SODI Solitron Devices Inc (PK)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

                          For the quarterly period ended May 31, 2023

                         or

For the transition period from _____ to _____

Commission File No. 001-04978

(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)

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 July 20, 2023, was 2,083,436.

SOLITRON DEVICES, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

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

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

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

SOLITRON DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

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 Audited 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, 2023 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, 2023.

See Note 2, “Summary of Significant Accounting Policies”, to the accompanying notes to the financial statements included in this Quarterly Report on 10-Q.

Results of Operations-Three Months Ended May 31, 2023 Compared to Three Months Ended May 31, 2022:

Net Sales. Net sales for the three months ended May 31, 2023 decreased 5% to $2,038,000 as compared to $2,136,000 for the three months ended May 31, 2022. The decrease in net sales was largely due to customer delivery schedules.

Net bookings for the three months ended May 31, 2023 increased 18% to $3,538,000 versus $3,007,000 during the three months ended May 31, 2022. Backlog as of May 31, 2023 increased 71% to $9,133,000 as compared to a backlog of $5,335,000 as of May 31, 2022.

Cost of Sales. Cost of sales for the three months ended May 31, 2023 increased to $1,431,000 from $1,319,000 for the three months ended May 31, 2022, due to increased raw materials, which included a $139,000 inventory reserve, and increased direct labor costs partially offset by lower overhead. Expressed as a percentage of net sales, cost of sales increased to 70% for the three months ended May 31, 2023 from 62% for the three months ended May 31, 2022.

Gross Profit. Gross profit for the three months ended May 31, 2023 decreased to $607,000 from $817,000 for the three months ended May 31, 2022, due to lower net sales and increased costs noted above. Accordingly, gross margins expressed as a percentage of net sales decreased to 30% for the three months ended May 31, 2023 as compared to 38% for the three months ended May 31, 2022.

For the three months ended May 31, 2023, we shipped 16,011 units as compared to 15,497 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 $542,000 for the three months ended May 31, 2023 from $576,000 for the same period in the prior year. The decrease was primarily due to a decrease in professional fees of $44,000 due to timing of payments for the fiscal 2023 audit. During the three months ended May 31, 2023, selling, general and administrative expenses as a percentage of net sales was 27% as compared to 27% for the three months ended May 31, 2022.

Operating Income.  Operating income for the three months ended May 31, 2023 decreased to $65,000 as compared to operating income of $241,000 for the three months ended May 31, 2022. This decrease is due primarily to decreased net sales and increased cost of sales as described above.

Other Income (Loss). Interest income increased to $14,000 for the three months ended May 31, 2023 as compared to $0 for the three months ended May 31, 2022.  Interest expense decreased to ($27,000) for the three months ended May 31, 2023 as compared to $(28,000) for the three months ended May 31, 2022.  Dividend income decreased to $1,000 for the three months ended May 31, 2023 as compared to $3,000 for the three months ended May 31, 2022.    Realized gains on investments for the three months ended May 31, 2023 increased to $122,000 as compared to $8,000 for the three months ended May 31, 2022.  Unrealized losses on investments for the three months ended May 31, 2023 were a loss of ($346,000) due to market price declines during the fiscal quarter in the common stock of two banks as compared to a loss of ($51,000) for the three months ended May 31, 2022.  Other income for the sale of scrap was $0 for the three months ended May 31, 2023 as compared to $598,000 in the three months ended May 31, 2022.

Net Income (Loss). Net income (loss) for the three months ended May 31, 2023 decreased to ($171,000) as compared to net income of $771,000 for the three months ended May 31, 2022.  This decrease is primarily due to decreased gross profit, increased unrealized losses on investments, and the absence of scrap income.

Liquidity and Capital Resources:

Operating Activities:

Net cash used in operating activities was ($7,000) for the three months ended May 31, 2023 primarily reflecting net loss of $171,000, an increase in accounts receivable of $407,000 and an increase in prepaid expenses and other assets of $117,000 partially offset by net realized and unrealized losses of $224,000, decrease in inventories of $140,000, increase in accounts payable of $125,000 and depreciation of $123,000.    

Net cash provided by operating activities was $1,622,000 for the three months ended May 31, 2022 primarily reflecting net income of $771,000, an increase in accounts payable of $445,000, a decrease in accounts receivable of $463,000 and depreciation of $70,000 partially offset by an increase in prepaid expenses and other current assets of $110,000. 

Investing Activities:

Net cash provided by in investing activities was $182,000 for the three months ended May 31, 2023 principally reflecting $237,000 in proceeds from the sale of marketable securities offset by $43,000 of purchases of marketable securities and $12,000 in purchases of property and equipment.

Net cash used in investing activities was ($1,400,000) for the three months ended May 31, 2022 principally reflecting $131,000 in proceeds from the sale of marketable securities offset by $1,080,000 of expenditures on construction in progress at our new facility, $311,000 in purchases of marketable securities, and $140,000 of purchases of property and equipment.

Financing Activities:

Net cash used in financing activities was ($27,000) for the three months ended May 31, 2023 reflecting ($27,000) in principal payments on the mortgage loan.

Net cash used in financing activities was ($26,000) for the three months ended May 31, 2022 reflecting ($26,000) in principal payments on the mortgage loan.

We expect our sole sources of liquidity over the next twelve months to be cash from operations and cash and cash equivalents, if necessary. We anticipate that our capital expenditures required to sustain operations will be approximately $250,000 during the next twelve months and that our cash from operations and cash and cash equivalents, if necessary, will be sufficient to fund these needs.

At May 31, 2023 and February 28, 2023, we had cash and cash equivalents of approximately $1,595,000 and $1,447,000, respectively. The increase for the three months ended May 31, 2023, was primarily due to cash from investing activities.     

At May 31, 2023 and February 28, 2023, we had short-term investments of approximately $994,000, and $986,000, respectively.

At May 31, 2023 and February 28, 2023, we had investments in securities of approximately $1,477,000 and $1,895,000, respectively.

At May 31, 2023 and February 28, 2023, we had working capital of $6,453,000 and $6,541,000, respectively.  The decrease for the three months ended May 31, 2023 was due primarily to cash used in financing activities.    

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. 

On June 1, 2023, the Company signed a non-binding term sheet for a potential acquisition of a target company which produces electronic components primarily for the medical industry. We are now conducting due diligence which is expected to last approximately 75 days. The terms set forth in the term sheet contemplate that, if completed, the acquisition would be funded from cash and securities on hand. An initial payment of approximately $3.0 million would be due upon close. Additional earnout payments of up to approximately $450,000 each would be payable over each of the next three years. We can make no guarantees that the transaction will be consummated, or if it is that it will yield the results or benefits desired or anticipated.

The Company will also 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.

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 and potential strategic transactions. 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, 2023, 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:

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 May 31, 2023 due to the material weakness described in the Company’s Annual Report on Form 10-K for the year ended February 28, 2023 under “Management’s Report on Internal Control over Financial Reporting”. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements or fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. 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 months ended May 31, 2023.

Changes in Internal Control over Financial Reporting.

There were no changes in the Company’s internal control over financial reporting during the quarter ended May 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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 May 31, 2023, 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, 2023, which could materially affect our business, financial condition or future results.

ITEM 6. EXHIBITS

Exhibits

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.