SOLITRON DEVICES INC - Quarter Report: 2022 November (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended November 30, 2022

or

For the transition period from _____ to _____

Commission File No. 001-04978

(561) 848‑4311

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of January 11, 2023 was 2,083,436.

SOLITRON DEVICES, INC.

TABLE OF CONTENTS

PART 1 - FINANCIAL INFORMATION

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOLITRON DEVICES, INC.

BALANCE SHEETS

AS OF NOVEMBER 30, 2022 AND FEBRUARY 28, 2022

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

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

SOLITRON DEVICES, INC.

STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2022 AND NOVEMBER 30, 2021

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

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

SOLITRON DEVICES, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2022 AND NOVEMBER 30, 2021

(Unaudited, in thousands, except for number of shares)

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

SOLITRON DEVICES, INC.

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED NOVEMBER 30, 2022 AND NOVEMBER 30, 2021

(unaudited, in thousands)

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

SOLITRON DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

1. THE COMPANY AND OPERATIONS

Solitron Devices, Inc., a Delaware corporation (“Solitron,” the “Company,” “we,” “us,” or “our”), 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 unaudited financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

The unaudited financial information furnished herein reflects all adjustments, consisting of normal recurring items that, in the opinion of management, are necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods. The results of operations for the three and nine months ended November 30, 2022 are not necessarily indicative of the results to be expected for the year ending February 28, 2023.

The information included in this Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended February 28, 2022.

Use of estimates

The financial statements are prepared in accordance with GAAP. Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable. The Company could have reasonably used different accounting estimates. This applies in particular to inventory and valuation allowance for deferred tax assets. Actual results could differ significantly from our estimates. To the extent that there are material differences between these estimates and actual results, the Company’s future financial statement presentation, financial condition, results of operations and cash flows will be affected. The ultimate impact from COVID-19 on the Company’s operations and financial results during fiscal 2023 will depend on, among other things, the ultimate severity and scope of the pandemic, the pace at which governmental and private travel restrictions and public concerns about public gatherings will ease, and the speed with which the economy recovers. The Company is not able to fully quantify the impact that these factors will have on the Company’s financial results during fiscal 2023 and beyond. The Company believes COVID-19 had a negative impact on the Company’s bookings in fiscal 2022, which will negatively impact fiscal 2023 net sales.

Cash and Cash Equivalents

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

Short-term Investments

Short-term investments consist of certificates of deposit and U.S. Treasury securities. The U.S. Treasury securities are classified as held to maturity, mature in less than twelve months, and are reported at amortized cost which approximates fair value of $2,512,000 as of November 30, 2022.

Investment in Marketable Securities

Investment in Marketable 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 statements of operations.

The following table summarizes investments in marketable securities at:

At November 30, 2022 and November 30, 2021, the deferred tax liability related to unrecognized gains and losses on marketable securities 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 Topic 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 result in management’s best estimate of fair value.

The carrying amounts of the Company’s short-term financial instruments, including accounts receivable, accounts payable, accrued expenses and other liabilities approximate their fair value due to the relatively short period to maturity for these instruments.  The carrying value of long-term debt approximates fair value since the related rates of interest approximate current market rates.

Accounts Receivable

Accounts receivable consists of unsecured credit extended to the Company’s customers in the ordinary course of business.  The Company reserves for any amounts deemed to be uncollectible based on past collection experiences and an analysis of outstanding balances, using an allowance account.  The allowance amount was $0 as of November 30, 2022 and February 28, 2022.

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.  Through February 28, 2022, the Company maintained a three-inch wafer fab which procured raw wafers and produced 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:

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:

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 November 30, 2022, all non-interest bearing checking accounts were FDIC insured to a limit of $250,000. Deposits in excess of FDIC insured limits were approximately $322,000 at November 30, 2022, as compared to $3,448,000 at February 28, 2022.  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.

Net Income (Loss) Per Common Share

Net income (loss) per common share is presented in accordance with ASC Topic 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 common stock equivalents outstanding during fiscal 2022 and 2023; therefore, there is no effect from dilution on earnings per share.

Revenue Recognition

The Company records revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers,”  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 core principle of the guidance in ASC 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’s 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.

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, performance obligations are determined, and we recognize revenue at the point in time in which each performance obligation is fully satisfied.

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.  Dwight Aubrey, a director of the Company, is a minority owner and an immediate family member of the majority owner of ES Components.    For the nine months ended November 30, 2022, the Company purchased $109,892 of die and $0 of used equipment from ES Components.  For the nine months ended November 30, 2021, the Company purchased $94,215 of die and $0 of used equipment from ES Components. The Company has included the expenses related to die in cost of goods sold in the accompanying statements of operations. The Company occasionally makes sales to ES Components.  For the nine months ended November 30, 2022 and November 30, 2021, sales were $0.

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.  No vesting of stock options or grants occurred during the three and nine months ended November 30, 2022 or November 30, 2021.

Financial Statement Estimates

The preparation of financial statements in conformity with GAAP 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 variable consideration related to revenue recognition, stock-based compensation, depreciable life of property and equipment, accounts receivable allowance, deferred tax valuation allowance, and allowance for inventory obsolescence.

Recent Accounting Pronouncements

The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.

3. REVENUE RECOGNITION

As of November 30, 2022, and November 30, 2021, sales returns and allowances accrual activity is shown below:

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 November 30, 2022, and February 28, 2022, the inventory balance at that distributor was believed to be $1,905,000 and $2,178,000, respectively.  Based upon sales levels to and by the distributor during the period, inventory levels at the distributors, current and projected market conditions, and historical experience under the programs, we believe it is highly unlikely that the distributor would exercise termination.  Should termination 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.  

4. INVENTORIES

As of November 30, 2022, inventories consisted of the following:

As of February 28, 2022, inventories consisted of the following:

Wafer bank inventory (completed wafers that are available to be consumed in the Company’s products), net of reserves, totaled $782,000 as of November 30, 2022 and $965,000 as of February 28, 2022.  As of November 30, 2022, 100% of the wafer bank inventory, net of reserves, consisted of wafers manufactured between calendar year 2018 and 2022.  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.  We did not relocate the wafer fab to our new facility.

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

As of November 30, 2022, and February 28, 2022, accrued expenses and other current liabilities consisted of the following:

6. DISAGGREGATION OF REVENUE AND MAJOR CUSTOMERS

Revenues from domestic and export sales are attributed to a global geographic region according to the location of the customer’s primary manufacturing or operating facilities.  Revenues from domestic and export sales to unaffiliated customers for the three months ended November 30, 2022 and November 30, 2021, respectively, are as follows:

Revenues from domestic and export sales to unaffiliated customers for the nine months ended November 30, 2022 and November 30, 2021, respectively are as follows:

For the three months ended November 30, 2022 and November 30, 2021, approximately 68% and 80%, respectively, of the Company’s sales are attributable to contracts with customers whose products are sold to the United States government.  The remaining 32% and 20%, respectively of sales are for non-military, scientific and industrial applications, or to distributors where we do not have end user information.

For the nine months ended November 30, 2022 and November 30, 2021, approximately 78% and 85%, respectively, of the Company’s sales are attributable to contracts with customers whose products are sold to the United States government.  The remaining 22% and 15%, respectively of sales are for nonmilitary, scientific and industrial applications, or to distributors where we do not have end user information.

Customers who contributed ten percent or more of revenues for the three months ended November 30, 2022 and November 30, 2021, respectively are as follows:

Customers who contributed ten percent or more of revenues for the nine months ended November 30, 2022 and November 30, 2021, respectively are as follows:

As of November 30, 2022, our top two customers accounted for 73% of accounts receivable.  As of February 28, 2022, our top four customers accounted for 77% of accounts receivable. 

7. MAJOR SUPPLIERS

Suppliers who accounted for 10% or more of purchases of production materials for the three months ended November 30, 2022 and November 30, 2021, respectively are as follows:

Suppliers who accounted for 10% or more of the cost of production materials for the nine months ended November 30, 2022 and November 30, 2021, respectively are as follows:

8. 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 November 30, 2022, and February 28, 2022, the carrying value of the asset was $6,000 and $12,000, respectively, 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 ended on December 31, 2021. The base rent provided in the Lease is $31,555 per month, excluding sales tax. The Company had 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 did not exercise its option. The Company entered into a month-to-month rental agreement for a substantially smaller portion of the facility that ended in September 2022.

Contingencies:

We may from time to time become a party to various legal proceedings arising in the ordinary course of business. As of November 30, 2022, we had no known material current, pending, or threatened litigation.

9. 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 was made through Bank of America, N.A., a national banking association. The PPP Loan was scheduled to mature on July 21, 2025 and bore interest at a rate of 1% per annum. Payments of principal and interest on the PPP Loan were initially deferred until January 1, 2021 and based on applying for forgiveness the deferral was extended through October 31, 2021. The PPP Loan could have been 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 to continue group health care benefits, mortgage payments, rent, utilities, and interest payments 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.

On April 16, 2021, 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. (the “Bank”) in the amount of $2,940,000 (the “Loan”) to fund that portion of the total purchase price, and entered into the Master Credit Agreement, a Note, a Mortgage, Assignment of Rents, Security Agreement and Fixture Filing and Financial Covenant Agreement (the “FCA”). The Loan accrues interest at a fixed rate of 3.8% per year and matures on April 15, 2031. Beginning on May 15, 2021 the Company began making monthly installment payments of $17,593 consisting of principal and interest. The payment and performance of the Loan is secured by a security interest in the property acquired. The Master Credit Agreement contains certain representations and warranties, undertakings and events of default customary for these types of agreements. Additionally, under the terms of the FCA, the Company has agreed to maintain a fixed charge coverage ratio of at least 1.15:1.0, calculated at the end of each fiscal year, using the results of the twelve-month period ending with that reporting period, and has agreed to maintain on a consolidated basis a minimum of no less than $1,000,000 of unrestricted, unencumbered liquid assets.

On June 29, 2022, the Company received notification from the Bank that the Bank had elected to suspend certain financial and reporting requirements set forth in the FCA. Specifically, the Bank elected on a going forward basis to suspend measurement of any of the following financial covenants to the extent they are included in Section 2.1, ‘Financial Covenants’ of the FCA: Tangible Net Worth; Debt Service Coverage Ratio; Fixed Charge Coverage Ratio; Asset Coverage Ratio; Funded Debt to EBITDA; and/or Liquidity. In addition, the Bank elected to suspend the requirements in the FCA, if any, for the submission of financial statements and information by the Borrower on a periodic basis as specified in Section 2.4, ‘Financial Information’ of the FCA. The Bank reserves the right in its sole discretion to require the Company to resume delivery of financial statements and other information and to evidence compliance with the financial covenant requirements as currently provided in the FCA.

10. 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.

The Company did not repurchase any shares under the stock repurchase program during the nine months ended November 30, 2022 or November 30, 2021.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Solitron Devices, Inc., a Delaware corporation (the “Company” or “Solitron”), designs, develops, manufactures and markets solid-state semiconductor components and related devices primarily for the military and aerospace markets.  The Company manufactures a large variety of bipolar and metal oxide semiconductor (“MOS”) power transistors, power and control hybrids, junction and power MOS field effect transistors and other related products.  Most of the Company’s products are custom made pursuant to contracts with customers whose end products are sold to the United States government.  Other products, such as Joint Army/Navy transistors, diodes and Standard Military Drawings voltage regulators, are sold as standard or catalog items.

The following discussion and analysis of factors which have affected the Company’s financial position and operating results during the periods included in the accompanying unaudited condensed financial statements should be read in conjunction with the Financial Statements and the related Notes to Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended February 28, 2022 and the Unaudited Financial Statements and the related Notes to Unaudited Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

Critical Accounting Estimates:

The discussion and analysis of our financial condition and results of operations are based upon the unaudited condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q which are prepared in accordance with GAAP.  Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses.  These estimates and assumptions are affected by management’s application of accounting policies.  See Note 2 in the financial statements for the Company’s significant accounting policies.  Of the Company’s accounting policies, the following are considered to be critical – Revenue Recognition and Inventories.  A discussion of these critical accounting policies are included in Note 2 of the “Notes To Financial Statements” in Item 8 of our Annual Report on Form 10-K for the fiscal year ended February 28, 2022.

See Note 2, “Summary of Significant Accounting Policies”, to the accompanying Notes to Financial Statements included in this Quarterly Report on Form 10-Q.

Results of Operations-Three Months Ended November 30, 2022 Compared to Three Months Ended November 30, 2021: 

Net Sales.  Net sales for the three months ended November 30, 2022 decreased 76% to $584,000 as compared to $2,468,000 for the three months ended November 30, 2021.  The decrease in net sales was largely due to the company relocating to its new facility during the three months ended November 30, 2022 along with associated startup delays.

Net bookings for the three months ended November 30, 2022 increased 68% to $2,257,000 versus $1,340,000 during the three months ended November 30, 2021.   Backlog as of November 30, 2022 increased 101% to $6,430,000 as compared to a backlog of $3,197,000 as of November 30, 2021. 

Cost of Sales.  Cost of sales for the three months ended November 30, 2022 decreased to $905,000 from $1,672,000 for the three months ended November 30, 2021, due to decreased raw materials and labor costs associated with decreased net sales, and decreased rent expense.  Expressed as a percentage of net sales, cost of sales increased to 155% for the three months ended November 30, 2022 from 68% for the three months ended November 30, 2021.  

Gross Profit (Loss).  Gross profit (loss) for the three months ended November 30, 2022 decreased to ($321,000) from $796,000 for the three months ended November 30, 2021, due primarily to lower net sales not covering fixed labor and overhead costs.  Accordingly, gross margins expressed as a percentage of net sales decreased to (55%) for the three months ended November 30, 2022 as compared to 32% for the three months ended November 30, 2021.

For the three months ended November 30, 2022, we shipped 6,130 units as compared to 36,047 units shipped during the same period of the prior year.  It should be noted that since we manufacture a wide variety of products with an average sales price ranging from a few dollars to several hundred dollars, such periodic variations in our volume of units shipped should not be regarded as a reliable indicator of our performance.

Selling, General & Administrative Expenses. Selling, general, and administrative expenses decreased to $460,000 for the three months ended November 30, 2022 from $497,000 for the same period in the prior year.  The decrease was due to a decrease in selling expenses of $34,000.  During the three months ended November 30, 2022, selling, general and administrative expenses as a percentage of net sales increased to 79% as compared to 20% for the three months ended November 30, 2021. 

Operating Income (Loss).  Operating income (loss) for the three months ended November 30, 2022 decreased to ($781,000) as compared to operating income of $299,000 for the three months ended November 30, 2021.  This decrease is due primarily to decreased net sales as described above.

Other Income.  Interest income increased to $18,000 for the three months ended November 30, 2022 as compared to $0 for the three months ended November 30, 2021.  Interest expense decreased to ($27,000) for the three months ended November 30, 2022 as compared to ($28,000) for the three months ended November 30, 2021.  Dividend income was $1,000 for the three months ended November 30, 2022 as compared to $1,000 for the three months ended November 30, 2021.  Realized gains (losses) on investments for the three months ended November 30, 2022 decreased to a loss of ($13,000) as compared to a gain of $41,000 for the three months ended November 30, 2021.  Unrealized gains (losses) on investments for the three months ended November 30, 2022 were a gain of $270,000 as compared to a loss of ($8,000) for the three months ended November 30, 2021.  Income from the sale of scrap was $40,000 for the three months ended November 30, 2022 as compared to $185,000 for the three months ended November 30, 2021.

Net Income (Loss).  Net income (loss) for the three months ended November 30, 2022 decreased to ($492,000) as compared to net income of $490,000 for the three months ended November 30, 2021.  This decrease is due primarily to decreased net sales as described above and decreased income from the sale of scrap partially offset by unrealized gains on securities.

Results of Operations-Nine Months Ended November 30, 2022 Compared to Nine Months Ended November 30, 2021: 

Net Sales.  Net sales for the nine months ended November 30, 2022 decreased 52% to $4,907,000 as compared to $10,308,000 for the nine months ended November 30, 2021.  The decrease in net sales was largely due to the decision to accelerate production and shipments in the nine months ended November 30, 2021 due to the planned facility relocation.

Net bookings for the nine months ended November 30, 2022 increased 46% to $6,871,000 versus $4,713,000 during the nine months ended November 30, 2021.  Backlog as of November 30, 2022 increased 101% to $6,430,000 as compared to a backlog of $3,197,000 as of November 30, 2021. 

Cost of Sales.  Cost of sales for the nine months ended November 30, 2022 decreased to $3,710,000 from $5,628,000 for the nine months ended November 30, 2021, due to decreased raw materials and labor costs associated with decreased net sales, and decreased rent expense.  Expressed as a percentage of net sales, cost of sales increased to 76% for the nine months ended November 30, 2022 from 55% for the nine months ended November 30, 2021.  

Gross Profit.  Gross profit for the nine months ended November 30, 2022 decreased to $1,197,000 from $4,680,000 for the nine months ended November 30, 2021, due primarily to lower net sales.  Accordingly, gross margins expressed as a percentage of net sales decreased to 24% for the nine months ended November 30, 2022 as compared to 45% for the nine months ended November 30, 2021.

For the nine months ended November 30, 2022, we shipped 39,012 units as compared to 89,512 units shipped during the same period of the prior year.  It should be noted that since we manufacture a wide variety of products with an average sales price ranging from a few dollars to several hundred dollars, such periodic variations in our volume of units shipped should not be regarded as a reliable indicator of our performance.

Selling, General & Administrative Expenses.  Selling, general, and administrative expenses decreased to $1,535,000 for the nine months ended November 30, 2022 from $1,870,000 for the same period in the prior year.  The decrease was primarily due to a decrease in bonus accrual of $200,000 and a decrease in selling expenses of $106,000.  During the nine months ended November 30, 2022, selling, general and administrative expenses as a percentage of net sales increased to 31% as compared to 18% for the nine months ended November 30, 2021. 

Operating Income/Loss.  Operating income (loss) for the nine months ended November 30, 2022 decreased to ($338,000) as compared to operating income of $2,810,000 for the nine months ended November 30, 2021.  This decrease is due primarily to decreased net sales as described above.

Other Income.  Interest income increased to $20,000 for the nine months ended November 30, 2022 as compared to $0 for the nine months ended November 30, 2021.  Interest expense increased to ($82,000) for the nine months ended November 30, 2022 as compared to $(74,000) for the nine months ended November 30, 2021.  Dividend income increased to $6,000 for the nine months ended November 30, 2022 as compared to $2,000 for the nine months ended November 30, 2021.  Realized gains on investments for the nine months ended November 30, 2022 decreased to $19,000 as compared to $67,000 for the nine months ended November 30, 2021.  Unrealized gains on investments for the nine months ended November 30, 2022 were $325,000 as compared to ($7,000) for the nine months ended November 30, 2021.  PPP loan forgiveness was $0 in the nine months ended November 30, 2022 as compared to $812,000 for the nine months ended November 30, 2021.  Income from the sale of scrap was $644,000 for the nine months ended November 30, 2022 as compared to $357,000 in the nine months ended November 30, 2021.

Net Income.  Net income for the nine months ended November 30, 2022 decreased to $594,000 as compared to net income of $3,967,000 for the nine months ended November 30, 2021.  This decrease is due primarily to decreased net sales as described above and a decrease in income from PPP loan forgiveness, partially offset by increased unrealized gains and increased income from the sale of scrap.

Liquidity and Capital Resources:

Operating Activities:

Net cash provided by operating activities was $1,605,000 for the nine months ended November 30, 2022 primarily reflecting net income of $594,000, a decrease in accounts receivable of $1,356,000, and depreciation and amortization of $233,000, partially offset by net realized and unrealized gains on investments of $344,000 and an increase in inventories of $224,000. 

Net cash provided by operating activities was $3,450,000 for the nine months ended November 30, 2021 primarily reflecting net income of $3,967,000, an increase in accrued expenses and other current and non-current liabilities of $283,000, a decrease in inventories of $204,000 and depreciation and amortization of $193,000, partially offset by PPP loan forgiveness of $812,000, an increase in other assets of $184,000, an increase in accounts receivable of $139,000 and prepaid and other expenses of $63,000. 

Investing Activities:

Net cash used in investing activities was ($4,999,000) for the nine months ended November 30, 2022 principally reflecting $2,494,000 in purchases of short-term investments, $1,814,000 in expenditures on construction in progress, $1,241,000 in purchases of marketable securities, and $332,000 in purchases of plant property and equipment, partially offset by $882,000 in proceeds from the sale of marketable securities.

Net cash used in investing activities was ($4,871,000) for the nine months ended November 30, 2021 principally reflecting $4,749,000 in purchases of plant property and equipment and $270,000 in proceeds from the sale of securities, offset by $392,000 in purchases of securities.

Financing Activities:

Net cash used in financing activities was ($77,000) for the nine months ended November 30, 2022 reflecting $77,000 in principal payments on the mortgage loan.     

Net cash provided by financing activities was $2,883,000 for the nine months ended November 30, 2021 principally reflecting $2,940,000 in proceeds from our mortgage loan, partially offset by $57,000 in principal payments on the mortgage loan

We expect our sole sources of liquidity over the next twelve months to be cash from operations, cash and cash equivalents, and short-term investments, if necessary.  We anticipate that our capital expenditures required to sustain operations will be approximately $200,000 during the next twelve months and that our cash from operations, cash and cash equivalents, and short-term investments, if necessary, will be sufficient to fund these needs.

At November 30, 2022, February 28, 2022, and November 30, 2021, we had cash and cash equivalents of approximately $617,000, $4,088,000, and $5,247,000, respectively.  The decrease for the nine months ended November 30, 2022, was due to purchases of short-term investments, expenditures on construction in progress, and purchases of marketable securities, partially offset by proceeds from the sale of marketable securities, income from operations and scrap income.   

At November 30, 2022, February 28, 2022, and November 30, 2021, we had investments in short-term investments of approximately $2,512,000, $0, and $0, respectively. 

At November 30, 2022, February 28, 2022, and November 30, 2021, we had investments in marketable securities of approximately $1,387,000, $684,000, and $435,000, respectively. 

At November 30, 2022, February 28, 2022, and November 30, 2021, we had working capital of $6,247,000, $7,660,000, and $8,593,000, respectively.  The decrease for the nine months ended November 30, 2022 was due primarily to cash used on construction in progress at the new facility. 

Based on various factors, including the Company’s desire to fully utilize its current net operating loss carryforwards, the Company may seek out acquisitions, additional product lines, and/or invest a portion of its cash into common stocks or higher yielding debt instruments.  The Company will continue to consider additional share repurchases under the Company’s stock repurchase program subject to market conditions, corporate liquidity requirements and priorities and other factors as may be considered in the Company’s sole discretion.

FORWARD-LOOKING STATEMENTS

Some of the statements in this Quarterly Report on Form 10-Q are “forward-looking statements”.  These forward-looking statements include statements regarding our business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters.  Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results.  Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.  Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements.  These factors include those described under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended February 28, 2022, including those identified below. We do not undertake any obligation to update forward-looking statements, except as required by law.

Some of the factors that may impact our business, financial condition, results of operations, strategies or prospects include:

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This item is not applicable as we are currently considered a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES

Our Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of its management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e), and 15d-15(e) as of the end of the period covered by this Quarterly Report.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of November 30, 2022 due to the material weakness described in the Company’s Annual Report on Form 10-K for the year ended February 28, 2022 under “Management’s Report on 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 Quarterly Report fairly present, in all material respects, the Company’s financial condition and results of operations as of and for the three and nine months ended November 30, 2022.

Changes in Internal Control over Financial Reporting.

Other than the changes referenced in the Company’s Annual Report on Form 10-K for the year ended February 28, 2022 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 quarter ended November 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II– OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We may from time to time become a party to various legal proceedings arising in the ordinary course of business. As of November 30, 2022, we had no known material current, pending, or threatened litigation.

ITEM 1A. RISK FACTORS

In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors discussed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended February 28, 2022, which could materially affect our business, financial condition or future results.

ITEM 6. EXHIBITS

Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.