Description

SODI is a thinly traded nano-cap that offers upside thanks to a significant operating cost reduction and new revenue from the federal government’s recently approved Omnibus spending bill.

SODI was last written up by AlexB91 who does a nice job of summarizing the business and discussing the changes that brought the current management team to the company.

In short, SODI designs, develops, manufactures and markets solid-state semiconductor components and related devices primarily for the military and aerospace markets.  Most (86% of revenue) 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 (14% of revenue), are sold as standard or catalog items.  SODI’s customers are concentrated and the industry is competitive.

Significantly, once SODI products have been included in a new military or aerospace program they are likely to be included for the life of the program, which can be decades.  The qualification and certification process for any supplier to these programs is very rigorous.  Thanks to its decades of services to these programs, SODI has deep customer relationships that positions it well to be considered for new programs.

The Company does not disclose many of the military programs in which it participates, but a scan of the contracts at the Defense Logistics Agency gives you a sense of the scope of SODI’s involvement.

Here is a screenshot of one of the company’s contracts as represented on the DLA database.  You can also search for SODI on the DLA website to see current and historical contract data, including reference to the AMRAAM program in which SODI participates.

Recent Developments

The chart above shows SODI’s consistent, if lumpy, revenue over the past five years.

Management notes that during the depths of COVID, customer sales calls effectively ceased.  The impact was SODI was unable to communicate effectively with customers about new projects they were developing and SODI’s potential to aid their effort.  In addition, SODI notes that customers struggled during COVID to even gather their teams to internally discuss projects, further slowing the sales cycle.

SODI used this time to begin work on new products which they are marketing now, including Silicon Carbide (“SiC”) applications which SODI describes as more efficient, smaller in size, and lower weight than current products.  While early, SODI is optimistic that its SiC efforts will produce incremental revenue.

Relocation

In May 2021, SODI purchased a building to serve as its primary facility allowing it to move out of leased space.  The planned move in date was August 2022. 

Once it has moved, SODI anticipates annual cost savings of $1,000,000 ($0.50 share) as a result of the elimination of the $40,000 monthly rent, and reduced costs for gases and utilities due to the smaller footprint of the new facility and headquarters, the Company’s decision to not relocate and operate the Company’s wafer fab at the new facility and headquarters, payroll savings, and insurance cost savings.

This is a material amount of savings on SODI’s cost base. To date, these savings have not been reflected in the company’s financials as the move took place in late 2022, and the most recent quarterly data is as of 11/30/22.  Now that it has been completed, the savings will appear.

Expanded contracts for existing programs

On 1/12/22, SODI announced the following:

“In December 2022 the President signed the $1.7 trillion omnibus spending bill. Included in the bill appropriations to replenish supplies used in Ukraine and to increase stockpiles. A number of programs are included in the spending, including two that represent Solitron‘s two largest revenue sources. The increased stockpiles program is a multi-year program that we currently expect to add approximately $20 million in total revenues starting in late 2024 and running through 2028, or approximately $4 million annually. Actual contract awards are expected to occur by the fall of 2024.” (My emphasis)

Impact of facility relocation and “stockpile increase” contracts

Due to the challenges of relocating its only production facility, SODI carefully managed its production capacity and timing to minimize the impact on customers.  As such, the timing of bookings and revenue over the last two years has been unusual to accommodate the downtime expected due to the move.  As such, the recent revenue numbers are not reflective of the business in a steady state.  

To account for this, we have averaged the last two years of operating performance to develop a base case operating scenario, before considering the omnibus spending bill stockpile increases.

Historical data

The green shading reflects quarters in which the company pulled revenue and production forward to accommodate future quarters with greatly reduced production due to the relocation, such as the most recent quarter ended 11/30/22.

Base Case

We have included the $1,000,000 in savings from the now-completed relocation in the base case above.  Management is confident in achieving these savings, nearly 50% of which are from elimination of rent at the prior facility.

As for the estimated value of the approved stockpile increases:

Risks

• Congressional budget games and the potential impact on future military program spending

• Loss of major contract due to poor performance or competition

Catalyst

• Reduced operating expenses flowing through income statement
• Return to more typical booking and revenue cadence