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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended November 30, 2016

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 on its charter)

 

 

 

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

1868 TUCKER INDUSTRIAL ROAD, TUCKER, GEORGIA 30084

(Address of principal executive offices)

770-938-2080

(Registrant’s telephone number including area code)

 

 

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

Indicate by check mark whether the registrant is a large accelerated filer, and 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  
Non-accelerated filer      Smaller reporting company  

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

As of November 30, 2016, the registrant had 5,890,748 shares of Common Stock outstanding.

 

 

 


Table of Contents

Video Display Corporation and Subsidiaries

Index

 

         Page  
PART I. FINANCIAL INFORMATION   
  Item 1.   Financial Statements.   
   

Interim Condensed Consolidated Balance Sheets – November  30, 2016 (unaudited) and February 29, 2016

     3   
   

Interim Condensed Consolidated Income Statements - Nine months ended November 30, 2016 and 2015 (unaudited)

     5   
   

Interim Condensed Consolidated Statement of Shareholders’ Equity - Nine months ended November 30, 2016 (unaudited)

     6   
   

Interim Condensed Consolidated Statements of Cash Flows – Nine months ended November 30, 2016 and 2015 (unaudited)

     7   
   

Notes to Interim Condensed Consolidated Financial Statements - November  30, 2016 (unaudited)

     8   
  Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.      17   
  Item 3.   Quantitative and Qualitative Disclosure About Market Risk.      24   
  Item 4.   Controls and Procedures.      24   
PART II. OTHER INFORMATION   
  Item 1.   Legal Proceedings.      26   
  Item 1A.   Risk Factors.      26   
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.      26   
  Item 3.   Defaults upon Senior Securities.      26   
  Item 4.   Submission of Matters to a Vote of Security Holders.      26   
  Item 5.   Other Information.      26   
  Item 6.   Exhibits.      26   
  SIGNATURES      28   
      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.   

 

2


Table of Contents

ITEM 1 – FINANCIAL STATEMENTS

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Balance Sheets (Unaudited)

(in thousands)

 

     November 30,     February 29,  
     2016     2016  
     (unaudited)        

Assets

    

Current assets

    

Cash and cash equivalents

   $ 42      $ 491   

Trading investments, at fair value

     357        145   

Accounts receivable, less allowance for doubtful accounts of $27 and $16

     1,767        1,072   

Note receivable

     171        200   

Inventories, net

     4,268        4,476   

Prepaid expenses and other

     643        104   

Assets of discontinued operations

     3,158        3,361   
  

 

 

   

 

 

 

Total current assets

     10,406        9,849   
  

 

 

   

 

 

 

Property, plant, and equipment

    

Land

     154        154   

Buildings

     2,705        2,614   

Machinery and equipment

     3,470        3,507   

Construction in progress

     —          94   
  

 

 

   

 

 

 
     6,329        6,369   

Accumulated depreciation and amortization

     (5,001     (5,073
  

 

 

   

 

 

 

Net property, plant, and equipment

     1,328        1,296   
  

 

 

   

 

 

 

Note receivable

     635        728   

Other assets

     23        29   

Assets of discontinued operations

     28        42   
  

 

 

   

 

 

 

Total assets

   $ 12,420      $ 11,944   
  

 

 

   

 

 

 

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

 

3


Table of Contents

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Balance Sheets (continued)

(in thousands)

 

     November 30,     February 29,  
     2016     2016  
     (unaudited)        

Liabilities and Shareholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 676      $ 720   

Accrued liabilities

     503        616   

Current maturities of long-term debt

     54        52   

Customer deposits

     1,468        —     

Current maturities of note payable to officer

     171        85   

Billings in excess of costs

     —          160   

Liabilities of discontinued operations

     963        1,420   
  

 

 

   

 

 

 

Total current liabilities

     3,835        3,053   

Long-term debt, less current maturities

     91        131   

Note payable to officer, less current maturities

     635        —     

Deferred rent

     210        300   
  

 

 

   

 

 

 

Total liabilities

     4,771        3,484   
  

 

 

   

 

 

 

Shareholders’ Equity

    

Preferred stock, no par value – 10,000 shares authorized; none issued and outstanding

     —          —     

Common stock, no par value – 50,000 shares authorized; 9,732 issued and 5,891 outstanding at November 30, 2016 and February 29, 2016.

     7,293        7,293   

Additional paid-in capital

     186        182   

Retained earnings

     16,438        17,253   

Treasury stock, shares at cost; 3,841 at November 30, 2016 and February 29, 2016

     (16,268     (16,268
  

 

 

   

 

 

 

Total shareholders’ equity

     7,649        8,460   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 12,420      $ 11,944   
  

 

 

   

 

 

 

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

 

4


Table of Contents

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Income Statements (Unaudited)

(in thousands, except per share data)

 

     Three Months Ended
November 30,
    Nine Months Ended
November 30,
 
     2016     2015     2016     2015  

Net sales

   $ 4,015      $ 2,387      $ 7,828      $ 7,670   

Cost of goods sold

     3,336        2,829        6,833        7,798   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     679        (442     995        (128
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Selling and delivery

     254        231        684        721   

General and administrative

     556        1,274        1,872        2,946   
  

 

 

   

 

 

   

 

 

   

 

 

 
     810        1,505        2,556        3,667   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (131     (1,947     (1,561     (3,795
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest income/ (expense)

     (3     16        (3     26   

Investment income/(loss)

     30        (153     218        (1,604

Other, net

     44        22        68        98   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (60     (2,062     (1,278     (5,275
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense/(benefit)

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     (60   $ (2,062     (1,278   $ (5,275
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations, net of income tax effect

     15        (77     463        201   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (45   $ (2,139   $ (815   $ (5,074
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share:

        

From continuing operations-basic

   $ (0.01   $ (0.35   $ (0.22   $ (0.89

From continuing operations-diluted

   $ (0.01   $ (0.35   $ (0.22   $ (0.89

From discontinued operations-basic

   $ 0.00      $ (0.01   $ 0.08      $ 0.03   
  

 

 

   

 

 

   

 

 

   

 

 

 

From discontinued operations-diluted

   $ 0.00      $ (0.01   $ 0.08      $ 0.03   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average shares outstanding

     5,891        5,894        5,891        5,915   
  

 

 

   

 

 

   

 

 

   

 

 

 
        
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

     5,891        5,897        5,891        5,916   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Statement of Shareholders’ Equity

Nine Months Ended November 30, 2016 (unaudited)

(in thousands)

 

     Common
Shares
     Share
Amount
     Additional
Paid-in
Capital
     Retained
Earnings
    Treasury
Stock
 

Balance, February 29, 2016

     5,891       $ 7,293       $ 182       $ 17,253      $ (16,268

Net loss

     —           —           —           (815     —     

Share based compensation

     —           —           4         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance, November 30, 2016

     5,891       $ 7,293       $ 186       $ 16,438      $ (16,268
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

 

6


Table of Contents

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

     Nine Months Ended
November 30,
 
     2016     2015  

Operating Activities

    

Net income (loss)

   $ (815   $ (5,074

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

    

Income from discontinued operations, net of tax

     (463     (201

Depreciation and amortization

     166        254   

Provision for doubtful accounts

     20        37   

Provision for inventory reserve

     275        825   

Non-cash charge for share based compensation

     3        9   

Loss on disposal of an asset

     92        —     

Loss from impairment of intangible assets

     —          471   

Realized/unrealized (gain) loss on investments

     (206     1,881   

Changes in working capital items:

    

Accounts receivable

     (715     (72

Note receivable

     16        (77

Inventories

     (67     1,263   

Prepaid expenses and other assets

     (533     (30

Customer deposits

     1,468        —     

Accounts payable and accrued liabilities

     (150     (83

Deferred rental income

     (90     (90

Cost, estimated earnings and billings on uncompleted contracts

     (160     187   

Income taxes refundable/payable

     (5     720   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (1,164     20   
  

 

 

   

 

 

 

Investing Activities

    

Capital expenditures

     (289     (101

Cash advance from discontinued operations

     223        596   

Purchases of investments

     (617     (7,187

Sales of investments

     793        9,447   
  

 

 

   

 

 

 

Net cash provided by investing activities

     110        2,755   
  

 

 

   

 

 

 

Financing Activities

    

Proceeds from related party loans

     912        80   

Repayments of related party loans

     (85     (80

Repayments of long-term debt

     (39     (37

Purchase of treasury stock

     —          (116

Repayment/proceeds of marginal float

     (183     (2,378
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     605        (2,531
  

 

 

   

 

 

 

Discontinued Operations

    

Operating activities

     313        382   

Investing activities

     (224     (428
  

 

 

   

 

 

 

Net cash provided by (used in) discontinued operations

     89        (46
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (360     198   

Cash and cash equivalents, beginning of year

     595        172   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

     235        370   

Cash and cash equivalents, discontinued operations

     193        64   
  

 

 

   

 

 

 

Cash and cash equivalents, continuing operations

     42        306   
  

 

 

   

 

 

 

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

 

7


Table of Contents

Video Display Corporation and Subsidiaries

November 30, 2016

Note 1. – Summary of Significant Accounting Policies

The interim condensed consolidated financial statements include the accounts of Video Display Corporation and its majority-owned subsidiaries (the “Company”) after elimination of all significant intercompany accounts and transactions.

As contemplated by the Securities and Exchange Commission (the “SEC” or “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual consolidated financial statements. Reference should be made to the Company’s year-end consolidated financial statements and notes thereto, including a description of the accounting policies followed by the Company, contained in its Annual Report on Form 10-K as of and for the fiscal year ended February 29, 2016, as filed with the Commission. There are no material changes in significant accounting policies during the nine months ended November 30, 2016.

The interim condensed consolidated financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the interim condensed consolidated financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The February 29, 2016 consolidated balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S. GAAP).

Note 2. – Banking & Liquidity

The accompanying 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 has sustained losses for each of the last two years and has seen a decline in both its working capital and liquid assets during this time. These losses were a combination of low revenues at all divisions without a commensurate reduction of expenses. During the year ended February 29, 2016, the Company operated using cash from operations of $0.8 million, which was primarily generated from a $0.7 million tax refund that was non-recurring in nature. During the nine months ended November 30, 2016 operational cash flows used were $1.2 million. Related to these operational results the Company’s working capital and liquid asset position are presented below (in thousands) as of the nine months ended November 30, 2016 and the year-ended February 29, 2016:

 

     November 30,
2016
     February 29,
2016
 

Working capital from continuing operations

   $ 4,376       $ 4,855   

Liquid assets

   $ 399       $ 636   

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 with an increase in the current backlog and growth in revenues. The Company has a plan to reduce expenses at the divisions, as well as at the corporate location with the expectation that expenses will be decreased by more than $1.7 million per year. Management continues to explore options to monetize certain long-term assets of the business, including current intentions to sell its Lexel Imaging subsidiary, presented as discontinued operations. The Company secured a $500 thousand line of credit on September 14, 2016. 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.

 

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Table of Contents

Video Display Corporation and Subsidiaries

November 30, 2016

 

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, to liquidate the subsidiary noted above, the procurement of suitable financing, or a combination of these. There can be no assurances that managements can be executed successfully, if at all. 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.

Note 3. – Fair Value Measurements and Financial Instruments

The Financial Accounting Standards Board’s (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 held for trading using Level 1 inputs. The following table sets forth our financial assets and liabilities that were accounted for at fair value on a recurring basis as of November 30, 2016 and February 29, 2016 (in thousands):

 

     November 30, 2016      Level 1 Assets
and Liabilities
     Level 2 Assets
and Liabilities
     Level 3 Assets
and Liabilities
 

Current trading investments:

           

Marketable equity securities

   $ 572       $ 572         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total value of investments

   $ 572       $ 572         —           —     

Current Liabilities:

           

Margin balance

     (215      (215      —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total value of liabilities

   $ (215    $ (215      —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 357       $ 357         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     February 29, 2016      Level 1 Assets
and Liabilities
     Level 2 Assets
and Liabilities
     Level 3 Assets
and Liabilities
 

Current trading investments:

           

Marketable equity securities

   $ 542       $ 542         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total value of investments

   $ 542       $ 542         —           —     

Current Liabilities:

           

Margin balance

     (397      (397      —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total value of liabilities

     (397      (397      —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 145       $ 145         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9


Table of Contents

Video Display Corporation and Subsidiaries

November 30, 2016

 

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.

Note 4. – Recent Accounting Pronouncements

In May, 2014, the FASB issued Accounting Standards Update No. (ASU) 2014-09 “Revenue with Contracts from Customers”. ASU 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”). The new guidance: (i) removes inconsistencies, and weaknesses in revenue requirements, (ii) provides a more robust framework for addressing revenue issues, (iii) improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (iv) provides more useful information to users of financial statements through improved disclosure requirements, and (v) simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer.

The guidance is effective for annual reporting periods beginning after December 15, 2016 including interim periods within that reporting period; however, a one year delay has been approved with the issuance of ASU 2015-14, “Revenue with Contracts from Customers”. The Company is still evaluating the effects that the adoption of this update will have on the Company’s consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements. Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to continue as a Going Concern”. Prior to its effective date there was no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. This update requires that an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable.) This update is effective for the annual reporting periods ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is still evaluating the effects that the adoption of this update will have on the Company’s consolidated financial position or results of operations.

In July 2015, the FASB issued ASU 2015-11,Simplifying the Measurement of Inventory”. ASU 2015-11 requires an entity to measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The guidance is effective for annual reporting periods beginning after December 15, 2016 and related interim periods. Early adoption is permitted. The Company does not believe this standard will have a material effect on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17,Balance Sheet Classification of Deferred Taxes”. ASU 2015-17 requires deferred tax assets and liabilities, along with related valuation allowances, to be classified as noncurrent on the balance sheet. Each tax jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. The Company does not expect the adoption of this update to have a material effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases”. ASU 2016-02 increases transparency and comparability among organizations by requiring entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about the lease arrangements. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. The Company is in the process of evaluating the impact of this guidance on the Company’s consolidated financial statements.

 

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Table of Contents

Video Display Corporation and Subsidiaries

November 30, 2016

 

Note 5. – 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 29,  
     2016      2016  

Raw materials

   $ 3,701       $ 3,878   

Work-in-process

     401         199   

Finished goods

     1,602         1,669   
  

 

 

    

 

 

 
     5,704         5,746   

Reserves for obsolescence

     (1,436      (1,270
  

 

 

    

 

 

 
   $ 4,268       $ 4,476   
  

 

 

    

 

 

 

Note 6. – Costs and Estimated Earnings Related to Billings on Uncompleted Contracts

Information relative to contracts in progress consisted of the following:

 

     November 30,      February 29,  
     2016      2016  

Costs incurred to date on uncompleted contracts

   $ —         $ 912   

Estimated earnings recognized to date on these contracts

     —           724   
  

 

 

    

 

 

 
     —           1,636   

Billings to date

     —           (1,796
  

 

 

    

 

 

 

Costs and estimated earnings in excess of billings, net

   $ —         $ (160
  

 

 

    

 

 

 

Costs and estimated earnings in excess of billings

   $ —         $ —     

Billings in excess of costs and estimated earnings

     —           (160
  

 

 

    

 

 

 
   $ —         $ (160
  

 

 

    

 

 

 

Costs and estimated earnings in excess of billings are the results of contracts in progress (jobs) in completing orders to customers’ specifications on contracts accounted for under FASB Accounting Standards Codification Topic No. ASC 605-35,Revenue Recognition: Construction-Type and Production-Type Contracts.” Costs included are material, labor, and overhead. These jobs require design and engineering effort for a specific customer purchasing a unique product. The Company records revenue on these fixed-price and cost-plus contracts on the percentage of completion basis using the ratio of costs incurred to estimated total costs at completion as the measurement basis for progress toward completion and revenue recognition. Any losses identified on contracts are recognized immediately. Contract accounting requires significant judgment relative to assessing risks, estimating contract costs and making related assumptions for schedule and technical issues. With respect to contract change orders, claims, or similar items, judgment must be used in estimating related amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is probable. Billings are generated based on specific contract terms, which might be a progress payment schedule, specific shipments, etc. None of the above contracts in progress contain post-shipment obligations.

 

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Changes in job performance, manufacturing efficiency, final contract settlements, and other factors affecting estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

As of November 30, 2016, there were no production costs that exceeded the aggregate estimated cost of all in process and delivered units relating to long-term contracts. Additionally, there were no claims outstanding that would affect the ultimate realization of full contract values. As of November 30, 2016, there were no progress payments that had been netted against inventory.

Note 7. – Long-Term Debt and Other Obligations

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

 

     November 30      February 29,  
     2016      2016  

Mortgage payable to bank; interest rate at Community Bank base rate plus 0.5% (4.00% as of November 30, 2016); monthly principal and interest payments of $5 thousand payable through October 2021; collateralized by land and building of Teltron Technologies, Inc.

     145         183   
  

 

 

    

 

 

 
     145         183   

Less current maturities

     (54      (52
  

 

 

    

 

 

 
   $ 91       $ 131   
  

 

 

    

 

 

 

The Company had outstanding margin account borrowings of $0.2 million as of November 30, 2016 and $0.4 million as of February 29, 2016. The margin account borrowings are used to purchase marketable equity securities and are netted against the investments in the balance sheet to show net trading investments. The gross investments were $0.6 million leaving net investments of $0.4 million after the margin account borrowings of $0.2 million for the period ending November 30, 2016 and $0.5 million leaving net investments of $0.1 million after the margin account borrowings of $0.4 million for the period ending February 29, 2016, respectively. The margin interest rate is 2%.

Note 8. – Related Party Transactions

The Company owed the Company’s Chief Executive Officer $85 thousand as of February 29, 2016. This money was borrowed during the Company’s fiscal year ended February 29, 2016 at an eight percent interest rate. The Company repaid the funds during the first quarter ending May 31, 2016. Interest paid on this loan during the quarter was $1 thousand.

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 in accordance with the provisions of ASC 860-10. 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 November 30, 2016 was $806 thousand.

 

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Note 9. – Supplemental Cash Flow Information

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

 

     Nine Months
Ended November 30,
 
     2016      2015  

Cash paid for:

     

Interest

   $ 12       $ 51   
  

 

 

    

 

 

 

Income taxes, net of refunds

   $ 21       $ (722
  

 

 

    

 

 

 

Non-cash activity:

     

Note receivable paid directly to officer

   $ 105         —     
  

 

 

    

 

 

 

Note payable to officer

   $ (105      —     
  

 

 

    

 

 

 

Imputed interest expense

   $ 65         —     
  

 

 

    

 

 

 

Imputed interest income

   $ (65      —     
  

 

 

    

 

 

 

Note 10. – Shareholder’s 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, 2016 and 2015 (in thousands, except per share data):

 

     Net
Income (Loss)
     Weighted
Average
Common Shares
Outstanding
     Earnings (Loss)
Per

Share
 

Nine months ended November 30, 2016

        

Basic-continuing operations

   $ (1,278      5,891       $ (0.22

Basic-discontinued operations

     463         5,891         0.08   

Effect of dilution:

        

Diluted-continuing operations

        

Diluted-discontinued operations

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ (815      5,891       $ (0.14

Nine months ended November 30, 2015

        

Basic-continuing operations

   $ (5,275      5,915       $ (0.89

Basic-discontinued operations

     201         5,915         0.03   

Effect of dilution:

        

Options

     —           1         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ (5,074      5,916       $ (0.86

 

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November 30, 2016

 

Three months ended November 30, 2016

        

Basic-continuing operations

   $ (60      5,891       $ (0.01

Basic-discontinued operations

     15         5,891         0.00   

Effect of dilution:

        

Diluted-continuing operations

        

Diluted-discontinued operations

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ (45      5,891       $ (0.01

Three months ended November 30, 2015

        

Basic-continuing operations

   $ (2,062      5,894       $ (0.35

Basic-discontinued operations

     (77      5,894         (0.01

Effect of dilution:

        

Options

     —           3         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ (2,139      5,897       $ (0.36
  

 

 

    

 

 

    

 

 

 

Stock-Based Compensation Plans

For the nine-month period ended November 30, 2016 and 2015, the Company recognized general and administrative expenses of $3.3 thousand and $9.6 thousand, respectively, related to share-based compensation. The liability for the share-based compensation recognized is presented in the consolidated balance sheet as part of additional paid in capital. As of November 30, 2016, total unrecognized compensation costs related to stock options granted was $1.3 thousand. The unrecognized stock option compensation cost is expected to be recognized over a period of approximately 1 year.

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 remain outstanding based on historical information. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s common stock, which represents the standard deviation of the differences in the weekly stock closing price, adjusted for dividends and stock splits.

No options were granted during the nine month periods ended November 30, 2016 and ten thousand options were granted for the nine months ended November 30, 2015.

 

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November 30, 2016

 

Stock Repurchase Program

The Company has a stock repurchase program, pursuant to which it had been authorized to repurchase up to 2,632,500 shares of the Company’s common stock in the open market. On January 20, 2014 the Board of Directors of the Company approved a one-time continuation of the stock repurchase program, and authorized the Company to repurchase up to 1,500,000 additional shares of the Company’s common stock in the open market. There is no minimum number of shares required to be repurchased under the program.

For the nine months ended November 30, 2016, the Company did not purchase any shares of Video Display Corporation stock. For the nine months ended November 30, 2015, the Company purchased 71,406 shares at an average price of $1.61 per share. Under the Company’s stock repurchase program, an additional 502,644 shares remain authorized to be repurchased by the Company at November 30, 2016.

Note 11. – Income Taxes

The effective tax rate for the nine months ended November 30, 2016 and 2015 was 0%. The Company lost $0.8 and $5.1 million dollars for the nine months ending November 30, 2016 and November 30, 2015, respectively, which resulted in a tax benefit of approximately $0.4 and $0.8 million, respectively. Due to the losses by the Company, a full valuation allowance was allocated to the deferred tax asset created by the loss. The net effect of this allowance was to have zero tax expense for the quarter.

Note 12. – Discontinued Operations

On March 26, 2014 with an effective date of February 28, 2014, the Company completed the sale of the Company’s wholly-owned subsidiary, Lexel Imaging, Inc. to Citadal Partners, LLC for approximately $3.9 million, consisting of $1.0 million cash payable over 180 days in the form of a note receivable and a guarantee to purchase $2.9 million in inventory over a five year period. The inventory was adjusted to its net realizable value as part of the sale. The Company recognized a loss on the sale of $4.4 million pre-tax during the year ended February 28, 2014.

On November 17, 2014 Video Display reacquired Lexel Imaging, Inc. when Citadal Partners, LLC defaulted on two notes payable to Video Display Corporation owed as financing on the original sale of the Lexel Imaging. Lexel Imaging is still presented as discontinued operations as Video Display Corporation is still considering offers for the sale of the entity.

Lexel’s net sales, expenses, net profits, operating income and cash flows, are being shown as discontinued operations per ASC 205-20-45 “Reporting Discontinued Operations” for all periods presented. Accordingly, assets and liabilities of this subsidiary are presented as discontinued operations on the interim condensed consolidated balance sheet.

 

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November 30, 2016

 

The summarized financial information for discontinued operations for the three months and nine months ended November 30, 2016, is as follows:

 

     Three months ending
November 30, 2016
     Nine months ending
November 30, 2016
 

Net sales

   $ 1,285       $ 4,815   

Cost of goods sold

     1,066         3,906   
  

 

 

    

 

 

 

Gross profit

     219         909   
  

 

 

    

 

 

 

Operating expenses

     

Selling and delivery

     —           18   

General and administrative

     204         596   
  

 

 

    

 

 

 

Total operating expenses

     204         614   
  

 

 

    

 

 

 

Operating profit from discontinued operations

     15         295   

Other income

     1         183   
  

 

 

    

 

 

 

Income from discontinued operations before income taxes

     16         478   

Income tax expense

     1         15   
  

 

 

    

 

 

 

Income from discontinued operations

   $ 15       $ 463   
  

 

 

    

 

 

 

 

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November 30, 2016

 

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 interim condensed consolidated financial statements of Video Display Corporation and subsidiaries (the “Company”) and with the Company’s 2016 Annual Report to Shareholders, which included audited consolidated financial statements and notes thereto as of and for the fiscal year ended February 29, 2016, 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.

 

    Broadcast and Control Center Products – offers high-end visual display products for use in video walls and command and control centers.

During fiscal 2017, 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. One of these areas is the merger of its two Florida businesses which is expected to be completed in the fourth quarter of this fiscal year. Challenges facing the Company during these efforts include:

Liquidity - The accompanying 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 has sustained losses for each of the last two years. These losses were a combination of low revenues at all divisions without a commensurate reduction of expenses. During the year ended February 29, 2016 the Company operated using cash from operations of $0.8 million, which was primarily generated from a $0.7 million tax refund that was non-recurring in nature. During the nine months ended November 30, 2016 operational cash flows used $1.2 million. Related to these operational results the Company’s working capital and liquid asset position are presented below (in thousands) for the nine months ended November 30, 2016 and the year-ended February 29, 2016:

 

     November 30,
2016
     February 29,
2016
 

Working capital from continuing operations

   $ 4,376       $ 4,855   

Liquid assets

   $ 399       $ 636   

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 with an increase in

 

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November 30, 2016

 

the current backlog and growth in revenues. The Company has a plan to reduce expenses at the divisions, as well as at the corporate location with the expectation that expenses will be decreased by more than $1.7 million per year. Management continues to explore options to monetize certain long-term assets of the business, including current negotiations to sell its Lexel Imaging subsidiary, which is presented as discontinued operations, where a final sale is expected during fiscal year ending February 28, 2017. The Company secured a $500 thousand line of credit on September 14, 2016. 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 revenues, the operational effectiveness of continuing operations, to liquidate the subsidiary 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.

Inventory management – The Company’s business units utilize different inventory components than the divisions had in the past. The Company has a monthly 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 the adequacy of its inventory reserves at November 30, 2016 and February 29, 2016 to be adequate.

Results of Operations

The following table sets forth, for the three and nine months ended November 30, 2016 and 2015, the percentages that selected items in the Statements of Operations bear to total sales:

 

     Three Months     Nine Months  
     Ended November 30,     Ended November 30,  
     2016     2015     2016     2015  

Sales

        

Simulation and Training (VDC Display Systems)

     49.3     53.3     49.2     56.1   

Data Display CRT

     10.6        26.0        13.5        22.0   

Broadcast and Control Centers (AYON Visual)

     28.8        4.9        19.4        4.7   

Cyber Secure Products (AYON Cyber Security)

     11.3        15.8        17.9        17.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Company

     100.0     100.0     100.0     100.0   

Costs and expenses

        

Cost of goods sold

     83.1     118.5     87.3     101.7   

Selling and delivery

     6.3        9.7        8.7        9.4   

General and administrative

     13.9        53.4        23.9        38.4   
  

 

 

   

 

 

   

 

 

   

 

 

 
     103.3     181.6     119.9     149.5   

Operating loss

     (3.3 )%      (81.6 )%      (19.9 )%      (49.5

Interest income/expense

     (0.1 )%      0.7     —       0.3   

Other income, net

     1.9        (5.5     3.6        (19.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) before income taxes

     (1.5 )%      (86.4 )%      (16.3 )%      (68.8

Income tax benefit

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income/ (loss) from continuing operations

     (1.5     (86.4     (16.3     (68.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations, net of income tax

     0.4        (3.2     5.9        2.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     (1.1 )%      (89.6 )%      (10.4 )%      (66.2
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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November 30, 2016

 

Net sales

Consolidated net sales were up 68.2% and 2.1% for the three and nine months ended November 30, 2016 compared to the three and nine months ended November 30, 2015. The Company’s 68.2% increase for the quarter was led by AYON Visual Solutions with an 887% increase with sales of $1.2 million for the quarter compared to $0.1 million for the comparable quarter last year. For the year AYON Visual Solutions is up 325%. The division has secured several large projects this year. The Display Systems division posted increase for the three months ended November 30, 2016 of 56% compared to the same three months last year. The Display System division is down 11% for the year, but expects to make that up next quarter. AYON Cyber Security was up 6% for the quarter ended November 30, 2016 compared to the comparable quarter last year and is up 20% for the year to year comparison. AYON Cyber Security has a strong backlog of over $2 million at November 30, 2016. The Data Display CRT division had a decrease of 31% and 37% in sales for the three months and nine months ending November 30, 2016 compared to the same periods last year primarily due to delays in getting product for its major customer. In addition, during the prior year the division had some last time buy sales that did not repeat in the current year. The Company expects Display Systems, AYON Cyber Security and AYON Visual Solutions to show positive results in the next quarter as the backlog for each division remains strong.

Gross margins

Consolidated gross margins increased by 254% for the three months ended November 30, 2016 compared the three months ended November 30, 2015 and increased 877% for the nine months ended November 30, 2016 compared to the nine months ended November 30, 2015. The gross margins increases were due substantially to the increase in sales for the three months ended November 30, 2016, while reducing costs as a percentage to sales which drove the increase in gross margins for the quarter and the nine months. Gross margin dollars increased $1.1 million dollars for the quarter compared to the same quarter last year and were up $1.1 million for the year over year comparison.

For the three months ending November 30, 2016, all divisions showed an improvement in their gross margin dollars compared to the same period last year. For the nine months ended November 30, 2016 all divisions, except for Data Display CRT division, showed increases in gross margin dollars earned. The Company expects gross margins will continue to improve due to increases in the revenue base and tighter controls on costs. The past three months were an improvement over the first six months of the fiscal year. The Company expects the trend to continue for the remainder of the year.

Operating expenses

Total operating expenses decreased by $0.7 million or 46% for the three months ending November 30, 2016 compared to the three months ending November 30, 2015 and decreased by $1.1 million or 30% for the nine months ended November 30, 2016 compared to the nine months ended November 30, 2015. The Company’s reduction in actual operating expenses was a result of strategic cuts in personnel, corporate operating expenses and professional services. The Company expects to continue to contain these costs while increasing revenues.

Interest expense

Interest expense was $3.1 thousand for the three months and $11.8 thousand for the nine months ending November 30, 2016 compared to $10.3 thousand for the three months and $50.6 thousand for the nine months ending November 30, 2015. The Company also earned $8.7 thousand for the nine months ended November 30, 2016 and $76.7 thousand in interest income for nine months ending November 30, 2015. The interest expense (approximately $1.0 thousand per month) is related to the balance owed on a building the Company owns in Pennsylvania and the interest on the margin balance in the Company’s investment account, which is a 2% rate.

 

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November 30, 2016

 

Other expense

For the three months and nine months ended November 30, 2016, the Company experienced gains of $0.1 million and $0.3 million, respectively. For the three months and nine months ended November 30, 2015 the Company lost $0.1 million and $1.5 million, respectively. The Company had $0.2 million in investment gains, $0.1 million in rental income and $0.1 million in other income offset by $0.1 million in asset disposals for the nine months ended November 30, 2016. Last year, the Company was invested heavily in energy stocks, which fared poorly due to the decline in the price of oil. For the nine months ended November 30, 2015 the losses were due primarily to losses in the investment account of $1.9 million offset by dividend income of $0.3 million and rental income of $0.1 million.

Income taxes

The effective tax rate for the nine months ended November 30, 2016 and 2015 was 0%. The Company lost $0.8 and $5.1 million dollars for the nine months ending November 30, 2016 and November 30, 2015, respectively, which resulted in a tax benefit of approximately $0.4 and $0.8 million, respectively. Due to the losses by the Company, a full valuation allowance was allocated to the deferred tax asset created by the loss. The net effect of this allowance was to have zero tax expense for the quarter.

Discontinued operations

On March 26, 2014 with an effective date of February 28, 2014, the Company completed the sale of the Company’s wholly-owned subsidiary, Lexel Imaging, Inc. to Citadal Partners, LLC for approximately $3.9 million, consisting of $1.0 million cash payable over 180 days in the form of a note receivable and a guarantee to purchase $2.9 million in inventory over a five-year period. The Company recognized a loss on the sale of $4.4 million pre-tax during the year ended February 28, 2014.

On November 17, 2014 Video Display reacquired Lexel Imaging, Inc. when Citadal Partners, LLC defaulted on two notes payable to Video Display Corporation owed as financing on the original sale of the Lexel Imaging. Lexel Imaging is still presented as discontinued operations as Video Display Corporation is still considering offers for the sale of the entity.

Lexel Imaging earned $0.5 million for the nine months ended November 30, 2016 and $0.2 million for the nine months ended November 30, 2015. The income increase is due primarily to a royalty received this year of $0.2 million. The subsidiary has a backlog in excess of $5.3 million.

Liquidity and Capital Resources

The accompanying 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 has sustained losses for each of the last two years. These losses were a combination of low revenues at all divisions without a commensurate reduction of expenses. During the year ended February 29, 2016, the Company operated using cash from operations of $0.8 million, which was primarily generated from a $0.7 million tax refund that was non-recurring in nature. During the nine months ended November 30, 2016 operational cash flows used $1.2 million. Related to these operational results the Company’s working capital and liquid asset position are presented below (in thousands) as of the nine months ended November 30, 2016 and the year-ended February 29, 2016:

 

     November 30,
2016
     February 29,
2016
 

Working capital from continuing operations

   $ 4,376       $ 4,855   

Liquid assets

   $ 399       $ 636   

 

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November 30, 2016

 

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 with an increase in the current backlog and growth in revenues. The Company has a plan to reduce expenses at the divisions, as well as at the corporate location with the expectation that expenses will be decreased by more than $1.7 million per year. Management continues to explore options to monetize certain long-term assets of the business, including current negotiations to sell its Lexel Imaging subsidiary, presented as discontinued operations, where a final sale is expected during fiscal year ending February 28, 2017. The Company secured a $500 thousand line of credit on September 14, 2016. 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 revenues, the operational effectiveness of continuing operations, to liquidate the subsidiary 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.

Cash used in operations for the nine months ended November 30, 2016 was $1.2 million. The net loss from operations was $0.8 million and adjustments to reconcile the net loss to net cash was $0.4 million, primarily the $0.5 million earned on discontinued operations, $0.2 million on realized and unrealized gains from investments offset by $0.4 million for depreciation and inventory reserves. Changes in working capital used $0.1 million due to an increase in customer deposits of $1.5 million, offset by a decrease in accounts payable of $0.2 million, an increase in prepaid expenses of $0.5 million, an increase in accounts receivable of $0.7 million and a decrease in billings in excess of costs of $0.2 million. Cash provided by operations for the nine months ended November 30, 2015 was $20 thousand. The net loss from operations was $5.1 million and adjustments to reconcile net loss to net cash were $5.1 million including realized and unrealized loss on investments of $1.9 million, a gain from discontinued operations of $0.2 million and depreciation and reserves change of $1.1 million. Changes in working capital provided $1.8 million, primarily due to a decrease in prepaid taxes due to a $0.7 million refund from the federal government and states, a decrease in inventories of $1.3 million offset by a decrease in payables of $0.1 million.

Investing activities provided $0.1 million for the nine months ended November 30, 2016. The Company received $0.2 million in cash repayments from Lexel Imaging and had net sales of investments of $0.2 million offset by capital expenditures of $0.3 million. For the nine months ended November 30, 2015, investing activities provided cash of $2.8 million due to the net sales of $2.3 million from the sale of investments, cash advance repayment from discontinued operations of $0.6 million and capital expenditures of $0.1 million.

Financing activities provided $0.6 million for the nine months ended November 30, 2016. The Company received $0.9 million from related party loans, offset by $0.2 million of marginal float in the investment account and $0.1 million of repayments of related party loans and long term debt. Financing activities used cash of $2.5 million, primarily for the repayment of marginal float on the investment account of $2.4 and the repurchase of treasury stock used cash of $0.1 million for the nine months ended November 30, 2015.

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

 

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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 ended November 30, 2016, the Company did not repurchase any shares. For the nine months ended November 30, 2015, the Company repurchased 71,406 shares at an average price of $1.61 per share. Under the Company’s stock repurchase program, an additional 502,644 shares remain authorized to be repurchased by the Company at November 30, 2016.

Critical Accounting 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, the allowance for bad debts and warranty reserves. 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. 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. Management believes the adequacy of its inventory reserves at November 30, 2016 and February 29, 2016 to be adequate.

Revenue Recognition

Revenue is recognized on the sale of products when the products are shipped, all significant contractual obligations have been satisfied, and the collection of the resulting receivable is reasonably assured. The Company’s delivery term typically is F.O.B. shipping point.

In accordance with ASC 605-45Revenue Recognition: Principal Agent Considerations”, shipping and handling fees billed to customers are classified in net sales in the consolidated income statements. Shipping and handling costs incurred are classified in selling and delivery in the consolidated income statements.

A portion of the Company’s revenue is derived from contracts to manufacture simulation systems to a buyers’ specification. These contracts are accounted for under the provisions of ASC 605-35Revenue Recognition: Construction-Type and Production-Type Contracts”. These contracts are fixed-price and cost-plus contracts and are recorded on the percentage of completion basis using the ratio of costs incurred to estimated total costs at completion as the measurement basis for progress toward completion and revenue recognition. Any losses identified on contracts are recognized immediately. Contract accounting requires significant judgment relative to assessing risks, estimating contract costs and making related assumptions for schedule and technical issues. With respect to contract change orders, claims, or similar items, judgment must be used in estimating related amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is probable.

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.

 

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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, 2016 and February 29, 2016 the Company has established a valuation allowance of $7.3 million and $6.9 million, respectively on the Company’s current and non-current 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, 2016, the Company did not record any liabilities for uncertain tax positions.

Recent Accounting Pronouncements

In May, 2014, the FASB issued Accounting Standards Update No. (ASU) 2014-09 “Revenue with Contracts from Customers”. ASU 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”). The new guidance: (i) removes inconsistencies, and weaknesses in revenue requirements, (ii) provides a more robust framework for addressing revenue issues, (iii) improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (iv) provides more useful information to users of financial statements through improved disclosure requirements, and (v) simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer.

The guidance is effective for annual reporting periods beginning after December 15, 2016 including interim periods within that reporting period; however, a one year delay has been approved with the issuance of ASU 2015-14, “Revenue with Contracts from Customers”. The Company is still evaluating the effects that the adoption of this update will have on the Company’s consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements. Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to continue as a Going Concern”. Prior to its effective date there was no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. This update requires that an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable.) This update is effective for the annual reporting periods ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is still evaluating the effects that the adoption of this update will have on the Company’s consolidated financial position or results of operations.

In July 2015, the FASB issued ASU 2015-11,Simplifying the Measurement of Inventory”. ASU 2015-11 requires an entity to measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The guidance is effective for annual reporting periods beginning after December 15, 2016 and related interim periods. Early adoption is permitted. The Company does not believe this standard will have a material effect on its consolidated financial statements.

 

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In November 2015, the FASB issued ASU 2015-17,Balance Sheet Classification of Deferred Taxes”. ASU 2015-17 requires deferred tax assets and liabilities, along with related valuation allowances, to be classified as noncurrent on the balance sheet. Each tax jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. The Company does not expect the adoption of this update to have a material effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases”. ASU 2016-02 increases transparency and comparability among organizations by requiring entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about the lease arrangements. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. The Company is in the process of evaluating the impact of this guidance on the Company’s consolidated financial statements.

Subsequent Events

None

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  29, 2016 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, 2016. 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, 2016.

 

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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.

 

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PART II

 

Item 1. Legal Proceedings

None.

 

Item 1A. Risk Factors

Information regarding risk factors appears under the caption Forward-Looking Statements 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 29, 2016. 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(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)   Purchase Agreement dated March 26, 2014 by and between the Company and Citidal Partners, LLC, with respect to the sale of the Company’s Lexel Imaging, Inc. subsidiary. (incorporated by reference to Exhibit 10(f) to the Company’s Current Report on Form 8-K dated April 1, 2014.)
  10(c)   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(d)   Video Display Corporation 2006 Stock Incentive Plan. (incorporated by reference to Appendix A to the Company’s 2006 Proxy Statement on Schedule 14A)
  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

 

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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 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 13, 2017

    By:  

/s/ Ronald D. Ordway

      Ronald D. Ordway
      Chief Executive Officer

January 13, 2017

    By:  

/s/ Gregory L. Osborn

      Gregory L. Osborn
      Chief Financial Officer

 

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