Item 5. Market for Registrant’s Common Equity
ITEM 5. MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information and Dividends
Our Common Stock trades on the Capital Market tier of the NASDAQ Stock Market under the symbol NVEC.
Dividends have been funded from net cash provided by operating activities and proceeds from maturities of marketable securities. Our dividend policy is subject to change at any time, and future dividends will be subject to Board approval and subject to the company’s results of operations, cash and marketable security balances, our forecasts of future cash requirements, and other factors our Board may deem relevant.
Shareholders
We had 52 shareholders of record as of March 31, 2024. There are also several thousand beneficial holders of our common stock in “street name,” whose shares of record are held by banks, brokers, and other financial institutions.
Securities Authorized for Issuance Under Equity Compensation Plans
Information regarding our securities authorized for issuance under equity compensation plans will be included in the section “Equity Compensation Plan Information” of our Proxy Statement for our 2024 Annual Meeting of Shareholders and is incorporated by reference into Item 12 of this Report.
Stock Repurchase Program
We did not repurchase any shares in fiscal 2024. We repurchased 264 shares in fiscal 2023. The Stock Repurchase Program may be modified or discontinued at any time without notice.
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ITEM 7. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read this discussion together with our financial statements and notes included elsewhere in this Report. In addition to historical information, the following discussion contains forward-looking information that involves risks and uncertainties. Our actual future results could differ materially from those presently anticipated due to a variety of factors, including those discussed in Item 1A of this Report.
General
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 manufacture high-performance spintronic products including sensors and couplers to revolutionize data sensing and transmission. We also receive contracts for research and development and are a licensor of spintronic magnetoresistive random access memory technology, commonly known as MRAM.
Application of Critical Accounting Policies and Estimates
In accordance with SEC guidance, those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition and require complex management judgment are discussed below.
Investment Valuation
Our investments consist primarily of corporate obligations. We have generally invested excess cash in high-quality investment-grade long-term marketable securities with less than five years to maturity. We classify all of our marketable securities as available-for-sale, thus securities are recorded at fair value and any associated unrealized gain or loss, net of tax, is included as a separate component of shareholders’ equity, “Accumulated other comprehensive income.” If we judged a decline in fair value for any security to be other than temporary, the cost basis of the individual security would be written down and a charge recognized to net income. The fair values for our securities are determined based on quoted market prices as of the valuation date and observable prices for similar assets. We consider a number of factors in determining whether other-than-temporary impairment exists, including credit market conditions; the credit ratings of the securities; historical default rates for securities of comparable credit rating; the presence of insurance of the securities and, if insured, the credit rating and financial condition of the insurer; the effect of market interest rates on the value of the securities; and the duration and extent of any unrealized losses. We also consider the likelihood that we will be required to sell the securities prior to maturity based on our financial condition and anticipated cash flows. If any of these conditions and estimates change in the future, or, if different estimates are used, the fair value of the investments may change significantly and could result in an other-than-temporary decline in value, which could have an adverse impact on our results of operations.
Inventory Valuation
Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first in, first out method. Where there is evidence that inventory could be disposed of at less than carrying value, the inventory is written down to the net realizable value in the current period. Additionally, we periodically examine our inventory in the context of inventory turnover, sales trends, competition, and other market factors, and we record provisions to inventory reserve when we determine certain inventory is unlikely to be sold. If reserved inventory is subsequently sold, corresponding reductions in inventory and inventory reserves are made. Our inventory reserve was $215,000 as of March 31, 2024 and March 31, 2023.
Deferred Tax Assets Estimation
In determining the carrying value of our net deferred tax assets, we must assess the likelihood of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions to realize the benefit of these assets. We evaluate the realizability of the deferred assets quarterly and assess the need for valuation allowances or reduction of existing allowances quarterly. No valuation allowance was recorded as we believe it is more likely than not that all of the deferred tax assets will be realized.
We had $1,453,704 of net deferred tax assets as of March 31, 2024, and $572,038 as of March 31, 2023. Net deferred tax assets included $101,668 in deferred tax assets for stock-based compensation deductions as of March 31, 2024, and $71,734 as of March 31, 2023.
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Results of Operations
The following table summarizes the percentage of revenue and year-to-year changes for various items for the last two fiscal years:
Percentage of Revenue
Year Ended March 31,
Year-
to-Year
2024
2023
Change
Revenue
Product sales
98.0
%
97.2
%
(21.4
)%
Contract research and development
2.0
%
2.8
%
(44.5
)%
Total revenue
100.0
%
100.0
%
(22.1
)%
Cost of sales
22.7
%
21.1
%
(16.0
)%
Gross profit
77.3
%
78.9
%
(23.7
)%
Expenses
Research and development
9.2
%
6.8
%
5.7
%
Selling, general, and administrative
5.9
%
5.1
%
(9.7
)%
Credit loss expense
0.0
%
-
-
Total expenses
15.1
%
11.9
%
(0.8
)%
Income from operations
62.2
%
67.0
%
(27.8
)%
Interest income
6.5
%
3.8
%
34.5
%
Income before taxes
68.7
%
70.8
%
(24.5
)%
Provision for income taxes
11.2
%
11.5
%
(24.0
)%
Net income
57.5
%
59.3
%
(24.5
)%
Total revenue for fiscal 2024 decreased 22% compared to fiscal 2023 due to a 21% decrease in product sales and a 45% decrease in contract research and development revenue. The decrease in product sales was primarily due to decreased purchases by existing customers due to the downturn in the semiconductor industry. The decrease in contract research and development revenue was due to fewer research and development contracts in fiscal 2024 compared to the prior year.
Gross profit as a percentage of revenue decreased to 77% for fiscal 2024 from 79% for fiscal 2023. The decrease was due to increases in material, labor, and production overhead costs.
Total expenses decreased 1% for fiscal 2024 compared to fiscal 2023 due to a 10% decrease in selling, general, and administrative expense, partially offset by a 6% increase in research and development expense. The increase in research and development expense was due to increased new product development activities. The decrease in selling, general, and administrative expense was primarily due to decreased performance-based accruals.
Interest income for fiscal 2024 increased 35% due to increased yields on marketable securities purchased in fiscal 2024.
Our effective tax rate was 16% for fiscal 2024 and fiscal 2023 compared to the statutory tax rate of 21%. Our lower effective tax rate was primarily due to Federal tax credits and deductions.
The 25% decrease in net income for fiscal 2024 compared to the prior year was primarily due to decreased revenue, partially offset by decreased expenses and increased interest income.
Liquidity and Capital Resources
Overview
Our liquidity and operating capital requirements are primarily for purchases of raw materials such as foundry wafers, purchases of packaging services, and the maintenance of work-in-process inventories. We maintain most of our marketable securities as long-term to maximize yield and fund future dividends.
Cash and cash equivalents were $10,283,550 as of March 31, 2024, compared to $1,669,896 as of March 31, 2023. The $8,613,654 increase in cash and cash equivalents was due to $18,247,411 of net cash provided by operating activities and $9,580,084 of net cash provided by investing activities, partially offset by $19,213,841 of net cash used in financing activities.
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Operating Activities
Net cash provided by operating activities related to product sales and research and development contract revenue was our primary source of working capital for fiscal 2024 and 2023. Net cash provided by operating activities was $18,247,411 for fiscal 2024 compared to $19,091,498 for fiscal 2023.
Accounts receivable decreased $3,368,997 during fiscal 2024 due to decreased revenue and the timing of customer payments.
Inventory increased $741,575 during fiscal 2024 primarily due to our decision to increase raw material and finished goods inventories in anticipation of a semiconductor industry recovery. This will enable us to quickly respond to sales opportunities and to mitigate supply-chain risks.
Accounts payables and accrued expenses decreased $964,152 during fiscal 2024 due to decreased performance-based accrual and the timing of purchases and vendor payments.
Investing Activities
Net cash provided by investing activities in fiscal 2024 consisted of $15,700,000 in proceeds from maturities of marketable securities, partially offset by $16,731 of fixed asset purchases and $6,103,185 of marketable securities purchases.
Our capital expenditures can vary significantly from year to year depending on our needs, strategic goals, and equipment purchasing opportunities. We are currently planning $4,000,000 to $5,000,000 of investments during fiscal years 2025 and 2026 to increase our production capacity and capabilities. These plans are subject to change. We expect to finance future capital equipment purchases with a combination of cash provided by operating activities and marketable security maturities.
Financing Activities
Net cash used in financing activities in fiscal 2024 consisted of $19,331,304 of cash dividends paid to shareholders, partially offset by $117,463 in proceeds from the exercise of stock options.
In addition to cash dividends to shareholders paid in fiscal 2024, on May 1, 2024, we announced that our Board had declared a cash dividend of $1.00 per share of Common Stock, or $4,833,676 based on shares outstanding as of April 26, 2024, to be paid May 31, 2024. 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 supply-chain shortages, the impacts of cost inflation, and other factors the Board may deem relevant. Furthermore, dividends may be modified or discontinued at any time without notice.
Labor Practices
In the past fiscal year, we significantly increased average pay to attract, retain, and motivate top-performing employees despite a tight labor market. These increased compensation costs are allocated to cost of sales and expenses in our income statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements and accompanying notes are included in this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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.