UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
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For the Quarterly Period Ended |
or |
For the Transition Period From _________________ to ________________________ |
Commission File Number
(Exact name of registrant as specified on its charter)
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) |
Name of each exchange on which registered |
OTCMKTS |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ |
Accelerated filer ☐ |
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Smaller reporting company |
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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 Secction 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of November 30, 2023, the registrant had
Video Display Corporation and Subsidiaries
Index
Page | |||||
PART I. | FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements. | ||||
Interim Condensed Consolidated Balance Sheets – November 30, 2023 (unaudited) and February 28, 2023 | 3 | ||||
Interim Condensed Consolidated Statements of Operations - Three and nine months ended November 30, 2023 and 2022 (unaudited) | 5 | ||||
Interim Condensed Consolidated Statements of Shareholders’ Equity (Deficit) - Three and nine months ended November 30, 2023 and 2022 (unaudited) | 6 | ||||
Interim Condensed Consolidated Statements of Cash Flows – Nine months ended November 30, 2023 and 2022 (unaudited) | 7 | ||||
Notes to Interim Condensed Consolidated Financial Statements - (unaudited) | 8 | ||||
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
14 | |||
Item 3. | Quantitative and Qualitative Disclosure About Market Risk. | 20 | |||
Item 4. | Controls and Procedures. | 20 | |||
PART II. | OTHER INFORMATION | ||||
Item 1. | Legal Proceedings. | 21 | |||
Item 1A. | Risk Factors. | 21 | |||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 21 | |||
Item 3. | Defaults upon Senior Securities. | 21 | |||
Item 4. | Submission of Matters to a Vote of Security Holders. | 21 | |||
Item 5. | Other Information. | 21 | |||
Item 6. | Exhibits. | 21 | |||
SIGNATURES | 22 | ||||
31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
32 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
ITEM 1 – FINANCIAL STATEMENTS
Video Display Corporation and Subsidiaries
Interim Condensed Consolidated Balance Sheets (unaudited)
(in thousands)
November 30, |
February 28, |
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2023 |
2023 |
|||||||
(unaudited) |
||||||||
Assets |
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Current assets |
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Cash and cash equivalents |
$ | $ | ||||||
Accounts receivable, less allowance for doubtful accounts of $ |
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Inventories |
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Contract assets |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant, and equipment |
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Buildings |
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Construction in progress |
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Machinery and equipment |
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Accumulated depreciation |
( |
) | ( |
) | ||||
Net property, plant, and equipment |
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Right of use assets under operating leases |
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Other noncurrent assets |
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Total assets |
$ | $ |
The accompanying notes are an integral part of these interim condensed consolidated statements.
Video Display Corporation and Subsidiaries
Interim Condensed Consolidated Balance Sheets (unaudited) (continued)
(in thousands)
November 30, |
February 28, |
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2023 |
2023 |
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(unaudited) |
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Liabilities and Shareholders’ Equity (Deficit) |
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Current liabilities |
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Accounts payable (including related party payables of ($ |
$ | $ | ||||||
Accrued liabilities |
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Contract liabilities |
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Note payable to officers and directors, current (Note 5) |
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Current maturities of financing lease obligations |
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Current operating lease liabilities |
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Total current liabilities |
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Long-term operating lease liabilities |
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Total liabilities |
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Shareholders’ Equity (Deficit) |
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Preferred stock, |
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Common stock, |
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Additional paid-in capital |
||||||||
Retained earnings |
||||||||
Treasury stock, shares at cost; |
( |
) | ( |
) | ||||
Total shareholders’ equity (deficit) |
( |
) | ( |
) | ||||
Total liabilities and shareholders’ equity (deficit) |
$ | $ |
The accompanying notes are an integral part of these interim condensed consolidated statements.
Video Display Corporation and Subsidiaries
Interim Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share data)
Three Months Ended November 30, |
Nine Months Ended November 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Net sales |
$ | $ | $ | $ | ||||||||||||
Cost of goods sold |
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Gross profit |
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Operating expenses |
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Selling and delivery |
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General and administrative |
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Operating loss |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Other income (expense) |
||||||||||||||||
Interest income (expense), net |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Gain on sale of equipment, net |
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Other, net |
( |
) | ||||||||||||||
( |
) | |||||||||||||||
Income (loss) before income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Income tax expense |
||||||||||||||||
Net income (loss) |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Net income (loss) per share - basic |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Net income (loss) per share - diluted |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Basic weighted average shares outstanding |
||||||||||||||||
Diluted weighted average shares outstanding |
The accompanying notes are an integral part of these interim condensed consolidated statements.
Video Display Corporation and Subsidiaries
Interim Condensed Consolidated Statements of Shareholders’ Equity (Deficit)
Three and Nine Months Ended November 30, 2023 and 2022 (unaudited)
(in thousands)
Common Shares* |
Share Amount |
Additional Paid-in Capital |
Retained Earnings |
Treasury Stock |
Total Shareholders’ Equity (Deficit) |
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For the Three Months Ended November 30, 2023 |
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Balance, August 31, 2023 (unaudited) |
$ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
Net loss |
- | ( |
) | ( |
) | |||||||||||||||||||
Balance, November 30, 2023 (unaudited) |
$ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
For the Nine Months Ended November 30, 2023 |
||||||||||||||||||||||||
Balance, February 28, 2023 (audited) |
$ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
Net loss |
- | ( |
) | ( |
) | |||||||||||||||||||
Balance, November 30, 2023 (unaudited) |
$ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
For the Three Months Ended November 30, 2022 |
||||||||||||||||||||||||
Balance, August 31, 2022 (unaudited) |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
Net loss |
- | ( |
) | ( |
) | |||||||||||||||||||
Balance, November 30, 2022 (unaudited) |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
For the nine Months Ended November 30, 2022 |
||||||||||||||||||||||||
Balance, February 28, 2022 (audited) |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
Net loss |
- | ( |
) | ( |
) | |||||||||||||||||||
Balance, November 30, 2022 (unaudited) |
$ | $ | $ | $ | ( |
) | $ |
*Common shares are shown net of Treasury Shares
The accompanying notes are an integral part of these interim condensed consolidated statements.
Video Display Corporation and Subsidiaries
Interim Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Nine Months Ended November 30, |
||||||||
2023 |
2022 |
|||||||
Operating Activities |
||||||||
Net loss |
$ | ( |
) | $ | ( |
) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation expense |
||||||||
Amortization of intangible assets |
||||||||
Non cash lease cost |
||||||||
Gain on sale of equipment |
( |
) | ( |
) | ||||
Other |
( |
) | ||||||
Changes in working capital items: |
||||||||
Accounts receivable |
( |
) | ||||||
Inventories |
( |
) | ||||||
Prepaid expenses and other assets |
( |
) | ( |
) | ||||
Contract assets |
( |
) | ||||||
Employee retention credit refund receivable |
||||||||
Operating lease liabilities |
( |
) | ( |
) | ||||
Contract liabilities |
( |
) | ||||||
Accounts payable and accrued liabilities |
( |
) | ||||||
Net cash used in operating activities |
( |
) | ( |
) | ||||
Investing Activities |
||||||||
Capital expenditures |
( |
) | ( |
) | ||||
Proceeds from sale of equipment |
||||||||
Net cash provided by (used in) investing activities |
( |
) | ||||||
Financing Activities |
||||||||
Repayments on lease financing |
( |
) | ( |
) | ||||
Proceeds from loans with officers and directors |
||||||||
Net cash provided by financing activities |
||||||||
Net change in cash and cash equivalents |
( |
) | ||||||
Cash and cash equivalents, beginning of year |
||||||||
Cash and cash equivalents, end of period |
$ | $ | ||||||
Non-cash Investing Activities: | ||||||||
ROU assets obtained in exchange for operating lease liabilities | $ | $ |
The accompanying notes are an integral part of these interim condensed consolidated statements.
Note 1. – Basis of Presentation of Principles of Consolidation
The accompanying unaudited interim condensed consolidated financial statements include the accounts of Video Display Corporation and its subsidiaries (“Video Display,” the “Company,” “we,” or “us”). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated balance sheet as of February 28, 2023 has been derived from audited financial statements. The accompanying unaudited condensed consolidated financial statements as of, and for the three and nine months ended, November 30, 2023 and 2022 have been prepared in accordance with (i) accounting principles generally accepted in the U.S. for interim financial information and (ii) the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, such statements do not include all of the information and disclosures required by accounting principles generally accepted in the U.S. for a complete presentation of financial statements. In the opinion of management, all adjustments (including those of a normal, recurring nature) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended November 30, 2023 are not necessarily indicative of the results that may be expected for the year ending February 29, 2024. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Video Display’s Annual Report on Form 10-K for the year ended February 28, 2023 filed with the SEC on May 30, 2023.
Note 2. – Going Concern, Banking & Liquidity
The accompanying unaudited interim condensed consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company reported a net loss and a decrease in working capital for the nine-month period ending November 30, 2023 primarily due to insufficient revenues in the Company. The Company also had a decrease in liquid assets for the nine- month period primarily as a result of the lack of revenue. The Company has sustained losses for the last four of five fiscal years and has seen overall a decline in working capital and liquid assets during this five -year period. Annual losses over this time are due to a combination of decreasing revenues across the divisions without a commensurate reduction of expenses. The Company’s working capital and liquid asset position are presented below (in thousands) as of November 30, 2023 and February 28, 2023:
November 30, 2023 |
February 28, 2023 |
|||||||
Working capital |
$ | ( |
) | $ | ( |
) | ||
Liquid assets |
$ | $ |
The Company has focused on building the rugged and specialty display business at the Cocoa, Florida subsidiary. The Company has four primary display lines in production with one more expected to be added in fiscal year 2024. There had been some unforeseen delays causing two of these product lines to be delayed in shipping, but most of these issues were resolved with one of the products shipping in the third quarter and the other is expected to ship in the Company’s fourth quarter. All of these current product lines are repeat business which should sustain the Company going forward. The Company is looking at ways to restructure its TEMPEST business by focusing on a couple of key customers for the TEMPEST services side of the business, which would provide a steady flow of business. The division will continue to provide products to existing customers. The Company relocated the corporate accounting functions to the Cocoa, Florida location which allows the Company to become more efficient and save money on reducing redundant operations. The former headquarters and distribution center in Tucker, Georgia closed as of March 31, 2022.
In order to assist funding operating activity, the Company’s CEO loaned an additional $
The ability of the Company to continue as a going concern is dependent upon the success of management’s plans to improve revenues, the operational effectiveness of continuing operations, the procurement of suitable financing, or a combination of these. The uncertainty regarding the potential success of management’s plan creates substantial doubt about the ability of the Company to continue as a going concern.
Note 3. – Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. This guidance is effective for annual reporting periods beginning after December 15, 2022 for smaller reporting companies, with early adoption permitted. Entities will apply the amendments using a modified retrospective approach. The adoption of ASU 2016-13 did not have a material impact on its financial statements and related disclosures of the Company.
Note 4. - Inventories
Inventories are stated at the lower of cost (first in, first out) or market and consisted of the following (in thousands):
November 30, |
February 28, |
|||||||
2023 |
2023 |
|||||||
Raw materials |
$ | $ | ||||||
Work-in-process |
||||||||
Finished goods |
||||||||
$ | $ |
Note 5. – Note Payable to Officers and Directors (Related Party Transactions)
The Company increased borrowings by $
Note 6. – Leases
Operating Leases
The Company leases its office space and manufacturing facilities under operating lease agreements. The base lease terms expire at various dates through 2025. While each of the leases include renewal options, the Company has only included the base lease term in its calculation of lease assets and liabilities.
Balance sheet information related to operating leases is as follows (in thousands):
November 30, 2023 |
February 28, 2023 |
|||||||
Assets |
||||||||
Operating lease right-of-use assets |
$ | $ | ||||||
Liabilities |
||||||||
Current portion of operating lease liabilities |
$ | $ | ||||||
Noncurrent portion of operating lease liabilities |
$ | |||||||
Total operating lease liabilities |
$ | $ |
Operating lease costs are included in Cost of goods sold in the Company’s condensed consolidated statements of operations and totaled approximately $
Cash paid for amounts included in the measurement of operating lease liabilities was approximately $
Weighted average information associated with the measurement of the Company’s remaining operating lease obligations is as follows:
November 30, 2023 |
February 28, 2023 |
||||||
Weighted average remaining lease term (in years) |
|
|
|||||
Weighted average discount rate |
The following table summarizes the maturity of the Company’s operating lease liabilities as of November 30, 2023 (in thousands):
FY2024 |
$ | |||
FY2025 |
||||
Total operating lease payments |
||||
Less imputed interest |
( |
) | ||
Total operating lease liabilities |
$ |
Included above are leases for manufacturing and warehouse facilities leased from Southeast Metro Savings, LLC and Honeyhill Properties, LLC (entities which are controlled by the Company’s chief executive officer) under operating leases expiring at various dates through 2025. Lease costs under these leases totaled approximately $
The Company subleases certain of its warehousing space at its Kentucky location. The amount of the sublease is negligible as of November 30, 2023 and totaled approximately $
Financing Leases
The Company has one financing lease entered into on November 23, 2020 for Tempest testing equipment for $
Balance sheet information related to financing lease is as follows (in thousands):
November 30, 2023 |
February 28, 2023 |
|||||||
Property, plant & equipment less accumulated depreciation |
$ | $ | ||||||
Current portion of financing lease liabilities |
$ | $ | ||||||
Noncurrent portion of financing lease liabilities |
$ | $ | ||||||
Total financing lease liabilities |
$ | $ |
The following table summarizes the maturity of the Company’s finance lease liabilities as of November 30, 2023 (in thousands):
Fiscal Year |
Amount |
|||
2024 |
$ | |||
Total finance lease payments |
$ | |||
Less imputed interest |
||||
Total finance lease liabilities |
$ |
Note 7 . – Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
Nine Months |
||||||||
Ended November 30, |
||||||||
2023 |
2022 |
|||||||
Cash paid for: |
||||||||
Interest |
$ | $ |
Note 8. – Shareholders’ Equity
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding during each period. Shares issued during the period are weighted for the portion of the period that they were outstanding. Diluted earnings (loss) per share is calculated in a manner consistent with that of basic earnings (loss) per share while giving effect to all potentially dilutive common shares that were outstanding during the period.
The following table sets forth the computation of basic and diluted earnings (loss) per share for the three and nine month periods ended November 30, 2023 and 2022 (in thousands, except per share data):
Weighted |
Earnings |
|||||||||||
Average |
(Loss) |
|||||||||||
Net Income |
Common Shares |
Per |
||||||||||
(Loss) |
Outstanding |
Share |
||||||||||
Three months ended November 30, 2023 |
||||||||||||
Basic |
$ | ( |
) | $ | ( |
) | ||||||
Effect of dilution: |
||||||||||||
Options |
- | |||||||||||
Diluted |
$ | ( |
) | $ | ( |
) | ||||||
Three months ended November 30, 2022 |
||||||||||||
Basic |
$ | ( |
) | $ | ( |
) | ||||||
Effect of dilution: |
||||||||||||
Options |
- | |||||||||||
Diluted |
$ | ( |
) | $ | ( |
) |
Weighted |
||||||||||||
Average |
Earnings (Loss) |
|||||||||||
Net |
Common Shares |
Per |
||||||||||
Income (Loss) |
Outstanding |
Share |
||||||||||
Nine months ended November 30, 2023 |
||||||||||||
Basic |
$ | ( |
) | $ | ( |
) | ||||||
Effect of dilution: |
||||||||||||
Options |
- | |||||||||||
Diluted |
$ | ( |
) | $ | ( |
) | ||||||
Nine months ended November 30, 2022 |
||||||||||||
Basic |
$ | ( |
) | $ | ( |
) | ||||||
Effect of dilution: |
||||||||||||
Options |
- | |||||||||||
Diluted |
$ | ( |
) | $ | ( |
) |
Stock options, debentures, and other liabilities convertible into
Stock Repurchase Program
The Company has a stock repurchase program, pursuant to which it had been authorized to repurchase up to
For the nine-months ending November 30, 2023 and November 30, 2022, the Company did
Note 9. – Income Taxes
Due to the Company’s overall and historical net loss position,
income tax expense was reported for the nine- month period ending November 30, 2023 and November 30, 2022. Due to continued losses reported by the Company, a full valuation allowance was allocated to the deferred tax asset created by these losses.
Note 10. – Legal Proceedings
The Company is involved in various legal proceedings related to claims arising in the ordinary course of business. The Company is not currently party to any legal proceedings the result of which management believes is likely to have a material adverse impact on its business, financial position, results of operations or cash flows.
Note 11. – Subsequent Events
On December 1, 2023, the Company sold all the outstanding stock and rights to ownership of its subsidiaries Lexel Imaging, Inc. and Unicomp LLC, to Ordway Properties LLC, a related party owned by the Company’s CEO, for the total purchase price of three hundred sixty-five thousand dollars ($
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached unaudited interim condensed consolidated financial statements and with the Company's 2023 Annual Report to Shareholders, which included audited consolidated financial statements and notes thereto as of and for the fiscal year ended February 28, 2023, as well as Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The Company manufactures and distributes a wide range of display devices, encompassing, among others, industrial, military, medical, and simulation display solutions. The Company is comprised of one segment - the manufacturing and distribution of displays and display components. The Company is organized into four interrelated operations aggregated into one reportable segment.
● |
Simulation and Training Products – offers a wide range of projection display systems for use in training and simulation, military, medical, entertainment and industrial applications. |
|
● |
Cyber Secure Products – offers advanced TEMPEST technology, and EMSEC products. This business also provides various contract services including the design and testing solutions for defense and niche commercial uses worldwide. |
|
● |
Data Display CRTs– offers a wide range of CRTs for use in data display screens, including computer terminal monitors and medical monitoring equipment. |
|
● |
Other Computer Products – offers a variety of keyboard products. |
During fiscal 2024, management of the Company is focusing key resources on strategic efforts to grow its business through internal sales of the Company’s more profitable product lines and reduce expenses in all areas of the business to bring its cost structure in line with the current size of the business. Challenges facing the Company during these efforts include:
Liquidity –
The accompanying unaudited interim condensed consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company reported a net loss and a decrease in working capital for the nine-month period ending November 30, 2023 primarily due to insufficient revenues in the Company. The Company also had a decrease in liquid assets for the nine- month period primarily as a result of the lack of revenue. The Company has sustained losses for the last four of five fiscal years and has seen overall a decline in working capital and liquid assets during this five -year period. Annual losses over this time are due to a combination of decreasing revenues across the divisions without a commensurate reduction of expenses. The Company’s working capital and liquid asset position are presented below (in thousands) as of November 30, 2023 and February 28, 2023:
November 30, 2023 |
February 28, 2023 |
|||||||
Working capital |
$ | (1,575 | ) | $ | (1,297 | ) | ||
Liquid asset |
$ | 136 | $ | 400 |
The Company has focused on building the rugged and specialty display business at the Cocoa, Florida subsidiary. The Company has four primary display lines in production with one more expected to be added in fiscal year 2024. There had been some unforeseen delays causing two of these product lines to be delayed in shipping, but most of these issues were resolved with one of the products shipping in the third quarter and the other is expected to ship in the Company’s fourth quarter. All of these current product lines are repeat business which should sustain the Company going forward. The Company is looking at ways to restructure its TEMPEST business by focusing on a couple of key customers for the TEMPEST services side of the business, which would provide a steady flow of business. The division will continue to provide products to existing customers. The Company relocated the corporate accounting functions to the Cocoa, Florida location which allows the Company to become more efficient and save money on reducing redundant operations. The former headquarters and distribution center in Tucker, Georgia closed as of March 31, 2022.
In order to assist funding operating activity, the Company’s CEO loaned an additional $710 thousand to the company during the first nine months of fiscal year 2024. There is no line of credit outstanding or other financing currently in place other than the note payable with the Company CEO with a balance of $2,094 thousand. There are no repayment terms related to the loan, however, the Company plans to repay the note within the next twelve months and therefore has classified the loan as a current liability on the condensed consolidated balance sheets as of November 30, 2023.
The ability of the Company to continue as a going concern is dependent upon the success of management’s plans to improve revenues, the operational effectiveness of continuing operations, the procurement of suitable financing, or a combination of these. The uncertainty regarding the potential success of management’s plan creates substantial doubt about the ability of the Company to continue as a going concern.
Inventory valuation – Management regularly reviews the Company’s investment in inventories for declines in value and writes down the cost when it is apparent that the expected net realizable value of the inventory falls below its carrying amount. The Company operates in an environment of constantly changing technologies and retains a certain amount of inventory for legacy products for maintenance and replacement capabilities for its customers. The Company maintains inventory on certain products to ensure it has adequate inventory to fulfill orders for transitioning product lines. Management reviews inventory levels on a quarterly basis. Such reviews include observations of product development trends of the original equipment manufacturers, new products being marketed, and technological advances relative to the product capabilities of the Company’s existing inventories.
Results of Operations
The following table sets forth, for the three and nine months ended November 30, 2023 and 2022, the percentages that selected items in the Interim Condensed Consolidated Statements of Operations bear to total sales (amounts in thousands):
Three Months Ended November 30, |
Nine Months Ended November 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Net Sales |
||||||||||||||||
Simulation and Training (VDC Display Systems) |
77.5 |
% |
64.2 |
% |
73.0 |
% |
65.4 |
% |
||||||||
Data Display CRT (Lexel and Data Display) |
5.7 | 19.7 | 9.4 | 18.7 | ||||||||||||
Cyber Secure Products (AYON Cyber Security) |
8.1 | 4.3 | 7.0 | 5.3 | ||||||||||||
Other Computer Products (Unicomp) |
8.7 | 11.8 | 10.6 | 10.6 | ||||||||||||
Total net sales |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
||||||||
Costs and expenses |
||||||||||||||||
Cost of goods sold |
70.8 |
% |
82.5 |
% |
73.4 |
% |
76.7 |
% |
||||||||
Selling and delivery |
9.1 | 5.5 | 6.0 | 5.7 | ||||||||||||
General and administrative |
41.0 | 52.4 | 36.4 | 40.0 | ||||||||||||
120.9 |
% |
140.4 |
% |
115.8 |
% |
122.4 |
% |
|||||||||
Operating loss |
(20.9 |
%) |
(40.4 |
%) |
(15.8 | %) | (22.4 |
%) |
||||||||
Interest income (expense), net |
(0.0 | %) | (0.2 |
%) |
(0.1 | %) | (0.2 |
%) |
||||||||
Other income (expense), net |
0.7 | (1.6 | ) | 8.6 | 8.1 | |||||||||||
Income (loss) before income taxes |
(20.2 | %) | (42.2 |
%) |
(7.3 | %) | (14.5 |
%) |
||||||||
Income tax expense |
- | - | - | - | ||||||||||||
Net income (loss) |
(20.2 | %) | (42.2 |
%) |
(7.3 | %) | (14.5 |
%) |
Net sales
Consolidated net sales increased 6.9% for the nine months ended November 30, 2023, and increased 19.6% for the three months ended November 30, 2023, compared to the nine months and three months ended November 30, 2022. The Display Systems division was up 19.4% for the nine months ended November 30, 2023, compared to the comparable period last year. The division has a varied mix of products including ruggedized displays, simulation, projector systems and specialty displays. For the three months ended November 30, 2023, the Display System division was up 44.5% compared to the same three months last year. The Company is focused on the ruggedized displays sector of the business, having revenue of approximately $2.8 million of rugged displays in the year. One of the Company’s rugged displays had delays in shipping, and will begin shipping in the Company’s fourth quarter. The Company’s AYON Cyber Security (ACS) division increased by 42.3% for the nine months ending November 30, 2023, compared to the nine months last year, $489 thousand this year, $343 thousand last year. The Company’s service side of the cyber business (testing other company’s products for compliance) was their primary revenue source. For the three months ending November 30, 2023, ACS business increased 123.1% compared to the comparable three-month period from last year. The Data Display division decreased 46.4% and 65.8% for the nine months and three months ended November 30, 2023, compared to the same period in the prior year due to decreases in the sales of CRTs. The demand for CRT products is diminishing as new technologies take its place. The division is exploring new opportunities in other industries. The Company’s keyboard division increased 6.2% for the nine months ended November 30, 2023, and was down 11.7% for three months ended November 30, 2023, respectively compared to the same periods last year. The division has been slow, but is attempting to get a new marketing strategy in place in an effort to increase sales.
Gross margins
Consolidated gross margins increased both as a percentage to sales (26.6% from 23.3%) and actual dollars ($1,846 thousand from $1,514 thousand) for the nine months ended November 30, 2023, compared to the nine months ended November 30, 2022. For the three months ended November 30, 2023, consolidated gross margins increased as a percentage to sales (29.2% from 17.5%) and increased actual dollars ($589 thousand from $295 thousand).
VDC Display Systems gross margin dollars were $1,811 thousand for the nine months ended November 30, 2023 compared to $1,412 thousand, for the the nine months ended November 30, 2022. VDC Display Systems gross margin percentage also increased from 33.3% to 35.7% for the nine months ended November 30, 2023, compared to the same nine months in 2022. AYON Cyber Security gross margin dollars were $271 thousand compared to $72 thousand for the nine months ended November 30, 2023, compared to the nine months ended November 30, 2022. AYON Cyber Security gross margin percentage increased to 55.4% from 21.0% for the nine months ended November 30, 2023 compared to the same nine-month period in 2022 due to the sales mix of primarily service jobs as the material costs were lower.
The Data Display division had a negative gross margin of $418 thousand compared to a negative gross margin of $99 for the nine months ended November 30, 2023, and November 30, 2022, respectively. The keyboard division, Unicomp, had $182 thousand of gross margin dollars or 24.8% to sales for the nine months ending November 30, 2023, compared to $129 thousand or 18.7% for the nine months ending November 30, 2022.
Operating expenses
Operating expenses decreased 0.8% or $23 thousand for the nine months ended November 30, 2023, compared to the nine months ended November 30, 2022. The decrease was due primarily to the decreased costs in administrative expenses. The various expenses have changed over the course of the year resulting in a slight decrease. The Company expects to continue to control costs while increasing revenues in tempest services, specialized displays and ruggedized displays. The Company has been filling vacancies that went unfilled following the pandemic as business conditions have changed. The Company expects costs will stay in line with the increase in business.
Operating expenses increased by 3.5% or $35 thousand for the three months ended November 30, 2023, compared to the three months ended November 30, 2022. The increase was due primarily to employee and contractor commissions as the Company increases sales of the rugged displays.
Interest expense
Interest expense was $4 thousand for the nine months ended November 30, 2023, compared to $13 thousand for the nine months ended November 30, 2022. Interest expense was $1 thousand for the three months ended November 30, 2023, and $4 thousand for the three months ended November 30, 2022. Interest expense in fiscal 2024 relates primarily to interest expense on the lease of TEMPEST equipment.
Other Income/ expense
For the nine months ended November 30, 2023, the Company had $238 thousand in retention credit income, $284 thousand in a write of prior year deferred salary of the Company CEO, $72 thousand in the sale of fully depreciated assets, $3 thousand in royalty income, $2 thousand for an insurance audit refund and $1 thousand rental income. For the nine months ended November 30, 2022, the Company received $498 thousand in proceeds from a class action lawsuit, $19 thousand in rental income, $32 thousand in retention credit revenue, $3 thousand on the sale of assets and $4 thousand in interest income.
For the three months ended November 30, 2023, the Company had $12 thousand in the sale of fully depreciated assets and $3 thousand in royalty income. For the three months ended November 30, 2022, the Company received $2 thousand in rental income and $2 thousand in interest income, offset by $31 thousand for the payment of a lawsuit.
Income taxes
Due to the Company’s overall and historical net loss position, no income tax has been reported and a full valuation allowance has been allocated to the deferred tax asset created by these losses.
Liquidity and Capital Resources
The accompanying unaudited interim condensed consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company reported a net loss and a decrease in working capital for the nine-month period ending November 30, 2023, primarily due to insufficient revenues in the Company. The Company also had a decrease in liquid assets for the nine- month period primarily as a result of the lack of revenue. The Company has sustained losses for the last four of five fiscal years and has seen overall a decline in working capital and liquid assets during this five -year period. Annual losses over this time are due to a combination of decreasing revenues across the divisions without a commensurate reduction of expenses. The Company’s working capital and liquid asset position are presented below (in thousands) as of November 30, 2023, and February 28, 2023:
November 30, 2023 |
February 28, 2023 |
|||||||
Working capital |
$ | (1,575 | ) | $ | (1,297 | ) | ||
Liquid assets |
$ | 136 | $ | 400 |
Management continues to implement plans to improve liquidity and to increase revenues at all divisions. The ability of the Company to continue as a going concern is dependent upon the success of management’s plans to improve revenues, the operational effectiveness of continuing operations, the procurement of suitable financing, or a combination of these. The uncertainty regarding the potential success of management’s plan create substantial doubt about the ability of the Company to continue as a going concern.
Cash used in operations for the nine months ended November 30, 2023, was $0.9 million. Adjustments to net loss of $0.4 million were $0.2 million for depreciation, $0.3 million for non-cash lease cost, offset by $0.1 million for gain on disposal of equipment. Changes in working capital used $0.8 million, primarily an increase in inventory of $0.9 million, a decrease in operating lease liabilities of $0.3 million, and a decrease in accounts payable of $0.1 million, offset by a decrease in contract assets of $0.2 million, a decrease in accounts receivables of $0.2 million and a decrease in accounts payable and accrued liabilities of $0.1 million. Cash used in operations for the nine months ended November 30, 2022, was $0.7 million. Deductions to net loss were $0.3 million for depreciation and amortization. Changes in working capital were negligible, primarily change in contract assets of $0.2 million, a change in accounts payables of $0.2 million, a change in accounts receivable of $0.3 million and a change in prepaid expenses and other assets of 0.1 million, offset by a change in inventories of $0.5 million, a change in employee retention credit receivables of $0.3 million.
Investing activities included $72 thousand of proceeds from disposal of equipment, offset by $41 thousand of capital expenditures for the nine months ended November 30, 2023. Investing activities used $44 thousand of capital expenditures offset by $3 thousand for proceeds of disposals of equipment for the nine months ended November 30, 2022.
Financing activities provided $636 thousand for the nine months ended November 30, 2023, as the result of borrowings from the CEO of $710 thousand offset by payment of debt and lease payments of $74 thousand. Financing activities provided $0.7 million for the nine months ended November 30, 2022, primarily from proceeds from additional borrowing from the Company’s CEO.
The Company has a stock repurchase program, pursuant to which it has been authorized to repurchase up to 2,632,500 shares of the Company’s common stock in the open market. On January 20, 2014, the Board of Directors of the Company approved a one-time continuation of the stock repurchase program, and authorized the Company to repurchase up to 1,500,000 additional shares of the Company’s common stock on the open market, depending on the market price of the shares. There is no minimum number of shares required to be repurchased under the program.
For the nine months ending November 30, 2023, and November 30, 2022, the Company did not purchase any shares of the Video Display Corporation stock. Under the Company’s stock repurchase program, an additional 490,186 shares remain authorized to be repurchased by the Company as of November 30, 2023.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company’s interim condensed consolidated financial statements. These interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the interim condensed consolidated financial statements and related notes. The accounting policies that may involve a higher degree of judgments, estimates, and complexity include reserves on inventories, revenue recognition, and the sufficiency of the valuation reserve related to deferred tax assets. The Company uses the following methods and assumptions in determining its estimates:
Inventory Valuation
Management regularly reviews the Company’s investment in inventories for declines in value and writes down the cost when it is apparent that the expected net realizable value of the inventory falls below its carrying amount. The Company operates in an environment of constantly changing technologies and retains a certain amount of inventory for legacy products for maintenance and replacement capabilities for its customers. The Company maintains inventory on certain products to ensure it has adequate inventory to fulfill orders for transitioning product lines. Management reviews inventory levels on a quarterly basis. Such reviews include observations of product development trends of the original equipment manufacturers, new products being marketed, and technological advances relative to the product capabilities of the Company’s existing inventories.
Revenue Recognition
We recognize revenue when we transfer control of the promised products or services to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services. We derive our revenue primarily from sales of simulation and video wall systems, cyber secure products, data displays, and keyboards. We exclude sales and usage-based taxes from revenue.
Our simulation and video wall systems are custom-built (using commercial off-the-shelf products) to customer specifications under fixed price contracts. Judgment is required to determine whether each product and service is considered to be a distinct performance obligation that should be accounted for separately under the contract. Generally, these contracts contain one performance obligation (the installation of a fully functional system). We recognize revenue for these systems over time as control is transferred based on labor hours incurred on each project.
We recognize revenue related to our cyber secure products, data displays, and keyboards at a point in time when control is transferred to the customer (generally upon shipment of the product to the customer).
Timing of invoicing to customers may differ from timing of revenue recognition; however, our contracts do not include a significant financing component as substantially all of our invoices have terms of 30 days or less. We are applying the practical expedient to exclude from consideration any contracts with payment terms of one year or less and we never offer terms extending beyond one year.
Other Loss Contingencies
Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple factors that often depend on judgments about potential actions by third parties.
Income Taxes
Deferred income taxes are provided to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of November 30, 2023, the Company has established a valuation allowance of $6.4 million on the Company’s deferred tax assets.
The Company accounts for uncertain tax positions under the provisions of ASC 740, which contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company's tax positions and tax benefits, which may require periodic adjustments. At November 30, 2023, the Company did not record any liabilities for uncertain tax positions.
Forward - Looking Information and Risk Factors
This report contains forward-looking statements and information that is based on management’s beliefs, as well as assumptions made by, and information currently available to management. When used in this document, the words “anticipate,” “believe,” “estimate,” “intends,” “will,” and “expect” and similar expressions are intended to identify forward-looking statements. Such statements involve a number of risks and uncertainties. These risks and uncertainties, which are included under Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended February 28, 2023 could cause actual results to differ materially.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company’s primary market risks include changes in technology. The Company operates in an industry which is continuously changing. Failure to adapt to the changes could have a detrimental effect on the Company.
ITEM 4. CONTROLS AND PROCEDURES
Our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, such as this quarterly report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
Our chief executive officer and chief financial officer have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of November 30, 2023. We perform this evaluation on a quarterly basis so that the conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our annual report on Form 10-K and quarterly reports on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of November 30, 2023.
Changes in Internal Controls
There have not been any changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II
Item 1. |
Legal Proceedings |
None.
Item 1A. |
Risk Factors |
Information regarding risk factors appears under the caption Forward-Looking Information and Risk Factors in Part I, Item 2 of this Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 28, 2023. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. |
Defaults upon Senior Securities |
None.
Item 4. |
Submission of Matters to a Vote of Security Holders |
None.
Item 5. |
Other information |
None.
Item 6. |
Exhibits |
Exhibit Number |
Exhibit Description |
|
3(a) |
Articles of Incorporation of the Company (incorporated by reference to Exhibit 3A to the Company’s Registration Statement on Form S-18 filed January 15, 1985). |
|
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). |
|
10(b) |
||
10(c) |
||
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 |
Inline XBRL Instance Document |
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
104 | Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
VIDEO DISPLAY CORPORATION |
|
|
|
|
|
January 12, 2024 |
By: |
/s/ Ronald D. Ordway |
|
|
|
Ronald D. Ordway |
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
January 12, 2024 |
By: |
/s/ Gregory L. Osborn |
|
|
|
Gregory L. Osborn |
|
|
|
Chief Financial Officer |
|