Quarterly Report (10-q)

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 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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, 2021

 

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 No. 001-04978 

SOLITRON DEVICES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		22-1684144
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
3301 Electronics Way, West Palm Beach, Florida		33407
(Address of Principal Executive Offices)		(Zip Code)

   

(561) 848‑4311

(Registrant’s Telephone Number, Including Area Code) 

 

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

 

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 has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”  “accelerated filer,”  “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)

 

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

  

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

 

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

 

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of January 10, 2021, was 2,083,452.

 

   

SOLITRON DEVICES, INC.

 

TABLE OF CONTENTS

 

			Page No.
PART 1 - FINANCIAL INFORMATION
Item 1.	Financial Statements		3
	Balance Sheets November 30, 2021 (unaudited) and February 28, 2021		3
	Statements of Operations (unaudited) Three and Nine Months Ended November 30, 2021 and 2020		4
	Statements of Changes in Stockholders’ Equity (unaudited) Three and Nine Months Ended November 30, 2021 and 2020		5
	Statements of Cash Flows (unaudited) Nine Months Ended November 30, 2021 and 2020		6
	Notes to Financial Statements (unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		20
Item 4.	Controls and Procedures		20
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		21
Item 1A	Risk Factors		21
Item 6.	Exhibits		22
Signatures			23

 

2

    

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SOLITRON DEVICES, INC.
BALANCE SHEETS
AS OF NOVEMBER 30, 2021 AND FEBRUARY 28, 2021
(in thousands, except for share and per share amounts)
		November 30, 2021				February 28, 2021
		Unaudited
ASSETS
CURRENT ASSETS
Cash and cash equivalents			5,247				3,785
Marketable securities			435				248
Accounts receivable			1,445				1,306
Inventories, net			2,517				2,721
Prepaid expenses and other current assets			435				372
TOTAL CURRENT ASSETS			10,079				8,432
Property, plant and equipment, net			4,837				281
Operating lease - right-of-use asset			35				340
Other assets			224				40
TOTAL ASSETS			15,175				9,093
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable			291				165
Customer deposits			24				49
Operating lease liability			39				377
Finance lease liability			9				9
Notes payable (PPP loan)			-				43
Mortgage loan			100				-
Accrued expenses and other current liabilities			1,023				740
TOTAL CURRENT LIABILITIES			1,486				1,383
Notes payable (PPP loan), net of current			-				764
Mortgage loan, net of current			2,783				-
Finance lease liability, net of current			6				13
TOTAL LIABILITIES			4,275				2,160
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, authorized 500,000shares, none issued			-				-
Common stock, $.01 par value, authorized 10,000,000 shares, 2,083,452 shares outstanding, net of 487,811 treasury shares at November 30, 2021 and 2,083,462 shares outstanding, net of  487,801 treasury shares at February 28, 2021, respectively			21				21
Additional paid-in capital			1,834				1,834
Retained Earnings			10,457				6,490
Less treasury stock			(1,412	)			(1,412	)
TOTAL STOCKHOLDERS’ EQUITY			10,900				6,933
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY			15,175				9,093

 

The accompanying notes are an integral part of the unaudited financial statements.

 

3

Table of Contents

   

SOLITRON DEVICES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2021 AND NOVEMBER 30, 2020
(Unaudited, in thousands except for share and per share amounts)
		For the three months ended				For the three months ended				For the nine months ended				For the nine months ended
		November 30, 2021				November 30, 2020				November 30, 2021				November 30, 2020
Net sales			2,468				2,312				10,308				7,913
Cost of sales			1,672				1,799				5,628				5,419
Gross profit			796				513				4,680				2,494
Selling, general and administrative expenses			497				575				1,870				1,587
Operating income			299				(62	)			2,810				907
Other income (loss)
Interest expense			(28	)			-				(74	)			-
Dividend income			1				-				2				7
Realized gain (loss) on investments			41				9				67				35
Unrealized gain (loss) on investments			(8	)			26				(7	)			28
Gain on PPP loan forgiveness			-				-				812				-
Scrap income			185				-				357				-
Total other income (loss)			191				35				1,157				70
Net income (loss)			490				(27	)			3,967				977
Net income (loss) per common share - basic and diluted		$	0.24			$	(0.01	)		$	1.90			$	0.47
Weighted average common shares outstanding			2,083,452				2,064,754				2,083,459				2,062,713

 

The accompanying notes are an integral part of the unaudited financial statements.

 

4

Table of Contents

    

SOLITRON DEVICES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2021 AND NOVEMBER 30, 2020
(Unaudited, in thousands, except for number of shares)
		Common Stock												Additional				Treasury
		Number				Treasury								Paid-in				Stock				Retained
		of Shares				Shares				Amount				Capital				Amount				Earnings				Total
Balance, February 29, 2020			2,571,263				(508,314	)		$	21			$	1,834			$	(1,481	)		$	5,109			$	5,483
Net income			-				-				-				-				-				369				369
Balance, May 31, 2020			2,571,263				(508,314	)		$	21			$	1,834			$	(1,481	)		$	5,478			$	5,852
Purchase of Common Stock			-				(2,493	)			-				-				(6	)			-				(6	)
Net income			-				-				-				-				-				635				635
Balance, August 31, 2020			2,571,263				(510,807	)		$	21			$	1,834			$	(1,487	)		$	6,113			$	6,481
Stock based compensation			-				23,006				-				-				75				-				75
Net (loss)			-				-				-				-				-				(27	)			(27	)
Balance, November 30, 2020			2,571,263				(487,801	)		$	21			$	1,834			$	(1,412	)		$	6,086			$	6,529
Balance, February 28, 2021			2,571,263				(487,801	)		$	21			$	1,834			$	(1,412	)		$	6,490			$	6,933
Net income			-				-				-				-				-				1,027				1,027
Balance, May 31, 2021			2,571,263				(487,801	)		$	21			$	1,834			$	(1,412	)		$	7,517			$	7,960
Net income			-				-				-				-				-				2,450				2,450
Balance, August 31, 2021			2,571,263				(487,801	)		$	21			$	1,834			$	(1,412	)		$	9,967			$	10,410
Transfer Agent Adjustment of Common Stock			-				(10	)			-				-				-				-				-
Net income			-				-				-				-				-				490				490
Balance, November 30, 2021			2,571,263				(487,811	)		$	21			$	1,834			$	(1,412	)		$	10,457			$	10,900

 

The accompanying notes are an integral part of the unaudited financial statements

 

5

Table of Contents

    

SOLITRON DEVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2021 AND NOVEMBER 30, 2020
(Unaudited, in thousands)
		November 30, 2021				November 30, 2020
Net income		$	3,967				977
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization			193				179
Operating lease expense			305				285
Net realized and unrealized (gains) on investments			(60	)			(63	)
Stock based compensation			-				75
PPP loan forgiveness			(812	)			-
Changes in Operating Assets and Liabilities:
Accounts receivable			(139	)			213
Inventories			204				(183	)
Prepaid expenses and other current assets			(63	)			(72	)
Other assets			(184	)			-
Payments on operating lease liabilities			(338	)			(308	)
Payments on capital lease liabilities			(7	)			-
Accounts payable			126				49
Customer deposits			(25	)			(22	)
Accrued expenses, other current and non-current liabilities			283				297
Net cash provided by operating activities			3,450				1,427
Investing activities
Proceeds from sale of marketable securities			270				340
Purchases of marketable securities			(392	)			(379	)
Purchases of property and equipment			(4,749	)			(68	)
Net cash (used in) investing activities			(4,871	)			(107	)
Financing activities
Proceeds from mortgage loan			2,940				807
Principal payments on mortgage loan			(57	)			-
Purchase of treasury stock			-				(6	)
Net cash provided by financing activities			2,883				801
Net increase in cash and cash equivalents			1,462				2,121
Cash and cash equivalents - beginning of the year			3,785				1,332
Cash and cash equivalents - end of period		$	5,247				3,453
Non-cash transactions
Capitalization of ROU asset and liability		$	-			$	26
Supplemental disclosures of cash flow data
Income taxes paid		$	-			$	-
Interest expense paid		$	74			$	-

 

The accompanying notes are an integral part of the unaudited financial statements.

 

6

Table of Contents

   

SOLITRON DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS

UNAUDITED

 

1. THE COMPANY AND OPERATIONS

 

Solitron Devices, Inc., a Delaware corporation (“Solitron,” the “Company,” “we,” “us,” or “our”), designs, develops, manufactures, and markets solid-state semiconductor components and related devices primarily for the military and aerospace markets.  The Company was incorporated under the laws of the State of New York in 1959 and reincorporated under the laws of the State of Delaware in August 1987.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

The unaudited financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

 

The unaudited financial information furnished herein reflects all adjustments, consisting of normal recurring items that, in the opinion of management, are necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods.  The results of operations for the three and nine months ended November 30, 2021 are not necessarily indicative of the results to be expected for the year ending February 28, 2022.

 

The information included in this Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended February 28, 2021.

 

Cash and Cash Equivalents

Cash and cash equivalents include demand deposits and money market accounts.

 

Investment in Marketable Securities

Investment in marketable securities includes investments in common stocks and bonds.  Investments in securities are reported at fair value with changes in unrecognized gains or losses included in other income on the income statement.

 

The following table summarizes available-for-sale investments (in 000’s):

 

Gross

Gross

November 30, 2021 Marketable Securities:

Cost

Unrealized Gains

Unrealized Losses

Fair Value

Common Stocks

399

49

(14

)

435

Gross

Gross

February 28, 2021 Marketable Securities:

Cost

Unrealized Gains

Unrealized Losses

Fair Value

Common Stocks

224

46

(22

)

248

 

One marketable security was marked at cost at the end of the quarter ended November 30, 2021, which matched the most recent trade in the security.  Total value of the security was $44,800.

 

At November 30, 2021 and February 28, 2021, the deferred tax liability related to unrecognized gains and losses on short-term investments was $0.

  

7

Table of Contents

 

Fair Value of Financial Instruments

Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures”, defines “fair value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also sets forth a valuation hierarchy of the inputs (assumptions that market participants would use in pricing an asset or liability) used to measure fair value. This hierarchy prioritizes the inputs into the following three levels:

 

Level 1:	Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.
Level 2:	Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3:	Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

  

The Company’s securities are subject to Level 1 fair value measurement.

 

The carrying amounts of the Company’s short-term financial instruments, including accounts receivable, accounts payable, accrued expenses and other liabilities approximate their fair value due to the relatively short period to maturity for these instruments.

 

Accounts Receivable

Accounts receivable consists of unsecured credit extended to the Company’s customers in the ordinary course of business. The Company reserves for any amounts deemed to be uncollectible based on past collection experiences and an analysis of outstanding balances, using an allowance account. The allowance amount was $0 as of November 30, 2021 and February 28, 2021.

 

Shipping and Handling

Shipping and handling costs billed to customers are recorded in net sales. Shipping costs incurred by the Company are recorded in cost of sales.

 

Inventories

Inventories are stated at the lower of cost and net realizable value.  Cost is determined using the “first-in, first-out” (FIFO) method.  The Company buys raw material only to fill customer orders.  Excess raw material is created only when a vendor imposes a minimum quantity buy in excess of actual requirements.  Such excess material will usually be utilized to meet the requirements of the customer’s subsequent orders.  If excess material is not utilized after two fiscal years it is fully reserved.  Any inventory item once designated as reserved is carried at zero value in all subsequent valuation activities.  The Company maintains a three inch wafer fab which procures raw wafers and produces finished wafers based on management’s estimates of projected future demand.  Finished wafers are considered work-in-process since they are usable for many years, and in some circumstances can be used on more than one finished product depending on customer parameters.

 

The Company does not classify a portion of inventories as non-current since we cannot reasonably estimate based on the length of our operating cycle which items will or will not be used within twelve months.

 

The Company’s inventory valuation policy is as follows:

 

Raw material /Work in process:	All material acquired or processed in the last two fiscal years is valued at the lower of its acquisition cost or net realizable value, except for wafers which function under a three-year policy. All material not used after two fiscal years is fully reserved for except wafers which are reserved for after three years. Finished wafers produced in our wafer fab are stored in the wafer bank and are considered work-in-process. Raw material in excess of five years’ usage that cannot be restocked, and slow-moving work in process are reserved for.
Finished goods:	All finished goods with firm orders for later delivery are valued (material and overhead) at the lower of cost or net realizable value. All finished goods with no orders are fully reserved.
Direct labor costs:	Direct labor costs are allocated to finished goods and work in process inventory based on engineering estimates of the number of man-hours required from the different direct labor departments to bring each device to its particular level of completion. Manufacturing overhead costs are allocated to finished goods and work in process inventory as a ratio to direct labor costs.

Raw material /Work in process:	All material acquired or processed in the last two fiscal years is valued at the lower of its acquisition cost or net realizable value, except for wafers which function under a three- year policy. All material not used after two fiscal years is fully reserved for except wafers which are reserved for after three years. Finished wafers produced in our wafer fab are stored in the wafer bank and are considered work-in-process. Raw material in excess of five years’ usage that cannot be restocked, and slow-moving work in process are reserved for.
Finished goods:	All finished goods with firm orders for later delivery are valued (material and overhead) at the lower of cost or net realizable value. All finished goods with no orders are fully reserved.
Direct labor costs:	Direct labor costs are allocated to finished goods and work in process inventory based on engineering estimates of the number of man-hours required from the different direct labor departments to bring each device to its particular level of completion. Manufacturing overhead costs are allocated to finished goods and work in process inventory as a ratio to direct labor costs.

Raw material /Work in process:

All material acquired or processed in the last two fiscal years is valued at the lower of its acquisition cost or net realizable value, except for wafers which function under a three- year policy. All material not used after two fiscal years is fully reserved for except wafers which are reserved for after three years. Finished wafers produced in our wafer fab are stored in the wafer bank and are considered work-in-process. Raw material in excess of five years’ usage that cannot be restocked, and slow-moving work in process are reserved for.

 

 

Finished goods:

All finished goods with firm orders for later delivery are valued (material and overhead) at the lower of cost or net realizable value. All finished goods with no orders are fully reserved.

 

 

Direct labor costs:

Direct labor costs are allocated to finished goods and work in process inventory based on engineering estimates of the number of man-hours required from the different direct labor departments to bring each device to its particular level of completion. Manufacturing overhead costs are allocated to finished goods and work in process inventory as a ratio to direct labor costs.

   

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Property, Plant, Equipment, and Leasehold Improvements

Property, plant, and equipment is recorded at cost.  Major renewals and improvements are capitalized, while maintenance and repairs that do not extend their expected life are expensed as incurred.  Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets.  Leasehold improvements are amortized over the shorter of the lease term or the lives of the related assets:

 

Building	39 years
Leasehold Improvements	10 years
Machinery and Equipment	5 years

  

Concentrations of Credit Risk

Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and account receivables. The Company places its cash with high credit quality institutions. At times, such amounts may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant credit risk on the accounts. As of November 30, 2021, all non-interest bearing checking accounts were FDIC insured to a limit of $250,000. Deposits in excess of FDIC insured limits were approximately $4,340,000 at November 30, 2021, as compared to $2,518,000 at November 30, 2020. With respect to the account receivables, most of the Company’s products are custom made pursuant to contracts with customers whose end-products are sold to the United States Government. The Company performs ongoing credit evaluations of its customers’ financial condition and maintains allowances for potential credit losses. Actual losses and allowances have historically been within management’s expectations.

 

Net Income (Loss) Per Common Share

Net income (loss) per common share is presented in accordance with ASC 260-10 “Earnings per Share.”  Basic earnings per common share are computed using the weighted average number of common shares outstanding during the period.  Diluted earnings per common share incorporate the incremental shares issuable upon the assumed exercise of stock options to the extent they are not anti-dilutive using the treasury stock method.  The Company had no stock options outstanding during fiscal 2020 and 2021; therefore, there is no effect from dilution on earnings per share.

 

Revenue Recognition

 

On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods and services to customers. The ASU replaces most existing revenue recognition guidance in the United States. The standard permits the use of either the full retrospective or modified retrospective transition method.

 

Based on a review of its customer contracts, the Company has determined that revenue on the majority of its customer contracts will continue to be recognized at a point in time, generally upon shipment of products, consistent with the Company’s historical revenue recognition model. 

 

The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

To achieve that core principle, the Company applied the following steps:

 

1. Identify the contract(s) with a customer.

 

The Company designs, develops, manufactures and markets solid-state semiconductor components and related devices.  The Company’s products are used as components primarily in the military and aerospace markets. 

 

The Company’s revenues are from purchase orders and/or contracts with customers associated with manufacture of products. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

 

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2. Identify the performance obligations in the contract.

 

The majority of the Company’s purchase orders or contracts with customers contain a single performance obligation, the shipment of products.

 

3. Determine the transaction price.

 

The transaction price reflects the Company’s expectations about the consideration it will be entitled to receive from the customer at a fixed price per unit shipped based on the terms of the contract or purchase order with the customer. To the extent our actual costs vary from the fixed price that was negotiated, we will generate more or less profit or could incur a loss.

 

4. Allocate the transaction price to the performance obligations in the contract.

 

5. Recognize revenue when (or as) the Company satisfies a performance obligation.

 

This performance obligation is satisfied when control of the product is transferred to the customer, which occurs upon shipment or delivery. The Company receives purchase orders for products to be delivered over multiple dates that may extend across reporting periods. The Company accounting policy treats shipping and handling activities as a fulfillment cost. The Company invoices for each delivery upon shipment and recognizes revenues at the fixed price for each distinct product delivered when transfer of control has occurred, which is generally upon shipment.

 

In addition, the Company may have a contract or purchase order to provide a non-recurring engineering service to a customer. These contracts are reviewed, performance obligations are determined, and we recognize revenue at the point in time in which each performance obligation is fully satisfied.

 

We recognize revenue on sales to distributors when the distributor takes control of the products ("sold-to" model).  We have agreements with distributors that allow distributors a limited credit for unsaleable products, which we refer to as a "scrap allowance." Consistent with industry practice, we also have a "stock, ship and debit" program whereby we consider requests by distributors for credits on previously purchased products that remain in distributors' inventory, to enable the distributors to offer more competitive pricing.  We have contractual arrangements whereby we provide distributors with protection against price reductions initiated by us after product is sold by us to the distributor and prior to resale by the distributor.  In addition, we have a termination clause in one of our distributor agreements that would allow for a full credit for all inventory upon 60 days' notice of terminating the agreement.

 

We recognize the estimated variable consideration to be received as revenue and record a related accrued expense for the consideration not expected to be received, based upon an estimate of product returns, scrap allowances, "stock, ship and debit" credits, and price protection credits that will be attributable to sales recorded through the end of the period.  We make these estimates based upon sales levels to our customers during the period, inventory levels at the distributors, current and projected market conditions, and historical experience under the programs. Our estimates require the exercise of significant judgments.  We believe that we have a reasonable basis to estimate future credits under the programs.

 

Related Party Transactions

The Company currently purchases and has purchased in the past die and wafers, as specified by the Company's customers, from ES Components.  Mr. Aubrey, a director of the Company is a minority owner, and an immediate family member of the majority owner of ES Components. For the nine months ended November 30, 2021, the Company purchased $94,215of die from ES Components. For the nine months ended November 30, 2020, the Company purchased $66,045of die from ES Components.  The Company has included these expenses in cost of goods sold in the accompanying statement of operations. The Company occasionally makes sales to ES Components.  For the nine months ended November 30, 2021 and November 30, 2020, sales were $0. 

 

Stock based compensation

The Company records stock-based compensation in accordance with the provisions of ASC Topic 718, "Compensation-Stock Compensation," which establishes accounting standards for transactions in which an entity exchanges its equity instruments for goods or services. Under ASC Topic 718, the Company recognizes an expense for the fair value of outstanding stock options and grants as they vest, whether held by employees or others. No vesting of stock options or grants occurred during the three and nine month periods ended November 30, 2021 or November 30, 2020.

 

Financial Statement Estimates

The preparation of condensed financial statements in conformity with GAAP  requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates, and the differences could be material.  Such estimates include depreciable life, valuation allowance, and allowance for inventory obsolescence.

 

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Recent Accounting Pronouncements

No recent accounting pronouncements affecting the Company were issued by the Financial Accounting Standards Board or other standards-setting bodies.

 

3. REVENUE RECOGNITION

 

As of November 30, 2021 and November 30, 2020, sales returns and allowances accrual activity is shown below:

 

		November 30, 2021				November 30, 2020
Beginning Balance		$	354,000			$	126,000
Accrued Allowances			117,000				199,000
Credits Issued			-				-
Ending Balance		$	471,000			$	325,000

 

As noted in Note 2 above, one of our distributor agreements has a termination clause that would allow for a full credit for all inventory upon 60 days' notice of terminating the agreement.  As of November 30, 2021 and February 28, 2021, the inventory balance at that distributor was approximately $2,193,000 and $1,854,000, respectively.  Based upon sales levels to and by the distributor during the period, inventory levels at the distributors, current and projected market conditions, and historical experience under the programs, we believe it is highly unlikely that the distributor would exercise termination.  Should termination occur, we believe the products could be sold to other distributors or held in inventory for future sale. 

 

The Company warrants that its products, when delivered, will be free from defects in material workmanship under normal use and service. The obligations are limited to replacing, repairing, or reimbursing for, at the option of the Company, any products that are returned within one year after the date of shipment. The Company does not reserve for potential warranty costs based on historical experience and the nature of its cost tracking system.

 

4. INVENTORIES

 

As of November 30, 2021 and February 28, 2021, inventories, net of reserves, consist of the following:

 

		November 30, 2021				February 28, 2021
Raw Materials			605,000				842,000
Work-In-Process			1,812,000				1,830,000
Finished Goods			100,000				49,000
Total		$	2,517,000			$	2,721,000

 

Wafer related inventory, which includes raw wafers, work-in-process wafers, and wafer bank (completed wafers that are available to be consumed in the Company’s products), net of reserves, totaled $1,115,000 as of November 30, 2021 and $1,154,000 as of February 28, 2021. Wafer production was temporarily curtailed during fiscal 2020 due to implementation of an improvement plan, which was completed in the first quarter of fiscal 2021. As of November 30, 2021, 100% of the wafer bank inventory consisted of wafers manufactured between calendar year 2018 and 2021. We do not expect all of our wafer inventory to be consumed within twelve months; however, since it is not possible to know which wafers will or will not be used, we classify all our inventory as current.

 

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

As of November 30, 2021 and February 28, 2021, accrued expenses and other current liabilities consist of the following:

 

		November 30, 2021				February 28, 2021
Payroll and related employee benefits		$	341,000			$	293,000
Legal fees			-				3,000
Property, Sales, and Franchise taxes			11,000				15,000
Return Allowance			471,000				354,000
Bonus Accrual			200,000				70,000
Accrued Interest on PPP loan			-				5,000
Totals		$	1,023,000			$	740,000

 

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6. DISAGGREGATION OF REVENUE AND MAJOR CUSTOMERS

 

Revenues from domestic and export sales are attributed to a global geographic region according to the location of the customer’s primary manufacturing or operating facilities. Revenues from domestic and export sales to unaffiliated customers for the three months ended November 30, 2021 and November 30, 2020, respectively are as follows:

 

Geographic Region		November 30, 2021				November 30, 2020
Europe and Australia			-				-
Canada and Latin America			4,000				-
Far East and Middle East			-				-
United States			2,464,000				2,312,000
Totals		$	2,468,000			$	2,312,000

 

Revenues from domestic and export sales are attributed to a global geographic region according to the location of the customer’s primary manufacturing or operating facilities. Revenues from domestic and export sales to unaffiliated customers for the nine months ended November 30, 2021 and November 30, 2020, respectively are as follows:

 

Geographic Region		November 30, 2021				November 30, 2020
Europe and Australia			-				-
Canada and Latin America			24,000				13,000
Far East and Middle East			-				9,000
United States			10,284,000				7,891,000
Totals		$	10,308,000			$	7,913,000

 

For the three months ended November 30, 2021 and November 30, 2020, approximately 80% and 72%, respectively, of the Company’s sales have been attributable to contracts with customers whose products are sold to the United States government. The remaining 20% and 28%, respectively of sales are for non-military, scientific and industrial applications, or to distributors where we do not have end user information.

 

For the nine months ended November 30, 2021 and November 30, 2020, approximately 85% and 69%, respectively, of the Company’s sales have been attributable to contracts with customers whose products are sold to the United States government. The remaining 15% and 31%, respectively of sales are for non-military, scientific and industrial applications, or to distributors where we do not have end user information.

 

Revenues from customers who accounted for 10% or more of the Company’s net sales for the three months ended November 30, 2021 and November 30, 2020, respectively, are as follows:

 

Customer		November 30, 2021				Customer		November 30, 2020
1. Raytheon			41	%		1. Raytheon			38	%
2. L3Harris			21	%					-
3. Avnet / USI Electronics			17	%					-
Totals			79	%		Totals			38	%

 

Revenues from customers who accounted for 10% or more of the Company’s net sales for the nine months ended November 30, 2021 and November 30, 2020, respectively, are as follows:

 

Customer		November 30, 2021				Customer		November 30, 2020
1. Raytheon			48	%		1. Raytheon			51	%
2. L3Harris			17	%		2. Avnet / USI Electronics			15	%
3. Avnet / USI Electronics			13	%					-
Totals			78	%		Totals			66	%

 

As of November 30, 2021, our top three customers accounted for 81% of accounts receivable. 

 

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7. MAJOR SUPPLIERS

 

For the three months ended November 30, 2021, Platronics Seals accounted for 33% of purchases of production materials, Wuxi Streamtek accounted for 27% of purchases of production materials, Stellar Industries accounted for 12% of purchases of production materials, and all other suppliers were individually less than 10% of purchases.  For the three months ended November 30, 2020, CPS Technologies accounted for 21% of purchases of production materials, no other supplier accounted for 10% or more of purchases of production materials.   

 

For the nine months ended November 30, 2021, Platronics Seals accounted for 21% of purchases of production materials, Wuxi Streamtek accounted for 20% of purchases of production materials, Stellar Industries accounted for 13% of purchases of production materials, and all other suppliers were individually less than 10% of purchases.  For the nine months ended November 30, 2020, purchases from the Company’s top supplier, Egide USA, accounted for 19% of the Company's total purchases of production materials, with all other suppliers were individually less than 10% of purchases. 

 

8. COMMITMENTS AND CONTINGENCIES

 

Finance lease:

During fiscal 2021, the Company entered into a 36-month finance lease for $27,000 of computer equipment. The Company does not consider the lease to be material to the Company’s financial statements.  As of November 30, 2021, and February 28, 2021, the carrying value of the asset was $15,000 and $22,000, respectively, and was included in Property, plant and equipment on the balance sheet.

 

Operating lease:

On October 1, 2014, the Company extended its current lease with its landlord, CF EB REO II LLC, for the occupancy and use of its 47,000 square foot facility located at 3301 Electronics Way, West Palm Beach, Florida 33407 (the “Lease”). The property subsequently was sold to La Boheme Properties, Inc., a Florida corporation, which is the current landlord as the Lease was assigned to them. The term of the Lease was scheduled to end on December 31, 2021. The base rent provided in the Lease is $31,555 per month, excluding sales tax. The Company had the option to extend the term of the Lease for an additional five years beginning on January 1, 2022 and ending on December 31, 2026. The Company did not exercise its option.

 

On November 5, 2021, the Company entered into the Second Amendment to the Lease, which extended the Lease portion over a portion of the leased premises until February 28, 2022 and extended the Lease term over a portion through March 31, 2022. On November 19, 2021, the Company entered into a replacement of the Second Amendment, which extended the Lease over the whole facility by one month and the aforementioned extensions by one month, respectively.  The Company does not consider the Lease extension to be material to the Company’s financial statements and has not adjusted the balance sheet classification.

 

The balance sheet classification of operating lease assets and liabilities as of November 30, 2021 are as follows:

 

Balance Sheet Classification		November 30, 2021
Assets
Operating lease right-of-use assets, March 1, 2021		$	340,000
Amortization for the nine months ended November 30, 2021			(305,000	)
Total operating lease right-of-use asset, November 30, 2021		$	35,000
Liabilities
Current
Operating lease liability, short-term		$	39,000
Non-current
Operating lease liability, long-term			-
Total lease liabilities		$	39,000

 

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Future minimum operating lease payments, excluding Florida sales tax, as of November 30, 2021 under non-cancelable operating leases are as follows:

 

Fiscal Year Ending February 28		Amount
2022			39,000
Total Future Undiscounted Cash Flows		$	39,000
Less Imputed Interest to be recognized in lease expense			-
Operating Lease Liabilities, as reported		$	39,000

 

The balance sheet classification of lease assets and liabilities as of February 28, 2021 was as follows:

 

Balance Sheet Classification		February 28, 2021
Assets
Operating lease right-of-use assets, March 1, 2020		$	723,000
Amortization for the fiscal year ended February 28, 2021			(383,000	)
Total operating lease right-of-use asset, February 28, 2021		$	340,000
Liabilities
Current
Operating lease liability, short-term		$	377,000
Non-current
Operating lease liability, long-term			-
Total lease liabilities		$	377,000

 

Future minimum operating lease payments, excluding Florida sales tax, as of February 28, 2021 under non-cancelable operating leases was as follows:

 

Fiscal Year Ending February 28		Amount
2022			388,000
Total Future Undiscounted Cash Flows		$	388,000
Less Imputed Interest to be recognized in lease expense			11,000
Operating Lease Liabilities, as reported		$	377,000

 

9. NOTES PAYABLE

 

On July 21, 2020, the Company received loan proceeds of $807,415 under the Paycheck Protection Program (the “PPP Loan”).  The Paycheck Protection Program (“PPP”) was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). The PPP Loan to the Company was made through Bank of America, N.A., a national banking association.  The PPP Loan was scheduled to mature on July 21, 2025 and bore interest at a rate of 1% per annum.  Payments of principal and interest on the loan were initially deferred until January 1, 2021 and based on applying for forgiveness the deferral was extended through October 31, 2021. The PPP Loan could have been prepaid by the Company at any time prior to maturity with no prepayment penalties. Funds from the PPP Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on certain other debt obligations. The Company used the entire PPP Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.  On June 12, 2021 the SBA notified Bank of America that the Company’s application for complete forgiveness of its PPP loan was approved. Gain on PPP loan forgiveness for the nine months ended November 30, 2021 includes the forgiveness of the loan and accrued interest.

  

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On April 16, 2021, the Company closed on the acquisition of a facility and real estate located in West Palm Beach, Florida for a purchase price of $4,200,000 pursuant to the Commercial Contract entered into on March 1, 2021.  In connection with the acquisition, the Company obtained mortgage financing from Bank of America, N.A. in the amount of $2,940,000 to fund that portion of the total purchase price, and entered into the Master Credit Agreement, a Note, a Mortgage, Assignment of Rents, Security Agreement and Fixture Filing and Financial Covenant Agreement.  The loan accrues interest at a fixed rate of 3.8% per year and matures on April 15, 2031. Beginning on May 15, 2021 the Company began making monthly installments of $17,593 consisting of principal and interest.  The payment and performance of the loan is secured by a security interest in the property acquired.  The Master Credit Agreement contains certain representations and warranties, undertakings and events of default customary for these types of agreements. Additionally, under the terms of the Financial Covenant Agreement, the Company has agreed to maintain a fixed charge coverage ratio of at least 1.15:1.0, calculated at the end of each fiscal year, using the results of the twelve-month period ending with that reporting period, and has agreed to maintain on a consolidated basis a minimum of unrestricted, unencumbered liquid assets of no less than $1,000,000.

 

The Company has begun making the necessary improvements to the property acquired in order to completely relocate its manufacturing operations and corporate headquarters in the spring of 2022.

 

10. EQUITY

 

Repurchase Program

 

The Board of Directors has authorized a stock repurchase program of up to $1.0 million of its outstanding common stock. Purchases under the program may be made through the open market or privately negotiated transactions as determined by the Company’s management, and in accordance with the requirements of the Securities and Exchange Commission. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other conditions.

 

The Company did not repurchase any shares under the stock repurchase program during the three and nine months ended November 30, 2021. The Company did not repurchase any shares under the stock repurchase program during the three months ended November 30, 2020, and repurchased 2,493 shares of common stock during the nine months ended November 30, 2020.

 

Stock Compensation

 

On November 13, 2020, the Company granted Mr. Eriksen and Mr. Matson the option to receive half of their bonuses in shares instead of cash, which both elected. Mr. Eriksen received 7,669 shares, with a fair market value of $25,000, or $3.26 per share, and Mr. Matson received 15,337 shares, with a fair market value of $50,000, or $3.26 per share. Shares were issued under the 2019 Stock Incentive Plan.

 

No shares were granted during the three and nine months ended November 30, 2021. The Company was notified of a ten share adjustment to outstanding shares during the three months ended November 30, 2021.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Solitron Devices, Inc., a Delaware corporation (the “Company” or “Solitron”), designs, develops, manufactures and markets solid-state semiconductor components and related devices primarily for the military and aerospace markets.  The Company manufactures a large variety of bipolar and metal oxide semiconductor (“MOS”) power transistors, power and control hybrids, junction and power MOS field effect transistors and other related products.  Most of the Company’s products are custom made pursuant to contracts with customers whose end products are sold to the United States government.  Other products, such as Joint Army/Navy transistors, diodes and Standard Military Drawings voltage regulators, are sold as standard or catalog items.

 

The following discussion and analysis of factors which have affected the Company's financial position and operating results during the periods included in the accompanying unaudited condensed financial statements should be read in conjunction with the Financial Statements and the related Notes to Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended February 28, 2021 and the Unaudited Financial Statements and the related Notes to Unaudited Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

 

Significant Accounting Policies:

 

The discussion and analysis of our financial condition and results of operations are based upon the unaudited condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q which are prepared in accordance with accounting principles generally accepted in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Our critical accounting policies include cash and cash equivalents, investment in marketable securities, revenue recognition, earnings per common share, shipping and handling, and inventories. A discussion of these critical accounting policies are included in Note 2 of the “Notes To Financial Statements” in Item 8 of our Annual Report on Form 10-K for the fiscal year ended February 28, 2021.

 

Results of Operations-Three Months Ended November 30, 2021 Compared to Three Months Ended November 30, 2020: 

 

Net sales for the three months ended November 30, 2021 increased 7% to $2,468,000 as compared to $2,312,000 for the three months ended November 30, 2020. 

 

Net bookings for the three months ended November 30, 2021 increased 4% to $1,340,000 versus $1,285,000 during the three months ended November 30, 2020.  Backlog as of November 30, 2021 decreased 27% to $3,197,000 as compared to a backlog of $4,401,000 as of November 30, 2020. 

 

Cost of sales for the three months ended November 30, 2021 decreased to $1,672,000 from $1,799,000 for the three months ended November 30, 2020, due to decreased material and direct labor costs.  Expressed as a percentage of net sales, cost of sales decreased to 68% for the three months ended November 30, 2021 from 78% for the three months ended November 30, 2020.

 

Gross profit for the three months ended November 30, 2021 increased to $796,000 from $513,000 for the three months ended November 30, 2020, due primarily to increased net sales and decreased materials and direct labor costs. Accordingly, gross margins increased to 32% for the three months ended November 30, 2021 as compared to 22% for the three months ended November 30, 2020.

 

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For the three months ended November 30, 2021, we shipped 36,047 units as compared to 10,259 units shipped during the same period of the prior year.  It should be noted that since we manufacture a wide variety of products with an average sales price ranging from a few dollars to several hundred dollars, such periodic variations in our volume of units shipped should not be regarded as a reliable indicator of our performance.

 

Selling, general, and administrative expenses decreased to $497,000 for the three months ended November 30, 2021 from $575,000 for the same period in the prior year.  The decrease was primarily due to decreased bonus expense and professional fees.  During the three months ended November 30, 2021, selling, general and administrative expenses as a percentage of net sales decreased to 20% as compared to 25% for the three months ended November 30, 2020. 

 

Operating income for the three months ended November 30, 2021 increased to $299,000 as compared to an operating loss of ($62,000) for the three months ended November 30, 2020. This increase is due primarily to increased net sales and decreased cost of sales and selling, general and administrative expense.

 

Interest expense was ($28,000) for the three months ended November 30, 2021 as compared to $0 for the three months ended November 30, 2020.  Interest and dividend income for the three months ended November 30, 2021 was $1,000 as compared to $0 for the three months ended November 30, 2020.  Realized gains on investments for the three months ended November 30, 2021 increased to $41,000 as compared to $9,000 for the three months ended November 30, 2020.  Unrealized loss on investments for the three months ended November 30, 2021 was ($8,000) as compared to unrealized gain on investments of $26,000 for the three months ended November 30, 2020.  Other income, consisting of primarily scrap income, for the three months ended November 30, 2021 was $185,000 as compared to $0 for the three months ended November 30, 2020.

 

Net income for the three months ended November 30, 2021 increased to $490,000 as compared to a net loss of ($27,000) for the three months ended November 30, 2020. This increase is due primarily to increased net sales and other income, and decreased cost of sales and selling, general and administrative expenses as described above.

 

Results of Operations-Nine Months Ended November 30, 2021 Compared to Nine Months Ended November 30, 2020: 

 

Net sales for the nine months ended November 30, 2021 increased 30% to $10,308,000 as compared to $7,913,000 for the nine months ended November 30, 2020. 

 

Net bookings for the nine months ended November 30, 2021 increased 6% to $4,713,000 versus $4,428,000 during the nine months ended November 30, 2020. Backlog as of November 30, 2021 decreased 27% to $3,197,000 as compared to a backlog of $4,401,000 as of November 30, 2020. 

 

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Cost of sales for the nine months ended November 30, 2021 increased to $5,628,000 from $5,419,000 for the nine months ended November 30, 2020, due to increased raw materials and factory overhead partially offset by decreased labor costs. Expressed as a percentage of net sales, cost of sales decreased to 55% for the nine months ended November 30, 2021 from 68% for the nine months ended November 30, 2020.  

 

Gross profit for the nine months ended November 30, 2021 increased to $4,680,000 from $2,494,000 for the nine months ended November 30, 2020, due primarily to increased net sales and improved productivity. Accordingly, gross margins increased to 45% for the nine months ended November 30, 2021 as compared to 32% for the nine months ended November 30, 2020.

 

For the nine months ended November 30, 2021, we shipped 89,512 units as compared to 58,770 units shipped during the same period of the prior year.  It should be noted that since we manufacture a wide variety of products with an average sales price ranging from a few dollars to several hundred dollars, such periodic variations in our volume of units shipped should not be regarded as a reliable indicator of our performance.

 

Selling, general, and administrative expenses increased to $1,870,000 for the nine months ended November 30, 2021 from $1,587,000 for the same period in the prior year.  The increase was primarily due to increased legal and professional fees, commissions on higher net sales, and increased bonus expense.   During the nine months ended November 30, 2021, selling, general and administrative expenses as a percentage of net sales decreased to 18% as compared to 20% for the nine months ended November 30, 2020. 

 

Operating income for the nine months ended November 30, 2021 increased to $2,810,000 as compared to operating income of $907,000 for the nine months ended November 30, 2020. This increase is due primarily to increased net sales.

 

Interest expense was ($74,000) for the nine months ended November 30, 2021 as compared to $0 for the nine months ended November 30, 2020.  Interest and dividend income for the nine months ended November 30, 2021 decreased to $2,000 as compared to $7,000 for the nine months ended November 30, 2020.  Realized gains on investments for the nine months ended November 30, 2021 increased to $67,000 as compared to $35,000 for the nine months ended November 30, 2020.  Unrealized loss on investments for the nine months ended November 30, 2021 was ($7,000) as compared to unrealized gain on investments of $28,000 for the nine months ended November 30, 2020.  Gain on PPP loan forgiveness for the nine months ended November 30, 2021 was $812,000 as compared to $0 for the nine months ended November 30, 2020.  Other income, consisting of primarily scrap income, for the nine months ended November 30, 2021 was $357,000 as compared to $0 for the nine months ended November 30, 2020.

 

Net income for the nine months ended November 30, 2021 increased to $3,967,000 as compared to $977,000 for the nine months ended November 30, 2020. This increase is due primarily to increased sales and other income as described above.

 

Liquidity and Capital Resources:

 

Operating Activities:

Net cash provided by operating activities was $3,450,000 for the nine months ended November 30, 2021 primarily reflecting net income of $3,967,000, an increase in accrued expenses and other current and non-current liabilities of $283,000, a decrease in inventories of $204,000 and depreciation and amortization of $193,000, partially offset by PPP loan forgiveness of $812,000, an increase in other assets of $184,000, an increase in accounts receivable of $139,000 and prepaid and other expenses of $63,000. 

 

Net cash provided by operating activities was $1,427,000 for the nine months ended November 30, 2020 primarily reflecting net income of $977,000, an increase in accrued expenses of $297,000, a decrease in accounts receivable of $213,000, and depreciation of $179,000, partially offset by increases in inventories of $183,000 and prepaid and other expenses of $72,000. 

 

Investing Activities:

Net cash used in investing activities was ($4,871,000) for the nine months ended November 30, 2021 principally reflecting $4,749,000 in purchases of plant property and equipment and $270,000 in proceeds from the sale of securities, offset by $392,000 in purchases of securities.

 

Net cash used in investing activities was ($107,000) for the nine months ended November 30, 2020 principally reflecting $340,000 in proceeds from the sale of securities, offset by $379,000 in purchases of securities and $68,000 in purchases of property, plant and equipment.

 

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Financing Activities:

Net cash provided by financing activities was $2,883,000 for the nine months ended November 30, 2021 principally reflecting $2,940,000 in proceeds from our mortgage loan, partially offset by $57,000 in principal payments on the mortgage loan. 

 

Net cash provided by financing activities was $801,000 for the nine months ended November 30, 2020 principally reflecting proceeds of the SBA Paycheck Protection Program loan.

 

We expect our sole source of liquidity over the next twelve months to be cash from operations and cash and cash equivalents, if necessary.  We anticipate that our capital expenditures required to sustain operations and complete the renovations to our new facility will be approximately $1,500,000 during the next twelve months and will be funded from operations and cash and cash equivalents, if necessary.  We anticipate that once we have completed our relocation to our new facility and headquarters we will realize annual, aggregate cost savings of approximately $1.0 million, consisting of the elimination of the $40,000 monthly rent, reduced costs for gases and utilities due to the smaller footprint of the new facility and headquarters, the Company’s decision to not relocate and operate the Company’s wafer fab at the new facility and headquarters, payroll savings and insurance cost savings.

 

At November 30, 2021, February 28, 2021, and November 30, 2020, we had cash and cash equivalents of approximately $5,247,000, $3,785,000, and $3,453,000, respectively. The increase for the nine months ended November 30, 2021 was primarily due to income from operations and scrap income.

 

At November 30, 2021, February 28, 2021, and November 30, 2020, we had investments in securities of approximately $435,000, $248,000, and $267,000, respectively. 

 

At November 30, 2021, February 28, 2021, and November 30, 2020, we had working capital of $8,593,000, $7,049,000, and $6,589,000, respectively.  The increase for the nine months ended November 30, 2021 was due primarily to income from operations and scrap income. 

 

Based on various factors, including the Company’s desire to fully utilize its current net operating loss carryforwards, the Company may explore certain transactions or actions, including acquisitions, additional product lines, and/or investing a portion of its cash into common stocks or higher yielding debt instruments.  The Company will continue to consider additional share repurchases under the Company's stock repurchase program in light of market conditions and the Company's liquidity needs and capital commitments.

 

Off-Balance Sheet Arrangements:

The Company has not engaged in any off-balance sheet arrangements.

 

FORWARD-LOOKING STATEMENTS

Some of the statements in this Quarterly Report on Form 10-Q are “forward-looking statements”. These forward-looking statements include statements regarding our business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended February 28, 2021, including those identified below. We do not undertake any obligation to update forward-looking statements, except as required by law.

 

Some of the factors that may impact our business, financial condition, results of operations, strategies or prospects include:

 

	·	Loss of, or reduction of business from, substantial clients could hurt our business by reducing our revenues, profitability and cash flow.
	·	Our complex manufacturing processes may lower yields and reduce our revenues.
	·	Our business could be materially and adversely affected if we are unable to obtain qualified supplies of raw materials, parts and finished components on a timely basis and at a cost-effective price.
	·	We are dependent on government contracts, which are subject to termination, price renegotiations and regulatory compliance, which can increase the cost of doing business and negatively impact our revenues.
	·	Changes in government policy or economic conditions could negatively impact our results.
	·	Our inventories may become obsolete and other assets may be subject to risks.
	·	Environmental regulations could require us to incur significant costs.

    

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	·	Our business is highly competitive and increased competition could reduce gross profit margins and the value of an investment in our Company.
	·	Changes in Defense related programs and priorities could reduce the revenues and profitability of our business.
	·	Our ability to complete facility upgrades and relocate to a new facility within the contemplated timeframe and budget.
	·	Our operating results may decrease due to the decline of profitability in the semiconductor industry.
	·	Uncertainty of current economic conditions, domestically and globally, could continue to affect demand for our products and negatively impact our business.
	·	We may not achieve the intended effects of our business strategy, which could adversely impact our business, financial condition and results of operations.
	·	Our inability to introduce new products could result in decreased revenues and loss of market share to competitors; new technologies could also reduce the demand for our products.
	·	The nature of our products exposes us to potentially significant product liability risk.
	·	We depend on the recruitment and retention of qualified personnel and our failure to attract and retain such personnel could seriously harm our business.
	·	Provisions in our charter documents could make it more difficult to acquire our Company and may reduce the market price of our stock.
	·	Natural disasters, like hurricanes, or occurrences of other natural disasters whether in the United States or internationally may affect the markets in which our common stock trades, the markets in which we operate and our profitability.
	·	Failure to protect our proprietary technologies or maintain the right to use certain technologies may negatively affect our ability to compete.
	·	We cannot guarantee that we will have sufficient capital resources to make necessary investments in manufacturing technology and equipment.
	·	We may make substantial investments in plant and equipment that may become impaired.
	·	While we attempt to monitor the credit worthiness of our customers, we may be at risk due to the adverse financial condition of one or more customers.
	·	Our international operations expose us to material risks, including risks under U.S. export laws.
	·	Security breaches and other disruptions could compromise the integrity of our information and expose us to liability, which would cause our business and reputation to suffer.
	·	The price of our common stock has fluctuated widely in the past and may fluctuate widely in the future.
	·	We cannot guarantee that we will declare future cash dividend payments, nor repurchase any shares of our common stock pursuant to our stock repurchase program.
	·	Compliance with regulations regarding the use of "conflict minerals" could limit the supply and increase the cost of certain metals used in manufacturing our products.
	·	Our failure to remediate the material weakness in our internal control over financial reporting or our identification of any other material weaknesses in the future may adversely affect the accuracy and timing of our financial reporting.
	·	The COVID-19 pandemic may have a material adverse effect on our business, cash flows and results of operations.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

This item is not applicable as we are currently considered a smaller reporting company.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Our Evaluation of Disclosure Controls and Procedures

 

The Company carried out an evaluation, under the supervision and with the participation of its management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e), and 15d-15(e)) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of November 30, 2021 due to the material weakness described in the Company’s Annual Report on Form 10-K for the year ended February 28, 2021 under “Management’s Report on Internal Control over Financial Reporting”. However, giving full consideration to the material weakness and the remediation plan, the Company’s management has concluded that the Company’s financial statements included in this Quarterly Report fairly present, in all material respects, the Company’s financial condition and results of operations as of and for the three and nine months ended November 30, 2021.

 

Changes in Internal Control over Financial Reporting.

 

Other than the changes referenced in the Company’s Annual Report on Form 10-K for the year ended February 28, 2021 under “Management’s Report on Internal Control over Financial Reporting”, there were no changes in the Company’s internal control over financial reporting during the quarter ended November 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II– OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We may from time to time become a party to various legal proceedings arising in the ordinary course of business. As of November 30, 2021, we had no known material current, pending, or threatened litigation.

 

ITEM 1A. RISK FACTORS

 

In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors discussed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended February 28, 2021, which could materially affect our business, financial condition or future results.

 

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ITEM 6. EXHIBITS

  

Exhibits
10.1		Second Amendment to Lease, effective as of November 3, 2021, between LaBoheme Properties, Inc. and Solitron Devices, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 9, 2021).
10.2		Replacement Second Amendment to Lease, effective as of November 19, 2021, between LaBoheme Properties, Inc. and Solitron Devices, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 24, 2021).
31		Certification of Chief Executive Officer and Interim Chief Financial Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
32		Certification of Chief Executive Officer and Interim Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase
101.DEF*		XBRL Taxonomy Extension Definition Linkbase
101.LAB*		XBRL Taxonomy Label Linkbase
101.PRE*		XBRL Taxonomy Presentation Linkbase

  

* Filed herewith

 

** Furnished herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	SOLITRON DEVICES, INC.
Date: January 14, 2022		/s/ Tim Eriksen
		Tim Eriksen
		Chief Executive Officer,
		and Interim Chief Financial Officer

  

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EXHIBIT INDEX

 

EXHIBIT NUMBER		DESCRIPTION
31		Certification of Chief Executive Officer and Interim Chief Financial Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
32		Certification of Chief Executive Officer and Interim Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase
101.DEF*		XBRL Taxonomy Extension Definition Linkbase
101.LAB*		XBRL Taxonomy Label Linkbase
101.PRE*		XBRL Taxonomy Presentation Linkbase

 

* Filed herewith

 

** Furnished herewith

  

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