NVE CORP /NEW/ 10-Q

Item 1. Financial Statements. NVE CORPORATION BALANCE SHEETS (Unaudited) September 30, 2020 March 31, 2020* ASSETS Current assets Cash and cash equivalents $ 3,845,070 $ 8,065,594 Marketable securities, short-term 23,231,981 19,084,814 Accounts receivable, net of allowance for uncollectible accounts of $15,000 1,922,076 2,694,018 Inventories 3,928,524 3,884,450 Prepaid expenses and other assets 610,635 655,835 Total current assets 33,538,286 34,384,711 Fixed assets Machinery and equipment 9,280,062 9,280,062 Leasehold improvements 1,797,245 1,797,245 11,077,307 11,077,307 Less accumulated depreciation and amortization 10,648,191 10,494,840 Net fixed assets 429,116 582,467 Deferred tax assets - 108,119 Marketable securities, long-term 40,777,322 43,606,495 Right-of-use asset – operating lease 752,861 816,358 Total assets $ 75,497,585 $ 79,498,150 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable $ 154,566 $ 186,993 Accrued payroll and other 424,957 482,074 Operating lease 113,666 127,134 Total current liabilities 693,189 796,201 Deferred tax liabilities 141,990 - Operating lease 644,987 706,600 Total liabilities 1,480,166 1,502,801 Shareholders’ equity Common stock, $0.01 par value, 6,000,000 shares authorized; 4,833,232 issued and outstanding as of September 30, 2020 and 4,835,038 as of March 31, 2020 48,332 48,350 Additional paid-in capital 19,329,577 19,383,956 Accumulated other comprehensive income 1,628,861 516,523 Retained earnings 53,010,649 58,046,520 Total shareholders’ equity 74,017,419 77,995,349 Total liabilities and shareholders’ equity $ 75,497,585 $ 79,498,150 *The March 31, 2020 Balance Sheet is derived from the audited financial statements contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020. See accompanying notes. 3 Table of Contents NVE CORPORATION STATEMENTS OF INCOME (Unaudited ) Quarter Ended September 30 2020 2019 Revenue Product sales $ 4,159,173 $ 6,187,708 Contract research and development 221,612 314,237 Total revenue 4,380,785 6,501,945 Cost of sales 941,287 1,346,098 Gross profit 3,439,498 5,155,847 Expenses Research and development 815,965 926,596 Selling, general, and administrative 358,182 368,450 Total expenses 1,174,147 1,295,046 Income from operations 2,265,351 3,860,801 Interest income 401,392 456,309 Income before taxes 2,666,743 4,317,110 Provision for income taxes 444,403 495,048 Net income $ 2,222,340 $ 3,822,062 Net income per share – basic $ 0.46 $ 0.79 Net income per share – diluted $ 0.46 $ 0.79 Cash dividends declared per common share $ 1.00 $ 1.00 Weighted average shares outstanding Basic 4,834,709 4,846,010 Diluted 4,834,809 4,847,881 STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Quarter Ended September 30 2020 2019 Net income $ 2,222,340 $ 3,822,062 Unrealized (loss) gain from marketable securities, net of tax (130,324 ) 178,716 Comprehensive income $ 2,092,016 $ 4,000,778 See accompanying notes. 4 Table of Contents NVE CORPORATION STATEMENTS OF INCOME (Unaudited) Six Months Ended Sept. 30 2020 2019 Revenue Product sales $ 8,517,808 $ 12,273,072 Contract research and development 452,239 523,569 Total revenue 8,970,047 12,796,641 Cost of sales 1,777,709 2,438,135 Gross profit 7,192,338 10,358,506 Expenses Research and development 1,696,948 1,899,663 Selling, general, and administrative 713,193 698,459 Total expenses 2,410,141 2,598,122 Income from operations 4,782,197 7,760,384 Interest income 800,604 915,348 Income before taxes 5,582,801 8,675,732 Provision for income taxes 948,596 1,246,251 Net income $ 4,634,205 $ 7,429,481 Net income per share – basic $ 0.96 $ 1.53 Net income per share – diluted $ 0.96 $ 1.53 Cash dividends declared per common share $ 2.00 $ 2.00 Weighted average shares outstanding Basic 4,834,872 4,846,010 Diluted 4,834,986 4,849,357 STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Six Months Ended Sept. 30 2020 2019 Net income $ 4,634,205 $ 7,429,481 Unrealized gain from marketable securities, net of tax 1,112,338 748,779 Comprehensive income $ 5,746,543 $ 8,178,260 See accompanying notes. 5 Table of Contents NVE CORPORATION STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) Additional Paid-In Capital Accumulated Other Comprehen- sive Income Retained Earnings Common Stock Shares Amount Total Balance as of March 31, 2020 4,835,038 $ 48,350 $ 19,383,956 $ 516,523 $ 58,046,520 $ 77,995,349 Comprehensive income: Unrealized gain on marketable securities, net of tax 1,242,662 1,242,662 Net income 2,411,865 2,411,865 Total comprehensive income 3,654,527 Stock-based compensation 2,707 2,707 Cash dividends declared ($1.00 per share of common stock) (4,835,038 ) (4,835,038 ) Balance as of June 30, 2020 4,835,038 $ 48,350 $ 19,386,663 $ 1,759,185 $ 55,623,347 $ 76,817,545 Repurchase of common stock (1,806 ) (18 ) (91,401 ) (91,419 ) Comprehensive income: Unrealized loss on marketable securities, net of tax (130,324 ) (130,324 ) Net income 2,222,340 2,222,340 Total comprehensive income 2,092,016 Stock-based compensation 34,315 34,315 Cash dividends declared ($1.00 per share of common stock) (4,835,038 ) (4,835,038 ) Balance as of September 30, 2020 4,833,232 $ 48,332 $ 19,329,577 $ 1,628,861 $ 53,010,649 $ 74,017,419 See accompanying notes. 6 Table of Contents NVE CORPORATION STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) Additional Paid-In Capital Accumulated Other Comprehen- sive Income (Loss) Retained Earnings Common Stock Shares Amount Total Balance as of March 31, 2019 4,846,010 $ 48,460 $ 19,910,558 $ (82,725 ) $ 62,903,918 $ 82,780,211 Comprehensive income: Unrealized gain on marketable securities, net of tax 570,063 570,063 Net income 3,607,419 3,607,419 Total comprehensive income 4,177,482 Cash dividends declared ($1.00 per share of common stock) (4,846,010 ) (4,846,010 ) Balance as of June 30, 2019 4,846,010 48,460 19,910,558 487,338 61,665,327 82,111,683 Comprehensive income: Unrealized gain on marketable securities, net of tax 178,716 178,716 Net income 3,822,062 3,822,062 Total comprehensive income 4,000,778 Stock-based compensation 48,360 48,360 Cash dividends declared ($1.00 per share of common stock) (4,846,010 ) (4,846,010 ) Balance as of September 30, 2019 4,846,010 $ 48,460 $ 19,958,918 $ 666,054 $ 60,641,379 $ 81,314,811 See accompanying notes. 7 Table of Contents NVE CORPORATION STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended Sept. 30 2020 2019 OPERATING ACTIVITIES Net income $ 4,634,205 $ 7,429,481 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 259,241 266,916 Stock-based compensation 37,022 48,360 Deferred income taxes (61,437 ) 75,521 Changes in operating assets and liabilities: Accounts receivable 771,942 (220,147 ) Inventories (44,074 ) (90,456 ) Prepaid expenses and other assets 108,697 41,687 Accounts payable and other liabilities (164,625 ) (130,726 ) Net cash provided by operating activities 5,540,971 7,420,636 INVESTING ACTIVITIES Purchases of fixed assets - (16,100 ) Purchases of marketable securities - (3,013,530 ) Proceeds from maturities of marketable securities - 12,500,000 Cash provided by investing activities - 9,470,370 FINANCING ACTIVITIES Repurchase of common stock (91,419 ) - Payment of dividends to shareholders ( 9,670,076 ) (9,692,020 ) Cash used in financing activities (9,761,495 ) (9,692,020 ) (Decrease) increase in cash and cash equivalents (4,220,524 ) 7,198,986 Cash and cash equivalents at beginning of period 8,065,594 6,877,304 Cash and cash equivalents at end of period $ 3,845,070 $ 14,076,290 Supplemental disclosures of cash flow information: Cash paid during the period for income taxes $ 934,788 $ 1,230,000 See accompanying notes. 8 Table of Contents NVE CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE 1. DESCRIPTION OF BUSINESS We develop and sell devices that use spintronics, a nanotechnology that relies on electron spin rather than electron charge to acquire, store, and transmit information. NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited financial statements of NVE Corporation are prepared consistent with accounting principles generally accepted in the United States and in accordance with Securities and Exchange Commission rules and regulations. In the opinion of management, these financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the financial statements. Although we believe that the disclosures are adequate to make the information presented not misleading, certain disclosures have been omitted as allowed, and it is suggested that these unaudited financial statements be read in conjunction with the audited financial statements and the notes included in our latest annual financial statements included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020. The results of operations for the quarter and six months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year ending March 31, 2021. Significant Accounting Policies Revenue Recognition We recognize revenue when we satisfy performance obligations by the transfer of control of products or services to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services. Revenue is disaggregated into product sales and contract research and development to depict the nature, amount, timing of revenue recognition and economic characteristics of our business, and is represented within the financial statements. We recognize revenue from product sales to customers and distributors when we satisfy our performance obligation, at a point in time, upon product shipment or delivery to our customer or distributor as determined by agreed upon shipping terms. Shipping charges billed to customers are included in product sales and the related shipping costs are included in cost of sales. Under certain limited circumstances, our distributors may earn commissions for activities unrelated to their purchases of our products, such as for facilitating the sale of custom products or research and development contracts with third parties. We recognize any such commissions as selling, general, and administrative expenses. We recognize discounts provided to our distributors as reductions in revenue. We recognize contract research and development revenue over a period of time as the performance obligation is satisfied over a period of time rather than a point in time. Contracts have specifications unique to each customer and do not create an asset with an alternate use, and we have an enforceable right to payment for performance completed to date. We recognize revenue over a period of time using costs incurred as the measurement of progress towards completion. Accounts receivable is recognized when we have transferred a good or service to a customer and our right to receive consideration is unconditional through the completion of our performance obligation. A contract asset is recognized when we have a right to consideration from the transfer of goods or services to a customer but have not completed our performance obligation. A contract liability is recognized when we have been paid by a customer but have not yet satisfied the performance obligation by transferring goods or services. We had no material contract assets or contract liabilities as of September 30, 2020 or March 31, 2020. Our performance obligations related to product sales and contract research and development contracts are satisfied in one year or less. Unsatisfied performance obligations represent contracts with an original expected duration of one year or less. As permitted under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers , we are using the practical expedient not to disclose the value of these unsatisfied performance obligations. We also use the practical expedient in which we do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less. 9 Table of Contents NOTE 3. RECENTLY ISSUED ACCOUNTING STANDARDS New Accounting Standards Not Yet Adopted In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes . ASU 2019-12 is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, which is fiscal 2022 for us, with early adoption permitted. We do not expect adoption of the new guidance to have a significant impact on our financial statements. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements . ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. In November 2018 the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses , which clarifies codification and corrects unintended application of the guidance, and in November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses , which clarifies or addresses specific issues about certain aspects of ASU 2016-13. In November 2019 the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates , and in February 2020 the FASB issued ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) , both of which delay the effective date of ASU 2016-13 by three years for certain Smaller Reporting Companies such as us. We were unaffected by the change in the effective date of the ASU related to Leases (Topic 842) because we have already adopted that ASU. In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments ; which modifies the measurement of expected credit losses of certain financial instruments. In accordance with ASU 2019-10 and ASU 2020-02, ASU 2016-13 is effective for certain Smaller Reporting Companies for financial statements issued for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years, which will be fiscal 2024 for us if we continue to be classified as a Smaller Reporting Company, with early adoption permitted. We do not expect adoption of the new guidance to have a significant impact on our financial statements. NOTE 4. NET INCOME PER SHARE Net income per basic share is computed based on the weighted-average number of common shares issued and outstanding during each period. Net income per diluted share amounts assume exercise of all stock options. The following tables show the components of diluted shares: Quarter Ended Sept. 30 2020 2019 Weighted average common shares outstanding – basic 4,834,709 4,846,010 Dilutive effect of stock options 100 1,871 Shares used in computing net income per share – diluted 4,834,809 4,847,881 Six Months Ended Sept. 30 2020 2019 Weighted average common shares outstanding – basic 4,834,872 4,846,010 Dilutive effect of stock options 114 3,347 Shares used in computing net income per share – diluted 4,834,986 4,849,357 10 Table of Contents NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS Our corporate bonds and money market funds are classified as available-for-sale securities and carried at estimated fair value. Unrealized holding gains and losses are included in accumulated other comprehensive income (loss) in the statement of shareholders’ equity. Corporate bonds with remaining maturities less than one year are classified as short-term, and those with remaining maturities greater than one year are classified as long-term. We consider all highly-liquid investments with maturities of three months or less when purchased, including money market funds, to be cash equivalents. Gains and losses on marketable security transactions are reported on the specific-identification method. Contractual maturities of available-for-sale securities as of September 30, 2020 are as follows: Total <1 Year 1–3 Years 3–5 Years $ 67,555,355 $ 26,778,033 $ 34,271,054 $ 6,506,268 Total available-for-sale securities represented approximately 89% of our total assets. Marketable securities as of September 30, 2020 had remaining maturities between one and 41 months. Generally accepted accounting principles establish a framework for measuring fair value, provide a definition of fair value, and prescribe required disclosures about fair-value measurements. Generally accepted accounting principles define fair value as the price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. Generally accepted accounting principles utilize a valuation hierarchy for disclosure of fair value measurements. The categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The categories within the valuation hierarchy are described as follows: Level 1 – Financial instruments with quoted prices in active markets for identical assets or liabilities. Level 2 – Financial instruments with quoted prices in active markets for similar assets or liabilities. Level 2 fair value measurements are determined using either prices for similar instruments or inputs that are either directly or indirectly observable, such as interest rates. Level 3 – Inputs to the fair value measurement are unobservable inputs or valuation techniques. Money market funds are included on the balance sheets in “Cash and cash equivalents.” Corporate bonds are included on the balance sheets in “Marketable securities, short term” and “Marketable securities, long term.” The following table shows the estimated fair value of assets that were accounted for at fair value on a recurring basis: As of September 30, 2020 As of March 31, 2020 Level 1 Level 2 Total Level 1 Level 2 Total Money market funds $ 3,546,052 $ - $ 3,546,052 $ 7,903,433 $ - $ 7,903,433 Corporate bonds - 64,009,303 64,009,303 - 62,691,309 62,691,309 Total $ 3,546,052 $ 64,009,303 $ 67,555,355 $ 7,903,433 $ 62,691,309 $ 70,594,742 Our available-for-sale securities as of September 30 and March 31, 2020, aggregated into classes of securities, were as follows: As of September 30, 2020 As of March 31, 2020 Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Estimated Fair Value Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Estimated Fair Value Money market funds $ 3,546,052 $ - $ - $ 3,546,052 $ 7,903,433 $ - $ - $ 7,903,433 Corporate bonds 61,924,230 2,085,073 - 64,009,303 62,030,120 752,621 (91,432 ) 62,691,309 Total $ 65,470,282 $ 2,085,073 $ - $ 67,555,355 $ 69,933,553 $ 752,621 $ (91,432 ) $ 70,594,742 11 Table of Contents NOTE 6. INVENTORIES Inventories are shown in the following table: Sept. 30, 2020 March 31, 2020 Raw materials $ 953,050 $ 1,017,451 Work in process 1,949,981 1,863,000 Finished goods 1,025,493 1,003,999 Total inventories $ 3,928,524 $ 3,884,450 NOTE 7. STOCK-BASED COMPENSATION Stock-based compensation expense was $34,315 for the second quarter of fiscal 2021, $37,022 for the first six months of fiscal 2021, and $48,360 for the second quarter and first six months of fiscal 2020. We calculate the share-based compensation expense using the Black-Scholes standard option-pricing model. NOTE 8. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We had no unrecognized tax benefits as of September 30, 2020, and we do not expect any significant unrecognized tax benefits within 12 months of the reporting date. We recognize interest and penalties related to income tax matters in income tax expense. As of September 30, 2020 we had no accrued interest related to uncertain tax positions. The tax years 2016 through 2019 remain open to examination by the major taxing jurisdictions to which we are subject. NOTE 9. LEASES We conduct our operations in a leased facility under a non-cancellable lease expiring March 31, 2026. Our lease does not provide an implicit rate, so we used our incremental borrowing rate to determine the present value of lease payments. Lease expense is recognized on a straight-line basis over the lease term. Variable lease costs consist primarily of common area maintenance and real estate taxes which are paid based on actual costs incurred by the lessor. Details of our operating lease are as follows: Quarter Ended Sept. 30, 2020 Six Months Ended Sept. 30, 2020 Operating lease cost $ 38,641 $ 77,282 Variable lease cost 30,608 61,216 Total $ 69,249 $ 138,498 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows for leases $ 44,433 $ 88,866 Remaining lease term 66 months Discount rate 3.5 % The following table presents the maturities of lease liabilities as of September 30, 2020: Year Ending March 31 Operating Leases 2021 $ 39,671 2022 152,703 2023 156,121 2024 159,592 2025 163,224 2026 165,947 Total lease payments 837,258 Imputed lease interest (78,605 ) Total lease liabilities $ 758,653 12 Table of Contents NOTE 10. STOCK REPURCHASE PROGRAM On January 21, 2009 we announced that our Board of Directors authorized the repurchase of up to $2,500,000 of our Common Stock from time to time in open market, block, or privately negotiated transactions. The timing and extent of any repurchases depends on market conditions, the trading price of the company’s stock, and other factors, and subject to the restrictions relating to volume, price, and timing under applicable law. On August 27, 2015, we announced that our Board of Directors authorized up to $5,000,000 of additional repurchases. Our repurchase program does not have an expiration date and does not obligate us to purchase any shares. The Program may be modified or discontinued at any time without notice. We intend to finance any stock repurchases with cash provided by operating activities or maturating marketable securities. The remaining authorization was $3,762,040 as of September 30, 2020. Common Stock repurchases during the second quarter of fiscal 2021, all of which were made as part of our publicly announced program, were as follows: Total number of Max. approximate Period Total Average shares purchased dollar value of number price as part of publicly shares that may of shares paid announced yet be purchased purchased per share program under the program July 1, 2020 – July 31, 2020 - $ - - $ 3,853,459 August 1, 2020 – August 31, 2020 - $ - - $ 3,853,459 September 1, 2020 – September 30, 2020 1,806 $ 50.62 1,806 $ 3,762,040 1,806 1,806 NOTE 11. INFORMATION AS TO EMPLOYEE STOCK PURCHASE, SAVINGS, AND SIMILAR PLANS All of our employees are eligible to participate in our 401(k) savings plan the first quarter after reaching age 21. Employees may contribute up to the Internal Revenue Code maximum. We make matching contributions of 100% of the first 3% of participants’ salary deferral contributions. Our matching contributions were $21,275 for the second quarter of fiscal 2021, $21,990 for the second quarter of fiscal 2020, $46,656 for the first six months of fiscal 2021, and $46,056 for the first six months of fiscal 2020. NOTE 12. SUBSEQUENT EVENTS On October 21, 2020 we announced that our Board had declared a quarterly cash dividend of $1.00 per share of Common Stock to be paid November 30, 2020 to shareholders of record as of the close of business November 2, 2020. 13 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements Some of the statements made in this Report or in the documents incorporated by reference in this Report and in other materials filed or to be filed by us with the Securities and Exchange Commission (“SEC”) as well as information included in verbal or written statements made by us constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to the safe harbor provisions of the reform act. Forward-looking statements may be identified by the use of the terminology such as may, will, expect, anticipate, intend, believe, estimate, should, or continue, or the negatives of these terms or other variations on these words or comparable terminology. To the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of NVE, you should be aware that our actual financial condition, operating results and business performance may differ materially from that projected or estimated by us in the forward-looking statements. We have attempted to identify, in context, some of the factors that we currently believe may cause actual future experience and results to differ from their current expectations. These differences may be caused by a variety of factors, including but not limited to risks related to our reliance on several large customers for a significant percentage of revenue, uncertainties related to the economic environments in the industries we serve, uncertainties related to future sales and revenues, risks related to the COVID-19 pandemic, risks and uncertainties related to future stock repurchases and dividend payments, and other specific risks that may be alluded to in this Report or in the documents incorporated by reference in this Report. Further information regarding our risks and uncertainties are contained in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended March 31, 2020 as updated in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 and Item 1A herein. General NVE Corporation, referred to as NVE, we, us, or our, develops and sells devices that use spintronics, a nanotechnology that relies on electron spin rather than electron charge to acquire, store and transmit information. We manufacture high-performance spintronic products including sensors and couplers that are used to acquire and transmit data. Critical accounting policies A description of our critical accounting policies is provided in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended March 31, 2020. As of September 30, 2020 our critical accounting policies and estimates continued to include investment valuation, inventory valuation, and deferred tax assets estimation. 14 Table of Contents Quarter ended September 30, 2020 compared to quarter ended September 30, 2019 The table shown below summarizes the percentage of revenue and quarter-to-quarter changes for various items: Percentage of Revenue Quarter Ended September 30 Quarter- to-Quarter Change 2020 2019 Revenue Product sales 94.9 % 95.2 % (32.8 )% Contract research and development 5.1 % 4.8 % (29.5 )% Total revenue 100.0 % 100.0 % (32.6 )% Cost of sales 21.5 % 20.7 % (30.1 )% Gross profit 78.5 % 79.3 % (33.3 )% Expenses Research and development 18.6 % 14.2 % (11.9 )% Selling, general, and administrative 8.2 % 5.7 % (2.8 )% Total expenses 26.8 % 19.9 % (9.3 )% Income from operations 51.7 % 59.4 % (41.3 )% Interest income 9.2 % 7.0 % (12.0 )% Income before taxes 60.9 % 66.4 % (38.2 )% Provision for income taxes 10.2 % 7.6 % (10.2 )% Net income 50.7 % 58.8 % (41.9 )% Total revenue for the quarter ended September 30, 2020 (the second quarter of fiscal 2021) decreased 33% compared to the quarter ended September 30, 2019 (the second quarter of fiscal 2020). The decrease was due to a 33% decrease in product sales and a 29% decrease in contract research and development revenue. The decrease in product sales from the prior-year quarter was primarily due to decreased purchases by existing customers. The decrease in contract research and development revenue the second quarter of fiscal 2021 was due to the completion of certain contracts. Total expenses decreased 9% in the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020 due to a 12% decrease in research and development expense and a 3% decrease in selling, general, and administrative expense. The decrease in research and development expense was primarily due to the completion of certain product development activities. Interest income for the second quarter of fiscal 2021 decreased 12% due to a decrease in our marketable securities and money market funds and a decrease in the average interest rates on those securities and funds. The 42% decrease in net income in the second quarter of fiscal 2021 compared to the prior-year quarter was primarily due to a decrease in revenue. 15 Table of Contents Six months ended September 30, 2020 compared to six months ended September 30, 2019 The table shown below summarizes the percentage of revenue and period-to-period changes for various items: Percentage of Revenue Six Months Ended Sept. 30 Period- to-Period Change 2020 2019 Revenue Product sales 95.0 % 95.9 % (30.6 )% Contract research and development 5.0 % 4.1 % (13.6 )% Total revenue 100.0 % 100.0 % (29.9 )% Cost of sales 19.8 % 19.1 % (27.1 )% Gross profit 80.2 % 80.9 % (30.6 )% Expenses Research and development 18.9 % 14.8 % (10.7 )% Selling, general, and administrative 8.0 % 5.5 % 2.1 % Total expenses 26.9 % 20.3 % (7.2 )% Income from operations 53.3 % 60.6 % (38.4 )% Interest income 8.9 % 7.2 % (12.5 )% Income before taxes 62.2 % 67.8 % (35.7 )% Provision for income taxes 10.5 % 9.7 % (23.9 )% Net income 51.7 % 58.1 % (37.6 )% Total revenue for the six months ended September 30, 2020 decreased 30% compared to the six months ended September 30, 2019, due to a 31% decrease in product sales and a 14% decrease in contract research and development revenue. The decrease in product sales from the prior-year period was due to decreased purchase volumes by existing customers. The decrease in contract research and development revenue was due to the completion of certain contracts. Total expenses decreased 7% for the first six months of fiscal 2021 compared to the first six months of fiscal 2020 due to an 11% decrease in research and development expense, partially offset by a 2% increase in selling, general, and administrative expense. The decrease in research and development expense was due to the completion of certain product development activities. Interest income for the first six months of fiscal 2021 decreased 13% due to a decrease in our marketable securities and money market funds and a decrease in the average interest rates on those securities and funds. The 38% decrease in net income in the first six months of fiscal 2021 compared to the prior-year period was primarily due to a decrease in revenue. The Impact of the COVID-19 Pandemic We believe the COVID-19 pandemic had a significant impact on total revenue and net income for the quarter and six months ended September 30, 2020 compared to the prior-year period due to its effects on market conditions in certain industries, especially medical devices. Total revenue and net income will likely continue to decrease for the quarter ending December 31, 2020 compared to the prior-year quarter. 16 Table of Contents Liquidity and Capital Resources Overview Cash and cash equivalents were $3,845,070 as of September 30, 2020 compared to $8,065,594 as of March 31, 2020. The $4,220,524 decrease in cash and cash equivalents was due to $9,761,495 of cash used in financing activities consisting of cash dividends and Common Stock repurchases, partially offset by $5,540,971 in net cash provided by operating activities. Investing Activities We had no maturities or purchases of debt securities and no capital expenditures during the six months ended September 30, 2020. Capital expenditures can vary from period to period depending on our needs and equipment purchasing opportunities. Financing Activities We paid $9,670,076 in cash dividends and repurchased $91,419 of our Common Stock in the first six months of fiscal 2021. In addition to cash dividends paid in the first six months of fiscal 2021, on October 21, 2020 we announced that our Board had declared a cash dividend of $1.00 per share of Common Stock, or $4,833,232 based on shares outstanding as of October 16, 2020, to be paid November 30, 2020. We plan to fund dividends through cash provided by operating activities and proceeds from maturities of marketable securities. All future dividends will be subject to Board approval and subject to the company’s results of operations, cash and marketable security balances, estimates of future cash requirements, the impacts of the COVID-19 pandemic, and other factors the Board may deem relevant. Furthermore, dividends may be modified or discontinued at any time without notice. We currently believe our working capital and cash generated from operations will be adequate for our needs at least for the next 12 months. Off-Balance-Sheet Arrangements Our off-balance sheet arrangements consist of purchase commitments. We believe such arrangements have no material current or anticipated future effect on our profitability, cash flows, or financial position. 17 Table of Contents