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Item 2. Management’s Discussion and Analysis

2025-10-22 compared with 2025-07-23 · 60 added, 26 removed, 34 unchanged (72% of the section changed)

12 unchanged sentences

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 fiscal year ended March 31, 2025.

As of June 30, 2025, our critical accounting policies and estimates continued to include marketable securities valuation, inventory valuation, and deferred tax assets estimation.

Quarter ended June 30, 2025, compared to quarter ended June 30, 2024

As of September 30, 2025, our critical accounting policies and estimates continued to include marketable securities valuation, inventory valuation, and deferred tax assets estimation.

Quarter ended September 30, 2025, compared to quarter ended September 30, 2024

The table shown below summarizes the percentage of revenue and quarter-to-quarter changes for various items:

Percentage of Revenue

Quarter Ended June 30,

Quarter Ended September 30,

Product sales

9 unchanged sentences

Provision for income taxes

Total revenue for the quarter ended June 30, 2025 (the first quarter of fiscal 2026) decreased 10% compared to the quarter ended June 30, 2024 (the first quarter of fiscal 2025).

The decrease was due to an 11% decrease in product sales, partially offset by a 17% increase in contract research and development revenue.

The decrease in product sales was primarily due to decreased defense industry sales during the quarter ended June 30, 2025, compared to the prior-year quarter.

Total revenue for the quarter ended September 30, 2025 (the second quarter of fiscal 2026) decreased 6% compared to the quarter ended September 30, 2024 (the second quarter of fiscal 2025).

The decrease was due to a 68% decrease in contract research and development revenue, partially offset by a 1% increase in product sales.

The increase in product sales was due to a significant increase in nondefense product sales, partially offset by a decrease in sales to the defense industry.

Defense industry sales can be highly variable because of procurement cycles.

The increase in contract research and development revenue was due to new research and development contracts.

Gross margin for the first quarter of fiscal 2026 was 81% of revenue, compared to 86% the prior-year quarter.

The decrease in gross margin percentage was due to a less profitable product mix and increased distributor sales for the quarter ended June 30, 2025, compared to the prior-year quarter.

Total operating expenses decreased 20% for the first quarter of fiscal 2026 compared to the first quarter of fiscal 2025, due to an 18% decrease in research and development expense and a 23% decrease in selling, general, and administrative expense.

The decrease in research and development expense was due to completion of some of our wafer-level chip scale packaging activities and reallocation of some research and development resources to manufacturing.

The decrease in selling, general, and administrative expenses was primarily due to the timing of sales and marketing activities, and reallocation of some general and administrative resources to manufacturing.

Our effective tax rate, which is the provision for income taxes as a percentage of income before taxes, increased to 17% for the first quarter of fiscal 2026 compared to 16% for the first quarter of fiscal 2025.

The increase in our effective tax rate compared to the prior-year quarter was due to changes in the timing and amounts of federal tax credits and deductions.

We currently expect to realize advanced manufacturing investment tax credits of between $700,000 an $800,000 if we deploy equipment as planned in fiscal 2026.

The 13% decrease in net income in the first quarter of fiscal 2026 compared to the prior-year quarter was primarily due to decreased revenue and decreased gross margin, partially offset by decreased operating expenses.

The decrease in contract research and development revenue was due to the timing of revenue recognition and fewer research and development contracts in the quarter ended September 30, 2025 compared to the prior-year quarter.

Gross margin for the second quarter of fiscal 2026 was 78% of revenue compared to 86% the prior-year quarter.

The decrease in gross margin percentage was due to a less profitable product mix and increased distributor sales for the quarter.

Distributor sales typically have lower gross margin than direct sales.

Total operating expenses decreased 7% for the second quarter of fiscal 2026 compared to the second quarter of fiscal 2025, due to a 3% increase in research and development expense and a 23% decrease in selling, general, and administrative expense.

The increase in research and development expense was due to increased new product development.

The decrease in selling, general, and administrative expenses was primarily due to the timing of sales and marketing activities, and reassignment of some selling, general and administrative resources to manufacturing and new product development.

Interest income increased 4% due to an increase in interest rates compared to the prior year.

Our effective tax rate, which is the provision for income taxes as a percentage of income before taxes, increased to 20% for the second quarter of fiscal 2026 compared to 17% for the second quarter of fiscal 2025.

The increase in our effective tax rate was primarily due to the non-cash impact of tax law changes on certain tax deductions this fiscal year.

We currently expect a full-year tax rate of 16% to 17% in fiscal 2026 because we expect advanced manufacturing investment tax credits of between $700,000 and $1,000,000 to offset the impact of other tax law changes.

The decrease in net income in the second quarter of fiscal 2026 compared to the prior-year quarter was primarily due to decreased revenue, decreased gross margin, and an increase in our effective tax rate, partially offset by decreased operating expenses and increased interest income.

Six months ended September 30, 2025, compared to six months ended September 30, 2024

The table shown below summarizes the percentage of revenue and year-to-year changes for various items:

Percentage of Revenue

Six Months Ended Sept.

Product sales

Contract research and development

Total revenue

Cost of sales

Research and development

Selling, general, and administrative

Total expenses

Income from operations

Interest income

Income before taxes

Provision for income taxes

Total revenue for the six months ended September 30, 2025 decreased 8% compared to the six months ended September 30, 2024.

The decrease was due to a 5% decrease in product sales and a 51% decrease in contract research and development revenue.

The decrease in product sales was primarily due to a decrease in defense industry sales during the six months ended September 30, 2025 compared to the prior-year period.

Defense industry sales can be highly variable because of procurement cycles.

The decrease in contract research and development revenue was primarily due to the timing of revenue recognition and fewer research and development contracts for the six months ended September 30, 2025, compared to the prior-year period.

Gross margin for the first six months of fiscal 2026 was 79% of revenue, compared to 86% for the first six months of fiscal 2025.

The decrease in gross margin percentage was due to a less profitable product mix and increased distributor sales for the six months ended September 30, 2025, compared to the prior-year period.

Total operating expenses decreased 14% for the first six months of fiscal 2026 compared to the first six months of fiscal 2025, due to an 8% decrease in research and development expense and a 23% decrease in selling, general, and administrative expense.

The decrease in research and development expense was due to the completion of some of our wafer-level chip scale packaging activities and reassignment of some research and development resources to manufacturing.

Our effective tax rate increased to 18% for the first six months of fiscal 2026 compared to 17% for the first six months of fiscal 2025.

The increase in our effective tax rate was primarily due to the non-cash impact of tax law changes on certain tax deductions this fiscal year.

The decrease in net income in the first six months of fiscal 2026 compared to the prior-year period was primarily due to decreased revenue, decreased gross margin, and an increase in our effective tax rate, partially offset by decreased operating expenses and increased interest income.

Liquidity and Capital Resources

Cash and cash equivalents were $3,222,552 as of June 30, 2025, compared to $8,036,564 as of March 31, 2025.

The $4,814,012 decrease in cash and cash equivalents during the first quarter of fiscal 2026 was due to $5,167,506 of net cash used in investing activities and $4,837,166 of cash used in financing activities, partially offset by $5,190,660 in net cash provided by operating activities.

Cash and cash equivalents were $5,107,481 as of September 30, 2025, compared to $8,036,564 as of March 31, 2025.

The $2,929,083 decrease in cash and cash equivalents during the first six months of fiscal 2026 was due to $1,237,963 of net cash used in investing activities and $9,674,332 of cash used in financing activities, partially offset by $7,983,212 in net cash provided by operating activities.

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 the current and prior-year quarters.

Accounts receivable decreased $1,335,447 during the first quarter of fiscal 2026 primarily due to the timing of customer payments.

Prepaid expenses and other assets increased $196,757 primarily due to increased accrued bond interest and prepaid insurance.

Accrued payroll and other liabilities increased $523,259 primarily due to the timing of estimated tax payments.

Net cash provided by operating activities related to product sales and research and development contract revenue was our primary source of working capital for the current and prior-year periods.

Non-cash operating lease expenses increased $103,931 primarily due to our receipt of a $100,000 leasehold improvement allowance.

Accounts receivable decreased $1,148,412 during the first six months of fiscal 2026 primarily due to the timing of customer payments.

Prepaid expenses and other assets increased $729,679 primarily due to increased accrued bond interest and a decrease in federal and state taxes due.

The decrease in taxes due was because we deducted previously unamortized research and development expenses in the quarter ended September 30, 2025 as permitted under the Federal budget reconciliation bill enacted July 4, 2025.

We expect accelerated deductions of previously unamortized research and development expenses to reduce our cash taxes by approximately $1,000,000 over the three quarters beginning with the quarter ending December 31, 2025.

Accrued payroll and other current liabilities decreased $285,774 primarily due to the payment of federal and state taxes balance due as of March 31, 2025.

Investing Activities

Cash used by investing activities during the quarter ended June 30, 2025, consisted of $10,108,982 of marketable securities purchases and $1,058,524 of fixed asset purchases, partially offset by $6,000,000 in proceeds from maturities of marketable securities.

Fixed asset purchases were production equipment.

Cash used by investing activities during the six months ended September 30, 2025, consisted of $10,108,982 of marketable securities purchases and $1,128,981 of fixed asset purchases, partially offset by $10,000,000 in proceeds from maturities of marketable securities.

Fixed asset purchases were primarily production equipment.

We currently expect an additional $1,000,000 to $1,500,000 of fixed asset purchases in the last six months of the fiscal year to complete a production expansion.

Financing Activities

Cash used in financing activities during the quarter ended June 30, 2025, consisted of $4,837,166 of cash dividends paid to shareholders.

In addition to cash dividends to shareholders paid in the first quarter of fiscal 2026, on July 23, 2025, we announced that our Board of Directors had declared a cash dividend of $1.00 per share of Common Stock, or $4,837,166 based on shares outstanding as of June 30, 2025, to be paid on August 29, 2025.

Cash used in financing activities during the six months ended September 30, 2025, consisted of $9,674,332 of cash dividends paid to shareholders.

In addition to cash dividends paid to shareholders in the first half of fiscal 2026, on October 22, 2025, we announced that our Board of Directors had declared a cash dividend of $1.00 per share of Common Stock, or $4,837,166 based on shares outstanding as of September 30, 2025, to be paid on November 28, 2025.

We plan to fund dividends through cash provided by operating activities and proceeds from maturities of marketable securities.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis