February 29,
2020
|
|
|
|
|
Marketable
Securities:
|
|
|
|
|
Common
Stocks
|
$155
|
$16
|
$(7)
|
$164
|
February 28,
2019
|
|
|
|
|
Marketable
Securities:
|
|
|
|
|
Common
Stocks
|
$115
|
$-
|
$(36)
|
$79
|
At
February 29, 2020 and February 28,
2019, 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.
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 Improv ements
|
10 years
|
Machinery and Equipment
|
5 years
|
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 29, 2020,
and February 28, 2019, all non-interest bearing checking accounts
were FDIC insured to a limit of $250,000. Deposits in excess of
FDIC insured limits were approximately $863,000 at February 29,
2020 and $29,000 at February 28, 2019. 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.
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 29, 2020, the Company purchased
$58,395 of die from ES Components. For the fiscal year ended
February 28, 2019, the Company purchased $209,979 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 year
ended February 29, 2020 sales were $0. For the fiscal year ended
February 28, 2019 sales were $10,560.
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.
On December 22, 2017, President Trump signed into law the
legislation generally known as the Tax Cut and Jobs Act of 2017.
The tax law includes significant changes to the U.S. corporate tax
systems including a rate reduction from 35% to 21% beginning in
January of 2018, a change in the treatment of foreign earnings
going forward and a deemed repatriation transition tax. In
accordance with ASC 740, “Income Taxes”, the impact of
a change in tax law is recorded in the period of enactment. Refer
to Note 6 for additional information on income taxes.
Net Loss Per Common Share
Net
loss/income 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, 2019 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. No vesting of stock options occurred
during the year ended February 29, 2020 or February 28,
2019.
Recent Accounting Pronouncements
In July 2015, the FASB issued Accounting Standards Update 2015-11,
Simplifying the Measurement of Inventory (“ASU
2015-11”) which requires that inventory within the scope of
this update, including inventory stated at average cost, be
measured at the lower of cost and net realizable value. This update
is effective for financial statements issued for fiscal years
beginning after December 15, 2016. Early application of the
ASU is permitted. The adoption of ASU 2015-11 did not impact the
Company’s financial position for the fiscal year ended
February 28, 2019.
In May
2014, the FASB issued Accounting Standards Update (ASU) No.
2014-09, Revenue from Contracts with Customers, and the
International Accounting Standards Board ("IASB") issued IFRS 15,
Revenue from Contracts with Customers.
Jointly issued by the FASB and the IASB, the revenue recognition
standard will supersede virtually all existing revenue recognition
guidance in US GAAP and IFRS. The intent of the new standard
is to replace the existing guidance with a single industry-neutral
revenue recognition model that will reduce complexity and increase
financial statement comparability across companies and industries.
The core principle of the model is to recognize revenue
when control of the goods or services transfers to the
customer, as opposed to recognizing revenue when the risks and
rewards transfer to the customer under the existing revenue
guidance. The adoption of ASU
2014-09 on March 1, 2017 did not have a material impact on the
financial statements.
In February 2016, the Financial Accounting Standards Board (FASB)
established Topic 842, Leases, by issuing Accounting Standards
Update (ASU) No. 2016-02, which requires lessees to recognize
leases on-balance sheet and disclose key information about leasing
arrangements. Topic 842 was subsequently amended by ASU No.
2018-01, Land Easement Practical Expedient for Transition to Topic
842. ASU No. 2018-10, Codification Improvements to Topic 842,
Leases. and ASU No. 2018-11, Targeted Improvements. The new
standard establishes a right-of-use (ROU) model that requires a
lessee to recognize a ROU asset and lease liability on the balance
sheet for all leases with a term longer than 12 months. Leases will
be classified as finance or operating, with classification
affecting the pattern and expense recognition in the income
statement. The Company adopted ASU No. 2016-02 effective March 1,
2019 using the modified retrospective method. See Note 12 to the
consolidated financial statements for further details.
In June 2016, the Financial Accounting Standards Board issued
Accounting Standards Update No. 2016-13, Financial
Instruments – Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments (“ASU
2016-13”), which modifies the measurement of expected credit
losses on certain financial instruments. The Company will adopt ASU
2016-13 in its first quarter of fiscal 2022. The Company does not
expect the adoption of ASU 2016-13 to have a material impact on its
financial statements.
3. REVENUE
RECOGNITION
As of
February 29, 2020, and February 28, 2019, sales returns and
allowances accrual activity is shown below:
|
|
|
Beginning
Balance
|
$88,000
|
$64,000
|
Accrued
Allowances
|
38,000
|
24,000
|
Ending
Balance
|
$126,000
|
$88,000
|
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 29, 2020, and February
28, 2019, the inventory balance at that distributor was $1,387,000
and $1,049,000, 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.
4. INVENTORIES
As of
February 29, 2020, and February 28, 2019, inventories, net of
reserves, consist of the following:
|
|
|
Raw
Materials
|
$766,000
|
$1,326,000
|
Work-In-Process
|
2,058,000
|
2,616,000
|
Finished
Goods
|
46,000
|
16,000
|
Totals
|
$2,870,000
|
$3,958,000
|
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
$1,239,000 as of February 29, 2020 and $1,822,000 as of February
28, 2019. 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 29,
2020, 100% of the wafer bank inventory consisted of wafers
manufactured between calendar year 2016 and 2019. 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 29, 2020, and February 28, 2019, property, plant, and
equipment consist of the following:
|
|
|
Leasehold
Improvements
|
$287,000
|
$287,000
|
Motor
Vehicles
|
70,000
|
70,000
|
Computer
Equipment
|
27,000
|
26,000
|
Machinery
and Equipment
|
3,910,000
|
3,804,000
|
Subtotal
|
4,294,000
|
4,187,000
|
Less:
Accumulated Depreciation and Amortization
|
(3,889,000)
|
(3,670,000)
|
Net
Property, Plant and Equipment
|
$405,000
|
$517,000
|
Depreciation
and amortization expense was $220,000 and $215,000 for the fiscal
years ended February 29, 2020 and February 28, 2019, respectively,
and is included in cost of sales in the accompanying statements of
operations.
6.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of
February 29, 2020, and February 28, 2019, accrued expenses and
other current liabilities consist of the following:
|
|
|
Payroll
and related employee benefits
|
$303,000
|
$339,000
|
Legal
fees
|
-
|
5,000
|
Property
and Sales taxes
|
8,000
|
9,000
|
Return
Allowance
|
126,000
|
88,000
|
Other
liabilities
|
-
|
2,000
|
Totals
|
$437,000
|
$443,000
|
7.
INCOME TAXES
The Company did not have a provision for income taxes (current or
deferred tax expense) for tax years ended February 29, 2020 and
February 28, 2019.
A
reconciliation of the U.S. federal statutory tax rate to the
Company’s effective tax rate for fiscal year ended February
29, 2020 and February 28, 2019 is as follows:
|
|
|
|
|
Net
Income/(Loss) Before Taxes
|
(606,000)
|
|
(1,440,000)
|
|
|
|
|
|
|
Provision/(Benefit)
at statutory rate
|
(127,000)
|
21.0%
|
(302,000)
|
21.0%
|
State
Tax Provision/(Benefit) net of federal benefit
|
(15,000)
|
2.5%
|
77,000
|
-5.3%
|
Permanent
Book/Tax Differences
|
27,000
|
-4.5%
|
1,000
|
-0.1%
|
Change
in Valuation Allowance
|
138,000
|
-22.8%
|
225,000
|
-15.6%
|
Other
|
(19,000)
|
3.1%
|
-
|
0.0%
|
Income
Tax Provision / (Benefit)
|
-
|
|
-
|
|
Effective
income tax rate
|
0.00%
|
|
0.00%
|
|
Total
net deferred taxes are comprised of the following at February 29,
2020 and February 28, 2019:
Deferred
Tax Asset (Liability):
|
|
|
Accrued
Liabilities
|
$44,177
|
$52,854
|
Inventory
Allowance
|
1,339,208
|
1,187,129
|
Section
263A Capitalized Costs
|
59,095
|
155,400
|
Net
Operating Loss Carryforwards
|
2,865,302
|
2,797,245
|
Other
|
33
|
18,579
|
Depreciation
|
( 18,952)
|
( 27,213)
|
Total
Deferred Tax Assets (Liabilities)
|
4,321,802
|
4,183,994
|
Valuation
allowance
|
(4,321,802)
|
(4,183,994)
|
|
$-
|
$-
|
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 $4,321,802 and $4,183,994 for the years ended on February 29,
2020 and February 28, 2019 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.
As of February 29, 2020, the Company estimates it has approximately
$11.8 million of Federal and $11 million of state net operating
loss (“NOL”) carryforwards as compared to $11.2 million
of Federal and $10.8 million of state net operating loss
carryforwards as of February 28, 2019. Of the Federal NOL
carryforwards, $0 expired in 2020 and the remaining balance will
expire between 2022 and 2040. Of the state NOL carryforwards,
$0 expired in 2020, 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:
Federal Net Operating
Loss Carryforward expirations:
|
Fiscal Year
Ending February 28/29
|
|
2022
|
$1,253,000
|
2023
|
1,248,000
|
2029
|
7,514,000
|
2037
|
322,000
|
2038
|
187,000
|
2039
|
986,000
|
2040
|
285,000
|
Total
|
$11,795,000
|
8.
STOCK OPTIONS
There
are no stock options outstanding and no options have been granted
during the fiscal years ended February 29, 2020 and February 28,
2019 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 29, 2020 and February 28,
2019.
10.
DISAGGREGATION OF REVENUES AND MAJOR CUSTOMERS
Revenues
from domestic and export sales to unaffiliated customers for the
fiscal years ended February 29, 2020 and February 28, 2019 are as
follows:
Geographic
Region
|
|
|
Europe
and Australia
|
$-
|
$-
|
Canada
and Latin America
|
21,000
|
28,000
|
Far
East and Middle East
|
1,000
|
31,000
|
United
States
|
9,215,000
|
9,319,000
|
Totals
|
$9,237,000
|
$9,378,000
|
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 29, 2020 and February 28, 2019,
approximately 78% and 76%, respectively, of the Company’s
sales have been attributable to contracts with customers
whose products are sold to the United States government. The
remaining 22% and 24%, 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 top two customers accounted for 70% of net sales
for the year ended February 29, 2020 as compared with
78% of the Company's net
sales for the year ended February 28, 2019. Sales to Raytheon
Technologies Corporation accounted for approximately 52% of net
sales for the year ended February 29, 2020 and 60% for the year
ended February 28, 2019. Sales to the second largest customer, USI
Electronics, accounted for 18% of net sales for the years ended
February 29, 2020 and February 28, 2019.
11.
MAJOR SUPPLIERS
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. For
the year ended February 28, 2019, purchases from the
Company’s top supplier, CPS Technologies Corp. accounted for
21% of
the Company's total purchases of production materials, Egide USA
accounted for 11% of the Company’s total purchases of
production materials, and all other suppliers were individually
less than 10% of purchases.
12.
COMMITMENTS AND CONTINGENCIES
Operating leases:
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.
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.
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.
The Company does not have any finance leases.
As our 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 lease assets and liabilities
were as follows:
Balance Sheet Classification
|
|
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 lease payments, excluding Florida sales tax, as of
February 29, 2020 under non-cancelable operating leases are as
follows:
Fiscal Year
Ending February 28
|
|
2021
|
454,000
|
2022
|
388,000
|
Total Future
Undiscounted Cash Flows
|
$842,000
|
Less Imputed
Interest to be recognized in lease expense
|
48,000
|
Operating Lease
Liabilities, as reported
|
$794,000
|
Actual
rent expense paid for the fiscal years ended February 29, 2020 and
February 28, 2019 including Florida sales tax was approximately
$472,000 and $456,000, respectively.
13.
STOCKHOLDERS’ EQUITY
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 28, 2019 the Company repurchased 20
shares of common stock and was notified by its transfer agent that
an adjustment increasing outstanding shares of common stock by 29
shares was necessary. During the fiscal year ended February 29,
2020 the Company repurchased 10 shares of common
stock.
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.
14.
SUBSEQUENT EVENTS
In June
2020 the Company repurchased 2,493 shares at a total cost of
$5,734, or $2.30 per share.
On July 21, 2020, the Company executed a promissory note in favor
of Bank of America, N.A. (the "Lender") for an unsecured $807,415
loan under the Paycheck Protection Program (the “PPP
Loan”). The Company received the proceeds of the PPP Loan on
July 23, 2020.
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 and Mr.
Matson received 15,337 shares. Shares were issued under the 2019
Stock Incentive Plan.