Quarterly Report for Quarter Ending August 31, 2026 (Form 10-Q)

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 consolidated financial statements should be read in conjunction with the Audited Consolidated 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, 2026 and the Unaudited Condensed Consolidated 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 consolidated 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, 2026.

See Note 2, "Summary of Significant Accounting Policies", to the accompanying notes to the financial statements included in this Quarterly Report on 10-Q.

Results of Operations-Three Months Ended August 31, 2026, Compared to Three Months Ended August 31, 2025:

Net Sales. Net sales for the three months ended August 31, 2026, increased 42% to $5,657,000 as compared to $3,986,000 for the three months ended August 31, 2025. The increase in net sales was largely due to increased backlog in fiscal year 2026 as compared to fiscal year 2025 and the associated delivery dates of those orders. In addition, this increase also reflects updated pricing which took effect on some products sold during the quarter.

Net bookings for the three months ended August 31, 2026, increased 48% to $6,416,000 versus $4,324,000 during the three months ended August 31, 2025 primarily due to the variable timing on the receipt of orders. Backlog as of August 31, 2026, increased 29% to $24,112,000 as compared to a backlog of $18,642,000 as of August 31, 2025. This increase was primarily due to a large order MEI received during the quarter.

Cost of Sales. Cost of sales for the three months ended August 31, 2026, decreased to $2,909,000 from $3,151,000 for the three months ended August 31, 2025. Expressed as a percentage of net sales, cost of sales decreased to 51% for the three months ended August 31, 2026, compared to 79% for the three months ended August 31, 2025. The decrease in cost of sales is due to the general increase in revenue in comparison to the Company's fixed overhead expenses and increased pricing on some products, as noted above.

Gross Profit. Gross profit for the three months ended August 31, 2026, increased to $2,748,000 from $835,000 for the three months ended August 31, 2025. Expressed as a percentage of net sales, gross profit increased to 49% for the three months ended August 31, 2026, compared to 21% for the three months ended August 31, 2025. This increase is due to the overall higher revenue during the quarter.

For the three months ended August 31, 2026, we shipped 24,620 units as compared to 20,805 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 $1,033,000 for the three months ended August 31, 2026 from $1,126,000 for the three months ended August 31, 2025. Expressed as a percentage of net sales, selling, general and administrative expenses during the three months ended August 31, 2026, was 18% as compared to 28% for the three months ended August 31, 2025. Included in expenses for the three months ended August 31, 2026, were $200,000 in professional fees related to the company pursuing strategic alternatives. Prior year selling, general and administrative expenses were higher due to $331,000 in stock award and stock option expenses granted during August 2025.

Operating Income (Loss). The operating income for the three months ended August 31, 2026, was $1,715,000 as compared to operating loss of ($291,000) for the three months ended August 31, 2025. This increase in income is due to the overall higher revenue during the quarter.

Other Income (Loss). Interest income increased to $54,000 for the three months ended August 31, 2026, as compared to $42,000 for the three months ended August 31, 2025. Interest expense decreased to ($45,000) for the three months ended August 31, 2026, as compared to ($66,000) for the three months ended August 31, 2025. Dividend income increased to $42,000 for the three months ended August 31, 2026, as compared to $18,000 for the three months ended August 31, 2025. Realized gains (losses) on investments for the three months ended August 31, 2026, was ($80,000), due to the Company liquidating its marketable securities, as compared to $170,000 for the three months ended August 31, 2025. Unrealized gains (losses) on investments for the three months ended August 31, 2026, was $80,000 due to market price changes in the company's common stock investments as compared to ($198,000) for the three months ended August 31, 2025. Contingent consideration expense was ($2,000) for the three months ended August 31, 2026, as compared to $0 for the three months ended August 31, 2025. Miscellaneous income was $2,000 for the three months ended August 31, 2026, as compared to $5,000 for the three months ended August 31, 2025.

Income (Taxes) Benefit. Income taxes for the three months ended August 31, 2026, increased to an expense of ($468,000) as compared to a benefit of $86,000 for the three months ended August 31, 2025. This change in income tax is due to the company's higher income in the current quarter ended August 31, 2026 compared to the loss for the three months ended August 31, 2025.

Net Income (Loss). Net income for the three months ended August 31, 2026, was $1,298,000 as compared to net loss of ($234,000) for the three months ended August 31, 2025.

Results of Operations-Six Months Ended August 31, 2026, Compared to Six Months Ended August 31, 2025:

Net Sales. Net sales for the six months ended August 31, 2026, increased 66% to $11,093,000 as compared to $6,686,000 for the six months ended August 31, 2025. The increase in net sales was largely due to increased backlog in fiscal year 2026 as compared to fiscal year 2025 and the associated delivery dates of those orders. In addition, this increase also reflects updated pricing which took effect on some products sold during the period.

Net bookings for the six months ended August 31, 2026, increased 11% to $7,870,000 versus $7,121,000 during the six months ended August 31, 2025 primarily due to the variable timing on the receipt of orders. Backlog as of August 31, 2026, increased 29% to $24,112,000 as compared to a backlog of $18,642,000 as of August 31, 2025. This increase was primarily due to a large order MEI received during the quarter.

Cost of Sales. Cost of sales for the six months ended August 31, 2026, increased 8% to $5,880,000 from $5,461,000 for the six months ended August 31, 2025. However, expressed as a percentage of net sales, cost of sales decreased to 53% for the six months ended August 31, 2026, compared to 82% for the six months ended August 31, 2025. The decrease in cost of sales is due to the general increase in revenue in comparison to the Company's fixed overhead expenses and increased pricing on some products, as noted above.

Gross Profit. Gross profit for the six months ended August 31, 2026, increased to $5,213,000 from $1,225,000 for the six months ended August 31, 2025. Expressed as a percentage of net sales, gross profit increased to 47% for the six months ended August 31, 2026, compared to 18% for the six months ended August 31, 2025. This increase is due to the overall higher revenue during the year.

For the six months ended August 31, 2026, we shipped 48,588 units as compared to 35,840 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 increased 4% to $1,963,000 for the six months ended August 31, 2026 from $1,894,000 for the six months ended August 31, 2025. However, expressed as a percentage of net sales, selling, general and administrative expenses during the six months ended August 31, 2026, was 18% as compared to 28% for the six months ended August 31, 2025. Included in expenses for the six months ended August 31, 2026, were $200,000 in professional fees related to the company pursuing strategic alternatives. Prior year selling, general and administrative expenses were higher due to $331,000 in stock award and stock option expenses granted during August 2025.

Operating Income (Loss). The operating income for the six months ended August 31, 2026, was $3,250,000 as compared to operating loss of ($669,000) for the six months ended August 31, 2025. This increase in income is due to the overall higher revenue during the period.

Other Income (Loss). Interest income increased to $136,000 for the six months ended August 31, 2026, as compared to $42,000 for the six months ended August 31, 2025. This increase was due to interest received on the Company's long-term investment for two quarters this year as opposed to only one quarter last year based on the timing of the investment purchase, in addition to interest received on a tax refund. Interest expense decreased to ($107,000) for the six months ended August 31, 2026, as compared to ($140,000) for the six months ended August 31, 2025. Dividend income increased to $67,000 for the six months ended August 31, 2026, as compared to $59,000 for the six months ended August 31, 2025. Realized gains (losses) on investments for the six months ended August 31, 2026, was ($80,000), due to the Company liquidating its marketable securities, as compared to $251,000 for the six months ended August 31, 2025. Unrealized gains (losses) on investments for the six months ended August 31, 2026, was $78,000 due to market price changes in the company's common stock investments as compared to ($325,000) for the six months ended August 31, 2025. Contingent consideration expense was ($333,000) for the six months ended August 31, 2026, as compared to $0 for the six months ended August 31, 2025. This adjustment to the contingent consideration was due to the increase in MEI's backlog. Scrap income was $100,000 for the six months ended August 31, 2026, as compared to $0 for the six months ended August 31, 2025. Miscellaneous income was $2,000 for the six months ended August 31, 2026, as compared to $5,000 for the six months ended August 31, 2025.

Income (Taxes) Benefit. Income taxes for the six months ended August 31, 2026, increased to an expense of ($825,000) as compared to a benefit of $207,000 for the six months ended August 31, 2025. This change in income tax is due to the company's higher income in the current quarter ended August 31, 2026 compared to the six months ended August 31, 2025.

Net Income (Loss). Net income for the six months ended August 31, 2026, was $2,288,000 as compared to net loss of ($570,000) for the six months ended August 31, 2025.

Liquidity and Capital Resources:

Operating Activities:

Net cash provided by operating activities was $3,601,000 for the six months ended August 31, 2026, primarily reflecting net income of $2,288,000, depreciation of $289,000, amortization of intangibles of $105,000, a decrease in net deferred taxes of $825,000, an increase in contingent consideration of $333,000, a decrease in accounts receivable of $332,000, an increase in accounts payable of $294,000, a decrease in other non-current assets of $285,000 and an increase in accrued expenses of $212,000, partially offset by an increase in inventories of $1,197,000 and an increase in prepaid expenses and other current assets of $189,000.

Net cash provided by operating activities was $777,000 for the six months ended August 31, 2025, primarily reflecting a net loss of ($570,000), an increase in customer deposits of $427,000, an increase in accounts payable of $372,000, stock compensation of $331,000, depreciation of $285,000, a decrease in inventories of $142,000, an increase in other non-current assets of $130,000, amortization of intangibles of $105,000 partially offset by an increase in accounts receivable of $299,000, change in net deferred taxes of $205,000 and an increase in other current assets of $152,000.

Investing Activities:

Net cash used in investing activities was ($184,000) for the six months ended August 31, 2026, principally reflecting $184,000 in purchases of property and equipment.

Net cash used in investing activities was ($1,887,000) for the six months ended August 31, 2025, principally reflecting $1,650,000 in purchases of a long-term investment, $409,000 of cash paid for acquisition, contingent consideration, partially offset by proceeds from the sale of marketable securities of $783,000 less the purchase of marketable securities of $533,000.

Financing Activities:

Net cash provided by financing activities was $26,000 for the six months ended August 31, 2026, principally reflecting $107,000 in sales of the Company's stock, partially offset by $81,000 in principal payments on the mortgage loans.

Net cash used in financing activities was ($139,000) for the six months ended August 31, 2025, principally reflecting $76,000 in principal payments on the mortgage loans and $63,000 for the repurchase of the Company's common stock.

We expect our sole sources of liquidity over the next twelve months to be cash from operations and cash and cash equivalents, if necessary. We anticipate that our capital expenditures required to sustain operations will be approximately $250,000 during the next twelve months and that our cash from operations and cash and cash equivalents, if necessary, will be sufficient to fund these needs for the next twelve months. Available cash and cash equivalents as of September 30, 2026 was approximately $7.6 million.

At August 31, 2026 and February 28, 2026, we had cash and cash equivalents of approximately $7,357,000 and $3,914,000, respectively. The increase for the six months ended August 31, 2026, was primarily due to the cash provided by increased sales over the last few quarters.

At August 31, 2026 and February 28, 2026, we had investments in securities of approximately $0 and $2,000, respectively. This is due to the Company selling its marketable securities.

At August 31, 2026 and February 28, 2026, we had working capital of $12,669,000 and $9,025,000, respectively. The increase for the six months ended August 31, 2026 was due primarily to the cash provided by increased sales over the last few quarters.

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 higher yielding debt instruments.

The Company will also continue to consider additional share repurchases under the Company's stock repurchase program subject to market conditions, corporate liquidity requirements and priorities and other factors as may be considered in the Company's sole discretion.

Off-Balance Sheet Arrangements:

The Company has not engaged in any off-balance sheet arrangements.

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 and potential strategic transactions. 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, 2026, 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:

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

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Our complex manufacturing processes may lower yields and reduce our revenues.

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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.

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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.

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Changes in government policy or economic conditions or technology or reduction in government spending to which our business relates could negatively impact our results.

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Our business is highly competitive and increased competition could reduce gross profit margins and the value of an investment in our Company.

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Changes in Defense related programs and priorities could reduce the revenues and profitability of our business.

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Our operating results may decrease due to the decline of profitability in the semiconductor industry.

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Uncertainty of current economic conditions, domestically and globally, could continue to affect demand for our products and negatively impact our business.

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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.

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Provisions in our charter documents could make it more difficult to acquire our Company and may reduce the market price of our stock.

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Failure to protect our proprietary technologies or maintain the right to use certain technologies may negatively affect our ability to compete.

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We cannot guarantee that we will have sufficient capital resources to make necessary investments in manufacturing technology and equipment.

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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.

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Our international operations expose us to material risks, including risks under U.S. export laws.

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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.

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Our failure to fully remediate and test the controls put in place related to 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.