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 29, 2020 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 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 29, 2020.
Results of Operations-Three Months Ended August 31, 2020 Compared to Three
Months Ended August 31, 2019:
Net sales for the three months ended August 31, 2020 increased 28% to $3,103,000
as compared to $2,420,000 for the three months ended August 31, 2019.
Net bookings for the three months ended August 31, 2020 decreased 56% to
$1,683,000 versus $3,827,000 during the three months ended August 31, 2019.
Backlog as of August 31, 2020 decreased 21% to $5,428,000 as compared to a
backlog of $6,839,000 as of August 31, 2019.
Cost of sales for the three months ended August 31, 2020 increased to $1,978,000
from $1,958,000 for the three months ended August 31, 2019, due to increased
materials cost partially offset by decreased labor costs and improved
productivity. Expressed as a percentage of net sales, cost of sales decreased to
64% for the three months ended August 31, 2020 from 81% for the three months
ended August 31, 2019.
Gross profit for the three months ended August 31, 2020 increased to $1,125,000
from $462,000 for the three months ended August 31, 2019, due primarily to
increased net sales. Accordingly, gross margins increased to 36% for the three
months ended August 31, 2020 as compared to 19% for the three months ended
August 31, 2019.
For the three months ended August 31, 2020, we shipped 23,343 units as compared
to 20,955 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 $526,000 for the
three months ended August 31, 2020 from $779,000 for the same period in the
prior year. The decrease was due to decreased stock compensation expense, legal
fees and travel expense, partially offset by bonus accrual. During the three
months ended August 31, 2020, selling, general and administrative expenses as a
percentage of net sales decreased to 17% as compared to 32% for the three months
ended August 31, 2019.
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Operating income for the three months ended August 31, 2020 increased to
$599,000 as compared to an operating loss of ($317,000) for the three months
ended August 31, 2019. This increase is due primarily to increased net sales and
the decrease in selling, general, and administrative expense.
Interest and dividend income for the three months ended August 31, 2020 and
August 30, 2019, was consistent at $1,000. Realized gains on investments for the
three months ended August 31, 2020 increased to $11,000 as compared to a loss of
($4,000) for the three months ended August 31, 2019. Unrealized gains on
investments for the three months ended August 31, 2020 were $24,000 as compared
to $0 for the three months ended August 31, 2019.
Net income for the three months ended August 31, 2020 increased to $635,000 as
compared to a net loss of ($320,000) for the three months ended August 31, 2019.
This increase is due primarily to increased net sales, decreased cost of sales
as a percentage of revenue as described above, and lower selling, general and
administrative expenses as described above.
Results of Operations-Six Months Ended August 31, 2020 Compared to Six Months
Ended August 31, 2019:
Net sales for the six months ended August 31, 2020 increased 13% to $5,601,000
as compared to $4,977,000 for the six months ended August 31, 2019.
Net bookings for the six months ended August 31, 2020 decreased 45% to
$3,143,000 versus $5,700,000 during the six months ended August 31, 2019.
Backlog as of August 31, 2020 decreased 21% to $5,428,000 as compared to a
backlog of $6,839,000 as of August 31, 2019.
Cost of sales for the six months ended August 31, 2020 decreased to $3,620,000
from $4,324,000 for the six months ended August 31, 2019, due to decreased
inventory obsolescence, raw materials and labor costs, and improved
productivity. Expressed as a percentage of net sales, cost of sales decreased to
65% for the six months ended August 31, 2020 from 87% for the six months ended
August 31, 2019.
Gross profit for the six months ended August 31, 2020 increased to $1,981,000
from $653,000 for the six months ended August 31, 2019, due primarily to
increased net sales and lower cost of sales. Accordingly, gross margins
increased to 35% for the six months ended August 31, 2020 as compared to 13% for
the six months ended August 31, 2019.
For the six months ended August 31, 2020, we shipped 48,511 units as compared to
35,147 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 $1,012,000 for the
six months ended August 31, 2020 from $1,223,000 for the same period in the
prior year. The decrease was due to decreased bonus accrual/expense and lower
legal fees, salaries and travel expense. During the six months ended August 31,
2020, selling, general and administrative expenses as a percentage of net sales
decreased to 18% as compared to 25% for the six months ended August 31, 2019.
Operating income for the six months ended August 31, 2020 increased to
$969,000 as compared to an operating loss of ($570,000) for the six months ended
August 31, 2019. This increase is due primarily to increased net sales, lower
cost of sales and decreased selling general and administrative expenses
described above.
Interest and dividend income for the six months ended August 31, 2020 increased
to $7,000 as compared to $2,000 for the six months ended August 31, 2019.
Realized gains on investments for the six months ended August 31, 2020 increased
to $26,000 as compared to a loss of ($20,000) for the six months ended August
31, 2019. Unrealized gains on investments for the six months ended August 31,
2020 were $2,000 as compared to a gain of $19,000 for the six months ended
August 31, 2019.
Net income for the six months ended August 31, 2020 increased to $1,004,000 as
compared to a net loss of ($569,000) for the six months ended August 31, 2019.
This increase is due primarily to increased net sales and decreased cost of
sales as described above.
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Liquidity and Capital Resources:
Operating Activities:
Net cash provided by operating activities was $726,000 for the six months ended
August 31, 2020 primarily reflecting net income of $1,004,000, an increase in
accrued expenses and other current and non-current liabilities of $448,000,
depreciation and amortization of $119,000, partially offset by increases in
accounts receivable of $403,000, inventories of $298,000 and prepaid and other
expenses of $131,000.
Net cash provided by operating activities was $474,000 for the six months ended
August 31, 2019 primarily reflecting a net loss of ($569,000) offset by a
decrease in inventory of $909,000, stock compensation expense of $282,000 and a
decrease in accounts receivable of $152,000, partially offset by a decrease in
accounts payable of $303,000 and accrued expenses and other current and
non-current liabilities of $103,000.
Investing Activities:
Net cash used in investing activities was ($40,000) for the six months ended
August 31, 2020 principally reflecting $272,000 in proceeds from the sale of
securities, offset by $272,000 in purchases of securities and $40,000 in
purchases of property, plant and equipment.
Net cash (used in) investing activities was ($55,000) for the six months ended
August 31, 2019 principally reflecting $45,000 in proceeds from sale of
securities, offset by $32,000 in purchases of securities and $68,000 in
purchases of plant, property and equipment.
Financing Activities:
Net cash provided by financing activities was $801,000 for the six months ended
August 31, 2020 principally reflecting proceeds of the SBA Paycheck Protection
Program loan.
There was no net cash used or provided by financing activities during the six
months ended August 31, 2019.
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 will be approximately
$300,000 during the next twelve months and will be funded from operations and
cash and cash equivalents, if necessary.
At August 31, 2020, February 29, 2020, and August 31, 2019, we had cash and cash
equivalents of approximately $2,819,000, $1,332,000, and $813,000, respectively.
The increase for the six months ended August 31, 2020 was primarily due to
income from operations and the SBA Paycheck Protection Program loan.
At August 31, 2020, February 29, 2020, and August 31, 2019, we had investments
in securities of approximately $193,000, $164,000, and $65,000, respectively.
At August 31, 2020, February 29, 2020, and August 31, 2019, we had working
capital of $6,526,000, $4,687,000, and $4,699,000, respectively. The increase
for the six months ended August 31, 2020 was due primarily to income from
operations.
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.
Off-Balance Sheet Arrangements:
The Company has not engaged in any off-balance sheet arrangements.
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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 29, 2020, 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.
?
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 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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ITEM 3.
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SOLITRON DEVICES, INC. 
