Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
fiscal year ended February 28, 2021
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.
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(Exact Name of Registrant as Specified in Its
Charter)
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Delaware
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22-1684144
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(State or Other
Jurisdiction of Incorporation or Organization)(I.R.S. Employer
Identification No.)
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(I.R.S. Employer
Identification No.)
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3301 Electronics
Way, West Palm Beach, Florida
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33407
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(Address of
Principal Executive Offices)
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(Zip Code)
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Registrant’s
Telephone Number, Including Area
Code:
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(561)
848-4311
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Securities
registered pursuant to Section 12(b) of the Act:
Title of Each
Class
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Trading
Symbol(s)
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Name of Each
Exchange on Which Registered
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None
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N/A
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N/A
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Common Stock, $0.01
par value
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(Title
of Class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities
Act. Yes ☐ No ☒
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the
Act. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes
☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit such files).
Yes ☒ No
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company”, and
"emerging growth company" in Rule 12b-2 of the Exchange Act. (Check
one) :
Large
accelerated filer ☐ Accelerated
filer ☐
Non-accelerated
filer ☐ (do not check if smaller reporting
company) Smaller reporting
company ☒
Emerging
growth
company ☐
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised accounting standards provided pursuant to
Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant has filed a report on
and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))
by the registered public accounting firm that prepared or issued
its audit report.☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the
Act). Yes ☐ No ☒
The
aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant as of August 31, 2020 was
$3,073,331 (based on the closing sales price of the
registrant’s common stock on that date).
The
number of shares of the registrant’s common stock, $0.01 par
value, outstanding as of June 14, 2021 was 2,083,462.
Table
of Contents
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Page
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PART
I
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16 |
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Part
II
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Part
III
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PART
I
ITEM 1.
BUSINESS
GENERAL
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 ("Power MOSFETS"), 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 ("JAN") transistors, diodes and
Standard Military Drawings (“SMD”) voltage regulators,
are sold as standard or catalog items.
The
Company was incorporated under the laws of the State of New York in
March 1959 and reincorporated under the laws of the State of
Delaware in August 1987. For information concerning the
Company’s financial condition, results of operations, and
related financial data, you should review the
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the “Financial
Statements and Supplementary Data” sections of this Annual
Report. You should also review and consider the risks relating to
the Company’s business, operations, financial performance,
and cash flows below under “Risk Factors.”
PRODUCTS
The
Company designs, manufactures and assembles bipolar and MOS power
transistors, power and control hybrids, junction and Power MOSFETs,
field effect transistors and other related products.
Set
forth below by principal product type are the percentage
contributions to the Company's total sales of each of the Company's
principal product lines for the fiscal years ended February 28,
2021 and February 29, 2020.
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Percentage
of Sales
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FY
2021
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FY
2020
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Power
Transistors
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10%
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14%
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Power
MOSFETS
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23%
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23%
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Hybrids
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48%
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51%
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Field
Effect Transistors
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15%
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12%
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Other
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4%
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0%
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100%
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100%
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The variation in the proportionate share of each product line for
each period reflects changes emanating from: demand, Congressional
appropriations, the process and timing associated with awards of
defense contracts, shifts in technology and consolidation of
defense prime contractors. The Company’s
microelectronic products can be classified as active electronic
components. Active electronic components are those that control and
direct the flow of electrical power by means of a control signal
such as a voltage or current.
It is
customary to subdivide active electronic components into those of a
discrete nature and those which are non-discrete. Discrete devices
contain a single microelectronic element; and non-discrete devices
consist of integrated circuits or hybrid circuits, which contain
two or more elements, either active or passive, that are
interconnected to make up an electrical circuit. An integrated
circuit incorporates various active and passive elements into a
single silicon chip. A hybrid circuit, on the other hand, comprises
a number of individual components that are mounted onto a suitable
surface material, interconnected by various means, and suitably
encapsulated. Hybrid and integrated circuits can be analog or
digital; presently, the Company manufactures analog components. The
Company’s products are either standard devices, such as
catalog type items (e.g., transistors and voltage regulators), or
application-specific devices, also referred to as custom or
semi-custom products. The latter are designed and manufactured to
meet a customer’s particular requirements. For the fiscal years ended February 28, 2021 and
February 29, 2020, approximately 86% and 87%, respectively, of the
Company’s sales have been of custom products, and the
remaining 14% and 13%, respectively, have been of standard or
catalog products.
3
Approximately 90% of the
semiconductor components produced by the Company are manufactured
pursuant to approved Source Control Drawings (“SCD”)
from the United States government and/or its prime contractors; the
remainder are primarily JAN qualified products approved for use by
the military. The Company’s semiconductor products are used
as components of military, commercial, and aerospace electronic
equipment, such as ground and airborne radar systems, power
distribution systems, missiles, missile control systems,
satellites, and space applications. The Company’s products
have been used on the space shuttle and on the space missions to
the moon, to Jupiter (on Galileo), and to Mars (on Global Surveyor
and Mars Sojourner). For the fiscal years ended February 28, 2021
and February 29, 2020, approximately 77% and 78%, respectively, of
the Company’s sales have been attributable to contracts with
customers whose products are sold to the United States government.
The remaining 23% and 22%, respectively of sales are for
non-military, scientific and industrial applications, or to
distributors where we do not have end user
information.
Custom
products are typically sold to the United States government and
defense or aerospace companies, such as Raytheon Technologies
Corporation, Lockheed Martin, L3Harris Technologies, General
Electric Aviation, Honeywell International, and Northrop Grumman
Systems Corporation, while standard products are sold to the same
customer base and to the general electronic industry. The Company
has standard and custom products available in all of its major
product lines.
The
following is a general description of the principal product lines
manufactured by the Company.
Power Transistors
Power
transistors are high current and/or high voltage control devices
commonly used for active gain applications in electronic circuits.
The Company manufactures a large variety of power bipolar
transistors for applications requiring currents in the range of
0.1A to 300A or voltages in the range of 30V to 1000V. The Company
employs over 60 types of silicon chips to manufacture over 500
types of power bipolar transistors and is currently expanding this
line in response to increased market demand resulting from other
companies’ departure from the military market. The Company
also manufactures power diodes under the same military
specification. The Company is qualified to deliver these products
under MIL-PRF-19500 in accordance with JAN, JANTX and JANTXV. JAN,
JANTX AND JANTXV denotes various quality military screening levels.
The Company manufactures both standard and custom power
transistors. Additionally, it manufactures power N-Channel and
P-Channel MOSFET transistors and is continuously expanding that
line in accordance with customers’ requirements.
The
Company has been certified and qualified since 1968 under
MIL-PRF-19500 (and its predecessor) standards promulgated by the
Defense Supply Center Columbus (“DSCC”). These
standards specify the uniformity and quality of bipolar transistors
and diodes purchased for United States military programs. The
purpose of the program is to standardize the documentation and
testing for bipolar semiconductors for use in United States
military and aerospace applications. Attainment of certification
and/or qualification to MIL-PRF-19500 requirements is important
since it is a prerequisite for a manufacturer to be selected to
supply bipolar semiconductors for defense-related purposes.
MIL-PRF-19500 establishes specific criteria for manufacturing
construction techniques and materials used for bipolar
semiconductors and assures that these types of devices will be
manufactured under conditions that have been demonstrated to be
capable of continuously producing highly reliable products. This
program requires a manufacturer to demonstrate its products’
performance capabilities. A manufacturer receives certification
once its Product Quality Assurance Program Plan is reviewed and
approved by DSCC. A manufacturer receives qualification once it has
demonstrated that it can build and test a sample product in
conformity with its certified Product Quality Assurance Program
Plan. The Company expects that its continued maintenance of
MIL-PRF-19500 qualification will continue to improve its business
posture by increasing product marketability. The Company continues
to expand its power transistor product offering.
Hybrids
Hybrids
are compact electronic circuits that contain passive and active
components mounted on thick film printed substrates and
encapsulated in appropriate packages. The Company manufactures
thick film hybrids, which generally contain discrete semiconductor
chips, integrated circuits, chip capacitors and thick film or thin
film resistors. Most of the hybrids are of the high-power type and
are custom manufactured for military and aerospace systems. Some of
the Company’s hybrids include high power voltage regulators,
power amplifiers, power drivers, boosters and controllers. The
Company manufactures both standard and custom hybrids.
4
The
Company has been certified (since 1990) and qualified (since 1995)
under MIL-PRF-38534 Class H (and its predecessor) standards
promulgated by the DSCC. These standards specify the uniformity and
quality of hybrid products purchased for United States military
programs. The purpose of the program is to standardize the
documentation and testing for hybrid microcircuits for use in
United States military and aerospace applications. Attainment of
certification and/or qualification under MIL-PRF-38534 Class H
requirements is important since it is a prerequisite for a
manufacturer to be selected to supply hybrids for defense-related
purposes. MIL-PRF-38534 Class H establishes definite criteria for
manufacturing techniques and materials used for hybrid
microcircuits and assures that these types of devices will be
manufactured under conditions that have been demonstrated to be
capable of continuously producing highly reliable products. This
program requires a manufacturer to demonstrate its products’
performance capabilities. Certification is a prerequisite of
qualification. A manufacturer receives certification once its
Product Quality Assurance Program Plan is reviewed and approved by
DSCC. A manufacturer receives qualification once it has
demonstrated that it can build and test a sample product in
conformity with its certified Product Quality Assurance Program
Plan. The Company expects that its continued maintenance of
MIL-PRF-38534 Class H qualification will continue to improve its
business posture by increasing product marketability.
Voltage Regulators
Voltage
regulators provide the power required to activate electronic
components such as the integrated circuits found in all electronic
devices from radar and missile systems to smart
phones.
Power MOSFETs
Power
MOSFETs perform the same function as bipolar transistors except
that power MOSFETs are current controlled and bipolar transistors
are voltage controlled. MOSFETs are popular due to their high input
impedance, fast switching speed, and resistance to thermal runaway
and secondary breakdown. Power MOSFETs are available in very high
voltage and current ratings.
Field Effect Transistors
Field
effect transistors are surface-controlled devices where conduction
of electrical current is controlled by the electrical potential
applied to a capacitively coupled control element. The Company
manufactures about 30 different types of junction field effect
transistor chips. They are used to produce over 350 different field
effect transistor types. Most of the Company’s field effect
transistors conform to standard Joint Electronic Device Engineering
Council designated transistors, commonly referred to with standard
2N designation numbers. The Company continues to expand its field
effect transistor product offering. The Company manufactures both
standard and custom field effect transistors.
MANUFACTURING
The
Company’s engineers design its transistors, diodes, field
effect transistors and hybrids, as well as other customized
products, based upon requirements established by customers, with
the cooperation of the Company’s product and marketing
personnel. The design of standard or catalog products is based on
specific industry standards.
Each
new design is first produced on a CAD/CAE (Computer Aided
Design/Computer Aided Engineering) computer system. The design
layout is then reduced to the desired geometry and transferred to
silicon wafers in a series of steps that include photolithography,
chemical or plasma etching, oxidation, diffusion and metallization.
The wafers then go through a fabrication process. When the process
is completed, each wafer contains a large number of silicon chips,
each chip being a single transistor device or a single diode. The
wafers are tested using a computerized test system prior to being
separated into individual chips. The chips are then assembled in
standard or custom packages, incorporated in hybrids or sold as
chips to other companies. The chips are normally mounted inside a
chosen package using eutectic, solder or epoxy die attach
techniques, and then wire bonded to the package pins using gold or
aluminum wires. Many of the packages are manufactured by the
Company and, in most cases, the Company plates its packages with
gold, nickel or other metals utilizing outside vendors to perform
the plating operation. In
the case of hybrids, design engineers formulate the circuit layout
designs. Ceramic substrates are then printed with thick film gold
conductors to form the interconnect pattern and with thick film
resistive inks to form the resistors of the designed circuit.
Semiconductor chips, resistor chips, capacitor chips and inductors
are then mounted on the substrates and sequential wire bonding is
used to interconnect the various components to the printed
substrate, as well as to connect the circuit to the package's
external pins.
5
In
addition to Company-performed testing and inspection procedures,
certain of the Company’s products are subject to source
inspections required by customers (including the United States
Government). In such cases, designated inspectors are authorized to
perform a detailed on-premise inspection of each individual device
prior to encapsulation in a casing or before dispatch of the
finished unit to ensure that the quality and performance of the
product meets the prescribed specifications.
ISO 9001 and AS9100
The Company is certified by NQA to AS 9100:2016 (sometimes
previously referred to as AS 9100D) and ISO 9001:2015
standards. The certification is valid until September 2021
and was reissued on August 31, 2018 for the cycle starting
September 8, 2018. The AS 9100 certification defines a
Quality Management System that is oriented to the aerospace
industry. It was released in 1999 by the European Association
of Aerospace Industries along with the Society of Automotive
Engineers. AS 9100 encompasses ISO 9001 requirements so the
certification to AS 9100 standards includes ISO 9001
standards. It is broadly accepted or endorsed as a
requirement for aerospace manufacturers among many Solitron
customers.
MARKETING AND CUSTOMERS
During
the fiscal year ended February 28, 2021, Raytheon Technologies
Corporation accounted for approximately 49% of net sales, USI
Electronics 15% of net sales, and L3Harris 11% of net sales, as
compared to 52%, 18%, and less than 10%, respectively, for the
fiscal year ended February 29, 2020. Nine of the Company’s
customers accounted for approximately 92% of the Company’s
net sales during the fiscal year ended February 28, 2021, as
compared to nine customers accounting for 95% of net sales for the
fiscal year ended February 29, 2020. It has been the
Company’s experience that a large percentage of its sales
have been attributable to a relatively small number of customers in
any particular period. Due to mergers and acquisitions activity in
general, and among large defense contractors in particular, the
number of large customers will most likely
continue to decline in number, but this does not necessarily mean
that the Company will experience a decline in sales. As a result,
the Company expects customer concentration to continue. The loss of
any major customer without offsetting orders from other sources
could have a material adverse effect on the business, financial
condition and results of operations of the Company.
Sales
to foreign customers accounted for less than 1% of the
Company’s net sales for the fiscal years ended February 28,
2021 and February 29, 2020. All sales to foreign customers
are conducted
utilizing exclusively U.S. dollars. See Note 10 of the financial
statements for more information regarding export sales to
customers.
BACKLOG
The
Company’s order backlog, which consists of semiconductor and
hybrid related open orders, was
approximately $9,150,000 at February 28, 2021, as compared to
$8,084,000 at February 29, 2020. Approximately 93% of the backlog
is scheduled for delivery within twelve months. For the years ended
February 28, 2021 and February 29, 2020, the entire backlog
consisted of orders for electronic components.
The
Company’s backlog as of any particular date may not be
representative of actual sales for any succeeding period because
lead times for the release of purchase orders depend upon the
scheduling practices of individual customers. The delivery times of
new or non-standard products can be affected by scheduling factors
and other manufacturing considerations, variances in the rate of
booking new orders from month to month and the possibility of
customer changes in delivery schedules or cancellations of orders.
Also, delivery times of new or non-standard products are affected
by the availability of raw material, scheduling factors,
manufacturing considerations and customer delivery
requirements.
The
rate of booking new orders varies significantly from month to
month, mostly as a result of sharp fluctuations in the government
budgeting and appropriation process. The Company has historically
experienced somewhat decreased levels of bookings during the summer
months, primarily as a result of such budgeting and appropriation
activities. For these reasons, and because of the possibility of
customer changes in delivery schedules or cancellations of orders,
the Company’s backlog as of any particular date may not be
indicative of actual sales for any succeeding period. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations –
Bookings and Backlog.”
6
PATENTS AND LICENSES
The
Company historically owned 33 patents (all of which have now
expired or have been allowed to lapse) relating to the design and
manufacture of its products. The terminations of these patents have
not had a material adverse effect on the Company. The Company
believes that engineering standards, manufacturing techniques and
product reliability are more important to the successful
manufacture and sale of its products than the expired or lapsed
patents it held.
COMPETITION
The
electronic component industry, in general, is highly competitive
and has been characterized by price erosion, rapid technological
changes and foreign competition. However, in the market segments in
which the Company operates, while highly competitive and subject to
the same price erosion, technological change is slow and minimal.
The Company believes that it is well regarded by its customers in
the segments of the market in which competition is dependent less
on price and more on product reliability, performance and service.
Management believes, however, that to the extent the
Company’s business is targeted at the military and aerospace
markets, where there has been virtually no foreign competition, it
is subjected to less competition than manufacturers of commercial
electronic components. Additionally, the decline in military orders
in programs the Company participates in and the shift in the
requirement of the Defense Department whereby the use of Commercial
Off The Shelf (“COTS”) components is encouraged over
the use of high reliability components that the Company
manufactures, prompting the number of competitors to decline,
afford the Company the opportunity to increase its market share. In
the non-military, non-aerospace markets, the Company is subject to
greater price erosion and foreign competition.
The
Company has numerous competitors across all of its product lines.
The Company is not in direct competition with any other
semiconductor manufacturer for an identical mixture of products;
however, one or more of the major manufacturers of semiconductors
manufacture some of the Company’s products. Other competitors
in the military market include Infineon Technologies, Microsemi
Corporation, Anaren, Inc., Natel Engineering Company and Sensitron
Semiconductor. The Company competes principally on the basis of
product quality, turn-around time, customer service and price. The
Company believes that competition for sales of products that will
ultimately be sold to the United States Government has intensified
and will continue to intensify as United States defense spending on
high reliability components continues to decrease and the
Department of Defense pushes for implementation of its 1995
decision to purchase COTS standard products in lieu of products
made in accordance with more stringent military
specifications.
The
Company believes that its primary competitive advantage is its
ability to produce high quality products as a result of its years
of experience, its sophisticated technologies and its experienced
staff. The Company believes that its ability to produce highly
reliable custom hybrids in a short period of time will give it a
strategic advantage in attempting to penetrate high-end commercial
markets and in selling military products complementary with those
currently sold, as doing so would enable the Company to produce
products early in design and development cycles.
The
Company believes that it will be able to improve its capability to
respond more quickly to customer needs and deliver products ahead
of schedule.
EMPLOYEES
At
February 28, 2021, the Company had 69 employees, 44 of whom were
engaged in production activities, 4 in sales and marketing, 10 in
executive and administrative capacities and 11 in technical and
support activities. Of the 69 employees, 64 were full time
employees and 5 were part time employees.
The
Company has never had a work stoppage, and none of its employees
are represented by a labor organization. The Company considers its
employee relations to be good.
SOURCES AND AVAILABILITY OF RAW MATERIAL
The
Company purchases its raw materials from multiple suppliers and has
a minimum of two suppliers for most of its material requirements.
The largest supplier in the fiscal year ended February 28, 2021 was
Egide USA, representing 18% of total purchases. Other suppliers
that represented more than 10% of total purchases were Wuxi
Streamtek, which accounted for 13% of total purchases, SemiDice,
which accounted for 10% of total purchases, and CPS Technologies,
which accounted for 10% of total purchases. The largest supplier in
the fiscal year ended February 29, 2020 was Egide USA, representing
18% of total purchases. No other supplier represented more than 10%
of total purchases. Because of a diminishing number of sources for
components and packages in particular, and the increase in the
prices of raw silicon semiconductor wafers, precious metals and
gold (used in the finish of the packages), the Company has been
obliged to pay higher prices, which results in higher costs of
goods sold. Most of the packages the Company uses are gold plated,
thus they are subject to the volatility and cost fluctuations of
gold.
7
EFFECT OF GOVERNMENT REGULATION
The
Company has received DSCC approval to supply its products in
accordance with MIL-PRF-19500 and Class H of MIL-PRF-38534. These
qualifications are required of vendors to supply to the United
States Government or its prime contractors. The Company expects
that its continued maintenance of these qualifications will
continue to improve its business posture by increasing product
marketability. The Company is also certified in accordance with
AS9100 which is a core requirement of most defense aerospace
contracts.
RESEARCH AND DEVELOPMENT
During
the fiscal years ended February 28, 2021 and February 29, 2020, the
Company spent $122,000 and $22,000, respectively, of its own funds
on research and development. The Company may decide to increase
research and development expenditures in the future. The cost of
designing custom products has historically been borne in full by
the customer, either as a direct charge or is amortized in the unit
price charged to the customer.
ENVIRONMENTAL REGULATION
While
the Company believes that it has the environmental permits
necessary to conduct its business and that its operations conform
to current 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. The annual cost of complying
with the regulations is minimal.
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 and its subsidiaries 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.
ITEM
1A. RISK FACTORS
The
following important business risks and factors, and those business
risks and factors described elsewhere in this report or our other
Securities and Exchange Commission filings, could cause our actual
results to differ materially from those stated in our
forward-looking statements, and which could affect the value of an
investment in the Company. All references to “we”,
“us”, “our” and the like refer to the
Company.
Risks Related to our Business and Industry
Loss of, or reduction of business from, substantial clients could
hurt our business by reducing our revenues, profitability and cash
flow.
During
the fiscal year ended February 28, 2021, four customers accounted
for approximately 79% of our revenues. The loss or financial
failure of any significant customer or distributor, any reduction
in orders by any of our significant customers or distributors, or
the cancellation of a significant order could materially and
adversely affect our business. Furthermore, due to continued
industry consolidation, the loss of any one customer or significant
order may have a greater impact than we anticipate. We cannot
guarantee that we will be able to retain long-term relationships or
secure renewals of short-term relationships with our more
substantial customers in the future.
8
Our complex manufacturing processes may lower yields and reduce our
revenues.
Our
manufacturing processes are highly complex, require advanced and
costly equipment and are continuously being modified in an effort
to improve yields and product performance. Minute impurities or
other difficulties in the manufacturing process can lower yields.
Our manufacturing efficiency will be an important factor in our
future profitability, and we cannot assure you that we will be able
to maintain our manufacturing efficiency or increase manufacturing
efficiency to the same extent as our competitors.
In
addition, as is common in the semiconductor industry, we have from
time to time experienced difficulty in effecting transitions to new
manufacturing processes. As a consequence, we may suffer delays in
product deliveries or reduced yields. We may experience
manufacturing problems in achieving acceptable yields or experience
product delivery delays in the future as a result of, among other
things, capacity constraints, upgrading or expanding our existing
facility or changing our process technologies, any of which could
result in a loss of future revenues. Our operating results could
also be adversely affected by the increase in fixed costs and
operating expenses related to increases in production capability if
revenues do not increase proportionately.
Our
ability to repair and maintain the aging manufacturing equipment we
own may adversely affect our ability to deliver products to our
customers’ requirements. We may be forced to expend
significant funds in order to acquire replacement manufacturing
equipment that may not be readily available, thus resulting in
manufacturing delays.
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.
The
Company relies on its relationships with certain key suppliers for
its supply of raw materials, parts and finished components that are
qualified for use in the end-products the Company manufactures.
While the Company currently has favorable working relationships
with its suppliers, it cannot be sure that these relationships will
continue in the future. Additionally, the Company cannot guarantee
the availability or pricing of raw materials. The price of
qualified raw materials can be highly volatile due to several
factors, including a general shortage of raw materials, an
unexpected increase in the demand for raw materials, disruptions in
the suppliers’ business and competitive pressure among
suppliers of raw materials to increase the price of raw materials.
In particular, the Company has experienced from time to time
increases in the prices of raw silicon semiconductor wafers,
copper, and precious metals (gold and silver). Suppliers may also
choose, from time to time, to extend lead times or limit supplies
due to a shortage in supplies. Additionally, some of the
Company’s key suppliers of raw materials may have the
capability of manufacturing the end products themselves and may
therefore cease to supply the Company with its raw materials and
compete directly with the Company for the manufacture of the
end-products. Any interruption in availability of these qualified
raw materials may impair the Company’s ability to manufacture
its products on a timely and cost-effective basis. If the Company
must identify alternative sources for its qualified raw materials,
it would be adversely affected due to the time and process required
in order for such alternative raw materials to be qualified for use
in the applicable end-products. Any significant price increase in
the Company’s raw materials that cannot be passed on to
customers or a shortage in the supply of raw materials could have a
material adverse effect on the Company’s business, financial
condition or results of operations.
Our inventories may become obsolete and other assets may be subject
to risks.
The
life cycles of some of our products depend heavily upon the life
cycles of the end products into which our products are designed.
Products with short life cycles require us to manage closely our
production and inventory levels. Inventory may also become obsolete
because of adverse changes in end-market demand. We may in the
future be adversely affected by obsolete or excess inventories
which may result from unanticipated changes in the estimated total
demand for our products or the estimated life cycles of the end
products into which our products are designed. The asset values
determined under Generally Accepted Accounting Principles for
inventory and other assets each involve the making of material
estimates by us, many of which could be based on mistaken
assumptions or judgments.
Environmental regulations could require us to incur significant
costs.
In the
conduct of our manufacturing operations, we have handled and do
handle materials that are considered hazardous, toxic or volatile
under federal, state and local laws and, therefore, are 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, we could be held liable for
damages and the cost of remediation and, along with the rest of the
semiconductor industry, we are subject to variable interpretations
and governmental priorities concerning environmental laws and
regulations. 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 we will
not be required to incur costs to comply with, or that our
operations, business or financial condition will not be materially
affected by, current or future environmental laws or
regulations.
9
Our business is highly competitive and increased competition could
reduce gross profit margins and the value of an investment in our
Company.
The
semiconductor industry, and the semiconductor product markets
specifically, are highly competitive. Competition is based on
price, product performance, quality, turn-around time, reliability
and customer service. The gross profit margins realizable in our
markets can differ across regions, depending on the economic
strength of end-product markets in those regions. Even in strong
markets, price pressures may emerge as competitors attempt to gain
more market share by lowering prices. Competition in the various
markets in which we participate comes from companies of various
sizes, many of which are larger and have greater financial and
other resources than we have and thus can better withstand adverse
economic or market conditions. In addition, companies not currently
in direct competition with us may introduce competing products in
the future.
Our operating results may decrease due to the decline of
profitability in the semiconductor industry.
Intense
competition and a general slowdown in the demand for military-rated
semiconductors worldwide have resulted in decreases in the
profitability of many of our products. We expect that profitability
for our products will continue to decline in the future. A decline
in profitability for our products, if not offset by reductions in
the costs of manufacturing these products, would decrease our
profits and could have a material adverse effect on our business,
financial condition and results of operations.
We may not achieve the intended effects of our business strategy
which could adversely impact our business, financial condition and
results of operations.
In
recognition of the changes in global geopolitical affairs and in
United States military spending, we have for a number of years
attempted to increase sales of our products for non-military,
scientific and industrial niche markets, such as medical
electronics, machine tool controls, satellites, telecommunications
networks and other market segments in which purchasing decisions
are generally based primarily on product quality, long-term
reliability and performance, rather than on product price. We are
also attempting to offer additional products to the military
markets that are complementary to those we currently sell to the
military markets. We cannot assure you that these efforts will be
successful and, if they are, that they will have the intended
effects of increasing profitability. Furthermore, as we attempt to
shift our focus to the sale of products having non-military,
non-aerospace applications, we will be subject to greater price
erosion and foreign competition.
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.
Rapidly
changing technology and industry standards, along with frequent new
product introductions, characterize the semiconductor industry. Our
success in these markets depends on our ability to design, develop,
manufacture, assemble, test, market and support new products and
enhancements on a timely and cost-effective basis. There can be no
assurance that we will successfully identify new product
opportunities and develop and bring new products to market in a
timely and cost-effective manner or those products or technologies
developed by others will not render our products or technologies
obsolete or noncompetitive. A fundamental shift in technology in
our product markets could have a material adverse effect on us. In
light of the fact that many of our competitors have substantially
greater revenues than us and that we have not spent any significant
funds on research and development in recent years, we may not be
able to accomplish the foregoing, which might have a material
adverse effect on the Company, our business, prospects, financial
condition or results of operations.
The nature of our products exposes us to potentially significant
product liability risk.
Our
business exposes us to potential product liability risks that are
inherent in the manufacturing and marketing of high-reliability
electronic components for critical applications. No assurance can
be made that our product liability insurance coverage is adequate
or that present coverage will continue to be available at
acceptable costs, or that a product liability claim would not
materially and adversely affect our business, prospects, financial
condition or results of operations.
10
We depend on the recruitment and retention of qualified personnel
and our failure to attract and retain such personnel could
seriously harm our business.
Due to
the specialized nature of our business, our future performance is
highly dependent on the continued services of our key engineering
personnel and executive officers. Our prospects depend on our
ability to attract and retain qualified engineering, manufacturing,
marketing, sales and management personnel for our operations as
well as conduct appropriate succession planning for our executive
officers. Competition for personnel is intense, and we may not be
successful in attracting or retaining qualified personnel. Our
failure to compete for these personnel could seriously harm our
business, prospects, results of operations and financial
condition.
Failure to protect our proprietary technologies or maintain the
right to use certain technologies may negatively affect our ability
to compete.
We rely
heavily on our proprietary technologies. Our future success and
competitive position may depend in part upon our ability to obtain
or maintain protection of certain proprietary technologies used in
our principal products. We do not have patent protection on any
aspects of our technology. Our reliance upon protection of some of
our technology as “trade secrets” will not necessarily
protect us from the use by other persons of our technology, or
their use of technology that is similar or superior to that which
is embodied in our trade secrets. Others may be able to
independently duplicate or exceed our technology in whole or in
part. We may not be successful in maintaining the confidentiality
of our technology, dissemination of which could have material
adverse effects on our business. In addition, litigation may be
necessary to determine the scope and validity of our proprietary
rights.
Obtaining
or protecting our proprietary rights may require us to defend
claims of intellectual property infringement by our competitors. We
could become subject to lawsuits in which it is alleged that we
have infringed or are infringing upon the intellectual property
rights of others with or without our prior awareness of the
existence of those third-party rights, if any.
If any
infringements, real or imagined, happen to exist, arise or are
claimed in the future, we may be exposed to substantial liability
for damages and may need to obtain licenses from the patent owners,
discontinue or change our processes or products or expend
significant resources to develop or acquire non-infringing
technologies. We may not be successful in such efforts or such
licenses may not be available under reasonable terms. Our failure
to develop or acquire non-infringing technologies or to obtain
licenses on acceptable terms or the occurrence of related
litigation itself could have material adverse effects on our
operating results, financial condition and cash flows.
We cannot guarantee that we will have sufficient capital resources
to make necessary investments in manufacturing technology and
equipment.
The
semiconductor industry is capital intensive. Semiconductor
manufacturing requires a regular upgrading of process technology to
remain competitive, as new and enhanced semiconductor processes are
developed which permit smaller, more efficient and more powerful
semiconductor devices. We maintain certain of our own
manufacturing, assembly and test facilities, which have required
and will continue to require significant investments in
manufacturing technology and equipment, especially for new
technologies we develop. We are also attempting to add the
appropriate level and mix of capacity to meet our customers' future
demand. There can be no assurance that we will have sufficient
capital resources to make necessary investments in manufacturing
technology and equipment. Although we believe that anticipated cash
flows from operations and existing cash reserves will be sufficient
to satisfy our future capital expenditure requirements, we cannot
guarantee that this will be the case or that alternative sources of
capital or credit will be available to us on favorable terms or at
all.
We may make substantial investments in plant and equipment that may
become impaired.
Some of
our investments in plant and equipment support particular
technologies, processes or products, and may not be applicable to
other or newer technologies, processes or products. Also, the
ability to relocate and qualify equipment for our operations,
whether within our Company or to and from third party contractors
could be time consuming and costly. To the extent we invest in more
equipment or a mix of equipment than we can use efficiently,
experience low plant or equipment utilization due to reduced demand
or adverse market conditions, our plant or equipment becomes older
or outmoded, or we are not able to efficiently recover and/or
utilize equipment on loan at third party contractors, we may incur
significant costs or impairment charges that could materially
adversely affect our results of operation and financial
condition.
11
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.
We have
established procedures for the review and monitoring of the credit
worthiness of our customers and/or significant amounts owing from
customers. Despite our monitoring and procedures, especially in the
current macroeconomic situation, we may find that, despite our
efforts, one or more of our customers become insolvent or face
bankruptcy proceedings. Such events could have an adverse effect on
our operating results if our receivables applicable to that
customer become uncollectible in whole or in part, or if our
customers' financial situation result in reductions in whole or in
part of our ability to continue to sell our products or services to
such customers at the same levels or at all.
Our international operations expose us to material risks, including
risks under U.S. export laws.
We
expect revenues from foreign markets to continue to represent a
portion of total revenues. Among others, these risks include:
changes in, or impositions of, legislative or regulatory
requirements, including tax laws in the United States and in the
countries in which we manufacture or sell our products; trade
restrictions; transportation delays; work stoppages; economic and
political instability; crime; kidnapping; war; terrorism; and
foreign currency fluctuations. Additionally, in certain
jurisdictions where we use third party contractors, the legal
systems do not provide effective remedies to us when the contractor
has breached its obligation or otherwise fails to
perform.
In
addition, it is more difficult in some foreign countries to protect
our products or intellectual property rights to the same extent as
is possible in the United States. Therefore, the risk of piracy or
misuse of our technology and product may be greater in these
foreign countries. Although we have not experienced any material
adverse effect on our operating results as a result of these and
other factors, such factors could have a material adverse effect on
our financial condition and operating results in the
future.
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.
Pursuant
to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010, the SEC promulgated disclosure rules for
manufacturers of products containing certain minerals which are
mined from the Democratic Republic of Congo and adjoining
countries. These "conflict minerals" are commonly found in metals
used in the manufacture of semiconductors. Manufacturers are also
required to disclose their efforts to prevent the sourcing of such
minerals and metals produced from them. While certain aspects of
these rules continue to be litigated and a ruling by the Federal
Court of Appeals for the D.C. Circuit has led to further
uncertainty regarding the SEC’s enforcement of the rule, the
disclosure rules, as modified by the ruling, went into effect in
2014. The implementation of these regulations may limit the
sourcing and availability of some of the metals used in the
manufacture of our products. The regulations may also reduce the
number of suppliers who provide conflict-free metals and may affect
our ability to obtain products in sufficient quantities or at
competitive prices. Finally, some of our customers may elect to
disqualify us as a supplier if we are unable to verify that the
metals used in our products are free of conflict
minerals.
Risks Related to Government Contracts and Policies
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.
All of
our contracts with the United States Government and its prime
contractors contain customary provisions permitting termination at
any time at the convenience of the United States Government or its
prime contractors upon payment to us for costs incurred plus a
reasonable profit. Certain contracts are also subject to price
renegotiations in accordance with United States Government sole
source procurement provisions. Nevertheless, we cannot assure you
that the foregoing government contracting risks will not materially
and adversely affect our business, prospects, financial condition
or results of operations. Furthermore, we cannot assure you that we
would be able to procure new government contracts to offset any
revenue losses incurred due to early termination or price
renegotiation of existing government contracts.
12
Our
government business is also subject to specific procurement
regulations, which increase our performance and compliance costs.
These costs might increase in the future, reducing our margins.
Failure to comply with procurement regulations could lead to
suspension or debarment, for cause, from government subcontracting
for a period of time. Among the causes for debarment are violations
of various statutes, including those related to procurement
integrity, export control, government security regulations,
employment practices, protection of the environment, and accuracy
of records. The termination of a government contract or
relationship as a result of any of these violations would have a
negative impact on our reputation and operations, and could
negatively impact our ability to obtain future government
contracts.
Changes in government policy or economic conditions could
negatively impact our results.
A large
portion of the Company’s sales are to military and aerospace
markets which are subject to the business risk of changes in
governmental appropriations and changes in national defense
policies and priorities.
Our
results may also be affected by changes in trade, monetary and
fiscal policies, laws and regulations, or other activities of U.S.
and non-U.S. governments, agencies and similar organizations.
Furthermore, our business, prospects, financial condition and
results of operations may be adversely affected by the shift in the
requirement of the United States Department of Defense policy
toward the use of standard industrial components over the use of
high reliability components that we manufacture. Our results may
also be affected by social and economic conditions, which impact
our sales, including in markets subject to ongoing political
hostilities, such as regions of the Middle East.
Changes in Defense related programs and priorities could reduce the
revenues and profitability of our business.
We depend on the U.S. government and its suppliers for a
substantial portion of our business, and changes in government
defense spending and priorities could have consequences on our
financial position, results of operations and business. U.S.
government contracts are subject to uncertain levels of funding and
timing, as well as termination. The funding of U.S.
government programs is subject to congressional appropriations,
which are made on a fiscal year basis even for multi-year
programs. Consequently, programs are often only partially
funded initially and may not continue to be funded in future
years. We may also experience significant changes
in our operating profit margins as a result of variations in sales,
changes in product mix, price competition for orders and costs
associated with the introduction of new products.
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic may have a material adverse effect on our
business, cash flows and results of operations.
On January 30, 2020, the World Health Organization
(“WHO”) declared a global emergency due to the COVID-19
pandemic, on March 11, 2020 the WHO declared COVID-19 a pandemic,
and on March 13, 2020, the United States declared a national
emergency with respect to COVID-19. The outbreak has resulted in
significant governmental measures being implemented to control the
spread of COVID-19, including, among others, restrictions on
travel, business operations and the movement of people in many
regions of the world in which the Company operates, and the
imposition of shelter-in-place or similarly restrictive
work-from-home orders. As an essential business, the Company was
not subject to most of the aforementioned restrictions (other than
implementing travel restrictions on its employees) and other than
the audit-related impacts it experienced it has experienced minimal
impact from COVID-19 to date.
The COVID-19 pandemic and its potential effects on the
Company’s business in its fiscal 2022 year remain dynamic,
and the broader implications for its business and results of
operations could change. These implications could include
disruptions or restrictions on the Company’s ability to
source, manufacture or distribute its products, including temporary
disruptions to the facilities of its suppliers globally.
Additionally, multiple countries have imposed and may further
impose restrictions on business operations and movement of people
and products to limit the spread of COVID-19. Delays in production
or delivery of components or raw materials that are part of the
Company’s global supply chain due to restrictions imposed to
limit the spread of COVID-19 could delay or inhibit its ability to
obtain the supply of components and finished goods. If COVID-19
becomes more prevalent in the locations where the Company, its
customers or suppliers conduct business, or the Company experiences
disruptions in its operations, the Company may experience
constrained supply or curtailed demand that may materially
adversely impact its business and results of operations. The
COVID-19 pandemic and its global economic impact may also impact
the timing or amount of government appropriations and could lead to
our government customers or their prime contractors requesting
delays, price renegotiations or contract terminations. In addition,
any other widespread health crisis that could adversely affect
global and regional economies, financial markets and overall demand
environment for the Company's products could have a material
adverse effect on the Company’s business, cash flows or
results of operations.
13
Risks Relating to Information Technology and
Cybersecurity
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.
We routinely collect and store sensitive data, including
intellectual property and other proprietary information about our
business and that of our customers, suppliers and business
partners. The secure processing, maintenance and transmission of
this information is critical to our operations and business
strategy. Despite our security measures, our information technology
and infrastructure may be vulnerable to attacks by hackers or
breached due to employee error, malfeasance or other disruptions.
Any such breach could compromise our networks and the information
stored there could be accessed, publicly disclosed, lost or stolen.
Any such access, disclosure or other loss of information could
result in legal claims or proceedings and liability under laws that
protect the privacy of personal information. It could also result
in regulatory penalties, disrupt our operations and the services we
provide to customers, damage our reputation and cause a loss of
confidence in our products and services, which could adversely
affect our business/operating margins, revenues and competitive
position.
Risks Relating to our Internal Control over Financial
Reporting
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.
We are
responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rule 13a-15(f) and
Rule 15d-15(f) under the Securities Exchange Act. A material
weakness is defined as a deficiency, or combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of the Company’s annual or interim financial statements will
not be prevented or detected on a timely basis.
We have
implemented remediation measures and we are in the process of
identifying any additional appropriate remediation measures. There
is the potential that our remediation efforts may not be
successful. Until our remediation plan is fully implemented, our
management will continue to devote significant time and attention
to these efforts. If we fail to complete our remediation plan in a
timely fashion, or at all, or if our remediation plan is inadequate
or we encounter difficulties in the implementation or maintenance
of our internal control over financial reporting or disclosure
controls and procedures, there will continue to be an increased
risk that we will be unable to timely file future periodic reports
with the SEC. In addition, any failure to implement our remediation
plan or any difficulties we encounter with our remediation plan
could result in additional material weaknesses or deficiencies in
our internal control or future material misstatements in our annual
or interim financial statements. Further, if any other material
weakness or deficiency in our internal control exist and go
undetected, our financial statements could contain material
misstatements that, when discovered in the future, could cause us
to fail to meet our future reporting obligations. Moreover, our
failure to remediate the material weakness identified above or the
identification or additional material weaknesses, could adversely
affect our stock price and investor confidence.
Risks Relating to our Common Stock
Provisions in our charter documents could make it more difficult to
acquire our Company and may reduce the market price of our
stock.
Our
Certificate of Incorporation and Bylaws contain certain provisions,
each of which could delay or prevent a change in control of our
company or the removal of management. These corporate provisions
could also deter potential acquirers from making an offer to our
stockholders and limit any opportunity to realize premiums over
prevailing market prices of our common stock.
14
The price of our common stock has fluctuated widely in the past and
may fluctuate widely in the future.
Our
common stock, which is traded on the over-the-counter bulletin
board, has experienced and may continue to experience significant
price and volume fluctuations that could adversely affect the
market price of our common stock without regard to our operating
performance. In addition, we believe that factors such as quarterly
fluctuations in financial results, financial performance and other
activities of other publicly traded companies in the semiconductor
industry could cause the price of our common stock to fluctuate
substantially. In addition, in recent periods, our common stock,
the stock market in general and the market for shares of
semiconductor industry-related stocks in particular have
experienced extreme price fluctuations which have often been
unrelated to the operating performance of the affected companies.
Any similar fluctuations in the future could adversely affect the
market price of our common stock.
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.
We do
not have an annual dividend policy in place. We have not declared
and paid a cash dividend since June 29, 2015. Our Board of
Directors has authorized a repurchase program under which the
Company may repurchase up to $1,000,000 of the Company's common
stock. The Company purchased 2,493 shares of common stock in fiscal
2021 and 10 shares of common stock in fiscal 2020. Any
determination to pay cash dividends or repurchase shares of the
Company’s common stock in the future is contingent on a
variety of factors, including our financial condition, results of
operations, business requirements, and our Board of Directors'
determination that such dividends or stock repurchases are in the
best interests of our stockholders and in compliance with all
applicable laws and agreements. Accordingly, there is no assurance
that we will pay cash dividends or repurchase stock pursuant to our
stock repurchase program, or that any declaration of cash dividends
or stock repurchases under our stock repurchase program will have a
beneficial impact on our stock price.
General Risk Factors
Uncertainty of current economic conditions, domestically and
globally, could continue to affect demand for our products and
negatively impact our business.
Current
conditions in the domestic and global economies are extremely
uncertain. As a result, it is difficult to estimate the level of
growth for the economy as a whole. It is even more difficult to
estimate growth in various parts of the economy, including the
markets in which we participate. Because all components of our
budgeting and forecasting are dependent upon estimates of growth in
the markets we serve and demand for our products, the prevailing
economic uncertainties render estimates of future income and
expenditures even more difficult than usual to make. The future
direction of the overall domestic and global economies will have a
significant impact on our overall performance.
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.
Natural
disasters, like those related to hurricanes, or threats or
occurrences of other similar events, whether in the United States
or internationally, may affect the markets in which we operate and
our profitability. Hurricanes have affected us in the past, and may
continue to affect us in the future, resulting in damage to our
manufacturing facility in South Florida and our manufacturing
equipment, office closures and impairing our ability to produce and
deliver our products. Such events could also affect our domestic
and international sales, disrupt our supply chains, primarily for
raw materials and process chemicals and gases, affect the physical
facilities of our suppliers or customers, and make transportation
of our supplies and products more difficult or cost prohibitive.
Due to the broad and uncertain effects that natural events have had
on financial and economic markets and stock exchanges and market
quotation systems generally, we cannot provide any estimate of how
these activities might affect our future results.
15
None
ITEM
2.
PROPERTIES.
The
Company’s manufacturing operations and its corporate
headquarters are located in one leased facility in West Palm Beach,
Florida. The Company leases approximately 47,000 sq. ft. for its
facility. The lease is for a term ending on December 31, 2021 and
includes an option to renew the lease for an additional five years
beginning on January 1, 2022 under current terms. The Company
believes that its facility in West Palm Beach, Florida is suitable
and adequate to meet its requirements currently and until the
Company relocates to its recently purchased facility. See Note 15
Subsequent Events.
ITEM
3.
LEGAL
PROCEEDINGS.
We may
from time to time become a party to various legal proceedings
arising in the ordinary course of business. As of February 28,
2021, we had no known material current, pending, or threatened
litigation.
ITEM
4.
MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM
5.
MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Since
March 1995, the Company’s Common Stock has been traded on the
Over The Counter Bulletin Board (“OTCBB”) under the
symbol “SODI”. The Company’s Common Stock was
traded on the New York Stock Exchange until October 13, 1993, at
which time it began trading on the Nasdaq Small Cap Market where it
was traded until March 1995.
As of February 28, 2021, there were approximately 612 holders of
record of the Company’s Common Stock. On February 28, 2021,
the last sale price of the Common Stock as reported on the OTCBB
was $6.74 per share.
The following table sets forth for the periods indicated, high and
low sell price of the Common Stock as reported by the OTCBB.
Fiscal Year Ended February 28, 2021
|
HIGH PRICE
|
LOW PRICE
|
Fourth
Quarter
|
$7.50
|
$4.15
|
Third
Quarter
|
$4.20
|
$2.18
|
Second
Quarter
|
$2.60
|
$2.21
|
First
Quarter
|
$2.90
|
$2.00
|
|
|
|
Fiscal Year Ended February 29,
2020
|
|
|
Fourth
Quarter
|
$3.93
|
$2.20
|
Third
Quarter
|
$2.38
|
$1.95
|
Second
Quarter
|
$2.70
|
$1.50
|
First
Quarter
|
$2.35
|
$1.30
|
We have no current plans to pay dividends. We plan on reinvesting
our earnings, if any, for use in the business, for acquisitions, or
for share repurchases.
16
The
Company currently has a repurchase program under which the Company
may repurchase up to $1,000,000 of its outstanding common stock
without an expiration date to the repurchase program. Under the
current repurchase program, repurchases may be made by the Company
from time to time in the open market or through privately
negotiated transactions depending on market conditions, stock
price, corporate and regulatory requirements, and other factors.
The Company repurchased 10 shares of common stock during fiscal
2020 under the program and 2,493 shares during fiscal
2021.
|
|
|
(c)
|
(d)
|
|
|
|
Total Number
|
Maximum Number (or
|
|
(a)
|
|
of Shares
|
Approximate Dollar
|
|
Total
|
(b)
|
Purchased
|
Value) of Shares
|
|
Number of
|
Average
|
as Part of
|
that May Yet
|
|
Shares
|
Price Paid
|
Publicly Announced
|
Be Purchased Under
|
Period
|
Purchased
|
Per Share (1)
|
Plans or Programs
|
the Plans or Programs
|
March
1, 2020 - March 31, 2020
|
-
|
$-
|
-
|
$-
|
April
1, 2020 - April 30, 2020
|
-
|
$-
|
-
|
$-
|
May
1, 2020 - May 31, 2020
|
-
|
$-
|
-
|
$-
|
June
1, 2020 - June 30, 2020
|
2,493
|
$2.30
|
-
|
$-
|
July
1, 2020 - July 31, 2020
|
-
|
$-
|
-
|
$-
|
August
1, 2020 - August 31, 2020
|
-
|
$-
|
-
|
$-
|
September
1, 2020 - September 30, 2020
|
-
|
$-
|
-
|
$-
|
October
1, 2020 - October 31, 2020
|
-
|
$-
|
-
|
$-
|
November
1, 2020 - November 30, 2020
|
-
|
$-
|
-
|
$-
|
December
1, 2020 - December 31, 2020
|
-
|
$-
|
-
|
$-
|
January
1, 2021 - January 31, 2021
|
-
|
$-
|
-
|
$-
|
February
1, 2021 - February 28, 2021
|
-
|
$-
|
-
|
$-
|
Total
|
2,493
|
$2.30
|
-
|
$994,189
|
Securities Issued Under Equity Compensation Plan
On
November 13, 2020, the Company granted Mr. Eriksen and Mr. Matson
the option to receive half of their bonuses in shares instead of
cash, which both elected. Mr. Eriksen received 7,669 shares, with a
fair market value of $25,000, or $3.26 per share, and Mr. Matson
received 15,337 shares, with a fair market value of $50,000, or
$3.26 per share. Shares were issued under the 2019 Stock Incentive
Plan.
On June
28, 2019 the Board approved restricted stock grants totaling
161,000 shares: 120,000 shares to COO and President Mark Matson,
15,000 shares to CEO Tim Eriksen, 8,000 shares to Board Chairman
David Pointer, and 6,000 shares each to Directors John Chiste,
Dwight Aubrey, and Charles Gillman. Fair value was approximately
$282,000 based on then current price of $1.75 per
share.
ITEM 6.
SELECTED FINANCIAL
DATA
Disclosure under this item is not required as the registrant is a
smaller reporting company.
17
ITEM
7.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS.
You
should read the following discussion in conjunction with the
“Financial Statements and Supplementary Data” section
of this Annual Report on Form 10-K. You also should review and
consider the risks relating to the Company’s business,
operations, financial performance, and cash flows presented earlier
under “Risk Factors.”
INTRODUCTION
The
Company 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 MOS power transistors, power and control
hybrids, junction and power MOFSETs, 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
JAN transistors, diodes and SMD voltage regulators, are sold as
standard or catalog items.
The
following table is included solely for use in comparative analysis
to complement Management’s Discussion and Analysis of
Financial Condition and Results of Operations:
The following table sets forth our statements of operations for the
fiscal year periods indicated (in 000’s):
|
2/28/2021
|
2/29/2020
|
Net
Sales
|
10,534
|
9,237
|
Cost
of Sales
|
7,257
|
7,762
|
Gross
Profit
|
3,277
|
1,475
|
Selling,
General and Administrative Expenses
|
2,108
|
2,104
|
Operating
Income (Loss)
|
1,169
|
(629)
|
Total
other income (loss)
|
212
|
23
|
Net
Income (Loss)
|
1,381
|
(606)
|
The following table sets forth our statements of operations as a
percentage of total revenue for the periods
indicated:
|
2/28/2021
|
2/29/2020
|
Net
Sales
|
100%
|
100%
|
Cost
of Sales
|
69%
|
84%
|
Gross
Profit
|
31%
|
16%
|
Selling,
General and Administrative Expenses
|
20%
|
23%
|
Operating
Income (Loss)
|
11%
|
-7%
|
Total
other income (loss)
|
2%
|
0%
|
Net
Income (Loss)
|
13%
|
-7%
|
TRENDS AND UNCERTAINTIES:
During
the fiscal year ended February 28, 2021, the Company’s
book-to-bill ratio was approximately 1.12 to 1 as compared to
approximately 1.22 to 1 for the fiscal year ended February 29,
2020, reflecting an
increase in the
volume of orders booked. Historically, the Company has experienced
seasonality in its bookings, with the fiscal fourth quarter
experiencing the highest level of bookings. Going forward we expect
more variability in bookings.
The
Company has been seeking out additional revenue sources, which may
involve new products and/or products the Company has not
manufactured in recent years, or before. The Company may incur
difficulty manufacturing those products, which could result in
decreased margins.
18
RESULTS OF OPERATIONS
Comparison of Fiscal Year Ended February 28, 2021 vs. Fiscal Year
Ended February 29, 2020
Revenue. Net sales for the fiscal year ended February 28,
2021 increased by approximately 14% to $10,534,000 versus
$9,237,000 for the fiscal year ended February 29,
2020.
Net
bookings for the fiscal year ended February 28, 2021 were greater
than net sales by approximately 12%. Backlog increased by
approximately 11% to $9,150,000 as of February 28, 2021 from
$8,223,000 as of February 29, 2020. The increase was due to the
development of new products and an increase in the dollar value of
new orders by key customers.
During
the fiscal year ended February 28, 2021, the Company shipped
78,811units as compared
with 75,313 units shipped during the fiscal year ended February 29,
2020. It should be noted that since the Company manufactures a wide
variety of products with an average sales price ranging from a few
dollars to several hundred dollars, such periodic variations in the
Company’s volume of units shipped might not be a reliable
indicator of the Company’s performance.
Cost of Sales. Cost of sales for the fiscal year ended
February 28, 2021 decreased to $7,257,000 from $7,762,000 for the
fiscal year ended February 29, 2020. Expressed as a percentage of
sales, cost of sales decreased to 69% for the fiscal year ended
February 28, 2021 as compared to 84% for the fiscal year ended
February 29, 2020.
Gross Profit. Gross profit for the fiscal year ended
February 28, 2021 increased to $3,277,000 from $1,475,000 for the
fiscal year ended February 29, 2020 due primarily to a decrease in
materials and labor. Expressed as a percentage of sales, gross
profit for the fiscal year ended February 28, 2021 increased to 31%
as compared to 16% for the fiscal year ended February 29,
2020.
Selling, General & Administrative Expenses. During the
fiscal year ended February 28, 2021, selling, general and
administrative expenses, as a percentage of sales, decreased to
approximately 20% as compared to 23% for the year ended February
29, 2020. In terms of dollars, selling, general and administrative
expenses increased 0.2% to $2,108,000 for the fiscal year ended
February 28, 2021 from $2,104,000 for the fiscal year ended
February 29, 2020. This increase is primarily due to an increase in
professional fees of $25,000 and sales commissions of $42,000,
partially offset by a $207,000 decrease in stock based
compensation.
Operating Income (Loss). Operating income for the fiscal
year ended February 28, 2021 was $1,169,000 as compared to an
operating loss of ($629,000) for the fiscal year ended February 29,
2020. The decrease in operating loss was mainly attributable to the
increase in net sales and decrease in materials and labor costs
noted above.
Total Other Income. Interest
income and dividend income were $0 and $7,000, respectively for the
fiscal year ended February 28, 2021, compared to $1,000 and $9,000,
respectively for the fiscal year ended February 29, 2020. Interest
expense was ($5,000) for the fiscal year ended February 28, 2021,
compared to $0 for the fiscal year ended February 29, 2020.
Realized gains on investments for the fiscal year ended February
28, 2021 were $98,000 compared to a loss of ($28,000) for the
fiscal year ended February 29, 2020. Unrealized gains on
investments for the fiscal year ended February 28, 2021 decreased
to $36,000 from $41,000 for the fiscal year ended February 29,
2020. Other income consisting primarily of scrap income was $76,000
in the fiscal year ended February 28, 2021 as compared to $0 in the
fiscal year ended February 29, 2020.
Net Income (Loss). Net income for the fiscal year ended
February 28, 2021 was $1,381,000 as compared to a net loss of
($606,000) for the fiscal year ended February 29, 2020. The
increase in net income was mainly attributable to the increase in
net sales and decrease in labor and materials discussed
above.
LIQUIDITY
AND CAPITAL RESOURCES
Operating Activities:
Net
cash provided by (used in) operating activities was $1,674,000 for
the year ended February 28, 2021 primarily reflecting net income of
$1,381,000, an increase in accrued expenses and other current and
non-current liabilities of $296,000, and depreciation of $225,000
partially offset by increased prepaid expense and other current
assets of $254,000, a decrease in accounts payable of
$104,000.
19
Net
cash provided by operating activities was $1,118,000 for the year
ended February 29, 2020 primarily reflecting a decrease in
inventories of $1,088,000, a decrease in accounts receivable of
$450,000, and an increase in stock based compensation of $282,000
partially offset by a net loss of $606,000, and a decrease in
accounts payable of $364,000.
Investing Activities:
Net
cash provided by (used in) investing activities was ($22,000) for
the year ended February 28, 2021 principally reflecting $530,000 in
proceeds from sales of securities, partially offset by $477,000
from the purchases of securities, and $75,000 from the purchases of
property, plant and equipment.
Net
cash provided by (used in) investing activities was ($180,000) for
the year ended February 29, 2020 principally reflecting $73,000 in
proceeds from sales of securities, offset by $145,000 in purchases
of securities and $108,000 in purchases of property, plant and
equipment.
Financing Activities:
Net
cash provided by (used in) financing activities was $801,000 for
the year ended February 28, 2021, reflecting proceeds from the SBA
Paycheck Protection Program loan of $807,000, partially offset by
($6,000) in treasury stock purchases.
Net
cash used in financing activities was $0 for the year ended
February 29, 2020.
The
Company expects its sole source of liquidity over the next twelve
months to be cash from operations and cash and cash equivalents, if
necessary. The Company anticipates
that its capital expenditures required to sustain operations will
be approximately $500,000 during the next twelve months and will be
funded from operations and cash and cash equivalents, if
necessary.
At
February 28, 2021 and February 29, 2020, the Company had cash and
cash equivalents of approximately $3,785,000 and $1,332,000,
respectively. The cash increase for the year ended February 28,
2021 was primarily due to income from operations and proceeds from
SBA Paycheck Protection Program loan.
At
February 28, 2021 and February 29, 2020, the Company had
investments in securities of approximately $248,000 and $164,000,
respectively.
At
February 28, 2021, the Company had working capital of $7,049,000 as
compared with working capital at February 29, 2020 of $4,687,000.
The increase for the year ended February 29, 2020 was due primarily
to income from operations and the SBA Paycheck Protection Program
loan.
Stock Repurchase Program:
On
January 15, 2016, the Board of Directors amended the
Company’s previously authorized stock repurchase program to
permit the Company to acquire up to $1,000,000 of its outstanding
common stock from time to time, increasing the Company’s
authorization from the $720,000 remaining at that time and
eliminating the expiration date of February 29, 2016. Purchases
under the amended stock repurchase program may be made through the
open market or privately negotiated transactions as determined by
the Company’s management, and in accordance with the
requirements of the Securities and Exchange Commission. The timing
and actual number of shares repurchased will depend on a variety of
factors including price, corporate and regulatory requirements and
other conditions.
The Company repurchased 2,493 shares for $5,734, or $2.30 per
share, under the stock repurchase program during the fiscal year
ended February 28, 2021, and 10 shares for $25, or $2.50 per share
during the fiscal year ended February 29, 2020.
CRITICAL ACCOUNTING POLICIES:
See
Note 2 in the financial statements for the Company’s
accounting policies. Of the Company’s accounting policies,
the following are considered to be critical –
Inventories.
20
OFF-BALANCE SHEET ARRANGEMENTS
The
Company has not engaged in any off-balance sheet
arrangements.
BOOKINGS AND BACKLOG
During
the fiscal year ended February 28, 2021, the Company’s net
bookings were $11,827,000 in new orders as compared with
$11,224,000 for the year ended February 29, 2020, reflecting an
increase in bookings of approximately 5%. The Company’s backlog increased to $9,150,000
at February 28, 2021 as compared with $8,223,000 as of February 29,
2020, reflecting an increase of approximately 11% in
backlog.
In the event that bookings in the long-term decline significantly
below the level experienced in the last fiscal year, the Company
may be required to implement cost-cutting or other downsizing
measures to continue its business operations. Such cost-cutting
measures could inhibit future growth prospects. For the
years ended February 28, 2021 and February 29, 2020, the entire
backlog consisted of orders for electronic components.
See
Part I, Item 1, “Business – Marketing and
Customers” and “Backlog.”
FUTURE PLANS
The
Company plans to continue its efforts in selling commercial
semiconductors and power modules and to develop appropriate
strategic alliance arrangements. If these plans are successful, the
Company intends to aggressively pursue sales of these products
which could require the Company to invest in the building up of
inventories of finished goods and invest in capital equipment
(assembly and test) to replace older generation equipment and to
support new product manufacturing. Any financing necessary to fund
these initiatives could come from equipment leasing, among other
financing alternatives. Despite its intentions, the Company cannot
assure you that any of the above-described plans will be successful
in increasing liquidity, reducing costs or improving
sales.
On
April 16, 2021, Solitron Devices, Inc. (the "Company") closed on
the acquisition of a facility and real estate located in West Palm
Beach, Florida for a purchase price of $4,200,000 pursuant to the
Commercial Contract entered into on March 1, 2021. In connection
with the acquisition, the Company obtained mortgage financing from
Bank of America, N.A. in the amount of $2,940,000 to fund that
portion of the total purchase price. The Company expects to begin
making the necessary improvements to the property acquired in order
to completely relocate its manufacturing operations and corporate
headquarters later in the calendar year.
INFLATION
The
rate of inflation has not had a material effect on the
Company’s revenues and costs and expenses, and it is not
anticipated that inflation will have a material effect on the
Company in the near future.
SEASONALITY
The
Company’s bookings of new orders and sales are largely
dependent on congressional budgeting and appropriation activities
and the cycles associated therewith. The Company has historically
experienced a decreased level of bookings during the summer months
as a result of a slowdown in the level of budgeting and
appropriation activities.
FORWARD-LOOKING STATEMENTS
Some of
the statements in this Annual Report on Form 10-K 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 this Annual Report on Form 10-K, including those
identified below. We do not undertake any obligation to update
forward-looking statements, except as required by law.
21
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.
ITEM
7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Disclosure under this item is not required as the registrant is a
smaller reporting company.
22
ITEM 8.
FINANCIAL STATEMENTS AND
SUPPLEMENTARY
DATA.
Index
to Financial Statements
|
Page
|
23
Management’s Report
on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and
maintaining adequate internal control over financial reporting, as
such term is defined in the Securities Exchange Act Rule 13a-15(f).
Because of its inherent limitations, internal control over
financial reporting can provide only reasonable assurance that the
objectives of the control system are met and may not prevent or
detect misstatements. In addition, any evaluation of the
effectiveness of internal controls over financial reporting in
future periods is subject to the risk that those internal controls
may become inadequate because of a change in conditions, or that
the degree of compliance with the policies or procedures may
deteriorate.
Under
the supervision and with the participation of the Company’s
management, including the Chief Executive Officer (principal
executive officer), Chief Operating Officer (principal operating
executive) and the Interim Chief Financial Officer (principal
financial officer), the Company’s management conducted an
evaluation of the effectiveness of its internal control over
financial reporting as of February 28, 2021. In making this
assessment, the Company’s management used the criteria set
forth in the framework in “Internal Control –
Integrated Framework (2013)” issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on the
evaluation conducted under the framework in “Internal Control
– Integrated Framework (1992)”, the Company’s
management concluded that the Company’s internal control over
financial reporting was not effective as of February 28, 2021 due
to the material weakness described below. A material weakness is a
deficiency, or combination of deficiencies, in internal control
over financial reporting, such that a reasonable possibility that a
material misstatement of the annual or interim financial statements
will not be prevented or detected on a timely basis.
The
Company’s management determined that the following material
weaknesses existed as of February 28, 2021:
●
The Company
concluded that certain controls over accounting for work-in-process
inventory did not operate with sufficient precision. This material
weakness was first identified in the second quarter of fiscal year
2015. Due to the manual nature of the critical inventory accounting
process, the work in process inventory is susceptible to material
misstatements as there is a significant amount of costing performed
in electronic spreadsheets of the Company’s work in process
inventory. This weakness previously resulted in a material
misstatement of work in process inventory and as a result has
impacted other financial statement areas including total assets,
cost of sales and net income. This control deficiency, if not
remediated, could result in a future misstatement of the valuation
of work in process inventory.
●
Failure in the
design and operation of controls over the review and approval of
journal entries at a sufficient level of precision.
●
Lack of segregation
of duties within the financial reporting function resulting in
limited level of multiple reviews
This
Management’s Report of Internal Control over Financial
Reporting does not include an attestation report of our independent
registered public accounting firm due to the exemption provisions
established by the Securities and Exchange Commission for smaller
reporting companies.
As of
February 28, 2021, the Company’s Management has implemented
the following measures to remediate the internal control
deficiency:
●
Implementation of a
process for review and verification of all manually entered data
with respect to the valuation of work in process inventory by a
second person with an appropriate level of accounting knowledge,
experience and training.
●
Automatic
data/price verification procedures such as the lower of cost or
market value testing.
●
Analytical review
of inventory against expectations and benchmarks designed to
identify potential material misstatements in the inventory
valuation.
Additionally,
the Company now performs quarterly cycle counts compared to
semi-annual cycle counts performed in prior years.
The
Company’s management believes the foregoing efforts will
effectively remediate the material weakness after this control has
operated effectively for a reasonable period of time. As we
continue to evaluate and work to improve our internal control over
financial reporting, management may determine to take additional
measures to address the material weakness or determine to modify
the remediation plan described above.
Solitron
Devices, Inc.
June
21, 2021
24
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the
Shareholders and Board of Directors of
Solitron Devices,
Inc.
Opinion on the Financial Statements
We have
audited the accompanying balance sheets of Solitron Devices, Inc.
(the “Company”) as of February 28, 2021 and 2020 and
the related statements of operations, stockholders’ equity,
and cash flows for the years then ended, and the related notes
(collectively referred to as the “financial
statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of February 28, 2021 and 2020, and the results of
its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the
United States of America.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audit. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) ("PCAOB") and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audit we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis
for our opinion.
Critical Audit Matters
The
critical audit matters communicated below are matters arising from
the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee
and that: (1) relate to accounts or disclosures that are material
to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. We determined that
there are no critical audit matters.
/s/ MaloneBailey, LLP
www.malonebailey.com
We have
served as the Company's auditor since 2020.
Houston,
Texas
June
21, 2021
25
SOLITRON DEVICES, INC.
|
||
BALANCE SHEETS
|
||
AS OF FEBRUARY 28, 2021 AND FEBRUARY 29, 2020
|
||
(in
thousands)
|
||
|
February
28, 2021
|
February
29, 2020
|
|
|
|
ASSETS
|
|
|
CURRENT
ASSETS
|
|
|
Cash
and cash equivalents
|
$3,785
|
$1,332
|
Marketable
securities
|
248
|
164
|
Accounts
receivable
|
1,306
|
1,379
|
Inventories,
net
|
2,721
|
2,870
|
Prepaid
expenses and other current assets
|
372
|
118
|
TOTAL
CURRENT ASSETS
|
8,432
|
5,863
|
|
|
|
Property,
plant and equipment, net
|
281
|
405
|
Operating
lease - right-of-use asset
|
340
|
723
|
Other
assets
|
40
|
45
|
TOTAL
ASSETS
|
$9,093
|
$7,036
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
CURRENT
LIABILITIES
|
|
|
Accounts
payable
|
$165
|
$269
|
Customer
deposits
|
49
|
53
|
Operating
lease liability
|
377
|
417
|
Finance
lease liability
|
9
|
-
|
Notes
payable (PPP loan)
|
43
|
-
|
Accrued
expenses and other current liabilities
|
740
|
437
|
TOTAL
CURRENT LIABILITIES
|
1,383
|
1,176
|
|
|
|
Notes
payable (PPP loan), net of current
|
764
|
-
|
Operating lease liability, net of current
|
-
|
377
|
Finance lease liability, net of current
|
13
|
-
|
TOTAL
LIABILITIES
|
2,160
|
1,553
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
Preferred
stock, $.01 par value, authorized 500,000 shares, none
issued
|
-
|
-
|
Common
stock, $.01 par value, authorized 10,000,000 shares,
|
|
|
2,083,462
shares outstanding, net of 487,801 treasury shares
|
|
|
at
February 28, 2021; 2,062,949 shares outstanding, net
of
|
|
|
508,314
treasury shares at February 29, 2020, respectively
|
21
|
21
|
Additional
paid-in capital
|
1,834
|
1,834
|
Retained
Earnings
|
6,490
|
5,109
|
Less
treasury stock
|
(1,412)
|
(1,481)
|
TOTAL
STOCKHOLDERS’ EQUITY
|
6,933
|
5,483
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$9,093
|
$7,036
|
The accompanying notes are an integral part of the financial
statements.
26
SOLITRON DEVICES, INC.
|
||
STATEMENTS OF OPERATIONS
|
||
FOR THE YEARS ENDED FEBRUARY 28, 2021 AND FEBRUARY 29,
2020
|
||
(in
thousands except for share and per share amounts)
|
||
|
|
|
|
2021
|
2020
|
|
|
|
Net
sales
|
$10,534
|
$9,237
|
Cost
of sales
|
7,257
|
7,762
|
|
|
|
Gross
profit
|
3,277
|
1,475
|
|
|
|
Selling,
general and administrative expenses
|
2,108
|
2,104
|
|
|
|
Operating
income (loss)
|
1,169
|
(629)
|
|
|
|
Other
income (loss)
|
|
|
Interest
income
|
-
|
1
|
Interest
expense
|
(5)
|
-
|
Dividend
income
|
7
|
9
|
Realized
gain (loss) on investments
|
98
|
(28)
|
Unrealized
gain (loss) on investments
|
36
|
41
|
Other,
net
|
76
|
-
|
Total
other income (loss)
|
212
|
23
|
|
|
|
Net
income (loss)
|
$1,381
|
$(606)
|
|
|
|
Net
income (loss) per common share - basic and diluted
|
$0.67
|
$(0.30)
|
|
|
|
Weighted
average common shares outstanding - basic and diluted
|
2,067,829
|
2,010,168
|
The accompanying notes are an integral part of the financial
statements.
27
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|||||||
FOR THE YEARS ENDED FEBRUARY 28, 2021 AND FEBRUARY 29,
2020
|
|||||||
(In thousands, except for number of shares)
|
|||||||
|
|
|
|
|
|
|
|
|
Common
Stock
|
Additional
|
Treasury
|
|
|
||
|
Number
|
Treasury
|
|
Paid-in
|
Stock
|
Retained
|
|
|
of
Shares
|
Shares
|
Amount
|
Capital
|
Amount
|
Earnings
|
Total
|
|
|
|
|
|
|
|
|
Balance,
February 28, 2019
|
2,571,263
|
(669,304)
|
$19
|
$1,834
|
$(1,761)
|
$5,806
|
$5,898
|
|
|
|
|
|
|
|
|
Adjustment
for Adoption of ASC 842
|
-
|
-
|
-
|
-
|
-
|
(91)
|
(91)
|
Stock
based compensation
|
-
|
161,000
|
2
|
-
|
280
|
-
|
282
|
Repurchase
of shares
|
-
|
(10)
|
-
|
-
|
-
|
-
|
-
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(606)
|
(606)
|
Balance,
February 29, 2020
|
2,571,263
|
(508,314)
|
$21
|
$1,834
|
$(1,481)
|
$5,109
|
$5,483
|
|
|
|
|
|
|
|
|
Repurchase
of shares
|
-
|
(2,493)
|
-
|
-
|
(6)
|
-
|
(6)
|
Stock
based compensation
|
-
|
23,006
|
-
|
-
|
75
|
-
|
75
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
1,381
|
1,381
|
Balance,
February 28, 2021
|
2,571,263
|
(487,801)
|
$21
|
$1,834
|
$(1,412)
|
$6,490
|
$6,933
|
The accompanying notes are an integral part of the financial
statements.
28
SOLITRON DEVICES, INC.
|
||
STATEMENTS OF CASH FLOWS
|
||
FOR THE YEARS ENDED FEBRUARY 28, 2021 AND FEBRUARY 29,
2020
|
||
(in thousands)
|
||
|
2021
|
2020
|
|
|
|
Net income
(loss)
|
$1,381
|
$( 606)
|
Adjustments to
reconcile net income (loss)
|
|
|
to net cash used in
operating activities:
|
|
|
Depreciation
and amortization
|
225
|
220
|
Operating
lease expense
|
383
|
358
|
Net
realized and unrealized (gains) on investments
|
(134)
|
(13)
|
Stock
based compensation
|
75
|
282
|
Changes
in Operating Assets and Liabilities:
|
|
|
Accounts
receivable
|
73
|
450
|
Inventories
|
149
|
1,088
|
Prepaid
expenses and other current assets
|
(254)
|
38
|
Other
assets
|
5
|
2
|
Payments
on operating lease liabilities
|
(417)
|
(379)
|
Accounts
payable
|
(104)
|
(364)
|
Customer
deposits
|
(4)
|
48
|
Accrued expenses,
other current and non-current liabilities
|
296
|
(6)
|
Net
cash provided by operating activities
|
1,674
|
1,118
|
|
|
|
Investing
activities
|
|
|
Proceeds
from sale of marketable securities
|
530
|
73
|
Purchases
of marketable securities
|
(477)
|
(145)
|
Purchases
of property and equipment
|
(75)
|
(108)
|
Net
cash (used in) investing activities
|
(22)
|
(180)
|
|
|
|
Financing
activities
|
|
|
Proceeds
from SBA Paycheck Protection Program loan
|
807
|
-
|
Purchase
of treasury stock
|
(6)
|
-
|
Net
cash provided by financing activities
|
801
|
-
|
|
|
|
Net increase in
cash and cash equivalents
|
2,453
|
938
|
Cash and cash
equivalents - beginning of the year
|
1,332
|
394
|
Cash and cash
equivalents - end of period
|
$3,785
|
$1,332
|
|
|
|
Non-cash
transactions
|
|
|
Non
cash increase in plant, property and equipment
|
$26
|
$-
|
Adjustment
for Adoption of ASC 842
|
$-
|
$(91)
|
Capitalization
of ROU asset and liability
|
$-
|
$1,081
|
The accompanying notes are an integral part of the financial
statements.
29
SOLITRON
DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1.
BUSINESS
DESCRIPTION
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.
2.
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The
financial statements have been prepared on the accrual basis of
accounting in conformity with accounting principles generally
accepted in the United States of America.
Cash and Cash Equivalents
Cash
and cash equivalents include demand deposits and money market
accounts.
Investment in Securities
Investment
in Securities includes investments in common stocks and bonds.
Investments in securities are reported at fair value with changes
in unrecognized gains or losses included in other income on the
income statement.
The
following table summarizes the Company's available-for-sale
investments (in 000’s):
February 28,
2021
|
|
Gross
|
Gross
|
|
Marketable
Securities:
|
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
Common
Stocks
|
$224
|
$46
|
$(22)
|
$248
|
February 29,
2020
|
|
Gross
|
Gross
|
|
Marketable
Securities:
|
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
Common
Stocks
|
$155
|
$16
|
$(7)
|
$164
|
At
February 28, 2021 and February 29,
2020, the deferred tax liability related to unrecognized
gains and losses on short-term investments was $0.
Fair Value of Financial Instruments
Accounting
Standards Codification (“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.
30
The
Company’s securities are subject to level 1 fair value
measurement.
The
carrying amounts of the Company’s short-term financial
instruments, including cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses and other
liabilities approximate their fair value due to the relatively
short period to maturity for these instruments.
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 amount.
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.
Inventories
Inventories
are stated at the lower of cost and net realizable value. 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
quantity 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 maintains a three inch
wafer fab which procures raw wafers and produces finished wafers
based on management’s estimates of projected future demand.
Finished wafers are considered work-in-process since they are
usable for many years, and in some circumstances can be used on
more than one finished product depending on customer
parameters.
The Company does not classify a portion of inventories as
non-current since we cannot reasonably estimate based on the length
of our operating cycle which items will or will not be used within
twelve months.
The Company’s inventory valuation policy is as
follows:
Raw material /Work
in process:
All material
acquired or processed in the last two fiscal years is valued at the
lower of its acquisition cost or net realizable value, except for
wafers which function under a three- year policy. All material not
used after two fiscal years is fully reserved for except wafers
which are reserved for after three years. Finished wafers produced
in our wafer fab are stored in the wafer bank and are considered
work-in-process. Raw material in excess of five years’ usage
that cannot be restocked, and slow-moving work in process are
reserved for.
Finished
goods:
All finished goods
with firm orders for later delivery are valued (material and
overhead) at the lower of cost or net realizable value. 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. Manufacturing overhead costs are
allocated to finished goods and work in process inventory as a
ratio to direct labor costs.
Property, Plant, Equipment, and Leasehold Improvements
Property,
plant, and equipment is recorded at cost. Major renewals and
improvements are capitalized, while maintenance and repairs that do not
extend their expected life are expensed as incurred. Depreciation
is provided on a straight-line basis over the estimated useful
lives of the related assets. Leasehold improvements are amortized
over the shorter of the lease term or the lives of the related
assets:
Leasehold
Improvements 10 years
Machinery
and Equipment 5 years
31
Concentrations of Credit Risk
Financial
instruments, which potentially subject the Company to concentration
of credit risk, consist principally of cash and account
receivables. The Company places its cash with high credit quality
institutions. At times, such amounts may be in excess of the
Federal Deposit Insurance Corporation (“FDIC”)
insurance limits. The Company has not experienced any losses in
such accounts and believes that it is not exposed to any
significant credit risk on the accounts. As of February 28, 2021,
and February 29, 2020, all non-interest bearing checking accounts
were FDIC insured to a limit of $250,000. Deposits in excess of
FDIC insured limits were approximately $2,757,000 at February 28,
2021 and $863,000 at February 29, 2020. With respect to the account
receivables, most of the Company’s products are custom made
pursuant to contracts with customers whose end-products are sold to
the United States Government. The Company performs ongoing credit
evaluations of its customers’ financial condition and
maintains allowances for potential credit losses. Actual losses and
allowances have historically been within management’s
expectations.
Revenue Recognition
On May 28, 2014, the Financial Accounting Standards Board (FASB)
issued Accounting Standard Update (ASU) No.
2014-09, Revenue from Contracts with
Customers (Topic 606), which
requires an entity to recognize the amount of revenue to which it
expects to be entitled for the transfer of promised goods and
services to customers. The ASU replaces most existing revenue
recognition guidance in the United States. The standard permits the
use of either the full retrospective or modified retrospective
transition method.
Based on a review of its customer contracts, the Company has
determined that revenue on the majority of its customer contracts
will continue to be recognized at a point in time, generally upon
shipment of products, consistent with the Company’s
historical revenue recognition model.
The core principle of the guidance in Topic 606 is that an entity
should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services.
To achieve that core principle, the Company applied the following
steps:
1. Identify the contract(s) with a customer.
The Company designs, develops, manufactures and markets solid-state
semiconductor components and related devices. The Company’s
products are used as components primarily in the military and
aerospace markets.
The Company’s revenues are from purchase orders and/or
contracts with customers associated with manufacture of products.
We account for a contract when it has approval and commitment from
both parties, the rights of the parties are identified, payment
terms are identified, the contract has commercial substance and
collectability of consideration is probable.
2. Identify the performance obligations in the
contract.
The majority of the Company’s purchase orders
or contracts with customers contain a single performance
obligation, the shipment of products.
3. Determine the transaction price.
The transaction price reflects the Company’s expectations
about the consideration it will be entitled to receive from the
customer at a fixed price per unit shipped based on the terms of
the contract or purchase order with the customer. To
the extent our actual costs vary from the fixed price that was
negotiated, we will generate more or less profit or could incur a
loss.
4. Allocate the transaction price to the performance obligations in
the contract.
5. Recognize revenue when (or as) the Company satisfies a
performance obligation.
This performance obligation is satisfied when control of the
product is transferred to the customer, which occurs upon shipment
or delivery. The Company receives purchase orders for products to
be delivered over multiple dates that may extend across reporting
periods. The Company accounting
policy treats shipping and handling activities as a fulfillment
cost. The Company invoices
for each delivery upon shipment and recognizes revenues at the
fixed price for each distinct product delivered when transfer of
control has occurred, which is generally upon
shipment.
32
In addition, the Company may have a contract or purchase order to
provide a non-recurring engineering service to a customer. These
contracts are reviewed and performance obligations are
determined and we recognize revenue at the point in time in
which each performance obligation is fully satisfied.
Effective January 1, 2018, we adopted Topic 606. Since all open
contracts at that time were based on a point-in-time recognition
model for revenue, there was no impact to retained earnings or
revenue. The future impact of Topic 606 is dependent on the mix and
nature of specific customer contracts.
We recognize revenue on sales to distributors when the distributor
takes control of the products ("sold-to" model). We have
agreements with distributors that allow distributors a limited
credit for unsaleable products, which we refer to as a "scrap
allowance." Consistent with industry practice, we also have a
"stock, ship and debit" program whereby we consider requests by
distributors for credits on previously purchased products that
remain in distributors' inventory, to enable the distributors to
offer more competitive pricing. We have contractual
arrangements whereby we provide distributors with protection
against price reductions initiated by us after product is sold by
us to the distributor and prior to resale by the distributor. In
addition, we have a termination clause in one of our distributor
agreements that would allow for a full credit for all inventory
upon 60 days notice of terminating the agreement.
We recognize the estimated variable consideration to be received as
revenue and record a related accrued expense for the consideration
not expected to be received, based upon an estimate of product
returns, scrap allowances, "stock, ship and debit" credits, and
price protection credits that will be attributable to sales
recorded through the end of the period. We make these
estimates based upon sales levels to our customers during the
period, inventory levels at the distributors, current and projected
market conditions, and historical experience under the programs.
Our estimates require the exercise of significant judgments.
We believe that we have a reasonable basis to estimate future
credits under the programs.
Related Party Transactions
The
Company currently purchases and has purchased in the past die and
wafers, as specified by the Company's customers, from ES
Components. Mr. Aubrey is a minority owner, and an immediate family
member of Mr. Aubrey is the majority owner of ES Components. For
the fiscal year ended February 28, 2021, the Company purchased
$65,892 of die and $11,600 of used equipment from ES Components.
For the fiscal year ended February 29, 2020, the Company purchased
$58,395 of die from ES Components. The Company has included these
expenses in cost of goods sold in the accompanying statement of
operations. The Company occasionally makes sales to ES Components.
For the fiscal years ended February 28, 2021 and February 29, 2020
sales were $0.
Income Taxes
Income
taxes are accounted for under the asset and liability method of ASC
740-10, “Income Taxes”. Deferred tax assets and
liabilities are recognized for the expected future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under ASC 740-10, the effect on deferred tax
assets and liabilities or a change in tax rate is recognized in
income in the period that includes the enactment date. Deferred tax
assets are reduced to estimated amounts to be realized by the use
of a valuation allowance.
The
Company adopted guidance related to accounting for uncertainty in
income taxes in accordance with ASC 740-10 and began evaluating tax
positions utilizing a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position
will be sustained upon examination based on the technical merits of
the position. The second step is to measure the benefit to be
recorded from tax positions that meet the more-likely-than-not
recognition threshold by determining the largest amount of tax
benefit that is greater than 50 percent likely of being
realized upon ultimate settlement and recognizing that amount in
the financial statements. Solitron has adopted ASC 740-10 and no
material impact on its financial condition, results of operations,
cash flows, or disclosures occurred upon adoption.
Refer to Note 7 for additional information on income
taxes.
33
Net Income (Loss) Per Common Share
Net
income/loss per common share is presented in accordance with ASC
260-10 “Earnings per Share.” Basic earnings per common
share are computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per common
share incorporate the incremental shares issuable upon the assumed
exercise of stock options to the extent they are not anti-dilutive
using the treasury stock method. The Company had no potentially
dilutive securities outstanding during the fiscal years ended
February 28, 2021 and February 29, 2020, therefore there is no
effect from dilution on earnings per share.
Impairment of long-lived assets
Potential
impairments of long-lived assets are reviewed annually or when
events and circumstances warrant an earlier review. In
accordance with ASC Subtopic 360-10, "Property, Plant and Equipment
– Overall," impairment is determined when estimated future
undiscounted cash flows associated with an asset are less than the
asset’s carrying value.
Financial Statement Estimates
The
preparation of 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 revenue recognition, stock-based compensation, depreciable
life of property and equipment, accounts receivable allowance,
deferred tax valuation allowance, and allowance for inventory
obsolescence.
Stock based compensation
The
Company records stock-based compensation in accordance with the
provisions of ASC Topic 718, "Compensation-Stock Compensation,"
which establishes accounting standards for transactions in which an
entity exchanges its equity instruments for goods or services.
Under ASC Topic 718, the Company recognizes an expense for the fair
value of outstanding stock options and grants as they vest, whether
held by employees or others. There are no stock options outstanding
and no options were granted or vested during the fiscal years ended
February 28, 2021 and February 29, 2020 under the Company’s
2019 Stock Incentive Plan.
Recent Accounting Pronouncements
None
3. REVENUE
RECOGNITION
As of
February 28, 2021, and February 29, 2020, sales returns and
allowances accrual activity is shown below:
|
February
28, 2021
|
February
29, 2020
|
Beginning
Balance
|
$126,000
|
$88,000
|
Accrued
Allowances
|
228,000
|
38,000
|
Ending
Balance
|
$354,000
|
$126,000
|
As
noted in Note 2 above, one of our distributor agreements has
a termination clause that would allow
for a full credit for all inventory upon 60 days notice of
terminating the agreement. As of February 28, 2021, and February
29, 2020, the inventory balance at that distributor was $1,854,000
and $1,387,000, respectively. Based upon sales levels to and by the
distributor during the period, inventory levels at the distributor,
current and projected market conditions, and historical experience
under the program, we believe it is highly unlikely that the
distributor would exercise termination. Should it occur, we believe
the products could be sold to other distributors or held in
inventory for future sale.
The Company warrants that its products, when delivered, will be
free from defects in material workmanship under normal use and
service. The obligations are limited to replacing, repairing, or
reimbursing for, at the option of the Company, any products that
are returned within one year after the date of shipment. The
Company does not reserve for potential warranty costs based on
historical experience and the nature of its cost tracking
system.
34
4. INVENTORIES
As of
February 28, 2021, and February 29, 2020, inventories, net of
reserves, consist of the following:
|
February
28, 2021
|
February
29, 2020
|
Raw
Materials
|
$842,000
|
$766,000
|
Work-In-Process
|
1,830,000
|
2,058,000
|
Finished
Goods
|
49,000
|
46,000
|
Totals
|
$2,721,000
|
$2,870,000
|
Wafer
related inventory, which includes raw wafers, work-in-process
wafers, and wafer bank (completed wafers that are available to be
consumed in the Company’s products), net of reserves, totaled
$1,154,000 as of February 28, 2021 and $1,239,000 as of February
29, 2020. Wafer production was temporarily curtailed during fiscal
2020 due to implementation of an improvement plan, which was
completed in the first quarter of fiscal 2021. As of February 28,
2021, 100% of the wafer bank inventory consisted of wafers
manufactured between calendar year 2018 and 2021. We do not expect
all of our wafer inventory to be consumed within twelve months;
however, since it is not possible to know which wafers will or will
not be used, we classify all our inventory as current.
5. PROPERTY, PLANT AND
EQUIPMENT
As of
February 28, 2021, and February 29, 2020, property, plant, and
equipment consist of the following:
|
February
28, 2021
|
February
29, 2020
|
Leasehold
Improvements
|
$287,000
|
$287,000
|
Motor
Vehicles
|
70,000
|
70,000
|
Computer
Equipment
|
27,000
|
27,000
|
Machinery
and Equipment
|
4,011,000
|
3,910,000
|
Subtotal
|
4,395,000
|
4,294,000
|
Less:
Accumulated Depreciation and Amortization
|
(4,114,000)
|
(3,889,000)
|
Net
Property, Plant and Equipment
|
$281,000
|
$405,000
|
Depreciation
and amortization expense was $225,000 and $220,000 for the fiscal
years ended February 28, 2021 and February 29, 2020, respectively,
and is included in cost of sales in the accompanying statements of
operations.
6.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of
February 28, 2021, and February 29, 2020, accrued expenses and
other current liabilities consist of the following:
|
February
28, 2021
|
February
29, 2020
|
Payroll
and related employee benefits
|
$293,000
|
$303,000
|
Legal
fees
|
3,000
|
-
|
Property,
Sales and Franchise taxes
|
15,000
|
8,000
|
Return
Allowance
|
354,000
|
126,000
|
Bonus
Accrual
|
70,000
|
-
|
Accrued
Interest on PPP loan
|
5,000
|
-
|
Totals
|
$740,000
|
$437,000
|
35
7.
INCOME TAXES
The Company did not have a provision for income taxes (current or
deferred tax expense) for tax years ended February 28, 2021 and
February 29, 2020.
A
reconciliation of the U.S. federal statutory tax rate to the
Company’s effective tax rate for fiscal year ended February
28, 2021 and February 29, 2020 is as follows:
|
2021
|
|
2020
|
|
Net
Income/(Loss) Before Taxes
|
1,381,000
|
|
(606,000)
|
|
|
|
|
|
|
Provision/(Benefit)
at statutory rate
|
290,000
|
21.0%
|
(127,000)
|
21.0%
|
State
Tax Provision/(Benefit) net of federal benefit
|
50,000
|
3.6%
|
(19,000)
|
3.0%
|
Permanent
Book/Tax Differences
|
-
|
0.0%
|
27,000
|
-4.5%
|
Change
in Valuation Allowance
|
(340,000)
|
-24.6%
|
138,000
|
-22.8%
|
Other
|
-
|
0.0%
|
(19,000)
|
3.1%
|
Income
Tax Provision / (Benefit)
|
-
|
|
-
|
|
Effective
income tax rate
|
0.00%
|
|
0.00%
|
|
Total
net deferred taxes are comprised of the following at February 28,
2021 and February 29, 2020:
Deferred
Tax Asset (Liability):
|
2021
|
2020
|
Accrued
Liabilities
|
$56,736
|
$44,177
|
Inventory
Allowance
|
1,406,453
|
1,339,208
|
Section
263A Capitalized Costs
|
53,799
|
59,095
|
Net
Operating Loss Carryforwards
|
2,456,278
|
2,865,302
|
Other
|
14,902
|
32,972
|
Depreciation
|
(6,058)
|
(18,952)
|
Total
Deferred Tax Assets (Liabilities)
|
3,982,110
|
4,321,802
|
Valuation
allowance
|
(3,982,110)
|
(4,321,802)
|
Total Net Deferred Tax Assets
(Liabilities)
|
$-
|
$-
|
A valuation allowance is recorded to reduce the deferred tax asset
if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax asset will not be
realized. After consideration of all the evidence, both positive
and negative, management has determined that a valuation allowance
of $3,982,110 and $4,321,802 for the years ended on February 28,
2021 and February 29, 2020 respectively, is necessary to reduce the
deferred tax asset to the amount that will more likely than not be
realized.
On March 27, 2020, the Coronavirus Aid, Relief and Economic
Security (“CARES”) Act was enacted and signed into law.
Certain provisions of the CARES Act could impact the 2019 income
tax provision computations of the Company and will be reflected in
the period of enactment (tax year 2020). The CARES Act, among other
things, contains modifications on the limitation of business
interest expense under Section 163(j), allow for NOL carryovers and
carrybacks to offset 100% of taxable income for taxable years
before 2021, and includes a technical correction to the TCJA with
respect to Qualified Improvement Property ("QIP") where such
property has a 15-year recovery period for purposes of the general
depreciation system of Section 168(a). The Company has evaluated
the impact of the CARES Act, and it believes that none of the
modifications or tax law changes will result in any material
benefit.
36
As of February 28, 2021, the Company estimates it has approximately
$10.1 million of Federal and $9.3 million of state net operating
loss (“NOL”) carryforwards as compared to $11.8 million
of Federal and $11 million of state net operating loss
carryforwards as of February 29, 2020. Of the Federal NOL
carryforwards, $0 expired in 2021 and the remaining balance will
expire between 2022 and 2040. Of the state NOL carryforwards,
$0 expired in 2021, and the remaining balance will expire
between 2022 and 2040. 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.
Under Sections 382 and 383 of the Internal Revenue Code of 1986, as
amended, (the Code), substantial changes in the Company’s
ownership may limit the amount of net operating loss and research
and development credit carryforwards that could be used annually in
the future to offset taxable income. A formal Section 382 study has
not been completed to determine if an ownership change has occurred
and if its net operating losses are subject to an annual
limitation. Such annual limitations could affect the utilization of
NOL and tax credit carryforwards in the future.
The Federal net operating loss carryforwards will expire as
follows:
Fiscal Year Ending
February 28/29
|
Amount
|
2023
|
$837,000
|
2029
|
7,514,000
|
2037
|
322,000
|
2038
|
187,000
|
2039
|
986,000
|
2040
|
285,000
|
Total
|
$10,131,000
|
8.
STOCK OPTIONS
There
are no stock options outstanding and no options have been granted
during the fiscal years ended February 28, 2021 and February 29,
2020 under the Company’s 2019 Stock Incentive
Plan.
9.
EMPLOYEE BENEFIT PLANS
The
Company has a 401k and Profit Sharing Plan (the "Profit Sharing
Plan") in which substantially all employees may participate after
three months of service. Contributions to the Profit Sharing Plan
by participants are voluntary. The Profit Sharing Plan allows for
matching and discretionary employer contributions. In addition, the
Company may make additional contributions at its discretion. The
Company did not contribute to the Profit Sharing Plan during the
fiscal years ended February 28, 2021 and February 29,
2020.
37
10.
DISAGGREGATION OF REVENUES AND MAJOR CUSTOMERS
Revenues
from domestic and export sales to unaffiliated customers for the
fiscal years ended February 28, 2021 and February 29, 2020 are as
follows:
Geographic
Region
|
February
28, 2021
|
February
29, 2020
|
Europe
and Australia
|
$-
|
$-
|
Canada
and Latin America
|
14,000
|
21,000
|
Far
East and Middle East
|
12,000
|
1,000
|
United
States
|
10,508,000
|
9,215,000
|
Totals
|
$10,534,000
|
$9,237,000
|
Revenues
from domestic and export sales are attributed to global geographic
regions according to the location of the customer’s primary
manufacturing or operating facilities.
For the fiscal years ended February 28, 2021 and February 29, 2020,
approximately 77% and 78%, respectively, of the Company’s
sales have been attributable to contracts with customers
whose products are sold to the United States government. The
remaining 23% and 22%, respectively of sales are for non-military,
scientific and industrial applications, or to distributors where we
do not have end user information.
Sales
to the Company's major customers accounted for 75% of net sales for
the year ended February 28, 2021 as compared with 70% of the Company's net sales for the
year ended February 29, 2020. For the year ended February 28, 2021,
sales to Raytheon Technologies Corporation accounted for
approximately 49% of net sales, sales to USI electronics accounted
for 15% of net sales, and sales to L3Harris Technologies accounted
for 11% of net sales. For the year ended February 29, 2020, sales
to Raytheon Technologies Corporation accounted for approximately
52% of net sales and sales to USI Electronics accounted for 18% of
net sales.
11.
MAJOR SUPPLIERS
For the year ended February 28, 2021, purchases from the
Company’s top supplier, Egide USA accounted for 18% of
the Company's total purchases of production materials. Other
suppliers that represented more than 10% of total purchases were
Wuxi Streamtek, which accounted for 13% of total purchases,
SemiDice, which accounted for 10% of total purchases, and CPS
Technologies, which accounted for 10% of total purchases.
For
the year ended February 29, 2020, purchases from the
Company’s top supplier, Egide USA, accounted for 18% of
the Company's total purchases of production materials, and all
other suppliers were individually less than 10% of purchases.
12.
COMMITMENTS AND CONTINGENCIES
Finance lease:
During fiscal 2021 the Company entered into a 36-month finance
lease for $27,000 of computer equipment. The Company does not
consider the lease to be material to the Company’s financial
statements. As of February 28, 2021 fiscal year end, the carrying
value of the asset was $22,000 and was included in Property, plant
and equipment on the balance sheet.
Operating lease:
On
October 1, 2014, the Company extended its current lease with its
landlord, CF EB REO II LLC, for the occupancy and use of its 47,000
square foot facility located at 3301 Electronics Way, West Palm
Beach, Florida 33407 (the “Lease”). The property
subsequently was sold to La Boheme Properties, Inc., a Florida
corporation, which is the current landlord as the Lease was
assigned to them. The term of the Lease ends on December 31, 2021.
The base rent provided in the Lease is $31,555 per month, excluding
sales tax. 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. The Company does not plan on
exercising its option.
Commencing
on January 1, 2016 and on the first day of January of every
subsequent year, the base rent will be increased to compensate for
changes in the cost of living, provided that in no event will the
base rent be increased by less than three percent nor more than
five percent annually.
We adopted ASU No. 2016-02—Leases (Topic 842), as amended, as
of March 1, 2019, using the modified retrospective approach. The
modified retrospective approach provides a method for recording
existing leases at adoption and in comparative periods that
approximates the results of a full retrospective
approach.
38
Adoption of the new standard resulted in the recording of an
additional net operating lease right-of-use asset of approximately
$1,081,000 and an operating lease liability of approximately
($1,172,000), as of March 1, 2019. The ($91,000) difference between
the additional lease assets and lease liabilities was recorded as
an adjustment to retained earnings. Operating lease assets
represent the Company’s right to use an underlying asset for
the lease term and lease liabilities represent its obligation to
make lease payments arising from the lease. The standard did not
materially impact our equity and had no impact on cash
flows.
As our operating lease does not provide an implicit interest rate,
we estimated a current borrowing rate of 6.25% in determining the
present value of lease payments.
The balance sheet classification of operating lease assets and
liabilities were as follows:
Balance Sheet Classification
|
February 28, 2021
|
Assets
|
|
Operating
lease right-of-use assets, March 1, 2020
|
$723,000
|
Amortization
for the fiscal year ended February 28, 2021
|
(383,000)
|
Total
operating lease right-of-use asset, February 28, 2021
|
$340,000
|
Liabilities
|
|
Current
|
|
Operating
lease liability, short-term
|
$377,000
|
Non-current
|
|
Operating
lease liability, long-term
|
-
|
Total
lease liabilities
|
$377,000
|
Balance Sheet Classification
|
February 29, 2020
|
Assets
|
|
Operating
lease right-of-use assets, March 1, 2019
|
$1,081,000
|
Amortization
for the fiscal year ended February 29, 2020
|
(358,000)
|
Total
operating lease right-of-use asset, February 29, 2020
|
$723,000
|
Liabilities
|
|
Current
|
|
Operating
lease liability, short-term
|
$417,000
|
Non-current
|
|
Operating
lease liability, long-term
|
377,000
|
Total
lease liabilities
|
$794,000
|
Future minimum operating lease payments, excluding Florida sales
tax, as of February 28, 2021 under non-cancelable operating leases
are as follows:
Fiscal
Year Ending February 28
|
Amount
|
2022
|
388,000
|
Total
Future Undiscounted Cash Flows
|
$388,000
|
Less
Imputed Interest to be recognized in lease expense
|
11,000
|
Operating
Lease Liabilities, as reported
|
$377,000
|
Actual
rent expense paid for the fiscal years ended February 28, 2021 and
February 29, 2020 including Florida sales tax was approximately
$484,000 and $472,000, respectively.
39
13.
NOTES PAYABLE
On July 21, 2020, the Company received loan proceeds of $807,415
under the Paycheck Protection Program (the “PPP Loan”).
The Paycheck Protection Program (“PPP”) was established
under the Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”) and is administered by the U.S. Small
Business Administration (“SBA”). The PPP Loan to the
Company is being made through Bank of America, N.A., a national
banking association. The PPP Loan matures on July 21, 2025 and
bears interest at a rate of 1% per annum. Payments of principal and
interest on the loan were initially deferred until January 1, 2021
and based on applying for forgiveness the deferral was extended
through October 31, 2021. The Note may be prepaid by the Company at
any time prior to maturity with no prepayment penalties. Funds from
the PPP Loan may only be used for payroll costs, costs used to
continue group health care benefits, mortgage payments, rent,
utilities, and interest on certain other debt obligations. The
Company used the entire PPP Loan amount for qualifying expenses.
Under the terms of the PPP, certain amounts of the PPP Loan may be
forgiven if they are used for qualifying expenses as described in
the CARES Act. On June 12, 2021, the SBA notified Bank of America
that the Company’s application for complete forgiveness of
its PPP loan was approved (see Note 15: Subsequent
Events).
14.
STOCKHOLDERS’ EQUITY
Repurchase
Program
The
Board of Directors has authorized a stock repurchase program of up
to $1.0 million of its outstanding common stock Purchases under the
program may be made through the open market or privately negotiated
transactions as determined by the Company’s management, and
in accordance with the requirements of the Securities and Exchange
Commission. The timing and actual number of shares repurchased will
depend on variety of factors including price, corporate and
regulatory requirements and other conditions.
During
the fiscal year ended February 29, 2020 the Company repurchased 10
shares of common stock. During the fiscal year ended February 28,
2021 the Company repurchased 2,493 shares of common
stock.
Stock
Compensation
On June
28, 2019 the Board approved restricted stock grants totaling
161,000 shares: 120,000 shares to COO and President Mark Matson,
15,000 shares to CEO Tim Eriksen, 8,000 shares to Board Chairman
David Pointer, and 6,000 shares each to Directors John Chiste,
Dwight Aubrey, and Charles Gillman. Fair value was approximately
$282,000 based on then current price of $1.75 per
share.
On
November 13, 2020, the Company granted Mr. Eriksen and Mr. Matson
the option to receive half of their bonuses in shares instead of
cash, which both elected. Mr. Eriksen received 7,669 shares, with a
fair market value of $25,000, or $3.26 per share, and Mr. Matson
received 15,337 shares, with a fair market value of $50,000, or
$3.26 per share. Shares were issued under the 2019 Stock Incentive
Plan.
15.
SUBSEQUENT EVENTS
On
April 16, 2021, Solitron Devices, Inc. (the "Company") closed on
the acquisition of a facility and real estate located in West Palm
Beach, Florida for a purchase price of $4,200,000.00 pursuant to
the Commercial Contract entered into on March 1, 2021. In
connection with the acquisition, the Company obtained mortgage
financing from Bank of America, N.A. in the amount of $2,940,000 to
fund that portion of the total purchase price. The Company expects
to begin making the necessary improvements to the property acquired
in order to completely relocate its manufacturing operations and
corporate headquarters later in the calendar year.
On June
12, 2021, the SBA notified Bank of America that the Company’s
application for complete forgiveness of its PPP loan was
approved.
40
ITEM
9.
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEM
9A.
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 Interim 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 Annual Report. Based upon that evaluation, our
Chief Executive Officer and Interim Chief Financial Officer
concluded that our disclosure controls and procedures were not
effective as of February 28, 2021 due to the material weakness
described above under “Management’s Report on Internal
Control over Financial Reporting”. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect all
misstatements or fraud. Any control system, no matter how well
designed and operated, is based upon certain assumptions and can
provide only reasonable, not absolute, assurance that its
objectives will be met. This
Annual Report does not include an attestation report of our
registered public accounting firm regarding internal control over
financial reporting. However, giving full consideration to
the material weakness and the remediation plan, the Company’s
management has concluded that the Company’s financial
statements included in this Annual Report fairly present, in all
material respects, the Company’s financial condition and
results of operations as of and for the year ended February 28,
2021.
Changes in Internal Control over Financial Reporting.
Other
than the changes referenced above under “Management’s
Report on Internal Control over Financial Reporting”, there
were no changes in the Company’s internal control over
financial reporting during the fourth quarter ended February 28,
2021 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
ITEM
9B.
OTHER INFORMATION
None.
41
PART III
ITEM
10.
DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE
GOVERNANCE.
Board of Directors
The
following table sets forth certain information concerning the
current directors:
Name
|
|
Age
|
|
Positions
with the Company
|
|
Class
|
|
Year
Term
Expires
and Class(4)
|
Tim
Eriksen
|
|
52
|
|
Chief
Executive Officer, Interim Chief Financial Officer and
Director
|
|
Class
II
|
|
2018
|
Dwight
P. Aubrey(1)(2)
|
|
74
|
|
Director
|
|
Class
I
|
|
2017
|
John F.
Chiste(1)(3)
|
|
65
|
|
Director
|
|
Class
I
|
|
2017
|
David
W. Pointer(2)(3)
|
|
51
|
|
Chairman
|
|
Class
II
|
|
2018
|
Charles
Gillman(2)(3)
|
|
50
|
|
Director
|
|
Class
III
|
|
2019
|
________________
(1)
Member of the Audit
Committee.
(2)
Member of the
Compensation Committee.
(3)
Member of the
Nominating Committee.
(4)
The last annual
meeting of stockholders was held on August 26, 2016.
Tim Eriksen
Mr. Eriksen was elected a director on August 4, 2015. Mr. Eriksen
served as a member of the Audit Committee from October 14, 2015
through July 22, 2016 when he resigned from the Audit Committee and
was named Chief Executive Officer and Interim Chief Financial
Officer. Mr. Eriksen was appointed Chief Executive Officer and
Interim Chief Financial Officer of the Company on July 22, 2016.
Mr. Eriksen founded Eriksen Capital Management LLC ("ECM"), a
Lynden, Washington based investment advisory firm, in 2005. Mr.
Eriksen is the Managing Member of ECM and Cedar Creek Partners LLC
("CCP"), a hedge fund founded in 2006 that focuses primarily on
micro-cap and small cap stocks. Prior to founding ECM, Mr. Eriksen
worked for Walker’s Manual, Inc., a publisher of books and
newsletters on micro-cap stocks, unlisted stocks and community
banks. Earlier in his career, Mr. Eriksen worked for Kiewit Pacific
Co, a subsidiary of Peter Kiewit Sons, as an administrative
engineer on the Benicia Martinez Bridge project. Mr. Eriksen
received a B.A. from The Master’s University and an M.B.A.
from Texas A&M University. Mr. Eriksen was appointed as a
director and member of the Audit Committee of Novation Companies
Inc. on April 12, 2018, and elected a director of TSR Inc. on
October 22,2019, and appointed to the Audit, Nominating,
Compensation, and Special Committee on December 30,
2019.
The Company believes that Mr. Eriksen’s extensive financial
expertise, including knowledge of unlisted micro-cap companies and
capital allocation, and his role as an officer of one of the
Company's largest institutional stockholders highly qualifies him
to serve as a member of the Board of Directors.
Dwight P. Aubrey
Mr.
Aubrey was appointed a director on January 12, 2015. Mr. Aubrey
also serves as Chairman of the Compensation Committee and a member
of the Audit Committee. Mr. Aubrey served as the President of ES
Components LLC, a franchised distributor for wire bondable die and
surface mountable components used by hybrid and semiconductor
component manufacturers, from1981 through 2017. Since 2017, Mr.
Aubrey has been a consultant for new business development at ES
Components. An immediate family member of Mr. Aubrey is the
majority owner of ES Components, and Mr. Aubrey is a minority
owner. Mr. Aubrey also served as the President and Owner of
Compatible Components, Inc., a manufacturer's representative
company supplying microelectronic components, from 1979 until 2005
when he elected to close the business due to the growth of ES
Components. Mr. Aubrey received an Associate of Arts in Business
Administration from Central N.E. College in 1975.
The
Company believes that Mr. Aubrey's extensive operational and
business background in semiconductor component manufacturing highly
qualifies him to serve as a member of the Board of
Directors.
John F. Chiste
Mr.
Chiste was appointed a director on January 12, 2015. Mr. Chiste
also serves as Chairman of the Audit Committee and a member of the
Nominating Committee. Mr. Chiste has served as the Chief Financial
Officer of Encore Housing Opportunity Fund I, Fund II, Fund III and
Rescore Property Corp., a group of private equity funds with assets
under management in excess of $1.0 billion focused on acquiring
opportunistic and distressed residential real estate primarily in
Florida, Texas, Arizona and California, since 2010. Mr. Chiste was
a director and Chairman of the Audit Committee of Forward
Industries, Inc., a Nasdaq listed manufacturer and distributor of
specialty and promotional products, primarily for hand held
electronic devices, from February 2008 through January 2015. Mr.
Chiste has also served since 2005 as Chief Financial Officer of the
Falcone Group which owns a diversified real estate portfolio of
companies. Mr. Chiste previously served as Chief Financial Officer
of Bluegreen Corporation, a NYSE listed developer and operator of
timeshare resorts, residential land and golf communities, from 1997
until 2005. He also served as Chief Financial Officer of Computer
Integration Corp., a Nasdaq listed provider of information products
and services, from 1992 until 1997. From 1983 until 1992, Mr.
Chiste served as a Senior Manager with Ernst & Young LLP, a
nationally recognized accounting firm. Mr. Chiste received a
Bachelor of Business Administration in Accounting from Florida
Atlantic University in Boca Raton. Mr. Chiste is a licensed
Certified Public Accountant in the State of Florida.
42
The
Company believes that Mr. Chiste's extensive financial and
accounting experience highly qualifies him to serve as a member of
the Board of Directors.
David W. Pointer
Mr. Pointer was elected a director on August 4, 2015. Mr. Pointer
was named Chairman of the Board on July 22, 2016, and also serves
as a member on the Nominating Committee and Compensation Committee.
On March 27, 2018, Mr. Pointer was appointed to serve as Chief
Executive Officer and Chairman of the Board of Novation Companies
Inc. On August 12, 2020 the Board of Novation separated the CEO and
Chairman roles, with Mr. Pointer remaining CEO. Mr. Pointer is the
founder and managing partner of VI Capital Management, LLC
(“VICM”). VICM was founded on January 1, 2008, and is
the general partner for VI Capital Fund, LP, a value oriented
investment limited partnership. Prior to founding VICM, Mr. Pointer
served as Senior Vice President and Senior Portfolio Manager for
ICM Investment Management (“ICM”). Prior to ICM, Mr.
Pointer served as a Portfolio Manager for Invesco, Inc., where he
worked with a senior partner in managing two mutual funds with
assets in excess of $15 billion. Mr. Pointer has been a member of
the Board of Directors of CompuMed, Inc., a healthcare services
company, since January 2014 (and has served as Chairman of the
Board since November 2014). From September 2014 to June 2015, he
was a member of the Board of Directors of ALCO Stores, Inc., a
publicly traded retailer in liquidation under the provisions of
Chapter 11 of Title 11 of the United States Code. Mr. Pointer has
an M.B.A. from the University of Pennsylvania and holds the
Chartered Financial Analyst designation.
The Company believes that Mr. Pointer’s experience as a
director at other companies and his ability to relate to the
broader investment community highly qualifies him to serve as a
member of the Board of Directors.
Charles Gillman
Mr. Gillman was appointed a director on July 22, 2016.
Mr. Gillman was elected as a director by shareholders on
August 26, 2016. Mr. Gillman also serves as Chairman of the
Nominating Committee, and a member of the Compensation Committee.
The appointment of Mr. Gillman was a result of both mutual business
interest and discussions between the Board and Novation Companies,
Inc. regarding the avoidance of a proxy contest. In return for
Novation Companies, Inc. agreeing to not pursue a proxy contest at
the Company’s 2016 Annual Meeting of Stockholders, the Board
agreed to appoint Mr. Gillman as a Class III director, nominate him
for re-election at the 2016 Annual Meeting of Stockholders and
reimburse the reasonable expenses incurred to date by Novation
Companies, Inc. regarding a potential proxy contest at the 2016
Annual Meeting of Stockholders.
Mr. Gillman is the Owner and Executive Managing Director of the
IDWR Multi-Family Office (the "IDWR"),
a position he has held since 2013. The IDWR employs a team of
analysts with expertise in finding publicly traded companies that
require operational enhancement and an improvement in corporate
capital allocation. From 2001 to 2013, Mr. Gillman was a portfolio
manager of certain family office investment portfolios at Nadel and
Gussman, LLC. Prior to his employment at Nadel and Gussman, Mr.
Gillman worked in the investment industry and as a strategic
management consultant at McKinsey & Company, where he gained
experience designing operational turnarounds of U.S. and
international companies. Mr. Gillman currently serves on the board
of directors of Digirad Corporation, Hill International, and Points
International. Additionally, Mr. Gillman previously served on the
board of directors of the following companies during the last five
years: Hooper Holmes, Inc., Datawatch Corporation, Novation
Companies Inc., Digirad, Hill International, and Points
International. Mr. Gillman is a Summa Cum Laude graduate of the
Wharton School and a Director of the Penn Club of New York which
serves as the Manhattan home of the Wharton and Penn alumni
community.
The Board believes that Mr. Gillman’s significant experience
designing operational turnarounds of companies, as a successful
portfolio manager and his mergers and acquisition experience highly
qualifies him to serve as a member of the Board of
Directors.
Executive Officers
Our executive officers are Tim Eriksen and Mark W. Matson. Mr.
Eriksen's position with the Company, his age and his biographical
and business experience appear above under the caption "Board of
Directors."
43
Mark W. Matson
Mr. Matson, age 60, was appointed President and Chief Operating
Officer on July 22, 2016. Mr. Matson served as a consultant to the
Company from May 2016 through July 2016. Prior to working as a
consultant to the Company, Mr. Matson provided consulting services
from March 2012 to May 2016 through Avlet, Denali Advanced
Integration and Tuxedo Technologies with respect to manufacturing
supply chain issues and systems and software issues related to
security and processes at global manufacturing plants. Mr. Matson
served as the Chief Operating Officer and Vice President of
Operations at YSI, a maker of environmental monitoring instruments,
sensors, software, systems and data collection platforms, from
December 2010 to March 2012. Mr. Matson served as the Vice
President of Global Operations and Engineering for Rockford
Corporation, a company that designed, sourced and distributed high
performance mobile audio products, from January 2006 to December
2010. Prior to joining Rockford Corporation, Mr. Matson was the
General Manager and Chief Operations Officer for Benchmark
Electronics' Division in Redmond, Washington from 2003 through
2005. Mr. Matson was a Vice President at Advanced Digital
Information Corporation from 1998 to 2003 and prior to that at
Interpoint Corporation. Mr. Matson has more than 20 years of
operations experience.
Mr. Matson graduated with honors with a B.A. from California State
University, Bakersfield.
Legal/Disciplinary History
Below is a summary of a consent order from the State of Washington
Department of Financial Institutions, Securities Division that one
of our directors was subject to and an SEC administrative order
that one of our directors was subject to.
V.I. Capital Management, LLC (“V.I. Capital”) and
Chairman of the Board David W. Pointer are subject to a consent
order (the “Consent Order”) from the State of
Washington Department of Financial Institutions, Securities
Division, dated March 12, 2018 (Order Number S-16-2093-17-CO01),
relating to alleged breaches of their fiduciary duty as investment
advisors to their clients, including (i) failure to disclose
certain conflict of interest stemming from Mr. Pointer’s
service on the Boards of Directors of CompuMed and Solitron
Devices, Inc., (ii) pledging V.I. Capital investment fund assets as
collateral for a line of credit for CompuMed, Inc. and failing to
disclose such pledge to V.I. Capital’s year-end auditor, and
(iii) failure to timely distribute audited financial statements and
a final fund audit to investors. As conditions of the Consent
Order, V.I. Capital and Mr. Pointer agreed to (i) cease and desist
from violating the Securities Act of 1933, (ii) pay a fine of
$10,000 and (iii) pay costs of $2,500. Mr. Pointer also agreed that
he will not be a principal, officer or owner of an investment
adviser or broker-dealer for 10 years following the entry of the
Consent Order, but he may apply for a securities salesperson or
investment adviser representative registration with an acceptable
plan of supervision.
Company director Charles M. Gillman is subject to an SEC
administrative order, dated February 14, 2017 (Securities Exchange
Act Release No. 80038), relating to alleged violations of Section
13(d) of the Exchange Act and the rules promulgated thereunder,
including failing to disclose the members of a stockholder group,
and further allegations that he violated Section 16(a) of the
Exchange Act and the rules promulgated thereunder, including
failing to timely file initial statements of beneficial ownership
on Form 3 and changes thereto on Form 4. Without admitting or
denying any violations, Mr. Gillman agreed to cease and desist from
committing or causing any violations of (i) Section 13(d) of the
Exchange Act and Rules 13d-1 and 13d-2 promulgated thereunder and
(ii) Section 16(a) of the Exchange Act and Rules 16a-2 and 16a-3
promulgated thereunder, and paid a civil penalty to the SEC in the
amount of $30,000.
Other
than as described above, our directors and executive officers have
not been convicted or named in a pending criminal proceeding
(excluding traffic and other minor offenses), or subject to any
judgment, order or legal proceeding of the nature described in Item
401(f) of Regulation S-K.
Committees
The
standing committees of the Board of Directors are the Audit
Committee, the Compensation Committee and the Nominating
Committee.
44
Audit Committee
The
Audit Committee consists of Messrs. Chiste (Chairman), and Aubrey.
The Board of Directors has determined that the members of the Audit
Committee are independent pursuant to the Nasdaq Rules. The
Company’s Audit Committee generally has responsibility for
appointing, overseeing and approving the compensation of our
independent certified public accountants, reviewing and approving
the discharge of our independent certified public accountants,
reviewing the scope and approach of the independent certified
public accountants’ audit, reviewing our audit and control
functions, approving all non-audit services provided by our
independent certified public accountants and reporting to our full
Board of Directors regarding all of the foregoing. Additionally,
our Audit Committee provides our Board of Directors with such
additional information and materials as it may deem necessary to
make our Board of Directors aware of significant financial matters
that require its attention. The Company has adopted an Audit
Committee Charter, a copy of which is published on the
Company’s web site at www.solitrondevices.com on the Investor
Relations page. The Company has determined that the "audit
committee financial expert" is Mr. Chiste.
Compensation Committee
The
members of the Compensation Committee are Messrs. Aubrey
(Chairman), Gillman and Pointer. The Board of Directors has
determined that the members of the Compensation Committee are
independent pursuant to the Nasdaq Rules. The responsibilities and
duties of the Compensation Committee consist of, but are not
limited to: reviewing, evaluating and approving the agreements,
plans, policies and programs of the Company to compensate the
officers and directors of the Company and otherwise discharging the
Board of Directors’ responsibilities relating to compensation
of the Company’s officers and directors. The Compensation
Committee has determined that no risks exist arising from the
Company’s compensation policies and practices for its
employees that are reasonably likely to have a material adverse
effect on the Company. During fiscal year 2021, the Compensation
Committee did not retain a compensation consultant to review our
policies and procedures with respect to executive compensation. The
Company has adopted a Compensation Committee Charter, a copy of
which is published on the Company's website,
www.solitrondevices.com on the Investor Relations
page.
Nominating Committee
The
members of the Nominating Committee are Messrs. Gillman (Chairman),
Chiste and Pointer. The Board of Directors has determined
that the members of the Nominating Committee are independent
pursuant to the Nasdaq Rules. The responsibilities and duties
of the Nominating Committee consist of, but are not limited
to: developing and periodically reviewing the criteria used
to evaluate the suitability of potential candidates for membership
on the Board of Directors; identifying and evaluating potential
director candidates and submitting to the Board of Directors the
candidates for director to be recommended by the Board of Directors
for election at each annual meeting and to be added by the Board of
Directors at any other times due to expansions to the Board of
Directors, director resignations or retirements, and candidates for
membership on each committee of the Board of Directors; making
recommendations to the Board of Directors regarding the size and
composition of the Board of Directors and its committees; and
receiving and evaluating any stockholder nominations for directors
received in accordance with Article II, Section 12 of the Company's
By-laws in the same manner the Nominating Committee would evaluate
a nomination received from any other party. The Company has
adopted a Nominating Committee Charter, a copy of which is
published on the Company's website at www.solitrondevices.com on
the Investor Relations page.
Communications with our Board of Directors
Any
stockholder who wishes to send a communication to our Board of
Directors should address the communication either to the Board of
Directors or to the individual director c/o David W. Pointer,
Chairman of the Board, Solitron Devices, Inc., 3301 Electronics
Way, West Palm Beach, Florida 33407. Mr. Pointer will forward to
the directors all communications that, in his judgment, are
appropriate for consideration by the directors. Examples of
communications that would not be appropriate for consideration by
the directors include commercial solicitations and matters not
relevant to stockholders, to the functioning of the Board of
Directors, or to the affairs of the Company.
Nominees for Director
The
Nominating Committee will consider all qualified director
candidates identified by various sources, including members of the
Board, management and stockholders. Candidates for directors
recommended by stockholders will be given the same consideration as
those identified from other sources. The Nominating Committee is
responsible for reviewing each candidate’s biographical
information and assessing each candidate’s independence,
skills and expertise based on a number of factors. While we do not
have a formal policy on diversity, when considering the selection
of director nominees, the Nominating Committee considers
individuals with diverse backgrounds, viewpoints, accomplishments,
cultural backgrounds, and professional expertise, among other
factors.
45
The
Board of Directors has established board candidate selection
criteria to be applied by the Nominating Committee and by the full
Board of Directors in evaluating candidates for election to the
Board. These criteria include general characteristics, areas of
specific experience and expertise and considerations of diversity.
The criteria include the following:
●
Integrity and
commitment to ethical behavior;
●
Personal maturity
and leadership skills, especially in related fields;
●
Independence of
thought;
●
Diversity of
background and experience;
●
Broad business
and/or professional experience with the understanding of business
and financial affairs and the complexity of the Company's
business;
●
Commitment to the
Company's business and its continued well-being; and
●
Board members must
be able to offer unbiased advice.
In
addition to the minimum qualifications for each candidate described
above, the Nominating Committee shall recommend that the Board of
Directors select individuals to help ensure that:
●
Board members have
executive management experience;
●
Board members have
an understanding of the electronics/components
industry;
●
A majority of the
Board consists of independent directors;
●
Each of the
Company's Audit Committee, Compensation Committee and Nominating
Committee shall be comprised entirely of independent directors;
and
●
At least one member
of the Audit Committee shall have such experience, education and
other qualifications necessary to qualify as an "audit committee
financial expert" under SEC rules.
Only
individuals who are nominated in accordance with the procedures set
forth in Article II, Section 12 of our By-laws shall be eligible
for election as directors. Nominations of persons for election to
the Board of Directors may be made at a meeting of stockholders at
which directors are to be elected only (i) by or at the direction
of the Board of Directors or (ii) by any stockholder of the Company
entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in Article II,
Section 12 of our By-laws. Such nominations, other than those made
by or at the direction of the Board of Directors, shall be made by
timely notice in writing to the Secretary of the Company. To be
timely, a stockholder’s notice must be delivered or mailed to
and received at the principal executive offices of the Company not
less than 30 days prior to the date of the meeting, provided,
however, that in the event that less than 40 days’ notice or
prior public disclosure of the date of the meeting is given or made
to stockholders, to be timely, a stockholder’s notice must be
so received not later than the close of business on the tenth day
following the day on which such notice of the date of the meeting
was mailed or such public disclosure was made. Such
stockholder’s notice shall set forth (i) as to each person
whom such stockholder proposes to nominate for election or
reelection as a director, all information relating to such person
that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including each such person’s written
consent to serving as a director if elected); and (ii) as to the
stockholder giving the notice (x) the name and address of such
stockholder as they appear on the Company’s books, and (y)
the class and number of shares of the Company’s capital stock
that are beneficially owned by such stockholder.
Code of Ethics
The
Company has adopted a Code of Ethics for senior officers, which
includes the Company’s principal executive officer, principal
financial officer and controller, pursuant to the Sarbanes-Oxley
Act of 2002. The Code of Ethics is published on the Company’s
web site at www.solitrondevices.com on the Investor Relations
page.
46
DELINQUENT SECTION 16(A) REPORTS
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires
directors and executive officers of the Company and ten percent
stockholders of the Company to file initial reports of ownership
and reports of changes in ownership of Common Stock and other
equity securities of the Company with the Securities and Exchange
Commission. Directors, executive officers, and ten percent
stockholders are required to furnish the Company with copies of all
Section 16(a) forms they file. To the Company’s knowledge,
based solely on a review of the copies of such reports furnished to
the Company and representations that no other reports were required
during the year ended February 28, 2021, all Section 16(a) filing
requirements applicable to directors and executive officers of the
Company and ten percent stockholders of the Company were timely
filed.
ITEM
11.
EXECUTIVE COMPENSATION
Summary Compensation Table
The
following table provides certain summary information concerning
compensation paid by the Company, to or on behalf of the following
named executive officer for the fiscal years ended February 28,
2021 and February 29, 2020.
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Stock
Awards
|
All
Other Compensation
|
Total
|
Tim Eriksen, CEO, Interim CFO (1)
|
2021
|
$80,000
|
$50,000
|
-
|
-
|
$130,000
|
|
2020
|
77,736
|
10,000
|
26,250
|
-
|
113,986
|
|
|
|
|
|
|
|
Mark Matson, President, COO (2)
|
2021
|
200,000
|
100,000
|
-
|
36,159(3)
|
336,159
|
|
2020
|
200,000
|
20,000
|
210,000
|
35,756(3)
|
465,756
|
(1)
Mr. Eriksen was
appointed Chief Executive Officer and Interim Chief Financial
Officer effective as of July 22, 2016. On June 28, 2019 the Company
granted Mr. Eriksen a discretionary bonus of $10,000, a grant of
15,000 shares of common stock that were immediately vested (valued
at $26,250 based on the $1.75 closing price of the common stock on
the date of the grant), and effective July 1, 2019 Mr.
Eriksen’s salary was increased from $72,000 to $80,000. On
November 13, 2020, the Company granted Mr. Eriksen the option to
receive half of his bonus in shares instead of cash, which he
elected. Mr. Eriksen received 7,669 shares, with a fair market
value of $25,000, or $3.26 per share. Shares were issued under the
2019 Stock Incentive Plan.
(2)
Mr. Matson was
appointed President and Chief Operating Officer effective as of
July 22, 2016. On June 28, 2019 the Company granted Mr. Matson a
discretionary bonus of $20,000, a grant of 120,000 shares of common
stock that were immediately vested (valued at $210,000 based on the
$1.75 closing price of the common stock on the date of the grant),
and retroactive to January 1, 2019 Mr. Matson’s salary was
increased from $160,000 to $200,000. On November 13, 2020, the
Company granted Mr. Matson the option to receive half of his bonus
in shares instead of cash, which he elected. Mr. Matson received
15,337 shares, with a fair market value of $50,000, or $3.26 per
share. Shares were issued under the 2019 Stock Incentive
Plan.
(3)
Represents Life,
Disability and Medical Insurance premiums, personal auto expenses,
allocation of the company’s corporate housing, and cell
phone. For the year ended February 28, 2021, Life, Disability and
Medical Insurance premiums were $6,449, housing allocation was
$8,400, car expenses were $19,716, and cell phone was $1,594. For
the year ended February 29, 2020, Life, Disability and Medical
Insurance premiums were $4,890, housing allocation was $7,964, car
expenses were $21,638, and cell phone was $1,264.
47
Director Compensation
The
following table sets forth information regarding the compensation
of our non-employee directors for the fiscal years ended February
28, 2021 and February 29, 2020.
Name
and Principal Position
|
Year
|
Fees
earned or paid in cash (1)
|
Stock
awards (2)
|
Total
|
David
W. Pointer, Chairman
|
2021
|
$48,000
|
$-
|
$48,000
|
|
2020
|
$41,000
|
$14,000
|
$55,000
|
|
|
|
|
|