# NVE Corp: Form 10-Q for the period ended Dec 31, 2014

- Company: [NVE Corp](/companies/nvec.md) (CIK 724910)
- Form: 10-Q
- Filed: 2015-01-21
- Accepted by EDGAR: Jan 21, 2015, 21:22 ET
- Period: 2014-12-31
- Accession: 0000724910-15-000006
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/724910/000072491015000006/NVE_Q3_FY2015_10Q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/724910/000072491015000006/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-10-01 to 2014-12-31 | $6.3m | us-gaap:Revenues |
| Revenue | 9 months, 2014-04-01 to 2014-12-31 | $23.0m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2014-10-01 to 2014-12-31 | $1.5m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2014-04-01 to 2014-12-31 | $4.6m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2014-10-01 to 2014-12-31 | $4.8m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2014-04-01 to 2014-12-31 | $18.4m | us-gaap:GrossProfit |
| Research and development | 3 months, 2014-10-01 to 2014-12-31 | $694.8k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2014-04-01 to 2014-12-31 | $2.3m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2014-10-01 to 2014-12-31 | $533.7k | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2014-04-01 to 2014-12-31 | $1.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2014-10-01 to 2014-12-31 | $3.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2014-04-01 to 2014-12-31 | $14.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2014-10-01 to 2014-12-31 | $1.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2014-04-01 to 2014-12-31 | $5.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-10-01 to 2014-12-31 | $2.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2014-04-01 to 2014-12-31 | $10.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-10-01 to 2014-12-31 | $0.57 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2014-04-01 to 2014-12-31 | $2.20 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-10-01 to 2014-12-31 | $0.57 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2014-04-01 to 2014-12-31 | $2.21 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-10-01 to 2014-12-31 | 4,876,074 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2014-04-01 to 2014-12-31 | 4,871,270 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2014-04-01 to 2014-12-31 | $10.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2014-04-01 to 2014-12-31 | $114.1k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2014-04-01 to 2014-12-31 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2014-12-31 | $11.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-12-31 | $30.6m | us-gaap:AssetsCurrent |
| Total assets | at 2014-12-31 | $115.8m | us-gaap:Assets |
| Current liabilities | at 2014-12-31 | $1.2m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2014-12-31 | $114.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 12,660 characters.

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 possible renewal of agreements with large customers, uncertainties related to the economic environments in the industries we serve, uncertainties related to future contract research and development revenue, risks related to material weaknesses in our internal control over financial reporting, 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, 2014, as updated in Part II, Item 1A of this Quarterly Report on Form 10-Q.

### 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. We have also licensed our spintronic magnetoresistive random access memory technology, commonly known as MRAM.

### 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, 2014. At December 31, 2014 our critical accounting policies and estimates continued to include investment valuation, inventory valuation, and deferred tax assets estimation.

### Quarter ended December 31, 2014 compared to quarter ended December 31, 2013

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

*Revenue*

| 2014 | Percentage of Revenue Quarter Ended Dec. 31 | 2013 | Quarter- to-Quarter Change |
| --- | ---: | ---: | ---: |
| Product sales | 93.5% | 99.6% | (8.8)% |
| Contract research and development | 6.5% | 0.4% | 1,513.5% |
| Total revenue | 100.0% | 100.0% | (2.8)% |
| Cost of sales | 23.4% | 22.4% | 1.7% |
| Gross profit | 76.6% | 77.6% | (4.1)% |
| Expenses |  |  |  |
| Selling, general, and administrative | 8.5% | 8.4% | (1.8)% |
| Research and development | 11.0% | 14.0% | (23.2)% |
| Total expenses | 19.5% | 22.4% | (15.2)% |
| Income from operations | 57.1% | 55.2% | 0.4% |
| Interest income | 8.8% | 8.2% | 5.2% |
| Income before taxes | 65.9% | 63.4% | 1.0% |
| Provision for income taxes | 21.5% | 20.5% | 2.0% |
| Net income | 44.4% | 42.9% | 0.6% |

Total revenue for the quarter ended December 31, 2014 (the third quarter of fiscal 2015) decreased 3% compared to the quarter ended December 31, 2013 (the third quarter of fiscal 2014). The decrease was due to a 9% decrease in product sales, partially offset by a 1,514% increase in contract research and development revenue.

The decrease in product sales from the prior-year quarter was primarily due to decreased purchase volume by existing customers and unfavorable order timing. The increase in contract research and development revenue was due to a new contract. Contract research and development activities can fluctuate for a number of reasons, some of which are beyond our control, and there can be no assurance of future contract revenue.

Gross profit margin decreased to 77% of revenue for the third quarter of fiscal 2015 compared to 78% for the third quarter of fiscal 2014, due to a less favorable revenue mix consisting of a higher percentage of contract research and development revenue.

Total expenses decreased 15% for the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014, due to a 2% decrease in selling, general, and administrative expense and a 23% decrease in research and development expense. The decrease in research and development expense was due to the completion of certain product development activities and an increase in contract research and development activities, which caused resources to be reallocated from expensed research and development activities. Research and development expense can fluctuate significantly depending on a number of factors including staffing, project requirements, and contract research and development activities.

Interest income increased 5% for the third quarter of fiscal 2015, primarily due to an increase in interest-bearing marketable securities, partially offset by a decrease in interest rates on reinvested funds. Interest income may decrease in future quarters because we plan to use proceeds from maturities of marketable securities to help fund cash dividends, rather than reinvesting proceeds in marketable securities as we have generally done in the past.

Net income for the third quarter of fiscal 2015 increased 1% due to increased contract research and development revenue, decreased expenses, and increased interest income, partially offset by decreased product sales and decreased gross profit margin as a percentage of revenue.

### Nine months ended December 31, 2014 compared to nine months ended December 31, 2013

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

*Revenue*

| 2014 | Percentage of Revenue Nine Months Ended Dec. 31 | 2013 | Period- to-Period Change |
| --- | ---: | ---: | ---: |
| Product sales | 97.1% | 98.5% | 13.7% |
| Contract research and development | 2.9% | 1.5% | 123.9% |
| Total revenue | 100.0% | 100.0% | 15.3% |
| Cost of sales | 20.2% | 21.7% | 7.2% |
| Gross profit | 79.8% | 78.3% | 17.6% |
| Expenses |  |  |  |
| Selling, general, and administrative | 7.8% | 8.8% | 1.8% |
| Research and development | 9.9% | 13.8% | (16.7)% |
| Total expenses | 17.7% | 22.6% | (9.5)% |
| Income from operations | 62.1% | 55.7% | 28.6% |
| Interest income | 7.3% | 7.9% | 5.8% |
| Income before taxes | 69.4% | 63.6% | 25.7% |
| Provision for income taxes | 22.9% | 20.6% | 27.6% |
| Net income | 46.5% | 43.0% | 24.9% |

Total revenue for the nine months ended December 31, 2014 increased 15% compared to the nine months ended December 31, 2013. The increase was due to a 14% increase in product sales and a 124% increase in contract research and development revenue.

The increase in product sales from the prior-year period was due to increased purchase volume by existing customers and new customers. The increase in contract research and development revenue was due to a new contract. Contract research and development activities can fluctuate for a number of reasons, some of which are beyond our control, and there can be no assurance of future contract revenue.

Gross profit margin increased to 80% of revenue for the first nine months of fiscal 2015 compared to 78% for the first nine months of fiscal 2014, due to a more favorable product sales mix.

Total expenses decreased 9% for the first nine months of fiscal 2015 compared to the first nine months of fiscal 2014, due to a 17% 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 and an increase in contract research and development activities, which caused resources to be reallocated from expensed research and development activities. Research and development expense can fluctuate significantly depending on staffing, project requirements, and contract research and development activities.

Interest income for the first nine months of fiscal 2015 increased 6% due to an increase in interest-bearing marketable securities, partially offset by a decrease in interest rates on reinvested funds. Interest income may decrease in future periods because we plan to use proceeds from maturities of marketable securities to help fund cash dividends, rather than reinvesting proceeds in marketable securities as we have generally done in the past.

Net income increased 25% for the first nine months of fiscal 2015 compared to the prior-year period due to increased product sales, increased contract research and development revenue, increased gross profit margin as a percentage of revenue, decreased research and development expense, and increased interest income.

### Liquidity and capital resources

Cash and cash equivalents were $11,796,943 at December 31, 2014 compared to $1,262,300 at March 31, 2014. The $10,534,643 increase in cash and cash equivalents was primarily due to $10,848,250 in net cash provided by operating activities. At December 31, 2014 we had $94,356,284 in short-term and long-term marketable securities compared to $94,382,401 at March 31, 2014. We had no purchases of marketable securities in the quarter ended December 31, 2014 in preparation for the possibility of returning cash to shareholders. Our entire portfolio of short-term and long-term marketable securities is classified as available for sale.

Accounts receivable decreased $476,495 in the first nine months of fiscal 2015 due to the timing of payments by our customers.

Inventories increased by $478,791 as we prepared for possible product shipments in the future.

Prepaid expenses and other assets increased $709,502 primarily due to estimated tax payments during the period.

Purchases of fixed assets were $114,139 in the first nine months of fiscal 2015, compared to $33,893 in the first nine months of fiscal 2014. Our capital expenditures can vary significantly from quarter to quarter depending on our needs, equipment purchasing opportunities, and production expansion activities.

Free cash flow, which is net cash provided by operating activities less purchases of fixed assets, was $10,734,111 for the nine months ended December 31, 2014.

On January 21, 2015 we announced that our Board declared a cash dividend to shareholders in the aggregate amount of approximately $10,000,000. We plan to continue quarterly dividends in excess of our free cash flow in order to return cash to our shareholders. We plan to fund these dividends through cash provided by operating activities and proceeds from maturities of marketable securities. Our plan for capital allocation is to continue cash dividends and opportunistic share repurchases until we have significantly decreased our balance of cash plus marketable securities. We expect to return significant cash to shareholders while maintaining sufficient liquidity for operations and strategic flexibility. We plan to maintain enough cash and marketable securities to fund our operations, to defend our intellectual property if necessary, to make opportunistic strategic investments, and for contingencies. 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, and other factors the Board may deem relevant. Furthermore, our stock repurchase program 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.

## Market risk

As filed, 968 characters.

The primary objective of our investment activities is to preserve principal while at the same time maximizing after-tax yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and marketable securities in securities including municipal obligations, corporate obligations, and money market funds. Short-term and long-term marketable securities are generally classified as available-for-sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income or loss, net of estimated tax. Our marketable securities as of December 31, 2014 had remaining maturities between three and 237 weeks. Marketable securities had a market value of $94,356,284 at December 31, 2014, representing approximately 81% of our total assets. We have not used derivative financial instruments in our investment portfolio.

## Controls and procedures

As filed, 3,623 characters.

### Evaluation of 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 management’s identification of previously reported deficiencies in internal control over financial reporting that it considers to be material weaknesses related to insufficient segregation of duties within the financial accounting and information technology environments, in conjunction with insufficient documented controls within revenue and journal entry processes, insufficient documentation regarding precision of monitoring controls and insufficient compensating reconciliation and review controls, management has concluded that disclosure controls and procedures were not effective at December 31, 2014. Steps to remediate these weaknesses are discussed below, and we currently expect the material weakness to be fully remediated by March 31, 2015.

Notwithstanding the material weaknesses described below, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that the financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

### Changes in Internal Control over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

As reported in our assessment of the effectiveness of our internal control over financial reporting as of March 31, 2014, included in “Item 9A. Controls and Procedures” of Form 10-K for the year ended March 31, 2014, material weaknesses existed in our internal control over financial reporting related to insufficient segregation of duties within the financial accounting and information technology environments, in conjunction with insufficient documented controls within revenue and journal entry processes, insufficient documentation regarding precision of monitoring controls and insufficient compensating reconciliation and review controls.

During the quarter ended June 30, 2014 we implemented new controls as remediation of the material weaknesses, including more segregation of duties within the financial accounting and information technology environments, additional documented controls within revenue and journal entry processes, additional documentation regarding precision of monitoring controls, and enhanced compensating reconciliation and review controls. The new controls have been operating but not evaluated for operating effectiveness.

## Risk factors

As filed, 1,135 characters.

There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014, except the risk factor titled, “We do not currently plan to pay dividends” is replaced in its entirety with the following:

***Any decisions to reduce or discontinue paying cash dividends to our shareholders could cause the market price of our common stock to decline.***

In January 2015 our Board of Directors declared our first cash dividend to our shareholders. While we currently plan to pay quarterly dividends indefinitely, our payment of cash dividends will be subject to, among other things, our results of operations, cash and marketable security balances, the timing of securities maturations, estimates of future cash requirements, fixed asset requirements, and other factors our Board may deem relevant. Because we plan to pay dividends that are significantly more than our current free cash flow, declared and planned dividend amounts are likely unsustainable. Any reduction or discontinuance by us of cash dividends could cause the market price of our common stock to decline.

Filed Jan 21, 2015.
Source: SEC EDGAR, the filing index for accession 0000724910-15-000006. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.