Business Viability Of LED Display Manufacturer Daktronics A “Going Concern”

December 12, 2022 by Dave Haynes

One of the most established and successful names in the LED display business is facing serious financial issues, with South Dakota-based Daktronics filing paperwork with the SEC that says its business viability is a going concern.

That “going concern” is raised when a company’s continuing ability to keep the lights on and the production line operating is in question.

The SEC filing last week caused shares on the NASDAQ to plummet, and the company has indicated it will put out its delayed earnings release Monday morning.

From that SEC filing last week:
Daktronics, Inc. (the “Company,” “we,” “us” or “our”) is unable to timely file its Quarterly Report on Form 10-Q for the period ended October 29, 2022 (the “Form 10-Q”) on or before the prescribed due date of December 8, 2022 without unreasonable effort or expense to the Company. Ongoing supply chain disruptions and inflationary challenges in materials, freight and personnel related costs have and will continue to cause volatility in our cash flow, pricing, order volumes, lead-times, competitiveness, revenue cycles, and production costs. Our ability to fund inventory levels, operations and capital expenditures in the future will be dependent on our ability to generate cash flow from operations in these conditions, to maintain or improve margins, to use funds from our credit facility, and to find other sources of liquidity.

Although supply chain disruptions have started to ease, and we expect our inventory levels to decline, we cannot be certain we will not experience future disruptions or need additional liquidity to fund inventory levels, operations, and capital expenditures. We will need additional liquidity to meet our obligations as they come due in the 12 months following the date of this Form 12b-25, and we cannot be assured that such liquidity will be available or the form of such liquidity, such as equity raises or debt financing. These conditions raise substantial doubt about our ability to continue as a going concern.

In response to these conditions, we are pursuing additional liquidity through various means, including but not limited to obtaining financing secured by a mortgage on our facilities, a sales-leaseback transaction, leasing property and equipment, and continued focus on reducing working capital. Since these plans are not finalized and are subject to market conditions that are not within our control, they cannot be deemed probable. As a result, we have concluded that our plans do not alleviate substantial doubt about our ability to continue as a going concern. In addition, we recorded a valuation allowance of approximately $13.0 million for deferred tax assets under these conditions. The recording of the deferred tax valuation allowance created a covenant violation under our line of credit agreement. We are in the process of obtaining a waiver for such violation, however, no assurances can be given it is forthcoming.

In light of the substantial doubt in our ability to continue as a going concern and our related evaluation of the income tax implications of reaching this conclusion, the Company also expects to conclude that its disclosure controls and procedures and internal control over financial reporting were not effective as a result of material weaknesses. Our going concern policy did not contemplate evaluating the income tax implications of reaching a substantial doubt going concern conclusion. In addition, the material weaknesses relate to the untimely internal communication to support the functioning of internal controls and the resulting accounting for income taxes. The Company continues to evaluate its disclosure controls and procedures and internal controls over financial reporting, and its ultimate conclusions on these topics may differ from what the Company currently anticipates.

For these reasons, the Company needs additional time to complete its financial statements and other disclosures in the Form 10-Q. In accordance with Rule 12b-25 promulgated under the Securities Exchange Act of 1934, as amended, the Company intends to file its Form 10-Q on or before December 13, 2022.

The company has an earnings call at 10 AM central US time, in which it will presumably lay out status and next steps.

An LA-based law firm has announced that it has launched an investigation on behalf of Daktronics investors “concerning the Company’s possible violations of the federal securities laws.” The firm describes itself as “a leading national shareholder rights law firm” … so this sort of announcement may be an investor-initiated legal action, or the law firm’s business development team cast a net for billable hours. Dunno. Not my world.

I have no real insight into what’s gone on at Daktronics, other than the obvious impact of hyper-competition from Chinese manufacturers, and supply chain issues that have hurt many to most technology hardware companies in the COVID-19 era.

Founded in 1968 by a couple of electrical engineering professors in South Dakota, Daktronics has evolved from simple school gym timer and scores systems into one of the most well-established brands in LED scoreboard, replay, advertising and promotions displays. Daktronics has, in recent years, developed and installed some of the biggest and most iconic LED displays in North America, including the halo display at the Mercedes-Benz Stadium in Atlanta. The company seemed to be on a roll, with big, high profile jobs announced for pro and college sports, as well as for the very different environment of fine-pitch control room video walls.

But these have been a challenging few years for display companies like Daktronics. It never had the North American market all to itself, but 10 years ago it had just a handful of serious, quality competitors. Now there are scores of them, and Chinese companies like Leyard, Unilumin, Absen, Sansi (SNA Displays in US), Yaham and many more, of all sizes, are all scrapping for business. On the other hand, 10 years ago LERD displays were still the sort of thing found on highway pylons and in sports venues – but rarely anywhere else. Now LED is mainstreamed, and while there are many more competitors, there is much more available business.

Hopefully, the financing gets organized or new investors come in, and this is a pothole for Daktronics, and not a sinkhole.

It was only back in March that the company was seeing enough current and future demand for indoor and outdoor LED that it was in the process of spending millions to expand production capabilities in several factories and double production of Surface Mount Device (SMD) LEDs, which are the most common type of tighter resolution displays.

The expansion work was budgeted at $25 million, boosting production at the main plant in Brookings by 90,000 sq. ft. and expected to mean new jobs in the US, Ireland and China.