The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of
these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Nature of Business
Video Display
Corporation and subsidiaries (the Company, our or we) is a provider and manufacturer of video products, components, and systems for data display and presentation of electronic information media in various
requirements and environments. The Company designs, engineers, manufactures, markets, distributes and installs technologically advanced display products and systems, from basic components to turnkey systems for government, military, aerospace,
medical and commercial organizations.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all
intercompany accounts and transactions.
Fiscal Year
All references herein to 2018 and 2017 mean the fiscal years ended February 28, 2018 and February 28, 2017,
respectively.
Use of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Examples include provisions for returns, warranty reserves, bad debts, inventory reserves, valuations on deferred income tax assets, other
intangible assets, accounting for percentage of completion contracts and the length of product life cycles and fixed asset lives. Actual results could vary from these estimates.
Banking and Liquidity
The accompanying
consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has sustained losses for each of the last three
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. Related to these operational results the
Companys working capital and liquid asset position deteriorated during the year ended February 28, 2018 as presented below:
|
|
|
|
|
|
|
|
|
|
|
February 28,
2018
|
|
|
February 28,
2017
|
|
Working capital
|
|
$
|
2,762
|
|
|
$
|
6,408
|
|
Liquid assets
|
|
$
|
261
|
|
|
$
|
503
|
|
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 subsequent to February 28, 2018. The Company implemented a plan to reduce expenses at the
divisions, as well as at the corporate location during the fiscal year ending February 28, 2018 with the expectation that expenses will be decreased by more than $0.7 million. The Company moved two of its plants in an effort to reduce
expenses and increase efficiencies. The plant move at its subsidiary in Lexington, Kentucky, took longer than anticipated and negatively affected cash flow. The plant move at the Florida operations was successful as the Company merged two businesses
and was able to keep production on schedule. Management continues to explore options to monetize certain long-term assets of the business, including the possible sale of a building in Pennsylvania. If additional and more permanent capital is
required to fund the operations of the Company, no assurance can be given that the Company will be able to obtain the capital on terms favorable to the Company, if at all.
26
The ability of the Company to continue as a going concern is dependent upon the success of
managements plans to improve the operational effectiveness of the operations, to sell strategic assets as noted above, the procurement of suitable financing, or a combination of these. The uncertainty regarding the potential success of
managements plan create substantial doubt about the ability of the Company to continue as a going concern.
Revenue Recognition
Revenues are recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable
and collect-ability can be reasonably assured. The Companys delivery term typically is F.O.B. shipping point.
Shipping and handling
fees billed to customers are classified in net sales in the consolidated statements of operations. Shipping costs of $0.1 million were included in the fiscal years ended 2018 and 2017, respectively.
A portion of the Companys revenue is derived from contracts to manufacture display systems to a buyers specification. 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. 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.
Research and Development
The Company includes research and development expenditures in the consolidated financial statements as a part of general and administrative
expenses. The Company did not incur any research and development costs in the fiscal year ended 2018 and $0.1 in the fiscal year ended 2017.
Cash and
Cash Equivalents and Investments
Highly liquid investments with a maturity date of three months or less at the date of purchase are
considered to be cash equivalents. Investment securities that are held by the Company, are bought and held principally for the purpose of selling them in the near term, are classified as trading and principally consist of equity
securities and mutual funds. These trading investments are carried at fair value with realized gains or losses and changes in fair value included in operations. Realized and unrealized gains/ (losses) on trading securities held were
approximated $0.0 million for the year ended February 28, 2018 and $0.2 million for the year ended February 28, 2017 respectively.
Fair Value Measurements and Financial Instruments
The FASBs 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.
|
27
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 February 28, 2018 and February 28, 2017 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,2018
|
|
|
Level 1 Assets
and Liabilities
|
|
|
Level 2 Assets
and Liabilities
|
|
|
Level 3 Assets
and Liabilities
|
|
Current trading investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stocks, options, and ETF (long)
|
|
|
291
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
Stocks, options, and ETF (short)
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value of investments
|
|
|
286
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin balance
|
|
|
(106
|
)
|
|
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value of liabilities
|
|
|
(106
|
)
|
|
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
180
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,2017
|
|
|
Level 1 Assets
and Liabilities
|
|
|
Level 2 Assets
and Liabilities
|
|
|
Level 3 Assets
and Liabilities
|
|
Current trading investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stocks, options, and ETF (long)
|
|
$
|
484
|
|
|
$
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stocks, options, and ETF (short)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value of investments
|
|
|
482
|
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin balance
|
|
|
(114
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value of liabilities
|
|
|
(114
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
368
|
|
|
$
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys financial instruments which are not measured at fair value on the consolidated balance
sheets include cash, accounts receivable, short-term liabilities, and debt. The estimated fair value of these financial instruments approximate cost due to the short period of time to maturity. Recorded amounts of long-term debt are considered
to approximate fair value due to either rates that fluctuate with the market or are otherwise commensurate with the current market.
Accounts Receivable
and Allowance for Doubtful Accounts
Accounts receivable are customer obligations due under normal trade terms. The Company sells its
products primarily to general contractors, government agencies, manufacturers, and consumers of video displays and CRTs. Management performs continuing credit evaluations of its customers financial condition and although the Company generally
does not require collateral, letters of credit may be required from its customers in certain circumstances, such as foreign sales. The allowance for doubtful accounts is determined by reviewing all accounts receivable and applying credit loss
experience to the current receivable portfolio with consideration given to the current condition of the economy, assessment of the financial position of the creditors as well as payment history and overall trends in past due accounts compared to
established thresholds. The Company monitors credit exposure and assesses the adequacy of the allowance for doubtful accounts on a regular basis. Historically, the Companys allowance has been sufficient for any customer write-offs. Management
believes accounts receivable are stated at amounts expected to be collected.
The following is a roll-forward of the allowance for doubtful accounts (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
Beginning
of Period
|
|
|
Additions:
Charged to
Costs and
Expenses
|
|
|
Deductions
|
|
|
Balance at
End of
Period
|
|
February 28, 2018
|
|
$
|
20
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
19
|
|
February 28, 2017
|
|
$
|
16
|
|
|
$
|
24
|
|
|
$
|
(20
|
)
|
|
$
|
20
|
|
28
Warranty Reserves
The Company records a liability for estimated warranty obligations at the date products are sold. Adjustments are made as new information
becomes available.
The warranty reserve is determined by recording a specific reserve for known warranty issues and a general reserve
based on claims experience. The Company considers actual warranty claims compared to net sales, then adjusts its reserve liability accordingly. Actual claims incurred could differ from the original estimates, requiring adjustments to the reserve.
Management believes that historically its procedures have been adequate and does not anticipate that its assumptions are reasonably likely to materially change in the future.
Inventories
Inventories consist
primarily of CRTs, electron guns, monitors, digital projectors, video components and electronic parts. Inventories are stated at the lower of cost (primarily
first-in,
first-out)
or market.
Reserves on inventories result in a charge to operations when the estimated
net realizable value declines below cost. Management regularly reviews the Companys investment in inventories for declines in value and establishes reserves when it is apparent that the expected net realizable value of the inventory falls
below its carrying amount. The Company provides for an obsolescence reserve at each of its divisions to offset any obsolescence although most purchases are for current orders, which should reduce the amount of obsolescence in the future. The Company
still has CRT inventory in stock and, although it believes the inventory will be sold in the future, will continue to reserve for any additional obsolescence. The reserve for inventory obsolescence was approximately $1.4 million and
$1.9 million at February 28, 2018 and February 28, 2017, respectively.
Property, Plant and Equipment
Property, plant, and equipment are stated at cost. Depreciation is computed principally by the straight-line method for financial reporting
purposes over the following estimated useful lives: Buildings ten to twenty-five years; Machinery and Equipment five to ten years. Depreciation expense totaled approximately $261 thousand and $237 thousand for the fiscal
years ended 2018 and 2017, respectively. Substantial betterments to property, plant, and equipment are capitalized and routine repairs and maintenance are expensed as incurred. The Company is expected to invest an additional $0.1 million to
upgrade the Cocoa, Florida location to accommodate the merger of the two Florida businesses into one facility. The Company does not anticipate any additional significant investments in capital assets for fiscal 2019.
Management reviews and assesses long-lived assets, which includes property, plant, and equipment for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, management estimates the future cash flows expected to result from the use of the asset. If the sum of the undiscounted
expected cash flows is less than the carrying amount of the asset, an impairment loss is recognized based upon the estimated fair value of the asset.
Stock-Based Compensation Plans
The
Company accounts for employee share-based compensation under the fair value method and uses an option pricing model for estimating the fair value of stock options at the date of grant.
Income Taxes
The Company accounts for
income taxes under the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Companys consolidated financial
statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than possible enactments of changes in the tax laws or rates.
29
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has determined that a valuation allowance is needed due to recent taxable net operating losses, the sale of profitable divisions and the
limited taxable income in the carry back periods. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
Deferred income taxes as of February 28, 2018 and February 28, 2017 reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain tax loss carryforwards, less any valuation allowance.
The Company accounts for uncertain tax positions as required in that a position taken or expected to be taken in a tax return is recognized in
the consolidated financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest
amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of February 28, 2018 and February 28, 2017 the Company did not have any material unrecognized tax benefits.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as components of interest expense and other
expense, respectively, in arriving at pretax income. The Company did not have any interest and penalties accrued as of February 28, 2018 and February 28, 2017.
The Companys tax years ended February 28, 2017, 2016 and 2015 remain open to examination by the Internal Revenue Service
(IRS).
Earnings (Loss) per Share
Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common
shares outstanding during each year. Shares issued or repurchased during the year are weighted for the portion of the year that they were outstanding. Diluted earnings per share is calculated in a manner consistent with that of basic earnings per
share while giving effect to all potentially dilutive common shares that were outstanding during the period.
The following is a
reconciliation of basic earnings (loss) per share to diluted earnings (loss) per share for 2018 and 2017, (in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
(loss)
|
|
|
Average Shares
Outstanding
|
|
|
Net
Income(loss) Per
Share
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(2,938
|
)
|
|
|
5,890
|
|
|
|
(0.50
|
)
|
Effect of dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
(2,938
|
)
|
|
|
5,890
|
|
|
|
(0.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1,006
|
)
|
|
|
5,891
|
|
|
$
|
(0.17
|
)
|
Effect of dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
(1,006
|
)
|
|
|
5,891
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, debentures, and other liabilities convertible into 200,000 and 69,000 shares, respectively, of
the Companys common stock were anti-dilutive and, therefore, were excluded from the fiscal 2018 and 2017 diluted earnings (loss) per share calculation.
30
Segment Reporting
We operate and manage our business as one reportable segment. All of our divisions have similarities such as products and markets served;
therefore, we believe they meet the criteria for aggregation under the applicable authoritative guidance and, as such, these operations are reported as one segment within the Consolidated Financial Statements.
Sales to foreign customers were 16% of consolidated net sales for fiscal 2018 and 21% for fiscal 2017.
Recent Accounting Pronouncements
In May
2014, the FASB issued Accounting Standards Update No. (ASU
2014-09),
Revenue from Contracts with Customers
. This guidance modifies how an entity will determine the measurement of revenue and
timing of when it is recognized. The guidance provides for a five-step approach in applying the standard: 1) identifying the contract with the customer, 2) identifying separate performance obligations in the contract, 3) determining the transaction
price, 4) allocating the transaction price to separate performance obligations, and 5) recognizing the revenue when the performance obligation has been satisfied. The new guidance requires enhanced disclosures for the nature, amount, timing, and
uncertainty of revenue that is being recognized. The guidance is effective for public companies for interim and annual reporting periods beginning after December 15, 2017. Companies may use either a full retrospective or a modified
retrospective approach to adopt ASU
2014-09.
We are in the process of assessing the impact of the new standard and anticipate no material impact from adopting ASU
2014-09
in how we recognize revenue. We will adopt ASU
2014-09
using the modified retrospective approach in the first quarter of fiscal year 2019.
In July 2015, the FASB issued Accounting Standards Update No. (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 adopted ASU
2015-11
and it did not have a material effect on the consolidated financial statements.
In November 2015, the FASB issued Accounting Standards Update No. (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 adoption of this update did not
have an impact on the Companys consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No.
(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 Companys consolidated financial statements.
Note 2. Inventories
Inventories
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28,
2018
|
|
|
February 28,
2017
|
|
Raw materials
|
|
|
4,657
|
|
|
$
|
5,217
|
|
Work-in-process
|
|
|
403
|
|
|
|
1,001
|
|
Finished goods
|
|
|
923
|
|
|
|
1,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,983
|
|
|
|
7,737
|
|
Reserves for obsolescence
|
|
|
(1,399
|
)
|
|
|
(1,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
4,584
|
|
|
$
|
5,838
|
|
|
|
|
|
|
|
|
|
|
31
The following is a roll forward of the Inventory Reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
Beginning
of Period
|
|
|
Additions:
Charged to
Costs and
Expenses
|
|
|
Deductions
|
|
|
Balance at
End of
Period
|
|
February 28, 2018
|
|
$
|
1,899
|
|
|
$
|
673
|
|
|
$
|
(1,173
|
)
|
|
$
|
1,399
|
|
February 28, 2017
|
|
$
|
1,270
|
|
|
$
|
1,076
|
|
|
$
|
(447
|
)
|
|
$
|
1,899
|
|
During fiscal 2018, the Company wrote off or disposed of inventories of $1.1 million of which were
previously reserved for through inclusion in the inventory reserve. During fiscal 2017, the Company disposed of inventories of $0.4 million of which none were previously reserved for through inclusion in the inventory reserve.
Note 3. Line of Credit and Long-Term Debt
The Company has a $0.5 million line of credit with the Brand Banking Company with a current balance of $0.2 million at
February 28, 2018. The line matures on June 30, 2018, is personally guaranteed by the Chief Executive Officer and has an interest rate of LIBOR plus 3.75%. The Company was in violation of certain financial covenants related to the line of
credit at February 28, 2018 and has obtained a debt covenant waiver. The Company is currently in discussions to amend its line of credit.
The only other commercial debt of the Company is $0.1 million it owes on a building owned by its subsidiary, Teltron Technologies, Inc.
in Birdsboro, PA.
The Company had outstanding margin account borrowing of $0.1 million as of February 28, 2018 and
$0.1 million as of February 28, 2017. 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 as of
February 28, 2018 were $0.3 million leaving net investments of $0.2 million after the margin account borrowings of $0.1 million and were gross investments were $0.5 million leaving net investments of $0.4 million after
the margin account borrowings of $0.1 million as of February 28, 2017. The margin interest rate is 2%.
Long-term debt consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28,
2018
|
|
|
February 28,
2017
|
|
Mortgage payable to bank; interest rate at BB&T Bank base rate plus 0.5% (5.00% as of
February 28, 2018); monthly principal and interest payments of $5 thousand payable through October 2021; collateralized by land and building of Teltron Technologies, Inc.
|
|
$
|
78
|
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
131
|
|
Less current maturities
|
|
|
(55
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
$
|
77
|
|
|
|
|
|
|
|
|
|
|
Future maturities of debt pertaining to the note with BB&T are as follows (in thousands):
|
|
|
|
|
Year
|
|
Amount
|
|
2019
|
|
$
|
55
|
|
2020
|
|
|
23
|
|
|
|
|
|
|
|
|
$
|
78
|
|
|
|
|
|
|
Note 4. Notes Payable to Officers and Directors
The Companys owed the Chief Executive officer $85 thousand dollars at the beginning of the Companys fiscal year ended
February 28, 2017. The Company repaid the $85 thousand during the first quarter of the fiscal year ended February 28, 2017. The interest rate was eight percent. The Company paid $1 thousand interest on this loan for fiscal 2017.
The Company has no outstanding loans from the Chief Executive officer at February 28, 2018.
32
On March 30, 2016, the Company entered into an assignment with recourse of the note
receivable from
Z-Axis
Inc.
(Z-Axis)
with Ronald D. Ordway, CEO, and Jonathan R. Ordway, related parties, for the sum of $912 thousand. The note receivable is
collateralized by a security interest in the shares of
Z-Axis
as well as a personal guaranty of its majority shareholder.
Z-Axis
is current on all scheduled payments
regarding this note. The Company retains the right to repurchase the note at any time for 80% of the outstanding principle balance. Also, in the event of default by
Z-Axis,
the Company is obligated to
repurchase the note for 80% of the remaining principle balance plus any accrued interest. Accordingly, the Company has recognized this transaction as a secured borrowing. The $0.9 million, 9% interest rate note originated on March 30,
2016, with payments beginning on April 16, 2016 and continuing for 56 months thereafter. The balance of the note at February 28, 2018 was $589 thousand with $191 thousand classified as a current as of February 28, 2018.
Under the terms of the arrangement, $191, $209 and $189 thousand are expected to be received in fiscal 2019, 2020 and 2021, respectively.
Note 5.
Accrued Expenses and Warranty Obligations
The following provides a reconciliation of changes in the Companys warranty reserve
for fiscal years 2018 and 2017. The Company provides no other guarantees.
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of year
|
|
|
127
|
|
|
$
|
125
|
|
Provision for current year sales
|
|
|
54
|
|
|
|
148
|
|
Warranty costs incurred
|
|
|
(54
|
)
|
|
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
127
|
|
|
$
|
127
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28,
2018
|
|
|
February 28,
2017
|
|
Accrued compensation and benefits
|
|
$
|
342
|
|
|
$
|
386
|
|
Accrued customer deposits
|
|
|
439
|
|
|
|
418
|
|
Accrued warranty
|
|
|
127
|
|
|
|
127
|
|
Accrued professional fees
|
|
|
|
|
|
|
133
|
|
Accrued other
|
|
|
408
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,316
|
|
|
$
|
1,252
|
|
|
|
|
|
|
|
|
|
|
Note 6. Stock Options and Stock Repurchase Plan
Stock Options
Upon recommendation of the
Board of Directors of the Company, on August 25, 2006, the shareholders of the Company approved the Video Display Corporation 2006 Stock Incentive Plan (Plan), whereby options to purchase up to 500,000 shares of the Companys
common stock may be granted and up to 100,000 restricted common stock shares may be awarded. Options may not be granted at a price less than the fair market value, determined on the day the options are granted. Options granted to a participant who
is the owner of ten percent or more of the common stock of the Company may not be granted at a price less than 110% of the fair market value, determined on the day the options are granted. The exercise price of each option granted is fixed and may
not be
re-priced.
The life of each option granted is determined by the plan administrator, but may not exceed the lesser of seven years from the date the participant has the vested right to exercise the
option, or nine years from the date of the grant. The life of an option granted to a participant who is the owner of ten percent or more of the common stock of the Company may not exceed five years from the date of grant. All full-time or part-time
employees, and Directors of the Company, are eligible for participation in the Plan. In addition, any consultant or advisor who renders bona fide services to the Company, other than in connection with the offer or sale of securities in a
capital-raising transaction, is eligible for participation in the Plan. The plan administrator is appointed by the Board of Directors of the Company.
33
The plan expired on August 25, 2016 and all options related to the plan have expired or were terminated. A separate stock option agreement with the Companys Chief Financial Officer
dated March 21,2017, a
non-qualifying
plan, are the only stock options open.
Information
regarding the stock option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
(in thousands)
|
|
|
Average Exercise Price
Per Share
|
|
Outstanding at February 29, 2016
|
|
|
83
|
|
|
$
|
3.73
|
|
Granted
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(14
|
)
|
|
|
5.07
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 28, 2017
|
|
|
69
|
|
|
$
|
3.46
|
|
Granted
|
|
|
200
|
|
|
|
0.82
|
|
Forfeited or expired
|
|
|
(69
|
)
|
|
|
3.46
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 28, 2018
|
|
|
200
|
|
|
$
|
0.82
|
|
|
|
|
Options exercisable
|
|
|
|
|
|
|
|
|
February 28, 2017
|
|
|
59
|
|
|
$
|
3.87
|
|
February 28, 2018
|
|
|
60
|
|
|
$
|
0.82
|
|
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model,
which requires the Company to estimate the expected term of the stock option grants and expected future stock price volatility over the term. The term represents the expected period of time the Company believes the options will be outstanding based
on historical information. Estimates of expected future stock price volatility are based on the historic volatility of the Companys common stock. The Company calculates the historic volatility based on the weekly stock closing price, adjusted
for dividends and stock splits. The fair value of the stock options is based on the stock price at the time the option is granted, the annualized volatility of the stock and the discount rate at the grant date.
The Company granted 200 stock options during fiscal 2018 with no options granted in fiscal 2017. The fair value assumptions used for the stock
options granted in fiscal 2018 are as follows
The assumptions used and the weighted average calculated value of the units is as follows
for the years ended February 28, 2018.
|
|
|
|
|
Risk-free interest rate
|
|
|
1.50
|
%
|
Expected dividend yield
|
|
|
|
|
Expected volatility
|
|
|
63
|
%
|
Expected life in years
|
|
|
7
|
|
Service period in years
|
|
|
2
|
|
For the fiscal years ended February 28, 2018 and February 28, 2017, the Company recognized $68 and $4 thousand,
respectively, of share-based compensation in general and administrative expense in the statements of operations. As of February 28, 2018, total unrecognized compensation costs related to stock options and shares of restricted stock granted was
$25 thousand. The amount of unrecognized share based compensation cost is expected to be recognized ratably over a period of approximately one year. The weighted average remaining contractual life at February 28, 2018 was 8 years.
34
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 Companys
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 Companys common stock in the open market. There is no minimum number of shares required to be repurchased under the program. During the fiscal year ended February 28, 2018, the Company repurchased 3,600
shares at an average price of $1.24 per share, which were added to treasury shares on the consolidated balance sheet, and during the fiscal year ended February 28, 2017, the Company did not repurchase any shares of Company in the fiscal year
ended February 28, 2017. Under this program, an additional 499,044 shares remain authorized to be repurchased by the Company at February 28, 2018.
35
Note 7. Income Taxes
Provision (benefit) for income taxes in the consolidated statements of operations consisted of the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes differs from the amount computed by applying the federal statutory rate of 34%
for the fiscal year ended February 28, 2017 and 24% for the fiscal year ended February 28, 2018 taxable income as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 28,
2018
|
|
|
February 28,
2017
|
|
Statutory U.S. federal income tax rate
|
|
|
(780
|
)
|
|
$
|
(370
|
)
|
State income taxes, net of federal benefit
|
|
|
(31
|
)
|
|
|
19
|
|
Tax rate adjustment 34% to 21%
|
|
|
2,243
|
|
|
|
|
|
Valuation allowance
|
|
|
(1,593
|
)
|
|
|
530
|
|
Other
|
|
|
161
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
Taxes at effective income tax rate
|
|
$
|
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
The income tax expense effective tax rate for fiscal 2018 was 0% compared to 1.8% for fiscal 2017. The higher
effective rate in 2017 compared to the effective rate in 2018 was primarily due to state taxes owed related to the Lexel Imaging subsidiary which is located in Kentucky, due to profitability reported related to Lexel in fiscal 2017 with no
offsetting state net operating losses. There was no income tax expense reported for fiscal 2018 due to net operating losses generated.
The deferred tax assets were reduced by a valuation allowance because, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company has determined that a 100% valuation allowance is needed due to recent taxable net operating losses and the limited taxable income in the carry back periods.
36
The sources of the temporary differences and carry forwards, and their effect on the net deferred tax asset
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
|
2018
|
|
|
2017
|
|
Current deferred tax assets(liabilities):
|
|
|
|
|
|
|
|
|
Uniform capitalization costs
|
|
$
|
88
|
|
|
$
|
87
|
|
Inventory reserves
|
|
|
336
|
|
|
|
703
|
|
Accrued liabilities
|
|
|
70
|
|
|
|
127
|
|
Allowance for doubtful accounts
|
|
|
5
|
|
|
|
7
|
|
Other
|
|
|
(1
|
)
|
|
|
(3
|
)
|
Valuation Allowance
|
|
|
(498
|
)
|
|
|
(921
|
)
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets
|
|
|
|
|
|
|
|
|
Non-current
deferred tax assets:
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
19
|
|
|
|
55
|
|
Deferred rent
|
|
|
14
|
|
|
|
67
|
|
Non-deductible
losses
|
|
|
1,373
|
|
|
|
2,107
|
|
State net operating loss carry-forward
|
|
|
732
|
|
|
|
534
|
|
Federal net operating loss carry-forward
|
|
|
2,733
|
|
|
|
3,174
|
|
Federal tax credit carry forward
|
|
|
318
|
|
|
|
318
|
|
Foreign tax credit carry-forward
|
|
|
99
|
|
|
|
99
|
|
Basis difference of property, plant and equipment
|
|
|
33
|
|
|
|
106
|
|
Valuation allowance
|
|
|
(5,321
|
)
|
|
|
(6,460
|
)
|
|
|
|
|
|
|
|
|
|
Net
non-current
deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Company has available federal and state net operating loss carryforwards of $13.0 million and
$9.4 million in fiscal years ending February 28, 2018 and February 28, 2017, respectively. The net operating loss carryforwards expire at various dates through fiscal 2038, if not used.
Note 8. Benefit Plan
The Company
maintains defined contribution plans that are available to all employees. The Company did not make a contribution in the fiscal year ended February 28, 2018 or February 28, 2017 to the Companys 401(k) plan.
Note 9. Commitments and Contingencies
Operating
Leases
The Company leases various manufacturing facilities and transportation equipment under leases classified as operating leases,
expiring at various dates through 2025. These leases provide that the Company pay taxes, insurance, and other expenses on the leased property and equipment. Rent expense for all leases was approximately $1.1 million and $1.4 million in
fiscal 2018 and 2017, respectively.
37
Future minimum rental payments due under these leases are as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
2019
|
|
$
|
620
|
|
2020
|
|
|
598
|
|
2021
|
|
|
594
|
|
2022
|
|
|
594
|
|
2023
|
|
|
273
|
|
Thereafter
|
|
|
380
|
|
|
|
|
|
|
|
|
$
|
3,059
|
|
|
|
|
|
|
Related Party Leases
Included above are leases for manufacturing and warehouse facilities leased from the Companys chief executive officer and Ordway
Properties, LLC (an entity in which the chief executive officer has an ownership interest in) under operating leases expiring at various dates through 2025. Rent expense under these leases totaled approximately $0.5 million in fiscal 2018 and
$0.4 million in fiscal 2017.
On July 3, 2017, the Company and Ordway Properties, LLC purchased Honeyhill Properties, LLC which
is the owner of the building at 510 Henry Clay Blvd. in Lexington, KY for $1,500,000. Video Display Corporation invested $500,000 towards the purchase price and is accounting for the investment under the cost method since Ordway Properties, LLC is
the majority owner. During the period ending November 30, 2017 the Company reduced its share in the LLC by $125,000, selling to Ordway Properties, LLC. There was no gain or loss on the sale. The Company is a one third owner in Honeyhill
Properties, LLC with Ordway Properties, LLC being a two thirds owner. The building is the new facility for the Companys Lexel Imaging subsidiary, which had previously signed a five (5) year lease agreement with Honeyhill Properties, LLC
on June 15, 2017 before the sale took place.
Future minimum rental payments due under these leases with related parties are as
follows (in thousands):
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
2019
|
|
$
|
588
|
|
2020
|
|
|
594
|
|
2021
|
|
|
594
|
|
2022
|
|
|
594
|
|
2023
|
|
|
273
|
|
Thereafter
|
|
|
379
|
|
|
|
|
|
|
|
|
$
|
3,022
|
|
|
|
|
|
|
Legal Proceedings
The Company is involved in various legal proceedings relating to claims arising in the ordinary course of business.
On May 19, 2017, Lexel Imagings Chapter 11 Bankruptcy case was dismissed upon approval of a settlement agreement between Lexel
Imaging (Lexel) and its landlord, Alidade Bull Lea, LLC (Alidade). The settlement agreement required Lexel to surrender possession of the rental property on or before September 30, 2017 and remit to Alidade all past due rent of approximately
$232 thousand. Lexel was also required to make payments totaling $100 thousand into an escrow account by July 28, 2017. These funds were held by Alidades counsel until full and timely compliance with the settlement agreement was
met, at which time the funds were returned to Lexel. The Company complied with all of the stipulations and successfully vacated the building on September 15, 2017.
38
Note 10. Concentrations of Risk and Major Customers
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, accounts receivable
and investments. At times, such cash in banks are in excess of the FDIC insurance limit.
The Company sells to a variety of domestic and
international customers on an open-unsecured account basis, in certain cases requiring letters of credit. These customers principally operate in the medical, military, and avionics industries. The Company had direct and indirect net sales to the
U.S. government, primarily the Department of Defense for training and simulation programs, which comprised approximately 50% and 32% of consolidated net sales in fiscal 2018 and 2017, respectively. Sales to foreign customers were 16% and 21% of
consolidated net sales in fiscal 2018 and 2017, respectively. The Company had one customer who comprised more than 10% of the Companys sales in fiscal year 2018, Lockheed Martin (25%).
Note 11. Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
(in thousands)
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
|
2018
|
|
|
2017
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
20
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
Income taxes, net of refunds
|
|
$
|
24
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
Non-cash
activity:
|
|
|
|
|
|
|
|
|
Note receivable paid directly to officer
|
|
$
|
175
|
|
|
$
|
147
|
|
|
|
|
|
|
|
|
|
|
Note payable to officer
|
|
$
|
175
|
|
|
$
|
147
|
|
|
|
|
|
|
|
|
|
|
Imputed interest expense
|
|
$
|
62
|
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
Imputed interest income
|
|
$
|
62
|
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
Capital additions transferred from inventory
|
|
$
|
113
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Note 12. Selected Quarterly Financial Data (unaudited)
The following table sets forth selected quarterly consolidated financial data for the fiscal years ended February 28, 2018 and
February 28, 2017, respectively. The summation of quarterly net income (loss) per share may not agree with annual net income (loss) per share due to rounding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
|
(in thousands, except per share amounts)
|
|
Net Sales
|
|
$
|
3,897
|
|
|
$
|
3,161
|
|
|
$
|
1,666
|
|
|
$
|
3,220
|
|
Gross profit (loss)
|
|
|
597
|
|
|
|
478
|
|
|
|
(144
|
)
|
|
|
(341
|
)
|
Net income (loss)
|
|
|
(266
|
)
|
|
|
(221
|
)
|
|
|
(1,203
|
)
|
|
|
(1,248
|
)
|
Basic net income (loss) per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.21
|
)
|
Diluted net income (loss) per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.21
|
)
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
|
(in thousands, except per share amounts)
|
|
Net Sales
|
|
$
|
3,710
|
|
|
$
|
3,632
|
|
|
$
|
5,299
|
|
|
$
|
6,998
|
|
Gross profit (loss)
|
|
|
416
|
|
|
|
590
|
|
|
|
898
|
|
|
|
835
|
|
Net income (loss)
|
|
|
(391
|
)
|
|
|
(378
|
)
|
|
|
(45
|
)
|
|
|
(192
|
)
|
Basic net income (loss) per share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
Diluted net income (loss) per share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
Note 13. Acquisition of Unicomp
On October 23, 2017, the Company acquired Unicomp, Inc., a keyboard manufacturer for a purchase price of $200 thousand. The
Company paid $100 thousand in cash and a note with the seller for $100 thousand. The $100 thousand note is
non-interest
bearing with expected payment in fiscal 2019. The fair value related to
the purchase price consideration has been allocated to inventory. The Company acquired Unicomp as an opportunity to develop, market and sell Tempest keyboards for its cyber security division.
40