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.

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