for bad debts of $9 and $16

     1,305       1,746  

Notes receivable due from officers and directors, current (Note 4)

     189       209  

Inventories, net

     4,480       3,451  

Prepaid expenses and other current assets

     411       476  
  

 

 

   

 

 

 

Total current assets

     7,229       6,292  
  

 

 

   

 

 

 

Property, plant and equipment:

    

Land

     154       154  

Buildings

     2,756       2,760  

Construction in progress

     106       73  

Machinery and equipment

     4,861       5,732  
  

 

 

   

 

 

 
     7,877       8,719  

Accumulated depreciation

     (6,607     (7,398
  

 

 

   

 

 

 

Net property, plant and equipment

     1,270       1,321  
  

 

 

   

 

 

 

Notes receivable due from officers and directors, noncurrent (Note 4)

     —         189  

Right of use assets under operating leases

     1,631       —    

Intangible assets, net

     387       —    

Other noncurrent assets

     2       5  
  

 

 

   

 

 

 

Total assets

   $ 10,519     $ 7,807  
  

 

 

   

 

 

 

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

 

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     February 29,
2020
    February 28,
2019
 

Liabilities and Shareholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 1,256     $ 1,008  

Accrued liabilities

     499       382  

Customer deposits

     2,338       1,100  

Current maturities of long-term debt

     —         23  

Current operating lease liabilities

     557       —    

Note payable

     100       100  

Notes payable to officers and directors, current (Note 4)

     1,216       325  
  

 

 

   

 

 

 

Total current liabilities

     5,966       2,938  

Long-term operating lease liabilities

     1,091       —    

Notes payable to officers and directors, less current maturities (Note 4)

     —         189  

Other noncurrent liabilities

     —         19  
  

 

 

   

 

 

 

Total liabilities

     7,057       3,146  
  

 

 

   

 

 

 

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; 5,878 outstanding at February 29, 2020 and February 28, 2019

     7,293       7,293  

Additional paid-in capital

     281       274  

Retained earnings

     12,170       13,376  

Treasury stock, 3,854 shares at February 29, 2020 and February 28, 2019, at cost

     (16,282     (16,282
  

 

 

   

 

 

 

Total shareholders’ equity

     3,462       4,661  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 10,519     $ 7,807  
  

 

 

   

 

 

 

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

 

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Video Display Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

 

     February 29,
2020
    February 28,
2019
 

Net sales

   $ 10,597     $ 15,023  

Cost of goods sold

     8,220       10,983  
  

 

 

   

 

 

 

Gross profit

     2,377       4,040  
  

 

 

   

 

 

 

Operating expenses

    

Selling and delivery

     623       844  

General and administrative

     3,637       3,645  
  

 

 

   

 

 

 
     4,260       4,489  
  

 

 

   

 

 

 

Operating loss

     (1,883     (449
  

 

 

   

 

 

 

Other income (expense)

    

Interest expense, net

     (8     (19

Investment gain

     12       42  

Other income, net

     673       493  
  

 

 

   

 

 

 

Total other income, net

     677       516  
  

 

 

   

 

 

 

(Loss) income before income taxes

     (1,206     67  

Income tax expense

     —         —    
  

 

 

   

 

 

 

Net (loss) income

   $ (1,206   $ 67  
  

 

 

   

 

 

 

Net (loss) income per share-basic

   $ (0.21   $ 0.01  
  

 

 

   

 

 

 

Net (loss) income per share-diluted

   $ (0.21   $ 0.01  
  

 

 

   

 

 

 

Average shares outstanding – basic

     5,878       5,878  
  

 

 

   

 

 

 

Average shares outstanding – diluted

     5,878       6,078  
  

 

 

   

 

 

 

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

 

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Video Display Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(in thousands)

 

     Common
Shares*
    Share
Amount
     Additional
Paid-in
Capital
     Retained
Earnings
    Treasury
Stock
    Total
Shareholders’
Equity
 

Balance, February 28, 2018

     5,887     $ 7,293      $ 256      $ 13,309     $ (16,272   $ 4,586  

Net income

     —         —          —          67       —         67  

Repurchase of treasury stock

     (9        —            (10     (10

Share based compensation

     —         —          18        —         —         18  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, February 28, 2019

     5,878     $ 7,293      $ 274      $ 13,376     $ (16,282   $ 4,661  

Net loss

     —         —          —          (1,206     —         (1,206

Share based compensation

     —         —          7        —               7  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, February 29, 2020

     5,878     $ 7,293      $ 281      $ 12,170     $ (16,282   $ 3,462  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

*

Common Shares are shown net of Treasury Shares

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

 

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Table of Contents

Video Display Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

 

     February 29,
2020
    February 28,
2019
 

Operating Activities

    

Net (loss) income

   $ (1,206   $ 67  

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Depreciation and amortization

     226       256  

Change in provision for doubtful accounts

     (7     (3

Changes in provision for inventory reserve

     (63     (540

Deferred rental income

     —         (60

Non-cash charge for share based compensation

     7       18  

Gain on disposal of assets

     —         (33

Realized/unrealized gain on investments

     (12     (42

Changes in working capital items:

    

Accounts receivable

     681       (1,079

Inventories

     (866     1,673  

Prepaid expenses and other assets

     69       (390

Accounts payable and accrued liabilities

     440       (332

Customer deposits

     1,182       661  

Other liabilities

     14       2  
  

 

 

   

 

 

 

Net cash provided by operating activities

     465       198  
  

 

 

   

 

 

 

Investing Activities

    

Capital expenditures

     (135     (152

Proceeds from sale of investment in real estate partnership - related party (Note 9)

     —         166  

Purchases of investments

     (60     (981

Proceeds from sale of equipment

     —         71  

Proceeds from sale of investments

     72       1,309  
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (123     413  
  

 

 

   

 

 

 

Financing Activities

    

Proceeds from related party loans

     148       406  

Repayments of long-term debt

     (23     (55

Proceeds from line of credit

     917       647  

Repayments on line of credit

     (917     (874

Purchase of treasury stock

     —         (10

Payments on marginal float

     —         (106

Repayments of notes payable to officers and directors

     (33     (290
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     92       (282

Net change in cash and cash equivalents

     434       329  

Cash and cash equivalents, beginning of year

     410       81  
  

 

 

   

 

 

 

Cash and cash equivalents, end of year

     844       410  
  

 

 

   

 

 

 

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

See Note 11 for supplemental cash flow information.

 

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Notes to Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Nature of Business

Video Display Corporation and subsidiaries (the “Company”, ”our” or “we”) is a provider and manufacturer of video products, components, and systems for data display and presentation of electronic information media in various requirements and environments. The Company designs, engineers, manufactures, markets, distributes and installs technologically advanced display products and systems, from basic components to turnkey systems for government, military, aerospace, medical and commercial organizations. The Company serves the simulation, ruggedized displays, video wall design and installation, tempest products, tempest services, cathode ray tubes (CRTS) and keyboard manufacturing.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all intercompany accounts and transactions. Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

Fiscal Year

All references herein to “2020” and “2019” mean the fiscal years ended February 29, 2020 and February 28, 2019, respectively.

Basis of Accounting

“The FASB Accounting Standards Codification” (“FASB ASC”) establishes the source of authoritative accounting standards generally accepted in the United States of America (“U.S. GAAP”) recognized by the Financial Accounting Standards Board (“FASB”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The FASB amends the FASB ASC through Accounting Standards Updates (“ASUs”). ASCs and ASUs are referred to throughout these consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Examples include provisions for returns, warranty reserves, bad debts, inventory reserves, valuations on deferred income tax assets, other intangible assets, accounting for percentage of completion contracts and the length of product life cycles and fixed asset lives. Actual results could vary from these estimates.

Banking and Liquidity

The accompanying 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 four of the last five years and has reported a decrease in its working capital during this current year. The historical losses resulted from a combination of low revenues at all divisions without a commensurate reduction of expenses. The Company has seen a rise in the backlog for customer orders and increased activity within the markets it serves. In the fourth quarter, the Company acquired a small display company to increase its presence in the ruggedized display market. The Company’s working capital and liquid asset position is presented as follows:

 

     February 29,
2020
     February 28,
2019
 

Working capital

   $ 1,263      $ 3,354  

Liquid assets

   $ 844      $ 410  

 

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Management has implemented a plan to improve the liquidity of the Company. The Company has been implementing a plan to increase revenues at all the divisions, each structured to the particular division. The fiscal year ended February 29, 2020 was a transition year for the Company. Many of the legacy programs the Company serviced were heading into new phases or the next generation of the product line. This caused delays in the normal flow of the orders for these programs. The Company is working with these customers and expects these programs to be placing orders to be fulfilled in the Company’s new fiscal year. The Company has expanded its cyber security business by adding a second testing chamber for testing tempest products allowing it to increase the business in cyber testing services to supplement the product side of the business. The Company is also now involved in ruggedized displays, recently bringing on engineering familiar with these products and acquiring a small specialized display company in January 2020. With the acquisition of the display company, the Company is in the process of completing the transfer of the remaining CRT operations to its Lexel Imaging facility in Lexington, KY in order to make room for the new business in its Cocoa facility. This will also reduce expenses in the CRT operation by having that business all under one roof. The Company also moved the corporate accounting functions to the Cocoa, Florida location which allows the Company to become more efficient and save money on reducing redundant operations. The plant move at its subsidiary in Lexington, Kentucky, took longer than anticipated and negatively affected cash flow. This subsidiary saw a turn -around in the fiscal year, being the only division to have a profitable year. The plant move at the Florida operations was successful as the Company merged two businesses and was able to keep production on schedule. Management continues to explore options to monetize certain long-term assets of the business, including the possible sale of a building in Pennsylvania. If additional and more permanent capital is required to fund the operations of the Company, no assurance can be given that the Company will be able to obtain the capital on terms favorable to the Company, if at all.

The ability of the Company to continue as a going concern is dependent upon the success of management’s plans to improve the operational effectiveness of the operations, to sell strategic assets as 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.

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 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.

Contract liabilities represents amounts collected prior to having completed performance on certain of our simulation or video wall system projects and are reported as Customer deposits on the accompanying consolidated balance sheets. The change in contract liabilities is due to the timing of customer deposits for orders offset by customer deposits recognized as revenue during the period. No revenue was recognized in FY2020 from performance obligations that were satisfied in prior periods. As of February 29, 2020, approximately $404 thousand of revenue is expected to be recognized from remaining performance obligations for simulation system projects (including deferred revenue as well as amounts that will be invoiced and recognized as revenue in future periods). We expect to recognize revenue these remaining performance obligations over the next 24 months. We have elected not to provide disclosures regarding remaining performance obligations for contracts with a term of 1 year or less.

 

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For the fiscal year ended February 29, 2020, revenue recognized by division of the Company is as follows (in thousands):

 

Simulation and training (including video walls)

   $ 4,921  

Cyber security

     1,990  

Data displays

     2,541  

Other computer products (keyboards)

     1,145  
  

 

 

 

Total revenue

   $ 10,597  
  

 

 

 

Cash and Cash Equivalents and Investments

We consider all highly liquid investments purchased with original maturities of three months or less to be cash or cash equivalents. Investment securities that are held by the Company, are bought and held principally for the purpose of selling them in the near term, are classified as “trading” and principally consist of equity securities and mutual funds. These trading investments are carried at fair value with realized gains or losses and changes in fair value included in operations.

Fair Value Measurements and Financial Instruments

The FASB’s fair value measurement guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

 

Level 1   Quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2   Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3   Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets measured at fair value on a recurring basis by the Company consist of investment securities that are held for trading using Level 1 inputs. The Company owned investment securities during each of the last two fiscal years. However, all investment security positions were liquidated as of February 29, 2020 and February 28, 2019.

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 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 rates that fluctuate with the market or are otherwise commensurate with the current market.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are customer obligations due under normal trade terms. The Company sells its products primarily to general contractors, government agencies, manufacturers, and consumers of video displays and CRTs. Management performs continuing credit evaluations of its customers’ financial condition and although the Company generally does not require collateral, letters of credit may be required from its customers in certain circumstances, such as foreign sales. The allowance for doubtful accounts is determined by reviewing all accounts receivable and applying credit loss experience to the current receivable portfolio with consideration given to the current condition of the economy, assessment of the financial position of the creditors as well as payment history and overall trends in past due accounts compared to established thresholds. The Company monitors credit exposure and assesses the adequacy of the allowance for doubtful accounts on a regular basis. Historically, the Company’s allowance has been sufficient for any customer write-offs. Management believes accounts receivable are stated at amounts expected to be collected.

 

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The following is a roll-forward of the allowance for doubtful accounts (in thousands):

 

Description

   Balance at
Beginning
of Period
     Additions:
Charged
to Costs
and
Expenses
     Deductions      Balance at
End of
Period
 

February 29, 2020

   $ 16      $ —        $ (7    $ 9  

February 28, 2019

   $ 19      $ —        $ (3    $ 16  

Warranty Reserves

The Company records a liability for estimated warranty obligations at the date products are sold. Adjustments are made as new information becomes available.

The warranty reserve is determined by recording a specific reserve for known warranty issues and a general reserve based on claims experience. The Company considers actual warranty claims compared to net sales, then adjusts its reserve liability accordingly. Actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. Management believes that historically its procedures have been adequate and does not anticipate that its assumptions are reasonably likely to materially change in the future.

Inventories

Inventories consist primarily of CRTs, electron guns, monitors, digital projectors, video components and electronic parts. Inventories are stated at the lower of cost (first-in, first-out) or market.

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. The reserve for inventory obsolescence was approximately $0.8 million and $0.9 million at February 29, 2020 and February 28, 2019, respectively.

The Company’s remaining business units utilize different inventory components than the divisions had in the past. The Company provides for an obsolescence 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, although it believes the inventory will be sold in the future, will continue to reserve for any additional obsolescence.

Property, Plant and Equipment

Property, plant, and equipment are stated at cost. Depreciation is computed principally by the straight-line method for financial reporting purposes over the following estimated useful lives: Buildings – ten to twenty-five years; Machinery and Equipment – five to ten years. In addition, leasehold improvements are amortized over the shorter of the useful life of the asset or the related lease term. Depreciation expense totaled approximately $226 thousand and $256 thousand for the fiscal years ended 2020 and 2019, respectively. Substantial betterments to property, plant, and equipment are capitalized and routine repairs and maintenance are expensed as incurred. The Company is expected to invest an additional $0.2 million to upgrade the Cocoa, Florida location to accommodate the increase in business at the Florida facility. The Company does not anticipate any additional significant investments in capital assets for fiscal 2021.

Business Combinations

When the Company acquires businesses, it applies the acquisition method of accounting and recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values on the acquisition date, which requires significant estimates and assumptions. Goodwill, if any, would be measured as the excess of the fair value of the consideration transferred over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method requires the Company to record provisional amounts for any items for which the accounting is not complete at the end of a reporting period. The Company must complete the accounting during the measurement period, which cannot exceed one year. Adjustments made during the measurement period could have a material impact on the Company’s financial condition and results of operations.

 

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The Company typically measures customer relationship and other intangible assets using an income approach. Significant estimates and assumptions used in this approach include discount rates and certain assumptions that form the basis of the forecasted cash flows expected to be generated from the asset (e.g., future revenue growth rates, operating margins and attrition rates). If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, the Company could record impairment charges. In addition, the Company has estimated the economic lives of certain acquired tangible and intangible assets and these lives are used to calculate depreciation and amortization expense. If the Company’s estimates of the economic lives change, depreciation or amortization expenses could be increased or decreased, or the acquired asset could be impaired.

Impairment of Long-lived Assets

Management reviews and assesses long-lived assets, which includes property, plant, and equipment and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, management estimates the future cash flows expected to result from the use of the asset. If the sum of the undiscounted expected cash flows is less than the carrying amount of the asset, an impairment loss is recognized based upon the estimated fair value of the asset. The Company did not recognize any impairment charges associated with its long-lived or intangible assets.

Share-Based Compensation Plans

The Company accounts for employee share-based compensation under the fair value method and uses an option pricing model for estimating the fair value of stock options at the date of grant.

Share Repurchase Program

The Company has a share 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. During the fiscal year ended February 29, 2020, the Company did not repurchase any of its shares. The Company repurchased 8,858 shares at an average price of $1.12 per share which were added to treasury shares on the consolidated balance sheet during the fiscal year ended February 28, 2019. Under this program, an additional 490,186 shares remain authorized to be repurchased by the Company at February 29, 2020.

Income Taxes

The Company accounts for income taxes under the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than possible enactments of changes in the tax laws or rates.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has determined that a valuation allowance is needed due to recent taxable net operating losses, the sale of profitable divisions and the limited taxable income in the carry back periods. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

Deferred income taxes as of February 29, 2020 and February 28, 2019 reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain tax loss carryforwards, less any valuation allowance.

The Company accounts for uncertain tax positions as required in that a position taken or expected to be taken in a tax return is recognized in the consolidated financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of February 29, 2020 and February 28, 2019 the Company did not have any material unrecognized tax benefits.

 

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The Company recognizes accrued interest and penalties related to unrecognized tax benefits as components of interest expense and other expense, respectively, in arriving at pretax income. The Company did not have any interest and penalties accrued as of February 29, 2020 and February 28, 2019.

The Company’s tax years ended February 28, 2019, 2018 and 2017 remain open to examination by the Internal Revenue Service (“IRS”).

Earnings (Loss) per Share

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

The following is a reconciliation of basic earnings (loss) per share to diluted earnings (loss) per share for 2020 and 2019, (in thousands, except for per share data):

 

     Net
Income
(Loss)
    

Average
Shares

Outstanding

     Net
Income
(Loss)
Per
Share
 

2020

        

Basic

     (1,206      5,878        (0.21

Effect of dilution:

        

Options

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Diluted earnings per share

     (1,206      5,878        (0.21
  

 

 

    

 

 

    

 

 

 

2019

        

Basic

     67        5,878        0.01  

Effect of dilution:

        

Options

     —          200        —    
  

 

 

    

 

 

    

 

 

 

Diluted earnings per share

     67        6,078        0.01  
  

 

 

    

 

 

    

 

 

 

Stock options, debentures, and other liabilities convertible into 200,000 shares of the Company’s common stock were anti-dilutive and therefore, were excluded from the fiscal 2020 diluted earnings (loss) per share calculation.

Segment Reporting

An operating segment is defined as a component that engages in business activities, whose operating results are reviewed by the chief operating decision maker in order to make decisions about allocating resources, and for which discrete financial information is available. We operate and manage our business as one reportable segment. All of our divisions have similarities such as products and markets served; therefore, we believe they meet the criteria for aggregation under the applicable authoritative guidance and, as such, these operations are reported as one segment within the consolidated financial statements.

Sales to foreign customers were 11% of consolidated net sales for fiscal 2020 and fiscal 2019, respectively.

Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

Effective March 1, 2019 we adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), as amended by ASU 2018-01, Leases (Topic 842) – Land Easement Practical Expedient for Transition to Topic 842, ASU 2018-10, Codification Improvements to Topic 842, ASU 2018-11, Leases (Topic 842) – Targeted Improvements, ASU 2018-20, Leases (Topic 842) – Narrow-Scope Improvements for Lessors, and ASU 2019-01, Leases (Topic 842) – Codification Improvements, (collectively, the new leases standard or Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires lessees to record ROU assets and lease obligations on the balance sheet for all leases with terms longer than 12 months.

 

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We adopted Topic 842 using the modified retrospective method and utilized the optional transition method under which we continue to apply the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative period presented. Therefore, the adjustment to recognize the Company’s leases on the balance sheet related to the adoption of the new standard was recorded as of the adoption date and prior periods were not restated.

As part of the adoption of Topic 842, we elected to adopt certain of the optional practical expedients, including the package of practical expedients, which, among other things, gives us the option to not reassess: 1) whether expired or existing contracts are or contain leases; 2) the lease classification for expired or existing leases; and 3) initial direct costs for existing leases. We also elected the practical expedient to not separate lease and non-lease components, which allows us to account for lease and non-lease components as a single lease component. We did not elect the hindsight practical expedient in our determination of the lease term for existing leases; therefore, the original lease terms, as determined under ASC 840, were used in the calculation of the Company’s initial Topic 842 lease liabilities.

Adoption of the new standard resulted in the recognition of operating lease assets and operating lease liabilities of approximately $2.1 million as of March 1, 2019. The adoption of this standard did not have an impact on retained earnings, the consolidated statements of operations or the consolidated statements of cash flows.

Recent Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820-10): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which changes the fair value measurement disclosure requirements of ASC Topic 820, Fair Value Measurements and Disclosures. Under this ASU, certain disclosure requirements for fair value measurements are eliminated, amended or added. These changes aim to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. The guidance is effective for the Company beginning on March 1, 2020 and prescribes different transition methods for the various provisions. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its financial statements and disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new ASU also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates. These changes aim to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. The guidance is effective for the Company beginning on March 1, 2021 and prescribes different transition methods for the various provisions. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its financial statements and related disclosures.

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

Note 2. Inventories

Inventories consisted of the following (in thousands):

 

     February 29,
2020
     February 28,
2019
 

Raw materials

   $ 3,497      $ 2,973  

Work-in-process

     773        706  

Finished goods

     1,006        631  
  

 

 

    

 

 

 
     5,276        4,310  

Reserves for obsolescence

     (796      (859
  

 

 

    

 

 

 
   $ 4,480      $ 3,451  
  

 

 

    

 

 

 

 

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The following is a roll forward of the inventory reserves (in thousands):

 

Description

   Balance
at
Beginning
of Period
     Additions:
Charged
to Costs
and
Expenses
     Deductions      Balance
at End
of
Period
 

February 29, 2020

   $ 859      $ 55      $ (118    $ 796  

February 28, 2019

   $ 1,399      $ 346      $ (886    $ 859  

During fiscal 2020 and 2019, the Company wrote off or disposed of inventories of $0.1 and $0.9 million, respectively, of which all were previously reserved for through inclusion in the inventory reserve.    

Note 3. Long-Term Debt

The Company had no commercial debt with any banks at February 29, 2020. The Company paid in full the amount it owed on a building owned by the Company’s subsidiary, Teltron Technology, Inc. in fiscal 2020.

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

 

     February 29,
2020
     February 28,
2019
 

Mortgage payable to bank; interest rate at BB&T Bank base rate plus 0.5% (6% as of February 28, 2019); monthly principal and interest payments of $5 thousand payable through July 2020; collateralized by land and building of Teltron Technologies, Inc. Loan paid in full in fiscal 2020.

   $ —        $ 23  
  

 

 

    

 

 

 
     —          23  

Less current maturities

     —          (23
  

 

 

    

 

 

 
   $ —        $ —    
  

 

 

    

 

 

 

In addition, resulting from a prior acquisition which occurred in October 2017, the Company has a $100 thousand note due to the seller that is non-interest bearing and is payable at the completion of a product development plan by the previous owner which is expected in fiscal 2021.

Note 4. Notes Receivable and Payable to Officers and Directors (Related Party Transactions)

To assist the Company in funding the debt assumed resulting from the acquisition of Jaco Displays, LLC (see Note 13), the Company borrowed $505,180 from Ronald D Ordway, CEO comprised of cash proceeds received of $148,330 with the remaining $356,850 in debt assumed as the CEO personally funded certain liabilities resulting from the acquisition. The Company combined this amount borrowed with another $438,832 owed to Mr. Ordway in back rent along with $82,838 from previous borrowings, and signed a promissory note for the aggregate balance of $1,026,850 at a six percent interest rate due on or before July 24, 2020 with Mr. Ordway. This note payable balance is therefore classified as a current liability on the consolidated balance sheets.

On March 30, 2016, the Company entered into an assignment with recourse of the note receivable from Z-Axis Inc. (Z-Axis) with Ronald D. Ordway, CEO, and Jonathan R. Ordway, related parties, for the sum of $912 thousand. The note receivable is collateralized by a security interest in the shares of Z-Axis as well as a personal guaranty of its majority shareholder. Z-Axis is current on all scheduled payments regarding this note. The Company retains the right to repurchase the note at any time for 80% of the outstanding principle balance. Also, in the event of default by Z-Axis, the Company is obligated to repurchase the note for 80% of the remaining principle balance plus any accrued interest. Accordingly, the Company has recognized this transaction as a secured borrowing. The $0.9 million, 9% interest rate note originated on March 30, 2016, with payments beginning on April 16, 2016 and continuing for 56 months thereafter. The balance of the note at February 29, 2020 was $189 thousand with the entire balance classified as a current note payable. Under the terms of the arrangement, $189 thousand is expected to be received in fiscal 2020 and therefore the corresponding receivable is recorded as a current note receivable.

 

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Table of Contents

Note 5. Accrued Expenses and Warranty Obligations

The following provides a reconciliation of changes in the Company’s warranty reserve for fiscal years 2020 and 2019. The Company provides no other guarantees.

 

     2020      2019  

Balance at beginning of year

     37        127  

Reduction/increase in provision based on current year sales activity

     63        (77

Warranty costs incurred

     (49      (13
  

 

 

    

 

 

 

Balance at end of year

     51        37  
  

 

 

    

 

 

 

Accrued liabilities consisted of the following (in thousands):

 

     February 29,
2020
     February 28,
2019
 

Accrued compensation and benefits

   $  238      $  296  

Accrued property taxes

     56        —    

Accrued warranty

     51        37  

Accrued other

     154        49  
  

 

 

    

 

 

 
   $ 499      $ 382  
  

 

 

    

 

 

 

Note 6. Stock Options

Upon recommendation of the Board of Directors of the Company, on August 25, 2006, the shareholders of the Company approved the Video Display Corporation 2006 Stock Incentive Plan (“Plan”), whereby options to purchase up to 500,000 shares of the Company’s common stock may be granted and up to 100,000 restricted common stock shares may be awarded. Options may not be granted at a price less than the fair market value, determined on the day the options are granted. Options granted to a participant who is the owner of ten percent or more of the common stock of the Company may not be granted at a price less than 110% of the fair market value, determined on the day the options are granted. The exercise price of each option granted is fixed and may not be re-priced. The life of each option granted is determined by the plan administrator, but may not exceed the lesser of seven years from the date the participant has the vested right to exercise the option, or nine years from the date of the grant. The life of an option granted to a participant who is the owner of ten percent or more of the common stock of the Company may not exceed five years from the date of grant. All full-time or part-time employees, and Directors of the Company, are eligible for participation in the Plan. In addition, any consultant or advisor who renders bona fide services to the Company, other than in connection with the offer or sale of securities in a capital-raising transaction, is eligible for participation in the Plan. The plan administrator is appointed by the Board of Directors of the Company. The Plan may be terminated by action of the Board of Directors, but in any event will terminate on the tenth anniversary of its effective date.

Information regarding the stock option plans is as follows:

 

     Number of Options
(in thousands)
     Average Exercise Price
Per Share
 

Outstanding at February 28, 2018

     200      $  0.82  

Granted

     —          —    

Forfeited or expired

     —          —    
  

 

 

    

 

 

 

Outstanding at February 28, 2019

     200      $ 0.82  

Granted

     —          —    

Forfeited or expired

     —          —    
  

 

 

    

 

 

 

Outstanding at February 29, 2020

     200      $ 0.82  

Options exercisable

     

February 28, 2019

     107      $ 0.82  

February 29, 2020

     153      $ 0.82  

 

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Table of Contents
    

Options Outstanding

  

Options Exercisable

Range

of Exercise Prices

  

Number

Outstanding at

February 29, 2020(in
thousands)

  

Weighted Average

Remaining

Contractual Life

(in years)

  

Weighted

Average

Exercise Price

  

Number

Exercisable at
February 29, 2020

(in thousands)

  

Weighted

Average

Exercise Price

$0.80 - $1.00  

   200    6.0    $0.82    153    $0.82
  

 

  

 

  

 

  

 

  

 

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 be outstanding based on historical information. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s common stock. The Company calculates the historic volatility based on the weekly stock closing price, adjusted for dividends and stock splits. The fair value of the stock options is based on the stock price at the time the option is granted, the annualized volatility of the stock and the discount rate at the grant date. No options were granted in fiscal 2019 or 2020.

For the fiscal years ended February 29, 2020 and February 28, 2019, the Company recognized $7 and $18 thousand, respectively, of share-based compensation in general and administrative expense in the statements of operations. As of February 29, 2020, there was no unrecognized compensation costs related to stock options.

Note 7. Income Taxes

The rate reconciliation related to income taxes differs from the amount computed by applying the federal statutory rate of 21% is as follows (in thousands):

 

     Fiscal Year Ended  
     February 29,
2020
     February 28,
2019
 

Statutory U.S. federal income tax rate

   $ 247      $ 17  

State income taxes, net of federal benefit

     19        22  

Valuation allowance

     (336      (57

Other

     70        18  
  

 

 

    

 

 

 

Taxes at effective income tax rate

   $ —        $  —    
  

 

 

    

 

 

 

Significant components of the Company’s net deferred income tax assets consist of the following (in thousands):

 

     February 29,      February 28,  
     2020      2019  

Deferred tax assets (liabilities):

     

Federal net operating loss carry-forward

   $ 3,130      $ 2,883  

Non-deductible losses

     1,365        1,360  

State net operating loss carry-forward

     808        717  

Federal tax credit carry-forward

     319        318  

Inventory reserves

     191        211  

Uniform capitalization costs

     101        85  

Foreign tax credit carry-forward

     73        99  

Accrued liabilities

     44        44  

Basis difference of property, plant and equipment

     39        43  

Allowance for doubtful accounts

     2        4  

Amortization of intangibles

     1        2  

Other

     (9      (10

Valuation allowance

     (6,064      (5,756
  

 

 

    

 

 

 

Net deferred tax assets

   $ —        $ —    
  

 

 

    

 

 

 

 

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Table of Contents

Deferred tax assets have been reduced by a valuation allowance because, in the opinion of management, it is more likely than not that the Company’s deferred tax assets will not be realized. The Company has determined that a 100% valuation allowance is needed due to historical cumulative taxable net operating losses and the limited taxable income related to the carry back periods. The Company has available federal and state net operating loss carry forwards of $14.9 million and $13.7 million, in the fiscal years ending February 29, 2020 and 2019, respectively. The net operating loss carry forwards expire at various dates through fiscal 2040, if not used.

Note 8. Benefit Plan

The Company maintains defined contribution plans that are available to all employees. The Company did not make a contribution in the fiscal year ended February 29, 2020 or February 28, 2019 to the Company’s 401(k) plan.

Note 9. Commitments and Contingencies

Operating Leases

The Company leases its office space and manufacturing facilities and equipment under operating lease agreements. The base lease terms expire at various dates from 2022 to 2025. While each of the leases include renewal options, the Company has only included the base lease term in its calculation of lease assets and liabilities. The Company does not have any finance leases.

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

 

     February 29, 2020  

Operating lease right-of-use assets

   $ 1,631  
  

 

 

 

Current portion of operating lease liabilities

   $ 557  

Noncurrent portion of operating lease liabilities

     1,091  
  

 

 

 

Total operating lease liabilities

   $ 1,648  
  

 

 

 

Rent expense is included in Cost of goods sold in the Company’s Consolidated Statements of Operations and totaled approximately $0.6 million for both fiscal 2020 and fiscal 2019. The Company did not have any variable lease costs or short-term lease costs for the year ended February 29, 2020.

Cash paid for amounts included in the measurement of operating lease liabilities was approximately $0.6 for the year ended February 29, 2020. The Company did not modify any existing leases or execute any new leases during the fiscal year ended February 29, 2020.

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

 

     February 29, 2020  

Weighted average remaining lease term

     3.0 years  

Weighted average discount rate

     6
  

 

 

 

The following table summarizes the maturity of the Company’s operating lease liabilities as of February 29, 2020 (in thousands):

 

Fiscal Year

   Amount  

2021

   $ 590  

2022

     572  

2023

     271  

2024

     190  

2025

     190  
  

 

 

 

Total operating lease payments

   $  1,813  

Less imputed interest

     (165
  

 

 

 

Total operating lease liabilities

   $ 1,648  
  

 

 

 

 

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The Company subleases certain of its warehousing space and also leases a building that it owns in Pennsylvania. The sublease expires concurrently with the head lease in March 2022. The Pennsylvania lease expires in August 2023. Sublease income and lease income are included in Other income, net in the Company’s Consolidated Statements of Operations and totaled approximately $0.4 million for the year ended February 29, 2020. Lease payments to be received as of February 29, 2020 are as follows (in thousands):

 

Fiscal Year

   Amount  

2021

   $ 359  

2022

     359  

2023

     227  

2024

     113  

2025

     —    
  

 

 

 
   $  1,058  
  

 

 

 

Related Party Leases

Included above are leases for manufacturing and warehouse facilities leased from the Company’s chief executive officer and Ordway Properties, LLC (an entity in which the chief executive officer has an ownership interest in) under operating leases expiring at various dates through 2025. Rent expense under these leases totaled approximately $0.4 million in fiscal 2020 and $0.6 million in fiscal 2019.    

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 accounted for the investment under the cost method since Ordway Properties, LLC was the majority owner. During the Fiscal 2018, the Company reduced its share in the LLC by $125,000, selling to Ordway Properties, LLC. In addition, during Fiscal 2019, the Company’s sold its remaining $375,000 ownership interest to Ordway Properties, LLC receiving $166,457 in cash and $208,543 in forgiveness of rent that was accrued and owed. There was no gain or loss on the sale. The building is the 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.

Future minimum rental payments due under leases with related parties are as follows (in thousands):

 

Fiscal Year

   Amount  

2021

   $ 390  

2022

     390  

2023

     256  

2024

     190  

2025

     189  
  

 

 

 
   $ 1,415  
  

 

 

 

Legal Proceedings

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

Note 10. Concentrations of Risk and Major Customers

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, accounts receivable and historically investments prior to liquidation. At times, such cash in banks are in excess of the FDIC insurance limit.

The Company sells to a variety of domestic and international customers on an open-unsecured account basis, in certain cases requiring letters of credit. These customers principally operate in the medical, military, and avionics industries. The Company had direct and indirect net sales to the U.S. government, primarily the Department of Defense for training and simulation programs, which comprised approximately 52% and 53% of consolidated net sales in fiscal

 

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Table of Contents

2020 and 2019, respectively. Sales to foreign customers were 11% of consolidated net sales in fiscal 2020 and 2019. The Company had two customers who each comprised more than 10% of the Company’s sales in fiscal year 2020 (aggregated 24%). These accounts are in good standing with the Company.

The Company attempts to minimize credit risk by reviewing all customers’ credit history before extending credit, by monitoring customers’ credit exposure on a daily basis and requiring letters of credit for certain sales. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

Note 11. Supplemental Cash Flow Information

 

     Fiscal Year Ended
(in thousands)
 
     February 29,      February 28,  
     2020      2019  

Cash paid for:

     

Interest

   $ 2      $ 20  
  

 

 

    

 

 

 

Non-cash activity:

     

Note receivable paid directly to officer (Z-Axis; Note 4)

   $ 209      $ 191  
  

 

 

    

 

 

 

Note payable to officer (Z-Axis; Note 4)

   $  209      $  191  
  

 

 

    

 

 

 

Note payable to officer related to officer personally funding liabilities related to Jaco acquisition (Note 4)

   $ 356      $ —    
  

 

 

    

 

 

 

Reduction of accrued rent in lieu of cash received resulting from sale of remaining interest in Honeyhill interest (Note 9)

   $ —        $ 209  
  

 

 

    

 

 

 

Reduction in related party rent owed to officer (originally recorded in accounts payable) in change for a note payable (Note 4)

   $ 439      $ —    
  

 

 

    

 

 

 

Imputed interest expense

   $ 27      $ 45  
  

 

 

    

 

 

 

Imputed interest income

   $ 27      $ 45  
  

 

 

    

 

 

 

In addition to the data disclosed in the table above, refer to Note 13 for a summary of the non-cash transactions pertaining to the acquisition of Jaco Displays, LLC.

Note 12. Selected Quarterly Financial Data (unaudited)

The following table sets forth selected quarterly consolidated financial data for the fiscal years ended February 29, 2020 and February 28, 2019, respectively. The summation of quarterly net income (loss) per share may not agree with annual net income (loss) per share due to rounding:

 

     2020  
     First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
 
     (in thousands, except per share amounts)  

Net sales

   $  2,709      $  3,228      $  1,466      $  3,194  

Gross profit

     425        499        264        1,189  

Net income (loss)

     (326      (435      (628      183  

Basic net income (loss) per share

   $ (0.06    $ (0.07    $ (0.11    $ 0.03  

Diluted net income (loss) per share

   $ (0.06    $ (0.07    $ (0.11    $ 0.03  

 

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     2019  
     First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
 
     (in thousands, except per share amounts)  

Net sales

   $  4,021      $  3,321      $  4,170      $  3,511  

Gross profit

     996        879        1,096        1,069  

Net income (loss)

     54        (6      71        (52

Basic net income (loss) per share

   $ 0.01      $ (0.00    $ 0.01      $ (0.01

Diluted net income (loss) per share

   $ 0.01      $ (0.00    $ 0.01      $ (0.01

Note 13. – Acquisition of Jaco Displays

On January 21, 2020, the Company acquired the net assets of Jaco Display Solutions, LLC. The aggregate purchase price was $760,787 in debt and other liabilities assumed (non-cash transaction). Jaco Display Solutions is a value-add provider of LCD embedded computing products and integrated display solutions. The Company expects the acquisition of Jaco will provide operating synergies and create potential growth opportunities through product enhancement and channel expansion in the display solutions sector.

The following table summarizes the fair values of the assets acquired and liabilities assumed as of the closing date of the Jaco Display Solutions acquisition:

 

    

Fair Value

    

Estimated Useful Life

Receivables

   $ 233,587     

n/a

Inventory

     100,000     

n/a

Property and equipment

     40,000     

5 years

Customer relationships

     333,000     

3 years

Tradename

     54,200     

3 years

  

 

 

    

Total identifiable assets acquired

   $ 760,787     
  

 

 

    

Accounts payable

   $ (120,852   

n/a

Customer deposits

     (56,000   

n/a

Notes payable

     (583,935   

n/a

  

 

 

    

Total liabilities assumed

   $ (760,787   
  

 

 

    

Net assets acquired

   $ —       
  

 

 

    

The total purchase consideration for the acquisition was allocated to identifiable assets purchased and liabilities assumed based on fair value. No portion of the purchase price was allocated to goodwill. The estimated fair value attributed to intangible assets was based on common valuation techniques performed by a third party valuation firm. The trademark was fair valued using the relief from royalty method. Key assumptions included estimating the fair royalty rate applied to projected revenues supported by the trademark to calculate gross royalty savings for the hypothetical license of the trademark. The valuation of customer relationships utilized an income approach and discounted cash flows taking into consideration the number of customer relationships acquired and estimated customer turnover.

The Company will record amortization expense resulting from the intangibles acquired of approximately $129 thousand per year over the three year useful life period. As the acquisition occurred at the end of Q4 in fiscal 2020, amortization expense was not recorded for fiscal 2020 as the amount was not material to the quarterly or annual results. Thus, amortization of the intangibles will commence in fiscal 2021.

Note 14. – Subsequent Events

The COVID-19 pandemic is disrupting supply chains and affecting production and sales across a range of industries. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, and the impact on our customers, employees, and vendors. At this point, the extent to which COVID-19 may impact our financial condition, statements of operations, and cash flows is uncertain and cannot be predicted.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $349 billion to the Paycheck Protection Program to help small businesses keep workers employed amid the COVID-19 pandemic and economic downturn. On April 13, 2020, our Lexel Imaging subsidiary entered into a $216,200 term loan with Central Bank and

 

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on April 23, 2020, Video Display Corporation entered into a $772,000 term loan with Renasant Bank under the Paycheck Protection Program (collectively the PPP Term Loan). Thus, the PPP Term Loan received aggregates $988,200. The U.S. Small Business Administration, an agency of the United States, fully guaranteed the PPP Term Loan. The PPP Term Loan is eligible to be partially or fully forgiven if used for specific expenses over the 8-week period after the loan was made, with the remaining balance, if any, repayable in 17 equal installments beginning November 17, 2020. The PPP Term Loan bears interest at a fixed rate of 1.00%.

 

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Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.    

 

Item 9A(T).

Controls and Procedures.

Evaluation of disclosure controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report (February 29, 2020). Our disclosure controls and procedures are intended to ensure that the information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as the principal executive and financial officers, respectively, to allow final decisions regarding required disclosures. Based on their evaluation of the Company’s disclosure controls and procedures as of February 29, 2020, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective.

The required certifications of our Chief Executive Officer and our Chief Financial Officer are included as exhibits to this Annual Report on Form 10-K. The disclosures set forth in this Item 9A contain information concerning the evaluation of our disclosure controls and procedures, internal control over financial reporting and changes to internal control referred to in those certifications. Those certifications should be read in conjunction with this Item 9A for a more complete understanding of the matters covered by the certifications.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Controls

There were no 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 fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

All internal controls, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of February 29, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013 Framework) entitled “Internal Control- Integrated Framework.” Based on such assessment, our management concluded that as of February 29, 2020 our internal control over financial reporting was effective.

 

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This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Limitations on the effectiveness of controls.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that internal control over financial reporting and our disclosure controls and procedures will prevent all errors and potential fraud. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Video Display Corporation have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Item 9B.

Other Information.

None.

 

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PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance.

The information contained in Video Display Corporation’s Proxy Statement to be filed within 120 days of the Company’s 2020 fiscal year end (the “2020 Proxy Statement”), with respect to directors and executive officers of the Company under the headings “Election of Directors” and “Executive Officers”, is incorporated herein by reference in response to this item; provided, however, that the information contained in the 2020 Proxy Statement under the heading “Compensation and Stock Option Committee Report” or under the heading “Performance Graph” shall not be incorporated herein by reference.

 

Item 11.

Executive Compensation.

The information contained in the 2020 Proxy Statement under the heading, “Executive Compensation and Other Benefits”, with respect to executive compensation, is incorporated herein by reference in response to this item.

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information contained in the 2020 Proxy Statement under the headings “Common Stock Ownership” and “Executive Compensation and Other Benefits”, is incorporated herein by reference in response to this item.

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

The information contained in the 2020 Proxy Statement under the heading, “Transactions with Affiliates”, is incorporated herein by reference in response to this item.

 

Item 14.

Principal Accounting Fees and Services.

The information contained in the 2020 Proxy Statement under the heading, “Audit Fees and All Other Fees” is incorporated herein by reference in response to this item.

 

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PART IV

 

Item 15.

Exhibits, Financial Statement Schedules.

 

(a)

The following documents are filed as part of this Report:

Financial Statements:

The following consolidated financial statements of the Company and its consolidated subsidiaries and the Reports of the Independent Registered Public Accounting Firms are included in Part II, Item 8.

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of February 29, 2020 and February 28, 2019.

Consolidated Statements of Operations - Fiscal Years Ended

February 29, 2020 and February 28, 2019.

Consolidated Statements of Shareholders’ Equity –

Fiscal Years Ended February 29, 2020 and February 28, 2019.

Consolidated Statements of Cash Flows - Fiscal Years Ended February 29, 2020 and February 28, 2019.

Notes to Consolidated Financial Statements

 

(b)

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)
  21   Subsidiary Companies
  23.1  

Consent of Hancock Askew & Co., LLP

  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

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: May 29, 2020     VIDEO DISPLAY CORPORATION
    By:  

/s/ Ronald D. Ordway

      Ronald D. Ordway
      Chairman of the Board and
      Chief Executive Officer

POWER OF ATTORNEY

Know all men by these presents, that each person whose signature appears below constitutes and appoints Ronald D. Ordway as attorney-in-fact, with power of substitution, for him in any and all capacity, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature -Name

  

Capacity

 

Date

/s/ Ronald D. Ordway

   Chief Executive Officer,   May 29, 2020
Ronald D. Ordway    Treasurer and Director  
   (Principal Executive Officer)  

/s/ Gregory L. Osborn

   Chief Financial Officer and Director   May 29, 2020
Gregory L. Osborn    (Principal Financial Officer)