Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has performed an evaluation of our disclosure controls and procedures that are defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Report. This evaluation included consideration of the controls, processes, and procedures that are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2023, our disclosure controls and procedures were effective.
Management ’ s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of March 31, 2023. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control — Integrated Framework . Based on our assessment using the criteria set forth by COSO in the 2013 Internal Control — Integrated Framework , management concluded that our internal control over financial reporting was effective as of March 31, 2023.
14
Table of Contents
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within NVE have been detected. Our internal controls over financial reporting, however, are designed to provide reasonable assurance that the objectives of internal control over financial reporting are met.
Changes in Internal Controls
During the year ended March 31, 2023, there was no change in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The section titled “Delinquent Section 16(a) Reports” sets forth information regarding delinquent Section 16(a) reports required by Item 10, to be included in our Proxy Statement for our 2023 Annual Meeting of Shareholders, the section titled “Proposal 1. Election of Board of Directors” sets forth certain information regarding our directors and executive officers required by Item 10, the section titled “Information About Our Executive Officers” sets forth information regarding our executive officers required by Item 10, and the section titled “Corporate Governance” sets forth information regarding our corporate governance and code of ethics required by Item 10. The information in these sections to be included in our Proxy Statement for our 2023 Annual Meeting of Shareholders is incorporated by reference into this section.
ITEM 11. EXECUTIVE COMPENSATION.
The information in the sections “Executive Compensation,” “Compensation Discussion and Analysis,” “Corporate Governance – Board Committees – Compensation Committee Interlocks and Insider Participation,” and “Director Compensation” to be included in our Proxy Statement for our 2023 Annual Meeting of Shareholders is incorporated by reference into this section.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information in the sections “Equity Compensation Plan Information” and “Security Ownership” to be included in our Proxy Statement for our 2023 Annual Meeting of Shareholders is incorporated by reference into this section. Information regarding the material features of our 2000 Stock Option Plan, as amended, is contained in Note 5 to the Financial Statements included elsewhere in this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information in the sections “Security Ownership – Transactions With Related Persons, Promoters, and Certain Control Persons” and “Corporate Governance – Board Composition and Independence” to be included in our Proxy Statement for our 2023 Annual Meeting of Shareholders is incorporated by reference into this section.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information in the sections “Audit Committee Disclosure – Fees Billed to Us by Our Independent Registered Public Accounting Firm During Fiscal 2023 and 2022” and “Audit Committee Disclosure – Audit Committee Pre-Approval Policy” to be included in our Proxy Statement for our 2023 Annual Meeting of Shareholders is incorporated by reference into this section.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Financial Statements and Schedules
Financial statements are provided pursuant to Item 8 of this Report. Certain financial statement schedules have been omitted because they are not required, not applicable, or the required information is provided in other financial statements or the notes to the financial statements.
(b) Exhibits
A list of exhibits is on the following page.
15
Table of Contents
Exhibit #
Description
3.1
Amended and Restated Articles of Incorporation of the company as amended by the Board of Directors effective November 21, 2002 (incorporated by reference to the Form 10-QSB for the period ended December 31, 2002).
3.2
Bylaws of the company as amended by the Board of Directors effective May 6, 2020.
4
Description of the registrant’s securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.
10.1
Lease dated October 1, 1998 with Glenborough Properties, LP (incorporated by reference to the Form 10-QSB for the period ended September 30, 2002).
10.2
First amendment to lease with Glenborough dated September 18, 2002 (incorporated by reference to the Form 10-QSB for the period ended September 30, 2002).
10.3
Second amendment to lease with Glenborough dated December 1, 2003 (incorporated by reference to the Form 10-QSB for the period ended December 31, 2003).
10.4
Third amendment to lease with Carlson Real Estate (incorporated by reference to the Form 8-K/A filed December 20, 2007).
10.5
Fourth amendment to lease with the Barbara C. Gage Revocable Trust (incorporated by reference to our Current Report on Form 8-K/A filed August 3, 2011).
10.6
Fifth amendment to lease with GRE – Bryant Lake, LLC (incorporated by reference to our Current Report on Form 8-K/A filed March 3, 2020).
10.7†
Employment Agreement with Daniel A. Baker dated January 29, 2001 (incorporated by reference to the Form 10-KSB for the year ended March 31, 2001).
10.8†
NVE Corporation 2000 Stock Option Plan as Amended July 19, 2001 by the shareholders (incorporated by reference to our Registration Statement on Form S-8 filed July 20, 2001).
10.9
Indemnification Agreement by and between Pacesetter, Inc., a St. Jude Medical Company, and the company (incorporated by reference to the Form 8-K filed September 27, 2005).
10.10+
Supplier Partnering Agreement by and between St. Jude and the company (incorporated by reference to the Form 8-K filed January 4, 2006).
10.11+
Amendment No. 1 to St. Jude Supplier Partnering Agreement (incorporated by reference to the Form 8-K/A filed September 10, 2007).
10.12+
Amendment No. 2 to St. Jude Supplier Partnering Agreement (incorporated by reference to the Form 8-K/A filed December 18, 2009).
10.13+
Amendment No. 3 to St. Jude Supplier Partnering Agreement (incorporated by reference to the Form 8-K/A filed September 16, 2010).
10.14
Amendment No. 4 to St. Jude Supplier Partnering Agreement (incorporated by reference to the Form 8-K/A filed February 7, 2011).
10.15
Supplier Quality Agreement between St. Jude and the company (incorporated by reference to the Form 8-K filed February 10, 2016).
10.16
Amendment No. 5 to St. Jude Supplier Partnering Agreement (incorporated by reference to the Form 8-K/A filed April 21, 2016).
10.17
Amendment No. 6 to Abbott Supplier Partnering Agreement (incorporated by reference to the Form 8-K/A filed December 21, 2020).
10.18
Amendment No. 7 to Abbott Supplier Partnering Agreement (incorporated by reference to the Annual Report on Form 10-K for the year ended March 31, 2021).
10.19*
Amendment No. 8 to Abbott Supplier Partnering Agreement (incorporated by reference to the Form 8-K/A filed February 2, 2022).
10.20*
Amendment No. 9 to Supplier Partnering Agreement between Abbott and the company (incorporated by reference to the Form 8-K/A filed January 25, 2023).
10.21+
Supply Agreement by and with Sonova AG (incorporated by reference to the Form 8-K/A filed November 16, 2015).
10.22*
First Amendment to Sonova Supply Agreement (incorporated by reference to the Form 8-K/A filed February 18, 2020).
23
Consent of Boulay PLLP.
31.1
Certification by Daniel A. Baker pursuant to Rule 13a-14(a)/15d-14(a).
31.2
Certification by Joseph R. Schmitz pursuant to Rule 13a-14(a)/15d-14(a).
32
Certification by Daniel A. Baker and Joseph R. Schmitz pursuant to 18 U.S.C. Section 1350.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
†Indicates a management contract or compensatory plan or arrangement.
+Confidential portions deleted and filed separately with the SEC.
*Certain confidential portions redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The omitted information is (i) not material and (ii) would likely cause us competitive harm if publicly disclosed. We agree to furnish supplementally an unredacted copy of the exhibit to the Securities and Exchange Commission on its request.
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Table of Contents
ITEM 16. FORM 10-K SUMMARY.
We have elected not to include an optional Form 10-K Summary.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NVE CORPORATION
(Registrant)
/s/Daniel A. Baker
by Daniel A. Baker
President and Chief Executive Officer
Date May 3, 2023
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/Terrence W. Glarner
Terrence W. Glarner
Director and
Chairman of the Board
May 3, 2023
/s/Daniel A. Baker
Daniel A. Baker
Director,
President and Chief Executive Officer
(Principal Executive Officer)
May 3, 2023
/s/ Joseph R. Schmitz
Joseph R. Schmitz
Chief Financial Officer
(Principal Financial Officer)
May 3, 2023
/s/Patricia M. Hollister
Patricia M. Hollister
Director
May 3, 2023
/s/Richard W. Kramp
Richard W. Kramp
Director
May 3, 2023
/s/James W. Bracke
James W. Bracke
Director
May 3, 2023
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
NVE Corporation
Opinion on the Financial Statements
We have audited the accompanying balance sheets of NVE Corporation (the Company) as of March 31, 2023 and 2022, and the related statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the two-year period ended March 31, 2023, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended March 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters.
/s/ Boulay PLLP
PCOAB ID: 542
We have served as the Company’s auditor since 2019.
Minneapolis, Minnesota
May 3, 2023
F-1
Table of Contents
NVE CORPORATION BALANCE SHEETS
March 31, 2023
March 31, 2022
ASSETS
Current assets
Cash and cash equivalents
$
1,669,896
$
10,449,510
Marketable securities, short-term
15,513,095
20,839,683
Accounts receivable, net of allowance for uncollectible accounts of $ 15,000
6,523,344
4,704,829
Inventories
6,417,010
5,088,635
Prepaid expenses and other assets
663,459
420,520
Total current assets
30,786,804
41,503,177
Fixed assets
Machinery and equipment
10,484,365
9,739,244
Leasehold improvements
1,956,309
1,810,872
12,440,674
11,550,116
Less accumulated depreciation and amortization
11,095,236
10,943,731
Net fixed assets
1,345,438
606,385
Deferred tax assets
572,038
483,469
Marketable securities, long-term
36,125,047
24,314,211
Right-of-use asset – operating lease
425,843
560,250
Total assets
$
69,255,170
$
67,467,492
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable
$
281,712
$
943,535
Accrued payroll and other
1,375,250
1,356,689
Operating lease
175,798
156,121
Total current liabilities
1,832,760
2,456,345
Operating lease
342,908
446,018
Total liabilities
2,175,668
2,902,363
Shareholders’ equity
Common stock, $ 0.01 par value, 6,000,000 shares authorized; 4,830,826 issued and outstanding as of March 31, 2023 and 2022
48,308
48,308
Additional paid-in capital
19,295,442
19,256,485
Accumulated other comprehensive income (loss)
( 1,213,858
)
( 318,120
)
Retained earnings
48,949,610
45,578,456
Total shareholders’ equity
67,079,502
64,565,129
Total liabilities and shareholders’ equity
$
69,255,170
$
67,467,492
See accompanying notes.
F-2
Table of Contents
NVE CORPORATION STATEMENTS OF INCOME
Year Ended March 31,
2023
2022
Revenue
Product sales
$
37,196,717
$
25,867,649
Contract research and development
1,056,875
1,119,321
Total revenue
38,253,592
26,986,970
Cost of sales
8,062,311
6,263,090
Gross profit
30,191,281
20,723,880
Expenses
Research and development
2,583,994
2,925,874
Selling, general, and administrative
1,963,105
1,469,321
Total expenses
4,547,099
4,395,195
Income from operations
25,644,182
16,328,685
Interest income
1,448,655
1,171,128
Income before taxes
27,092,837
17,499,813
Provision for income taxes
4,398,379
2,992,312
Net income
$
22,694,458
$
14,507,501
Net income per share – basic
$
4.70
$
3.00
Net income per share – diluted
$
4.70
$
3.00
Cash dividends declared per common share
$
4.00
$
4.00
Weighted average shares outstanding
Basic
4,830,826
4,833,661
Diluted
4,832,096
4,835,639
STATEMENTS OF COMPREHENSIVE INCOME
Year Ended March 31,
2023
2022
Net income
$
22,694,458
$
14,507,501
Unrealized gain (loss) from marketable securities, net of tax
( 895,738
)
( 1,419,239
)
Comprehensive income
$
21,798,720
$
13,088,262
See accompanying notes.
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Table of Contents
NVE CORPORATION STATEMENTS OF SHAREHOLDERS ’ EQUITY
Common Stock
Additional
Paid-In
Accumulated
Other
Comprehen-
sive Income
Retained
Shares
Amount
Capital
(Loss)
Earnings
Total
Balance as of March 31, 2021
4,833,232
$
48,332
$
19,338,127
$
1,101,119
$
50,404,364
$
70,891,942
Repurchase of common stock
( 2,888
)
( 29
)
( 163,492
)
( 163,521
)
Exercise of stock options, net of shares withheld for exercise price
482
5
( 5
)
-
Comprehensive income:
Unrealized gain on marketable securities, net of tax
( 1,419,239
)
( 1,419,239
)
Net income
14,507,501
14,507,501
Total comprehensive income
13,088,262
Stock-based compensation
81,855
81,855
Cash dividends declared ($4.00 per share of common stock)
( 19,333,409
)
( 19,333,409
)
Balance as of March 31, 2022
4,830,826
48,308
19,256,485
( 318,120
)
45,578,456
64,565,129
Repurchase of common stock
( 264
)
( 3
)
( 20,697
)
( 20,700
)
Exercise of stock options, net of shares withheld for exercise price
264
3
( 3
)
-
Comprehensive income:
Unrealized loss on marketable securities, net of tax
( 895,738
)
( 895,738
)
Net income
22,694,458
22,694,458
Total comprehensive income
21,798,720
Stock-based compensation
59,657
59,657
Cash dividends declared ($4.00 per share of common stock)
( 19,323,304
)
( 19,323,304
)
Balance as of March 31, 2023
4,830,826
48,308
$
19,295,442
$
( 1,213,858
)
$
48,949,610
$
67,079,502
See accompanying notes.
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Table of Contents
NVE CORPORATION STATEMENTS OF CASH FLOWS
Year Ended March 31,
2023
2022
OPERATING ACTIVITIES
Net income
$
22,694,458
$
14,507,501
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
257,606
424,981
Stock-based compensation
59,657
81,855
Deferred income taxes
161,894
24,457
Changes in operating assets and liabilities:
Accounts receivable
( 1,818,515
)
( 2,740,548
)
Inventories
( 1,328,375
)
( 1,187,858
)
Prepaid expenses and other assets
( 208,532
)
99,724
Accounts payable and accrued expenses
( 726,695
)
1,293,567
Net cash provided by operating activities
19,091,498
12,503,679
INVESTING ACTIVITIES
Purchases of fixed assets
( 935,791
)
( 484,579
)
Purchases of marketable securities
( 28,441,317
)
-
Proceeds from maturities of marketable securities
20,750,000
7,500,000
Receipt of tenant improvement allowance
100,000
-
Net cash (used in) provided by investing activities
( 8,527,108
)
7,015,421
FINANCING ACTIVITIES
Repurchase of common stock
( 20,700
)
( 163,521
)
Payment of dividends to shareholders
( 19,323,304
)
( 19,333,409
)
Net cash used in financing activities
( 19,344,004
)
( 19,496,930
)
(Decrease) increase in cash and cash equivalents
( 8,779,614
)
22,170
Cash and cash equivalents at beginning of year
10,449,510
10,427,340
Cash and cash equivalents at end of year
$
1,669,896
$
10,449,510
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes
$
4,501,656
$
2,520,000
See accompanying notes.
F-5
Table of Contents
NVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
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. We operate in one reportable segment.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
We consider all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable approximates fair value because of the short maturity of these instruments. Fair values of marketable securities are based on quoted market prices.
Concentration of Risk and Financial Instruments
Financial instruments potentially subject to significant concentrations of credit risk consist principally of cash equivalents, marketable securities, and accounts receivable.
Cash and cash equivalents have been maintained in financial institutions we believe have high credit quality, however, these accounts are generally in excess of federally insured amounts.
We have invested our excess cash in corporate-backed and municipal-backed bonds and money market instruments. Our investment policy prescribes purchases of only high-grade securities, and limits the amount of credit exposure to any one issuer.
Our customers are throughout the world. We generally do not require collateral from our customers, but we perform ongoing credit evaluations of their financial condition. More information on accounts receivable is contained in the paragraph titled “Accounts Receivable and Allowance for Doubtful Accounts” of this note.
Additionally, we are dependent on critical suppliers including our packaging vendors and suppliers of certain raw silicon and semiconductor wafers that are incorporated in our products. Industry shortages and supply-chain disruptions in the past several years have increased the risks of supply interruptions.
Accounts Receivable and Allowance for Doubtful Accounts
We grant credit to customers in the normal course of business and at times may require customers to prepay for an order prior to shipment. Accounts receivable are recorded net of an allowance for doubtful accounts. We make estimates of the uncollectibility of accounts receivable. We specifically analyze accounts receivable, historical bad debts, and customer creditworthiness when evaluating the adequacy of the allowance. We had no charges or provisions to our allowance for doubtful accounts in fiscal 2023 or 2022.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first in, first out method. We record inventory reserves when we determine certain inventory is unlikely to be sold based on sales trends, turnover, competition, and other market factors.
Product Warranty
In general, we warranty our products to be free from defects in material and workmanship for one year.
Fixed Assets
Fixed assets are stated at cost. Depreciation of machinery and equipment is recorded over the estimated useful lives of the assets, generally five years, using the straight-line method. Amortization of leasehold improvements is recorded using the straight-line method over the lesser of the lease term or five-year useful life. We record losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. We did not identify any indicators of impairment during fiscal 2023 or 2022. Depreciation expense related to fixed assets was $ 196,738 for fiscal 2023 and $ 214,877 for fiscal 2022.
F-6
Table of Contents
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, on product shipment or delivery to our customer or distributor as determined by agreed on 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 March 31, 2023 or March 31, 2022.
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.
Income Taxes
We account for income taxes using the asset and liability method. Deferred income taxes are provided for temporary differences between the financial reporting and tax bases of assets and liabilities. We provide valuation allowances against deferred tax assets if we determine that it is less likely than not that we will be able to utilize the deferred tax assets.
Research and Development Expense Recognition
Research and development costs are expensed as they are incurred. Customer-sponsored research and development costs are included in cost of sales.
Stock-Based Compensation
We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize the compensation expense over the requisite service period, which is generally the vesting period. We recognize any forfeitures as they occur.
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 year. Net income per diluted share amounts assume exercise of all stock options. The following table shows the components of diluted shares:
Year Ended March 31,
2023
2022
Weighted average common shares outstanding – basic
4,830,826
4,833,661
Dilutive effect of stock options
1,270
1,978
Shares used in computing net income per share – diluted
4,832,096
4,835,639
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
F-7
Table of Contents
Recently Adopted Accounting Standard
In May 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options . ASU 2021-04 addresses issuers’ accounting for certain modifications or exchanges of freestanding equity-classified written call options. We adopted ASU 2021-04 beginning with the quarter ended June 30, 2022. The adoption had no material impact on our financial statements.
New Accounting Standard Not Yet Adopted
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. 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. We do not expect the adoption of ASU 2016-13 to have a material impact on our financial statements.
NOTE 3. 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 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.
The fair value of our available-for-sale securities as of March 31, 2023 by maturity were as follows:
Total
<1 Year
1–3 Years
3–7 Years
$
52,544,283
$
16,419,236
$
21,694,499
$
14,430,548
Total available-for-sale securities represented approximately 76% of our total assets. Marketable securities as of March 31, 2023 had remaining maturities between 12 days and 73 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.
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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 March 31, 2023
As of March 31, 2022
Level 1
Level 2
Total
Level 1
Level 2
Total
Money market funds
$
906,141
$
-
$
906,141
$
6,756,993
$
-
$
6,756,993
Corporate bonds
-
51,638,142
51,638,142
-
45,153,894
45,153,894
Total
$
906,141
$
51,638,142
$
52,544,283
$
6,756,993
$
45,153,894
$
51,910,887
Our available-for-sale securities as of March 31, 2023 and 2022, aggregated into classes of securities, were as follows:
As of March 31, 2023
As of March 31, 2022
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
$
906,141
$
-
$
-
$
906,141
$
6,756,993
$
-
$
-
$
6,756,993
Corporate bonds
53,191,981
1,007
( 1,554,846
)
51,638,142
45,561,114
230,085
( 637,305
)
45,153,894
Total
$
54,098,122
$
1,007
$
( 1,554,846
)
$
52,544,283
$
52,318,107
$
230,085
$
( 637,305
)
$
51,910,887
The following table shows the gross unrealized holding losses and fair value of our available-for-sale securities with unrealized holding losses, aggregated by class of securities and length of time that individual securities had been in a continuous unrealized loss position as of March 31, 2023 and 2022.
Less Than 12 Months
12 Months or Greater
Total
Estimated
Fair
Value
Gross
Unrealized
Holding Losses
Estimated
Fair
Value
Gross
Unrealized
Holding Losses
Estimated
Fair
Value
Gross
Unrealized
Holding Losses
As of March 31, 2023
Corporate bonds
$
37,084,628
$
( 590,967
)
$
13,294,817
$
( 963,879
)
$
50,379,445
$
( 1,554,846
)
Total
$
37,084,628
$
( 590,967
)
$
13,294,817
$
( 963,879
)
$
50,379,445
$
( 1,554,846
)
As of March 31, 2022
Corporate bonds
$
6,306,750
$
( 23,727
)
$
9,738,338
$
( 613,578
)
$
16,045,088
$
( 637,305
)
Total
$
6,306,750
$
( 23,727
)
$
9,738,338
$
( 613,578
)
$
16,045,088
$
( 637,305
)
We did not consider any of our available-for-sale securities to be impaired as of March 31, 2023. None of the securities were impaired at acquisition, and subsequent declines in fair value are not attributed to declines in credit quality. When evaluating for impairment we assess indicators that include, but are not limited to, earnings performance, changes in underlying credit ratings, market conditions, bona fide offers to purchase or sell, and ability to hold until maturity. Because we believe it is more likely than not we will recover the cost basis of our investments, we did not consider any of our marketable securities to be impaired as of March 31, 2023.
NOTE 4. INVENTORIES
Inventories are shown in the following table:
March 31,
2023
2022
Raw materials
$
1,601,962
$
987,062
Work in process
3,781,894
3,355,838
Finished goods
1,033,154
745,735
Total inventories
$
6,417,010
$
5,088,635
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NOTE 5. STOCK-BASED COMPENSATION
Stock Option Plan
Our 2000 Stock Option Plan, as amended, provides for issuance to employees, directors, and certain service providers of incentive stock options and nonstatutory stock options. Generally, the options may be exercised at any time prior to expiration, subject to vesting based on terms of employment. The period ranges from immediate vesting to vesting over a five-year period. The options have exercisable lives ranging from one year to ten years from the date of grant, and are generally not eligible to vest early in the event of retirement, death, disability, or change in control. Exercise prices are not less than fair market value of the underlying Common Stock at the date the options are granted. Stock-based compensation expense was $ 59,657 in fiscal 2023 and $ 81,855 in fiscal 2022.
Valuation assumptions
We use the Black-Scholes-Merton option-pricing model to determine the fair value of stock options. The following assumptions were used to estimate the fair value of options granted:
Year Ended March 31,
2023
2022
Risk-free interest rate
0.9 % – 3.0 %
0.7 % – 0.9 %
Expected volatility
35 % – 39 %
35 % – 36 %
Expected life (years)
4.6 %
4.6
Dividend yield
5.0 % – 5.5 %
5.0 % – 5.4 %
The determination of the fair value of the awards on the date of grant using the Black-Scholes-Merton model is affected by our stock price as well as assumptions of other variables, including projected stock option exercise behaviors, risk-free interest rate, and expected volatility of our stock price in future periods. Our estimates and assumptions affect the amounts reported in the financial statements and accompanying notes.
Expected life
We analyze historical exercise and termination data to estimate the expected life assumption. We believe historical data currently represents the best estimate of the expected life of a new option.
Risk-free interest rate
The risk-free rate is based on the yield of U.S. Treasury securities on the grant date for maturities similar to the expected lives of the options.
Volatility
We use historical volatility to estimate the expected volatility of our common stock.
Dividend yield
We assumed a 5.0% to 5.5% dividend yield for fiscal 2023 and 5.0% to 5.4% for fiscal 2022 based on the dividend yield on the date the options were granted.
Tax effects of stock-based compensation
Stock-based compensation reduced deferred tax assets by $16,976 for fiscal 2023 and increased deferred tax assets by $13,521 for fiscal 2022.
General stock option information
The following table summarizes the activity for all stock options outstanding for the years ended March 31:
2023
2022
Shares
Weighted Average
Exercise Price
Shares
Weighted Average
Exercise Price
Options outstanding at beginning of year
29,000
$
69.52
30,500
$
68.28
Granted
6,500
50.35
6,500
74.22
Exercised
( 1,000
)
57.46
( 5,000
))
61.36
Terminated
-
-
( 3,000
)
80.75
At March 31,
34,500
$
66.26
29,000
$
69.52
Options exercisable at March 31,
32,000
$
63.60
24,000
$
64.32
Weighted average grant date fair value of options granted during the year
$
9.06
$
13.04
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The following table summarizes additional information about stock options outstanding and exercisable at March 31, 2023:
Options Outstanding
Options Exercisable
Weighted Average
Remaining Contractual
Life (Years)
Weighted Average
Exercise Price
Aggregate
Intrinsic Value
Options
Exercisable
Weighted Average
Exercise Price
Aggregate
Intrinsic Value
Options
Outstanding
34,500
5.67
$
66.26
$
562,415
32,000
$
63.60
$
562,415
The remaining weighted-average exercisable life was 5.9 years as of March 31, 2023 and 5.0 years as of March 31, 2022. 32,000 outstanding options were exercisable as of March 31, 2023 and 24,000 outstanding options were exercisable as of March 31, 2022. The total intrinsic value of options outstanding March 31, 2023, based on our closing stock price for that day, was $562,415, all of which was exercisable. The total fair value of option grants was $ 58,900 in fiscal 2023. There was $ 2,173 of unrecognized stock-based compensation as of March 31, 2023 related to nonvested options, which we expect to recognize in the first quarter of fiscal 2024.
NOTE 6. INCOME TAXES
Income tax provisions for fiscal 2023 and 2022 consisted of the following:
Year Ended March 31,
2023
2022
Current taxes
Federal
$
4,039,848
$
2,863,915
State
195,939
140,822
Deferred taxes
Federal
156,053
( 11,926
)
State
6,539
( 499
)
Income tax provision
$
4,398,379
$
2,992,312
A reconciliation of income tax provisions at the U.S. statutory rate for fiscal 2023 and 2022 is as follows:
Year Ended March 31,
2023
2022
Tax expense at U.S. Statutory rate
$
5,689,294
$
3,674,961
State income taxes, net of Federal benefit
180,091
136,144
Research & development and manufacturing tax credits
( 255,713
)
( 42,688
)
Foreign-derived intangible income deduction
( 1,265,055
)
( 662,467
)
Other
49,762
( 113,638
)
Income tax provision
$
4,398,379
$
2,992,312
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Table of Contents
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. Significant components of our deferred tax assets and liabilities as of March 31, 2023 and 2022 were as follows:
March 31,
2023
2022
Paid time off accrual
$
52,525
$
63,055
Inventory reserve
47,042
47,042
Depreciation and amortization
( 167,551
)
88,690
Stock-based compensation deductions
71,734
88,710
Unrealized gain on marketable securities
339,980
89,102
UNICAP 263A inventory
204,424
103,588
Other
23,884
3,282
Deferred tax assets
$
572,038
$
483,469
We had no unrecognized tax benefits as of March 31, 2023, 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 March 31, 2023 we had no accrued interest related to uncertain tax positions. Income taxes payable were $161,092 as of March 31, 2023 and $432,506 as of March 31, 2022. The tax years 2019 through 2021 remain open to examination by the major taxing jurisdictions to which we are subject.
Unrealize losses on our available-for-sale securities and their tax effects are as follows:
Year Ended March 31,
2023
2022
Unrealized loss from available-for-sale securities
$
( 1,146,618
)
$
( 1,816,742
)
Tax effects
250,880
397,503
Unrealized loss from available-for-sale securities, net of tax
( 895,738
)
( 1,419,239
)
NOTE 7. 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. Details of our operating lease are as follows:
Year Ended March 31,
2023
2022
Operating lease cost
$
151,014
$
170,062
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for leases
$
75,168
$
174,313
Remaining lease term (years)
3
4
Discount rate
3.5
%
3.5
%
The following table presents the maturities of lease liabilities as of March 31, 2023:
Year Ending March 31,
Operating Leases
2024
178,640
2025
182,271
2026
184,995
Total lease payments
545,906
Imputed lease interest
( 27,200
)
Total lease liabilities
$
518,706
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NOTE 8. CONCENTRATIONS
The following table summarizes customers comprising 10% or more of revenue for the two most recent fiscal years:
% of Revenue for
Year Ended March 31
2023
2022
Customer A
22 %
25 %
Customer B
-
11 %
These customers accounted for 19% of our accounts receivable as of March 31, 2023 and 40% as of March 31, 2022. We believe the receivable balances from these customers do not represent a significant credit risk based on past collection experience.
NOTE 9. 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, tax considerations, 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. Our Board of Directors has resolved to forgo stock buybacks for five years if, under Government policies, such a voluntary agreement would result in preferential treatment for grants under the CHIPS and Science Act of 2022.
We intend to finance any stock repurchases with cash provided by operating activities or maturating marketable securities. We repurchased 1,000 shares of our Common Stock in fiscal 2023 and 2,888 shares in fiscal 2022. The remaining authorization was $ 3,520,369 as of March 31, 2023.
NOTE 10. 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’ before-tax salary deferral contributions. Our matching contributions were $ 98,029 for fiscal 2023 and $ 101,735 for fiscal 2022.
NOTE 11. SUBSEQUENT EVENTS
On May 3, 2023 we announced that our Board had declared a quarterly cash dividend of $ 1.00 per share of Common Stock to be paid May 31, 2023 to shareholders of record as of the close of business May 15, 2023 .
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EXHIBIT INDEX
Exhibit #
Description
4
Description of the registrant’s securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.
23
Consent of Boulay PLLP.
31.1
Certification by Daniel A. Baker pursuant to Rule 13a-14(a)/15d-14(a).
31.2
Certification by Joseph R. Schmitz pursuant to Rule 13a-14(a)/15d-14(a).
32
Certification by Daniel A. Baker and Joseph R. Schmitz pursuant to 18 U.S.C. Section 1350.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
F-14
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.