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, 2022 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.
Critical Accounting Estimates:
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
GAAP. 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. See Note 2 in the financial statements for
the Company's significant accounting policies. Of the Company's accounting
policies, the following are considered to be critical - Revenue Recognition 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, 2022.
See Note 2, "Summary of Significant Accounting Policies", to the accompanying
Notes to Financial Statements included in this Quarterly Report on Form 10-Q.
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Results of Operations-Three Months Ended November 30, 2022 Compared to Three
Months Ended November 30, 2021:
Net Sales. Net sales for the three months ended November 30, 2022 decreased 76%
to $584,000 as compared to $2,468,000 for the three months ended November 30,
2021. The decrease in net sales was largely due to the company relocating to
its new facility during the three months ended November 30, 2022 along with
associated startup delays.
Net bookings for the three months ended November 30, 2022 increased 68% to
$2,257,000 versus $1,340,000 during the three months ended November 30, 2021.
Backlog as of November 30, 2022 increased 101% to $6,430,000 as compared to a
backlog of $3,197,000 as of November 30, 2021.
Cost of Sales. Cost of sales for the three months ended November 30, 2022
decreased to $905,000 from $1,672,000 for the three months ended November 30,
2021, due to decreased raw materials and labor costs associated with decreased
net sales, and decreased rent expense. Expressed as a percentage of net sales,
cost of sales increased to 155% for the three months ended November 30, 2022
from 68% for the three months ended November 30, 2021.
Gross Profit (Loss). Gross profit (loss) for the three months ended November 30,
2022 decreased to ($321,000) from $796,000 for the three months ended November
30, 2021, due primarily to lower net sales not covering fixed labor and overhead
costs. Accordingly, gross margins expressed as a percentage of net sales
decreased to (55%) for the three months ended November 30, 2022 as compared to
32% for the three months ended November 30, 2021.
For the three months ended November 30, 2022, we shipped 6,130 units as compared
to 36,047 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 & Administrative Expenses. Selling, general, and administrative
expenses decreased to $460,000 for the three months ended November 30, 2022 from
$497,000 for the same period in the prior year. The decrease was due to a
decrease in selling expenses of $34,000. During the three months ended November
30, 2022, selling, general and administrative expenses as a percentage of net
sales increased to 79% as compared to 20% for the three months ended November
30, 2021.
Operating Income (Loss). Operating income (loss) for the three months ended
November 30, 2022 decreased to ($781,000) as compared to operating income of
$299,000 for the three months ended November 30, 2021. This decrease is due
primarily to decreased net sales as described above.
Other Income. Interest income increased to $18,000 for the three months ended
November 30, 2022 as compared to $0 for the three months ended November 30,
2021. Interest expense decreased to ($27,000) for the three months ended
November 30, 2022 as compared to ($28,000) for the three months ended November
30, 2021. Dividend income was $1,000 for the three months ended November 30,
2022 as compared to $1,000 for the three months ended November 30, 2021.
Realized gains (losses) on investments for the three months ended November 30,
2022 decreased to a loss of ($13,000) as compared to a gain of $41,000 for the
three months ended November 30, 2021. Unrealized gains (losses) on investments
for the three months ended November 30, 2022 were a gain of $270,000 as compared
to a loss of ($8,000) for the three months ended November 30, 2021. Income from
the sale of scrap was $40,000 for the three months ended November 30, 2022 as
compared to $185,000 for the three months ended November 30, 2021.
Net Income (Loss). Net income (loss) for the three months ended November 30,
2022 decreased to ($492,000) as compared to net income of $490,000 for the three
months ended November 30, 2021. This decrease is due primarily to decreased net
sales as described above and decreased income from the sale of scrap partially
offset by unrealized gains on securities.
Results of Operations-Nine Months Ended November 30, 2022 Compared to Nine
Months Ended November 30, 2021:
Net Sales. Net sales for the nine months ended November 30, 2022 decreased 52%
to $4,907,000 as compared to $10,308,000 for the nine months ended November 30,
2021. The decrease in net sales was largely due to the decision to accelerate
production and shipments in the nine months ended November 30, 2021 due to the
planned facility relocation.
Net bookings for the nine months ended November 30, 2022 increased 46% to
$6,871,000 versus $4,713,000 during the nine months ended November 30, 2021.
Backlog as of November 30, 2022 increased 101% to $6,430,000 as compared to a
backlog of $3,197,000 as of November 30, 2021.
Cost of Sales. Cost of sales for the nine months ended November 30, 2022
decreased to $3,710,000 from $5,628,000 for the nine months ended November 30,
2021, due to decreased raw materials and labor costs associated with decreased
net sales, and decreased rent expense. Expressed as a percentage of net sales,
cost of sales increased to 76% for the nine months ended November 30, 2022 from
55% for the nine months ended November 30, 2021.
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Gross Profit. Gross profit for the nine months ended November 30, 2022 decreased
to $1,197,000 from $4,680,000 for the nine months ended November 30, 2021, due
primarily to lower net sales. Accordingly, gross margins expressed as a
percentage of net sales decreased to 24% for the nine months ended November 30,
2022 as compared to 45% for the nine months ended November 30, 2021.
For the nine months ended November 30, 2022, we shipped 39,012 units as compared
to 89,512 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 & Administrative Expenses. Selling, general, and
administrative expenses decreased to $1,535,000 for the nine months ended
November 30, 2022 from $1,870,000 for the same period in the prior year. The
decrease was primarily due to a decrease in bonus accrual of $200,000 and a
decrease in selling expenses of $106,000. During the nine months ended November
30, 2022, selling, general and administrative expenses as a percentage of net
sales increased to 31% as compared to 18% for the nine months ended November 30,
2021.
Operating Income/Loss. Operating income (loss) for the nine months ended
November 30, 2022 decreased to ($338,000) as compared to operating income of
$2,810,000 for the nine months ended November 30, 2021. This decrease is due
primarily to decreased net sales as described above.
Other Income. Interest income increased to $20,000 for the nine months ended
November 30, 2022 as compared to $0 for the nine months ended November 30,
2021. Interest expense increased to ($82,000) for the nine months ended
November 30, 2022 as compared to $(74,000) for the nine months ended November
30, 2021. Dividend income increased to $6,000 for the nine months ended
November 30, 2022 as compared to $2,000 for the nine months ended November 30,
2021. Realized gains on investments for the nine months ended November 30, 2022
decreased to $19,000 as compared to $67,000 for the nine months ended November
30, 2021. Unrealized gains on investments for the nine months ended November
30, 2022 were $325,000 as compared to ($7,000) for the nine months ended
November 30, 2021. PPP loan forgiveness was $0 in the nine months ended
November 30, 2022 as compared to $812,000 for the nine months ended November 30,
2021. Income from the sale of scrap was $644,000 for the nine months ended
November 30, 2022 as compared to $357,000 in the nine months ended November 30,
2021.
Net Income. Net income for the nine months ended November 30, 2022 decreased to
$594,000 as compared to net income of $3,967,000 for the nine months ended
November 30, 2021. This decrease is due primarily to decreased net sales as
described above and a decrease in income from PPP loan forgiveness, partially
offset by increased unrealized gains and increased income from the sale of
scrap.
Liquidity and Capital Resources:
Operating Activities:
Net cash provided by operating activities was $1,605,000 for the nine months
ended November 30, 2022 primarily reflecting net income of $594,000, a decrease
in accounts receivable of $1,356,000, and depreciation and amortization of
$233,000, partially offset by net realized and unrealized gains on investments
of $344,000 and an increase in inventories of $224,000.
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.
Investing Activities:
Net cash used in investing activities was ($4,999,000) for the nine months ended
November 30, 2022 principally reflecting $2,494,000 in purchases of short-term
investments, $1,814,000 in expenditures on construction in progress, $1,241,000
in purchases of marketable securities, and $332,000 in purchases of plant
property and equipment, partially offset by $882,000 in proceeds from the sale
of marketable securities.
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.
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Financing Activities:
Net cash used in financing activities was ($77,000) for the nine months ended
November 30, 2022 reflecting $77,000 in principal payments on the mortgage
loan.
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
We expect our sole sources of liquidity over the next twelve months to be cash
from operations, cash and cash equivalents, and short-term investments, if
necessary. We anticipate that our capital expenditures required to sustain
operations will be approximately $200,000 during the next twelve months and that
our cash from operations, cash and cash equivalents, and short-term investments,
if necessary, will be sufficient to fund these needs.
At November 30, 2022, February 28, 2022, and November 30, 2021, we had cash and
cash equivalents of approximately $617,000, $4,088,000, and $5,247,000,
respectively. The decrease for the nine months ended November 30, 2022, was due
to purchases of short-term investments, expenditures on construction in
progress, and purchases of marketable securities, partially offset by proceeds
from the sale of marketable securities, income from operations and scrap
income.
At November 30, 2022, February 28, 2022, and November 30, 2021, we had
investments in short-term investments of approximately $2,512,000, $0, and $0,
respectively.
At November 30, 2022, February 28, 2022, and November 30, 2021, we had
investments in marketable securities of approximately $1,387,000, $684,000, and
$435,000, respectively.
At November 30, 2022, February 28, 2022, and November 30, 2021, we had working
capital of $6,247,000, $7,660,000, and $8,593,000, respectively. The decrease
for the nine months ended November 30, 2022 was due primarily to cash used on
construction in progress at the new facility.
Based on various factors, including the Company's desire to fully utilize its
current net operating loss carryforwards, the Company may seek out acquisitions,
additional product lines, and/or invest 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
subject to market conditions, corporate liquidity requirements and priorities
and other factors as may be considered in the Company's sole discretion.
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, 2022, 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.
· Our inventories may become obsolete and other assets may be subject to
risks.
· Environmental regulations could require us to incur significant costs.
· Our business is highly competitive and increased competition could reduce
gross profit margins and the value of an investment in our Company.
· Our operating results may decrease due to the decline of profitability in
the semiconductor industry.
· We may not achieve the intended effects of our business strategy, which
could adversely impact our business, financial condition and results of
operations.
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· 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.
· 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.
· 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.
· 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.
· Changes in Defense related programs and priorities could reduce the
revenues and profitability of our business.
· The COVID-19 pandemic may have a material adverse effect on our business,
cash flows and results of operations.
· 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.
· 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.
· Provisions in our charter documents could make it more difficult to
acquire our Company and may reduce the market price of our stock.
· 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.
· Uncertainty of current economic conditions, domestically and globally,
could continue to affect demand for our products and negatively impact our
business.
· 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.
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