UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended August 31, 2014

 

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 Incorporation or Organization)		(I.R.S. Employer 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)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ☒    No ☐

 

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

 

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

 

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 September 30, 2014 was 2,185,832.

 

 

 

SOLITRON DEVICES, INC.

 

TABLE OF CONTENTS

 

			Page No.
PART 1 - FINANCIAL INFORMATION
Item	1.	Financial Statements
		Condensed Balance Sheets August 31, 2014 (unaudited) and February 28, 2014	2
		Condensed Statements of Income (unaudited) Three and Six Months Ended August 31, 2014 and 2013	3
		Condensed Statements of Cash Flows (unaudited) Six Months Ended August 31, 2014 and 2013	4
		Notes to Condensed Financial Statements	5-11
Item	2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-17
Item	4.	Controls and Procedures	18
PART II – OTHER INFORMATION
Item	1.	Legal Proceedings	19
Item	6.	Exhibits	20
Signatures			21

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.     FINANCIAL STATEMENTS

 

SOLITRON DEVICES, INC.

CONDENSED BALANCE SHEETS

AS OF AUGUST 31, 2014 AND FEBRUARY 28, 2014

 

		(unaudited)
		August 31,				February 28,
		2014				2014
ASSETS		(in thousands, except for share  and per share amounts)
CURRENT ASSETS
Cash and cash equivalents		$	698			$	625
Treasury bills and certificates of deposit			6,720				6,261
Accounts receivable, less allowance for doubtful accounts of $2			385				785
Inventories, net  (Note 5)			4,929				4,316
Prepaid expenses and other current assets			141				155
TOTAL CURRENT ASSETS			12,873				12,142
PROPERTY, PLANT AND EQUIPMENT, net			493				558
OTHER ASSETS			10				7
TOTAL ASSETS		$	13,376			$	12,707
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable – Post-petition		$	385			$	307
Accounts payable – Pre-petition			-				8
Customer deposits			97				94
Accrued expenses and other liabilities (Note 8)			440				605
TOTAL CURRENT LIABILITIES			922				1,014
LONG-TERM LIABILITIES, net of current portion			-				-
TOTAL LIABILITIES			922				1,014
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, authorized 500,000 shares, none issued			-				-
Common stock, $.01 par value, authorized 10,000,000 shares,
2,185,832 shares issued and outstanding, net of 273,230 shares of treasury stock at Aug 31, 2014 2,177,832 shares issued and outstanding, net of 273,230 shares of treasury stock at Feb 28, 2014			23				23
Additional paid-in capital			2,749				2,743
Accumulated other comprehensive income			14				14
Retained earnings			9,943				9,188
Less treasury stock			(275	)			(275	)
TOTAL STOCKHOLDERS' EQUITY			12,454				11,693
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	13,376			$	12,707

 

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

 

 

SOLITRON DEVICES, INC.

CONDENSED STATEMENTS OF INCOME

FOR THE THREE AND SIX MONTHS ENDED AUGUST 31, 2014 AND AUGUST 31, 2013

(Unaudited, in thousands except for share and per share amounts)

 

		Three months								Six Months
		2014				2013				2014				2013
Net Sales		$	2,305			$	2,041			$	4,610			$	4,317
Cost of Sales			1,218				1,547				3,032				3,217
Gross Profit			1,087				494				1,578				1,100
Selling, General and Administrative Expenses			386				322				722				767
Operating Income			701				172				856				333
Other income (Note 7)
Other income			-				-				8				86
Interest Income			2				7				6				16
Total other income			2				7				14				102
Income before provision for income taxes			703				179				870				435
Provision for income taxes			(3	)			(2	)			(7	)			(6	)
Net Income		$	700			$	177			$	863			$	429
Other comprehensive income:
Unrealized (loss)/gain on investments			1				(8	)			-				2
Total comprehensive income		$	701			$	169			$	863			$	431
Income Per Share from operating income-Basic		$	.32			$	.08			$	.39			$	.15
Income Per Share from operating income-Diluted		$	.29			$	.07			$	.36			$	.14
Net Income Per Share-Basic		$	.32			$	.08			$	.40			$	.20
Net Income Per Share-Diluted		$	.29			$	.07			$	.36			$	.18
Weighted average shares outstanding-Basic			2,185,832				2,177,832				2,181,920				2,177,832
Weighted average shares outstanding-Diluted			2,410,081				2,402,491				2,406,110				2,403,041

 

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

 

 

SOLITRON DEVICES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED AUGUST 31, 2014 AND AUGUST 31, 2013

(Unaudited)

 

		2014				2013
		(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	863			$	431
Adjustments to reconcile net income to net cash provided by and (used in) operating activities:
Depreciation and amortization			113				117
Decrease (increase) in operating assets:
Accounts receivable			400				425
Inventories, net			(613	)			(236	)
Prepaid expenses and other current assets			14				17
Other assets			(3	)			6
Increase (decrease) in operating liabilities:
Accounts payable – Post-petition			78				50
Accounts payable – Pre-petition			(8	)			(198	)
Customer deposits			3				25
Accrued expenses			(165	)			(253	)
Total adjustments			(181	)			(47	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			682				384
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of Treasury Bills and Certificates of Deposit			2,777				2,340
Purchases of Treasury Bills and Certificates of Deposit			(3,236	)			(3,182	)
Purchases of property, plant and equipment			(47	)			(128	)
NET CASH (USED IN) BY INVESTING ACTIVITIES			(506	)			(970	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash from exercise of employee stock options			6				-
Payment of Dividends			(109	)			-
NET CASH (USED IN) FINANCING ACTIVITIES			(103	)			-
Net increase/(decrease) in cash and cash equivalents			73				(586	)
Cash and cash equivalents – beginning of the period			625				1,297
Cash and cash equivalents - end of the period		$	698			$	711

 

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

 

 

SOLITRON DEVICES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

  

1.      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations and Activities

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 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.

 

Basis of Presentation

The unaudited condensed 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 condensed 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 six months ended August 31, 2014 are not necessarily indicative of the results to be expected for the year ending February 28, 2015.

 

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, 2014.

 

Cash and Cash Equivalents

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

 

Investment in Treasury Bills and Certificates of Deposit

For the quarter ended August 31, 2014, investment in treasury bills and certificates of deposit include certificates of deposit with maturities of one year or less, and is stated at market value.

 

All of the Company’s investments are classified as available-for-sale.  As they are available for current operations, they are classified as current on the balance sheets.  Investments in available-for-sale securities are reported at fair value with unrecognized gains or losses, net of tax, as a component of accumulated other comprehensive income and is included as a separate component of stockholders’ equity. The Company monitors its investments for impairment periodically and records appropriate reductions in carrying values when the declines are determined to be other-than-temporary. 

 

Total Face Value as of 08/31/14 (in thousands)
Certificates of deposit			6,720

 

 

SOLITRON DEVICES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

As of August 31, 2014, contractual maturities of the Company's available-for-sale non-equity investments were as follows:

 

		Face value				Fair Value
		(In thousands)
Maturing within one year		$	6,720			$	6,720

  

Fair Value of Financial Instruments

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 results in management’s best estimate of fair value.

 

The Company’s brokered Treasury bills and certificates of deposits 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. The fair value of long-term debt is based on current rates at which the Company could borrow funds with similar remaining maturities, and the carrying amount of the long-term debt approximates fair value.

 

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 $2,000 as of August 31, 2014 and February 28, 2014.

 

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.

 

 

SOLITRON DEVICES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

Inventories

Inventories are stated at the lower of cost or market. 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 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’s inventory valuation policy is as follows:

 

Raw material /Work in process:	All material purchased, processed, and/or used in the last two fiscal years is valued at the lower of its acquisition cost or market.  All material not purchased/used in the last two fiscal years is fully reserved.
Finished goods:	All finished goods with firm orders for later delivery are valued (material and overhead) at the lower of cost or market.  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 amount of man-hours required from the different direct labor departments to bring each device to its particular level of  completion.

 

Revenue Recognition

Revenue is recognized in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition.  This pronouncement requires that four basic criteria be met before revenue can be recognized: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4) collectability is reasonably assured. We recognize revenue upon determination that all criteria for revenue recognition have been met.  The criteria are usually met at the time of product shipment. Shipping terms are generally FCA (Free Carrier) shipping point.

 

Financial Statement Estimates

The preparation of condensed financial statements in conformity with accounting principles generally accepted in the United States 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.

 

Recent Accounting Pronouncements

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

 

2.       ENVIRONMENTAL REGULATION

 

While the Company believes that it has the environmental permits necessary to conduct its business and that its operations conform to present environmental regulations, increased public attention has been focused on the environmental impact of semiconductor manufacturing operations. The Company, in the conduct of its manufacturing operations, has handled and does handle materials that are considered hazardous, toxic or volatile under federal, state and local laws and, therefore, is subject to regulations related to their use, storage, discharge and disposal. No assurance can be made that the risk of accidental release of such materials can be completely eliminated. In the event of a violation of environmental laws, the Company could be held liable for damages and the costs of remediation. In addition, the Company, along with the rest of the semiconductor industry, is subject to variable interpretations and governmental priorities concerning environmental laws and regulations.

 

 

SOLITRON DEVICES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

Environmental statutes have been interpreted to provide for joint and several liability and strict liability regardless of actual fault. There can be no assurance that the Company will not be required to incur costs to comply with, or that the operations, business or financial condition of the Company will not be materially adversely affected by current or future environmental laws or regulations.

 

3.      ENVIRONMENTAL LIABILITIES

 

In November 2013, the Company was named as a defendant in a Third Party Complaint filed in the United States District Court for the Northern District of New York.  The Plaintiff in the lawsuit, the Clarkstown Landfill Joint Defense Group (“JDG”), alleged that the Company was liable for an equitable share of the JDG’s settlement payment to the New York State Department of Environmental Conservation (“NYSDEC”) in connection with response costs incurred by NYSDEC to remediate the Clarkstown Landfill Site, located in Clarkstown, New York.  On May 23, 2014, the Company obtained an order from the United States Bankruptcy Court for the Southern District of Florida (“Court”) finding that the JDG’s claim against the Company was derivative of NYSDEC’s claim, and that NYSDEC’s claim had been discharged in the Court’s Final Order Confirming Debtor’s Fourth Amended Plan of Reorganization, entered on August 19, 1993.  On June 2, 2014, the JDG filed a Notice of Voluntary Dismissal of its lawsuit against the Company.

 

4.      EARNINGS PER SHARE

 

The shares used in the computation of the Company’s basic and diluted earnings per common share were as follows:

 

		For the three months ended August 31,								For the six months ended August 31,
		2014				2013				2014				2013
Weighted average common shares outstanding			2,185,832				2,177,832				2,181,920				2,177,832
Dilutive effect of employee stock options			224,249				224,659				224,190				225,209
Weighted average common shares outstanding, assuming dilution			2,410,081				2,402,491				2,406,110				2,403,041

 

Weighted average common shares outstanding, assuming dilution, include the incremental shares that would be issued upon the assumed exercise of stock options. For the three-month and six-month periods ended August 31, 2014 and August 31, 2013 respectively, 0 and 12,300 shares underlying the Company's stock options were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares, and therefore their inclusion would have been anti-dilutive.

 

These options could be dilutive in the future if the average share price increases and is greater than the exercise price of these options.

 

5.      INVENTORIES

 

As of August 31, 2014, inventories consist of the following:

 

		Gross				Reserve				Net
Raw Materials		$	2,060,000			$	(447,000	)		$	1,613,000
Work-In-Process			4,094,000				(1,299,000	)			2,795,000
Finished Goods			1,232,000				(711,000	)			521,000
Totals		$	7,386,000			$	(2,457,000	)		$	4,929,000

 

 

SOLITRON DEVICES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

As of February 28, 2014, inventories consist of the following:

 

		Gross				Reserve				Net
Raw Materials		$	1,878,000			$	(447,000	)		$	1,431,000
Work-In-Process			3,103,000				(1,292,000	)			1,811,000
Finished Goods			1,782,000				(708,000	)			1,074,000
Totals		$	6,763,000			$	(2,447,000	)		$	4,316,000

 

6.       INCOME TAXES

 

At August 31, 2014, the Company has net operating loss carryforwards of approximately $13,380,000 that expire through 2031. Such net operating losses are available to offset future taxable income, if any. As the utilization of such net operating losses for tax purposes is not assured, the deferred tax asset has been fully reserved through the recording of a 100% valuation allowance. Should a cumulative change in the ownership of more than 50% occur within a three-year period, there could be an annual limitation on the use of the net operating loss carryforwards.

 

Total net deferred taxes are comprised of the following at August 31, 2014 and February 28, 2014:

 

Deferred Tax Asset (Liability):		8/31/14				2/28/14
Current
Allowance for doubtful accounts		$	1,000			$	1,000
Inventory allowance			934,000				930,000
Section 263A capitalized costs			246,000				246,000
Total current deferred tax assets			1,181,000				1,177,000
Valuation allowance			(1,181,000	)			(1,177,000	)
		$	0			$	0
Long-term
Loss carryforwards		$	4,978,000			$	5,309,000
Depreciation			(32,000	)			(46,000	)
Total long-term deferred tax assets			4,946,000				5,263,000
Valuation allowance			(4,946,000	)			(5,263,000	)
		$	0			$	0

 

The change in the valuation allowance on deferred tax assets is due principally to the utilization of the net operating loss for the period ended August 31, 2014 and the year ended February 28, 2014. A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate for the quarter ended August 31, 2014 and for the year ended February 28, 2014 is as follows:

 

		8/31/14				2/28/14
U.S. federal statutory rate			34.0	%			34.0	%
Change in valuation allowance			(34.0	)			(34.0	)
Alternative minimum taxes			1.0				1.0
Effective income tax rate			1.0	%			1.0	%

 

7.      OTHER INCOME

 

The $2,000 of other income reflected in the unaudited condensed statements of income for the quarter ended August 31, 2014 consists of interest income on investment in treasury bills and certificates of deposit. The $7,000 of other income reflected in the unaudited condensed statements of income for the quarter ended August 31, 2013 consists of $7,000 of interest income on investment in treasury bills and certificates of deposit.

 

 

SOLITRON DEVICES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

  

8.       ACCRUED EXPENSES AND OTHER LIABILITIES

 

As of August 31, 2014 and February 28, 2014, accrued expenses and other liabilities consisted of the following:

 

		8/31/14				2/28/14
Payroll and related employee benefits		$	387,000			$	539,000
Income taxes			13,000				15,000
Property taxes			29,000				7,000
Other liabilities			11,000				44,000
		$	440,000			$	605,000

  

9.       EXPORT SALES AND MAJOR CUSTOMERS

 

Revenues from domestic and export sales to unaffiliated customers for the three months ended August 31, 2014 are as follows:

 

		Power								Field Effect				Power
Geographic Region		Transistors				Hybrids				Transistors				MOSFETS				Totals
Europe and Australia		$	0			$	453,000			$	0			$	0			$	453,000
Far East and Middle East			4,000				0				3,000				194,000				201,000
United States			337,000				788,000				51,000				475,000				1,651,000
Totals		$	341,000			$	1,241,000			$	54,000			$	669,000			$	2,305,000

  

Revenues from domestic and export sales to unaffiliated customers for the three months ended August 31, 2013 are as follows:

 

		Power								Field Effect				Power
Geographic Region		Transistors				Hybrids				Transistors				MOSFETS				Totals
Europe and Australia		$	7,000			$	63,000			$	0			$	18,000			$	88,000
Canada and Latin America			7,000				0				3,000				0				10,000
Far East and Middle East			6,000				0				1,000				98,000				105,000
United States			389,000				873,000				99,000				477,000				1,838,000
Totals		$	409,000			$	936,000			$	103,000			$	593,000			$	2,041,000

  

Revenues from domestic and export sales are attributed to global geographic region according to the location of the customer’s primary manufacturing or operating facilities.

  

For the quarter ended August 31, 2014, sales to the Company’s top two customers consisted of the following:

 

Customer		% of Sales
Raytheon Company			46	%
BAE Systems Australia			20	%
			66	%

 

 

SOLITRON DEVICES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

For the quarter ended August 31, 2013, sales to the Company’s top two customers consisted of the following:

 

Customer		% of Sales
Raytheon Company			49	%
Lockheed Martin Corporation			11	%
			60	%

 

10.     MAJOR SUPPLIERS

 

For the quarter ended August 31, 2014, purchases from the Company’s top two vendors consisted of the following:

 

Vendor		% of Purchases
Egide, USA			29	%
Wuxi Streamtek Ltd.			12	%
			41	%

For the quarter ended August 31, 2013, purchases from the Company’s top two vendors consisted of the following:

 

Vendor		% of Purchases
Egide, USA			44	%
Air Products, Inc.			9	%
			53	%

 

11.     COMMITMENTS AND CONTINGENCIES

 

Future minimum lease payments for the Company’s manufacturing facility are as follows:

  

Fiscal Year Ending February 28/29		Amount
2015			203,000
2016			415,000
2017			428,000
2018			441,000
2019			454,000
2020			468,000
2021			482,000
2022			411,000
		$	3,302,000

 

12.     PAYMENT OF DIVIDEND

 

On June 24, 2014, the Company paid a cash dividend of $.05 per share of common stock to stockholders of record as of the close of business on June 9, 2014. The Company had previously recorded a $109,000 liability for dividends payable on its May 31, 2014 balance sheet.

  

13.     SUBSEQUENT EVENT

 

Lease of Manufacturing Facility

On October 6, 2014, the Company extended its lease for the occupancy and use of its 47,000 square foot facility located at 3301 Electronics Way, West Palm Beach, Florida 33407. The lease extension is for five years beginning on January 1, 2017 and ending on December 31, 2021. The Company has 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. Also, in connection with the extension, the landlord waived the rent for the month of October 2014.

 

 

Item 2.

Management’s Discussion and Analysis of FINANCIAL CONDITION AND RESULTS of operations

 

Overview:

 

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, 2014 and the unaudited Condensed Financial Statements and the related Notes to Condensed 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 in Item 1 of 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 Treasury bills and certificates of deposit, accounts receivable, shipping and handling, and inventories. A discussion of all of these critical accounting policies can be found in Note 1 of the “Notes To Financial Statements” in Item 8 of our Annual Report on Form 10-K for the fiscal year ended February 28, 2014.

 

Trends and Uncertainties:

 

During the three months ended August 31, 2014, the Company’s book-to-bill ratio was approximately .43 as compared to approximately 1.14 for the three months ended August 31, 2013, reflecting a decrease in the volume of orders booked. The Company does not believe that, in most years, the year-to-year change in the book-to-bill ratio indicates a specific trend in the demand for the Company’s products. Generally, the intake of orders over the last twenty four months has varied greatly as a result of the fluctuations in the general economy, variations in defense spending on programs the Company supports, and the timing of contract awards by the Department of Defense and subsequently by its prime contractors, which is expected to continue over the next twelve to twenty four months. These fluctuations are best demonstrated by the fact that during October 2014, the Company received an order increase of $1,355,000. The Company continues to identify means intended to reduce its variable manufacturing costs to offset the potential impact of low volume of orders to be shipped. However, should order intake fall drastically in the coming periods, the Company might be required to implement further cost cutting or other downsizing measures to continue profitable business operations.

 

Inventories

 

Inventories are stated at the lower of cost or market. 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 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’s inventory valuation policy is as follows:

 

Raw material /Work in process:	All material purchased, processed and/or used in the last two fiscal years is valued at the lower of its acquisition cost or market.  All material not purchased/used in the last two fiscal years is fully reserved for.
Finished goods:	All finished goods with firm orders for later delivery are valued (material and overhead) at the lower of cost or market.  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 amount of man hours required from the different direct labor departments to bring each device to its particular level of completion.

 

Results of Operations-Three Months Ended August 31, 2014 Compared to Three Months Ended August 31, 2013:

 

Net sales for the three months ended August 31, 2014 increased 13% to $2,305,000 as compared to $2,041,000 for the three months ended August 31, 2013. This increase was primarily attributable to an increase in the value of orders that were shipped in accordance with customer requirements.

 

Cost of sales for the three months ended August 31, 2014 decreased to $1,218,000 from $1,547,000 for the three months ended August 31, 2013, due primarily to lower raw material costs due to precious metal recovery, increased efficiency in manufacturing, and increases in work-in-process and finished goods inventories resulting in $531,000 of materials, labor, and manufacturing overhead being capitalized into inventory reducing those expenses for the quarter ended August 31, 2014. This capitalization resulted in a 21% decrease to cost of sales.

 

Gross profit for the three months ended August 31, 2014 increased to $1,087,000 from $494,000 for the three months ended August 31, 2013, due primarily to higher sales, lower raw material costs due to precious metal recovery, increased efficiency in manufacturing, and increases in work-in-process and finished goods inventories as mentioned above. Accordingly, gross margins on the Company’s sales increased to 47% for the three months ended August 31, 2014 in comparison to 24% for the three months ended August 31, 2013.

 

For the three months ended August 31, 2014, the Company shipped 21,294 units as compared to 30,191 units shipped during the same period of the prior year. It should be noted that since the Company manufactures a wide variety of products with an average sales price ranging from less than one dollar to several hundred dollars, such periodic variations in the Company’s volume of units shipped should not be regarded as a reliable indicator of the Company’s performance.

 

For the three months ended August 31, 2014, the Company’s backlog of open orders increased 10% to $6,749,000 as compared to the backlog of open orders of $6,127,000 as of August 31, 2013. Changes in backlog reflect changes in the intake of orders and in the delivery requirements of customers.

 

The Company has experienced a decrease of 57% to $996,000 in the level of bookings during the three months ended August 31, 2014 as compared to the same period in the prior year. The decrease in bookings for the three months ended August 31, 2014 is principally a result of a decrease in the placement of orders by key customers, resulting in a decrease in the monetary value of, and timing differences in, the placement of contracts by the Department of Defense and its prime contractors.

 

Selling, general, and administrative expenses increased to $386,000 for the three months ended August 31, 2014 from $322,000 for the same period in the prior year. The increase reflects higher sales wages, sales travel, sales commissions and professional fees. During the three months ended August 31, 2014, selling, general, and administrative expenses as a percentage of net sales increased to 17% as compared to 16% for the three months ended August 31, 2013.

 

Operating income for the three months ended August 31, 2014 increased to $701,000 as compared to $172,000 for the three months ended August 31, 2013. This increase is due primarily to lower raw material costs due to precious metal recovery, increased efficiency in manufacturing, and increases in work-in-process and finished goods inventories as described above.

 

 

The Company recorded other income of $2,000 for the three months ended August 31, 2014 as compared to $7,000 for the three months ended August 31, 2013. Other income for the three months ended August 31, 2014 represents $2,000 of interest income on investment in treasury bills and certificates of deposit. Other income for the three months ended August 31, 2013 represents $7,000 of interest income on investment in treasury bills and certificates of deposit.

 

Net income for the three months ended August 31, 2014 increased to $700,000 as compared to $177,000 for the same period in 2013. This increase is due primarily to higher sales, lower raw material costs due to precious metal recovery, increased efficiency in manufacturing, and increases in work-in-process and finished goods inventories as described above.

 

Results of Operations-Six Months Ended August 31, 2014 Compared to Six Months Ended August 31, 2013:

 

Net sales for the six months ended August 31, 2014 increased 7% to $4,610,000 as compared to $4,317,000 for the six months ended August 31, 2013. This increase was primarily attributable to an increase in the value of orders that were shipped in accordance with customer requirements.

 

Cost of sales for the six months ended August 31, 2014 decreased to $3,032,000 from $3,217,000 for the six months ended August 31, 2013. This decrease was due primarily to lower raw material costs due to precious metal recovery, increased efficiency in manufacturing, and increases in work-in-process and finished goods inventories resulting in $531,000 of materials, labor, and manufacturing overhead being capitalized into inventory reducing those expenses for the six months ended August 31, 2014. This capitalization resulted in a 6% decrease to cost of sales.

 

Gross profit for the six months ended August 31, 2014 increased to $1,578,000 from $1,100,000 for the six months ended August 31, 2013, due primarily to lower raw material costs due to precious metal recovery, increased efficiency in manufacturing, and increases in work-in-process and finished goods inventories described above. Gross margins on the Company’s sales increased to 34% as compared to 25% for the same period in 2013.

 

For the six months ended August 31, 2014, the Company shipped 44,876 units as compared to 56,021 units shipped during the same period of the prior year. It should be noted that since the Company manufactures a wide variety of products with an average sales price ranging from less than one dollar to several hundred dollars, such periodic variations in the Company’s volume of units shipped should not be regarded as a reliable indicator of the Company’s performance.

 

For the six months ended August 31, 2014, the Company’s backlog of open orders decreased 17% to $6,749,000 as compared to the backlog of open orders of $8,170,000 as of February 28, 2014. The Company’s backlog of $6,749,000 as of August 31, 2014 was 10% higher as compared to the backlog of open orders of $6,127,000 as of August 31, 2013. Changes in backlog resulted from changes in the intake of orders and in the delivery dates required by customers.

 

The Company has experienced an increase of 15% to $3,190,000 in the level of bookings during the six months ended August 31, 2014 when compared with the six months ended August 31, 2013. The increase occurred principally as a result of an increase in the placement of orders by key customers, resulting in an increase in the monetary value of, and timing differences in, the placement of contracts by the Department of Defense and its prime contractors.

 

Selling, general, and administrative expenses decreased to $722,000 for the six months ended August 31, 2014 from $767,000 for the same period in the prior year, primarily due to lower legal fees associated with a shareholder lawsuit and lower expenses associated with our annual meeting offset by increased sales wages, sales travel and sales commissions. During the six months ended August 31, 2014, selling, general, and administrative expenses as a percentage of net sales decreased to 16% as compared to 18% for the six months ended August 31, 2013.

 

Operating income for the six months ended August 31, 2014 increased to $856,000 from $333,000 for the six months ended August 31, 2013. This increase is due primarily to higher net sales and lower raw material cost due to precious metal recovery, increased efficiency in manufacturing, and increases in work-in-process and finished goods inventories described above.

 

 

The Company recorded other income of $14,000 for the six months ended August 31, 2014 as compared to other income of $102,000 for the six months ended August 31, 2013. Included in other income for the six months ended August 31, 2014 was $8,000 of income from relief of obligation related to the Company’s 1992 bankruptcy proceedings and $6,000 of interest income on investment in treasury bills and certificates of deposit. Included in other income for the six months ended August 31, 2013 was $90,000 of income from cancellation of debt and $16,000 of interest income on investment in treasury bills and certificates of deposit partially offset by $4,000 of other expense.

 

Net income for the six months ended August 31, 2014 increased to $863,000 from $429,000 for the same period in 2013. This increase is due primarily to higher net sales and lower raw material cost due to precious metal recovery, increased efficiency in manufacturing, and increases in work-in-process and finished goods inventories described above

 

Liquidity and Capital Resources:

 

Operating Activities:

Net cash provided by operating activities was $682,000 for the six months ended August 31, 2014 primarily reflecting net income of $863,000, depreciation of $113,000, and accounts receivables of $400,000 offset by an increase in inventory of $613,000.

 

Net cash provided by operating activities was $384,000 for the six months ended August 31, 2013 primarily reflecting net income of $431,000, depreciation of $117,000, and accounts receivables of $425,000 offset by an increase in inventory of $236,000.

 

Investing Activities:

Net cash used in investing activities was $506,000 for the six months ended August 31, 2014 primarily reflecting $2,777,000 in sales of treasury bills and certificates of deposit, $3,236,000 in investments in certificates of deposit and $47,000 in purchases of property, plant and equipment.

 

Net cash used in investing activities was $970,000 for the six months ended August 31, 2013 primarily reflecting $2,340,000 in sales of treasury bills and certificates of deposit, $3,182,000 in investments in certificates of deposit and $128,000 in purchases of property, plant and equipment.

 

Financing Activities:

Net cash used in financing activities was $103,000 for the six months ended August 31, 2014 primarily reflecting a $109,000 dividend paid to shareholders offset by $6,000 from stock option exercises by the Company’s employees.

 

There was no net cash used in financing activities for the six months ended August 31, 2013.

 

Subject to the following discussion, the Company expects its sole source of liquidity over the next twelve months to be cash from operations. The Company anticipates that its capital expenditures required to sustain operations will be approximately $300,000 during the next twelve months and will be funded from operations.

 

Based upon (i) management’s best information as to current national defense priorities, future defense programs, as well as management’s expectations as to future defense spending, (ii) the market trends signaling a declining level of bookings, but with an increase in the cost of raw materials, if precious metal recovery cannot be utilized, an increase in the cost of operations that will result in the potential erosion of profit levels and continued price pressures due to more intense competition, and (iii) the continued competition in the defense and aerospace market, the Company believes that it will have sufficient cash on hand to satisfy its operating needs during the next twelve months with cash from operations. However, due to the level of current backlog, projected new order intake, the status of the general economy and the shift to Commercial Off –The-Shelf (COTS) by the defense industry, the Company might be required to take cost cutting and productivity enhancing activity to assure its continued profitability.

 

Over the long-term, based on these factors and at the current level of bookings, costs of raw materials and services, profit margins and sales levels, the Company believes that it will generate sufficient cash from operations to satisfy its operating needs over the next twelve months. In the event that bookings in the long-term decline significantly below the level experienced during the previous two fiscal years, the Company may be required to implement further cost-cutting or other downsizing measures to continue its business operations. Such cost-cutting measures could inhibit future growth prospects. In appropriate situations, the Company may seek strategic alliances, joint ventures with others or acquisitions in order to maximize marketing potential and utilization of existing resources to provide further opportunities for growth.

 

 

At August 31, 2014, February 28, 2014 and August 31, 2013, the Company had cash of approximately $698,000, $625,000 and $711,000, respectively. The cash increase for the six months ended August 31, 2014 was primarily due to net income.

 

At August 31, 2014, February 28, 2014 and August 31, 2013, the Company had investments in treasury bills and certificates of deposit of approximately $6,720,000, $6,261,000 and $6,015,000, respectively.

 

At August 31, 2014, the Company had working capital of $11,951,000 as compared with a working capital at August 31, 2013 of $10,594,000. At February 28, 2014, the Company had a working capital of $11,128,000. The $823,000 increase for the six months ended August 31, 2014 was due primarily to the $863,000 of net income for the period. 

 

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," as that term is defined in the Private Securities Litigation Reform Act of 1995. 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, 2014, 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:

 

·

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.

·

Downturns in the business cycle 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.

·

Cost reduction efforts may be unsuccessful or insufficient to improve our profitability and may adversely impact productivity.

·

We may not achieve the intended effects of our new 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.

·

Loss of, or reduction of business from, substantial clients could hurt our business by reducing our revenues, profitability and cash flow.

·

A shortage of three-inch silicon wafers could result in lost revenues due to an inability to build 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 and rights agreement 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 promise 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 could 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.

·

Compliance with new regulations regarding the use of “conflict minerals” could limit the supply and increase the cost of certain metals used in manufacturing our products.

 

  

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 effective as of the end of the period covered by this Quarterly Report.

 

Changes in Internal Control over Financial Reporting

 

Based on an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, there has been no change in our internal control over financial reporting during our last fiscal quarter identified in connection with that evaluation, 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 previously discussed in this Form 10-Q (Note 3), in November 2013, the Company was named as a defendant in a Third Party Complaint filed in the United States District Court for the Northern District of New York.  The Plaintiff in the lawsuit, the Clarkstown Landfill Joint Defense Group (“JDG”), alleged that the Company was liable for an equitable share of the JDG’s settlement payment to the New York State Department of Environmental Conservation (“NYSDEC”) in connection with response costs incurred by NYSDEC to remediate the Clarkstown Landfill Site, located in Clarkstown, New York.  On May 23, 2014, the Company obtained an order from the United States Bankruptcy Court for the Southern District of Florida (“Court”) finding that the JDG’s claim against the Company was derivative of NYSDEC’s claim, and that NYSDEC’s claim had been discharged in the Court’s Final Order Confirming Debtor’s Fourth Amended Plan of Reorganization, entered on August 19, 1993.  On June 2, 2014, the JDG filed a Notice of Voluntary Dismissal of its lawsuit against the Company.

 

As of the filing date of this report, we had no known material current, pending, or threatened litigation.

 

ITEM 6.       EXHIBITS

 

Exhibits

 

31		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32		Certification of Chief Executive Officer and 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

 

  

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: October 15, 2014
	/s/ Shevach Saraf
	Shevach Saraf
	Chairman, President,
	Chief Executive Officer,
	Treasurer and
	Chief Financial Officer
	(Principal Executive and
	Financial Officer)

 

 

EXHIBIT INDEX

 

EXHIBIT NUMBER		DESCRIPTION
31		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32		Certification of Chief Executive Officer and 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

 

22