Solitron Devices Inc. (SODI, Financial) designs, develops, manufactures and markets semiconductors components. The main customers are the military and aerospace markets in the United States and internationally. Solitron also provides the army and navy transistors, diodes and standard military drawing voltage regulators. The firm also provides the army and navy power supplies and other electronic control products. Solitron semiconductors are use in a various products ranging from military weapons to commercial use. The firm sells its product directly and through a network of manufacturers representatives and distributors. Currently investor Tim Eriksen of Eriksen Capital Management involve with the company demand changes. Tim Eriksen has written a letter to the board and its CEO Shev Saraf, where he discuss his and other shareholders lack of say in the company that they own and the board and the CEO continues to go against shareholders will.
Solitron offers a various of components:
- bipolar and metal oxide semiconductors (MOS) power transistors.
- power and control hybrids.
- junction and power (MOS) field effect transistors.
- other related products.
Products that Solitron semiconductors are used in:
- aerospace electronic equipment.
- ground and airborne radar systems.
- power distribution systems.
- missiles and missile control systems.
- industrial applications.
Financials and valuation
The company has a market cap of $8.9 million and has $6.9 million in cash which makes up over half the company's market cap. Solitron net income for fiscal year 2014 was over $800,000 and revenues were $8.65 million. Net income and sales grew at 8% and 2% for the fiscal year. The firm capital expenditures for fiscal year 2014 was -$204,000 and free cash flow for the year was $415,000 or $0.17 per share. Solitron has made money 18 out of the last 19 years with earnings per share coming in at $0.37 per share. The firm has a 10-year average earnings of 0.51 per share. Solitron has a tangible book value of $5.37, and working capital per share of $5.11 per share. The company is selling for 0.73x its tangible book value and 0.96x working capital. As well the company is selling for about 7.36x earnings and EV/EBITDA of 2.29x which are low valuation for the firm. The company low valuation across the board is clearly been cause by mis-management of the company. Solitron is profitable and as over half its market value in cash mainly treasuries. The company because of its excessive cash hoarding as a current ratio of 11.97x, quick ratio of 7.72x and a cash ratio of 6.79. Clearly the company has more liquidity than its needs. The company can afford to remove excess cash of its book and distribute its to shareholders. With an Activist investor getting more involved and demanding changes with the board will help close the gap between value in price.
Valuations ratios
| Price to Tangible Book Value | 0.73x |
| Price to Working Capital | 0.96x |
| P/E | 7.36x |
| EV/EBITDA | 2.29x |
| Current Ratio | 11.97x |
| Quick Ratio | 7.72x |
| Cash Ratio | 6.79x |
| Capital Expenditure Ratio | 0.05x |
Management shenanigans and activist investors
Solitron is run by Shevach Saraf who is the chairman, CEO, president and CFO of the company. He has been running the company for over 20 years now since its emergence from bankruptcy and owns 30% of its shares. The firm hasn't had an annual meeting for 10 years when Nate Tobik took a personal stake and wrote about the company on his http://www.oddballstocks.com blog. He got other shareholders together to demand an annual meeting which worked. Tobik even wrote the board a letter where he outline two proposals to close the gap between market price and intrinsic value. He advocated a share buyback which was modest, explaining that the company would instantly achieve a 10% return on invested capital, which is better than keeping excess cash in Treasuries. At the first shareholder meeting in 10 year in 2013 shareholder rejected two of the four board nominees. In response to this the board appointed one of the rejected nominees anyways. An at the 2014, annual meeting shareholder rejected the board solo nominee. When the company's largest shareholders reach out to help the board fill the vacant seat, they just ignored them all. On January 12, 2015, the board voted to expand to five seats and appointed John Christe and Dwight Aubrey to fill the two vacancies. Due to a staggered board, shareholders won't be able to affirm either one of them until 2017. Tim Eriksen in his letter informs investor and the board that the company potentially filed false statements to the SEC regarding one of the directors.
In the 8-k filing on January 12, 2015 Solitron states that "Mr. Christe is a director and Chairman of the Audit Committee of Forward Industries., a manufacturer and distributor of specialty and promotional products, primarily for handheld electronic devices.”
Which is untrue since Mr. Christe was voted out by shareholders along with the rest of Forward Industries nominees in a proxy contest which was certified on January 5, 2015. How can the board not know this? Did the board file a false statement with the SEC? The company brazenly appointed a director who was in the process of being thrown out by shareholders in a proxy fight. He owns no stock in the company and collected $45,000 in directors fees in 2014, and he was accused of illegally issuing preferred stock to insiders without a full board approval. Even after shareholders rejected Christe and the Forward Industries slate 3 to 1 the board still appointed him to the board. After all Christe has done to limit and even stack the odds against shareholders the company appointed him to the Nominating Committee. On November 26, 2014 Chairman, CEO, President, and CFO Shevach Saraf certified an inaccurate filing with OTC Market. In the filing the company failed to include Eriksen Capital Management among the list of 5% shareholders. The investment management firm filed a 13D with the SEC in August 7, 2014. How did the CEO not know that Eriksen Capital had a 5% stake in the company? In his letter to the company and shareholders Tim Eriksen does the companies accounting problem and management Shenanigans.
List of auditing firms
- 1994 - Arthur Andersen & Co
- 1995 - 1996 - BDO Seidman LLP
- 1997 - 1999 - Milward & Co CPAs
- 2000 - 2003 - Goldstein Golub Kessier LLP
- 2004 - Berkovits Lago & Company LLP
- 2005 - Goldstein, Lewin & Co CPAs
- 2006 - 2008 - DeLeon & Company PA
- 2009 - 2009 - Friedman, Cohen, Tubman & Company LLC
- 2011 - 2012 - Meeks International LLC
Accounting problem
The company has gone through auditing firms the last 19 years which frequent changes in auditing firms is never a positive sign. On January 9, 2015 the company filed a 8-K with the SEC which informed shareholders that there was material error which resulted in a $449,000 restatement to fiscal second quarter results. There was a sudden tripling of earnings which should have triggered an internal search to find the error. In his letter to management Tim Eriksen proposed solution to these problems.
Management shenanigans
- Not having an annual meeting for 10 years
- John Christe trying to issue preferred shares without the whole boards approval and distribute the share to a few board members.
- Board appointing one of its nominees after be rejected by shareholders in 2013.
- Creating new board two new board seats, and appointing outgoing board member John Christe.
- Reporting false statements to the SEC not John Christe.
- Reporting false statements to the SEC on 5% shareholders, leaving out Eriksen Capital Management.
- Have an accounting error, that produce a tripling in earnings.
- Going through a lot of auditing firms.
Activist proposal to solve these problems
Tim Eriksen's proposals for the 2015 Annual Meeting:
- Approve an amendment to declassify the board of directors.
- Nominate two directors in opposition to Solitron's two nominees.
- Increase the board size to seven from five directors.
- Elect additional board members to fill the new board seats.
- Repeal any and all changes to the bylaws subsequent to the date of this letter, up through the time of the annual meeting.
In closing
The company is clearly undervalued which is a result of management's behavior and actions when it comes to shareholders. Solitron is profitable and sells at low valuations that creates a margin of safety for investors. With an Activist investor involve and other large shareholder wanting change to management . A collision is on the way at the 2015 annual shareholder meeting. The chairman, CEO, president, and CFO Saraf must go along with John Christe and a audit of the firm operations should be done since the company seem unable to find accounting error or even know who owns 5% in the company.
Link To Go To:
Read Tobik letter to the board here: http://www.oddballstocks.com/2012/06/my-letter-to-solitrons-board-of.html
Tim Eriksen Letter here: http://www.sec.gov/Archives/edgar/data/91668/000114420415003301/v399304_ex99-1.htm
Solitron False Statements In Filings To The SEC:
http://www.sec.gov/Archives/edgar/data/91668/000121390015000514/f8k011215a1_solitron.htm
http://www.sec.gov/Archives/edgar/data/91668/000121390015000173/f8k010915_solitrondevices.htm
