UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2005
Commission File Number: 000-12196
NVE Corporation
(Exact name of registrant as specified in its charter)
Minnesota 41-1424202
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11409 Valley View Road, Eden Prairie, Minnesota 55344
(Address of principal executive offices) (Zip Code)
(952) 829-9217
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 Par Value - 4,570,104 shares outstanding as of
July 15, 2005
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
NVE CORPORATION
BALANCE SHEETS
JUNE 30, 2005 AND MARCH 31, 2005
(Unaudited) *
June 30, 2005 March 31, 2005
-------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 1,462,601 $ 1,240,205
Short-term investments 759,030 252,775
Accounts receivable, net of allowance for
uncollectible accounts of $15,000 2,207,720 2,285,472
Inventories 1,660,158 1,572,759
Deferred tax asset 783,395 756,074
Prepaid expenses and other assets 130,990 130,873
-------------- --------------
Total current assets 7,003,894 6,238,158
Fixed assets
Machinery and equipment 4,102,089 4,140,307
Leasehold improvements 413,482 413,482
-------------- --------------
4,515,571 4,553,789
Less accumulated depreciation 2,927,035 2,826,227
-------------- --------------
Net fixed assets 1,588,536 1,727,562
Long-term investments 6,269,848 6,224,284
-------------- --------------
Total assets $ 14,862,278 $ 14,190,004
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 280,426 $ 319,427
Accrued payroll and other 506,061 465,930
Deferred revenue 219,914 267,355
Capital lease obligations 84,392 67,430
-------------- --------------
Total current liabilities 1,090,793 1,120,142
Capital lease obligations, less current portion - 33,281
-------------- --------------
Total liabilities 1,090,793 1,153,423
Shareholders' equity:
Common stock 45,701 45,698
Additional paid-in capital 14,307,683 14,064,625
Accumulated other comprehensive loss (53,034) (132,228)
Accumulated deficit (528,865) (941,514)
-------------- --------------
Total shareholders' equity 13,771,485 13,036,581
-------------- --------------
Total liabilities and shareholders' equity $ 14,862,278 $ 14,190,004
============== ==============
*The March 31, 2005 Balance Sheet is from the audited financial statements
contained in our Annual Report on Form 10-KSB for the year ended
March 31, 2005.
See accompanying notes.
NVE CORPORATION
STATEMENTS OF INCOME
QUARTERS ENDED JUNE 30, 2005 AND 2004
(Unaudited)
Quarter Ended June 30
2005 2004
------------ ------------
Revenue
Product sales $ 1,784,250 $ 1,363,140
Contract research and development 1,241,298 1,526,087
------------ ------------
Total revenue 3,025,548 2,889,227
Cost of sales 1,681,118 1,625,881
------------ ------------
Gross profit 1,344,430 1,263,346
Expenses
Research and development 376,800 361,259
Selling, general, and administrative 409,594 484,596
------------ ------------
Total expenses 786,394 845,855
------------ ------------
Income from operations 558,036 417,491
Interest income 68,319 54,869
Interest expense (2,053) (4,457)
Other income 30,815 15,768
------------ ------------
Income before taxes 655,117 $ 483,671
Provision for income taxes 242,468 -
------------ ------------
Net income $ 412,649 $ 483,671
============ ============
Net income per share - basic $ 0.09 $ 0.11
============ ============
Net income per share - diluted $ 0.09 $ 0.10
============ ============
Weighted average shares outstanding
Basic 4,569,861 4,493,180
Diluted 4,683,151 4,977,489
See accompanying notes.
NVE CORPORATION
STATEMENTS OF CASH FLOWS
QUARTERS ENDED JUNE 30, 2005 AND 2004
(Unaudited)
Quarter Ended June 30
2005 2004
------------ ------------
OPERATING ACTIVITIES
Net income $ 412,649 $ 483,671
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 143,142 118,587
Gain on sale of fixed assets (25,500) -
Deferred income taxes 240,468 -
Changes in operating assets and liabilities:
Accounts receivable 77,752 (211,486)
Inventories (87,399) 30,221
Prepaid expenses and other (117) (26,670)
Accounts payable and accrued expenses 1,130 (76,442)
Deferred revenue (47,441) (31,040)
------------ ------------
Net cash provided by operating activities 714,684 286,841
INVESTING ACTIVITIES
Proceeds from the sale of fixed assets 25,500 -
Purchases of fixed assets - (233,666)
Purchases of investment securities (504,063) (19,922)
------------ ------------
Net cash used in investing activities (478,563) (253,588)
FINANCING ACTIVITIES
Net proceeds from sale of common stock 2,594 50,003
Repayment of capital lease obligations (16,319) (40,594)
------------ ------------
Net cash (used in) provided by
financing activities (13,725) 9,409
------------ ------------
Increase in cash and cash equivalents 222,396 42,662
Cash and cash equivalents at beginning of period 1,240,205 1,055,796
------------ ------------
Cash and cash equivalents at end of period $ 1,462,601 $ 1,098,458
============ ============
See accompanying notes.
NVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
1. NATURE OF BUSINESS
We develop, manufacture, and sell "spintronics" devices, a nanotechnology
which relies on electron spin rather than electron charge to acquire, store,
and transmit information.
2. INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements of NVE Corporation (the
"Company") are consistent with accounting principles generally accepted in the
United States and reporting with Securities and Exchange Commission rules and
regulations. In the opinion of management, these financial statements reflect
all adjustments, consisting only of normal and recurring adjustments, necessary
for a fair presentation of the financial statements. Although we believe that
the disclosures are adequate to make the information presented not misleading,
it is suggested that these unaudited financial statements be read in
conjunction with the audited financial statements and the notes included in our
latest annual financial statements included in our Annual Report on Form 10-KSB
for the fiscal year ended March 31, 2005. The results of operations for the
quarter ended June 30, 2005 are not necessarily indicative of the results that
may be expected for the full fiscal year ending March 31, 2006.
NOTE 3. FINANCIAL INSTRUMENTS
Our financial instruments consist of cash and cash equivalents,
investments, short-term trade receivables, and accounts payable. Because of
their short-term nature, carrying values of our financial instruments
approximate their fair value.
NOTE 4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Quarter ended June 30
2005 2004
------------ ------------
Net income $ 412,649 $ 483,671
Unrealized gain (loss) from investments 79,194 (158,245)
------------ ------------
Comprehensive income $ 491,843 $ 325,426
============ ============
NOTE 5. INVENTORIES
Inventories consisted of the following:
June 30 March 31
2005 2005
------------ ------------
Raw materials $ 852,590 $ 754,456
Work-in-process 619,641 614,337
Finished goods 367,927 383,966
------------ ------------
1,840,158 1,752,759
Less obsolescence reserve (180,000) (180,000)
------------ ------------
$ 1,660,158 $ 1,572,759
============ ============
NOTE 6. STOCK-BASED COMPENSATION
We have adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) Nos. 123 and 148, Accounting for Stock-Based
Compensation, but apply Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for
our plans. Under APB Opinion No. 25, when the exercise price of employee stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recognized.
Pro forma information regarding net income and income per share is
required by SFAS Nos. 123 and 148, and has been determined as if we had
accounted for our employee stock options under the fair value method. The fair
value for these options was estimated at the date of grant using the Black-
Scholes option pricing model with the following weighted average assumptions:
risk-free interest rate of 2.7% to 3.1% for the three months ended June 30,
2005 and 2004; expected volatility of 55% to 99% for the three months ended
June 30, 2005 and 2004; a weighted-average expected life of the options of one
to five years, and no dividend yield.
Option valuation models were developed for use in estimating the fair
value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of our employee stock options.
The pro forma information is as follows:
Quarter Ended June 30
2005 2004
------------ ------------
Net income applicable to common shares:
As reported $ 412,649 $ 483,671
Pro forma adjustment for stock options (10,319) (132,564)
------------ ------------
Pro forma net income $ 402,330 $ 351,107
============ ============
Earnings per share:
Basic - as reported $ 0.09 $ 0.11
Basic - pro forma $ 0.09 $ 0.08
Diluted - as reported $ 0.09 $ 0.10
Diluted - pro forma $ 0.09 $ 0.07
NOTE 7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
We do not expect to pay taxes in the near future because we have stock-
based compensation deductions. We began recognizing tax expenses for reporting
purposes in fiscal 2006, however, because under SFAS No. 109, Accounting for
Income Taxes, stock-based compensation deductions do not reduce provision for
income taxes reported for book purposes. Regardless of our expectations, there
can be no assurance that we will generate any specific level of continuing
earnings.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.
Forward-looking statements
Some of the statements made in this Report 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 adverse economic
conditions, intense competition including entry of new competitors, our ability
to obtain sufficient financing to support our operations, progress in research
and development activities by us and others, variations in costs that are
beyond our control, adverse federal, state and local government regulations,
unexpected costs, lower sales and net income or higher net losses than
forecasted, price increases for equipment, our dependence on significant
suppliers including Taiwan Semiconductor Manufacturing Corporation for foundry
semiconductor wafers, our ability to meet stringent customer technical
requirements, our ability to consummate additional license agreements, our
ability to continue eligibility for SBIR awards, our inability to raise prices,
failure to obtain new customers, the possible fluctuation and volatility of our
operating results and financial condition, inability to carry out marketing and
sales plans, loss of key executives, and other specific risks that may be
alluded to in this report and those discussed in Exhibit 99 to this Report, as
well as those discussed in Exhibit 99 to our Annual Report on Form 10-KSB for
the year ended March 31, 2005.
General
We develop, manufacture, and sell devices using "spintronics," a
nanotechnology we helped pioneer, which utilizes electron spin rather than
electron charge to acquire, store and transmit information. We are a licensor
of spintronic magnetic random access memory technology, commonly referred to as
MRAM, which we believe has the potential to revolutionize electronic memory. We
also manufacture high-performance spintronic products including sensors and
couplers to revolutionize data sensing and transmission.
Quarter ended June 30, 2005 compared to the quarter ended June 30, 2004
The table below summarizes certain summary information for various items
for the periods indicated:
Percentage of Revenue Period-
Quarter Ended June 30 to-Period
2005 2004 Change
------- ------- ---------
Revenue
Product sales 59.0 % 47.2 % 30.9 %
Research and development 41.0 % 52.8 % (18.7)%
------- -------
Total revenue 100.0 % 100.0 % 4.7 %
Cost of sales 55.6 % 56.3 %
------- -------
Gross profit 44.4 % 43.7 %
Total expenses 26.0 % 29.3 % (7.0)%
------- -------
Income from operations 18.4 % 14.4 % 33.7 %
Net interest and other income 3.2 % 2.3 % 46.7 %
------- -------
Income before taxes 21.6 % 16.7 % 35.4 %
Provision for income taxes 8.0 % - -
------- -------
Net income 13.6 % 16.7 % (14.7)%
======= =======
Total revenue for the quarter ended June 30, 2005 (the first quarter of
fiscal 2006) was $3,025,548, an increase of 5% from revenue of $2,889,227 for
the quarter ended June 30, 2004 (the first quarter of fiscal 2005). The
increase was due to a 31% increase in product sales to $1,784,250 from
$1,363,140, partially offset by a decrease in contract research and development
revenue.
Gross profit margin increased to 44.4% for the first quarter of fiscal
2006 from 43.7% for fiscal 2005. The increase was due to a more favorable
revenue mix and higher product margins due to the deployment of lower-cost
coupler designs.
Research and development expenses increased by 4% to $376,800 for the
quarter ended June 30, 2005 compared to $361,259 for the quarter ended June 30,
2004. The increase was due to a shift from government-funded to company-funded
research, an increase in efforts to secure new research contracts, and efforts
to develop new and improved commercial products.
Selling, general and administrative expenses for the quarter ended June
30, 2005 decreased by 15% to $409,594 compared to $484,596 for the quarter
ended June 30, 2004. The decrease was due to a shift to distributors to sell
our products rather than manufacturers' representatives. This shift reduced
commissions we paid and expenses associated with supporting the manufacturers'
representatives.
Pre-tax income increased 35% to $655,117 for the quarter ended June 30,
2005 from $483,671 for the quarter ended June 30, 2004. The increase was due to
an increase in revenue, an increase in gross profit margin, and a decrease in
selling, general and administrative expenses. These changes were partially
offset by an increase in research and development expense.
The provision for income taxes for the quarter ended June 30, 2005 is due
to the exhaustion of our net operating losses in fiscal 2005. We do not expect
to pay cash taxes in the near future, however, because we have significant
stock-based compensation deductions.
Net income totaled $412,649 for the quarter ended June 30, 2005 compared
to $483,671 for the quarter ended June 30, 2004. The decrease in net income was
due to the provision for income taxes.
Liquidity and capital resources
At June 30, 2005 we had $8,491,479 in cash and investments compared to
$7,717,264 at March 31, 2005. The increase was due to cash generated from
operations.
Accounts receivable decreased to $2,207,720 at June 30, 2005 from
$2,285,472 at March 31, 2005. The decrease was primarily due to payments for
product shipments weighted toward late in fiscal 2005 as product sales
recovered from a downturn in the quarter ended December 31, 2004. We expect
accounts receivable in the future to approximately track revenue.
Inventory increased to $1,660,158 at June 30, 2005 from $1,572,759 at
March 31, 2005. The increase was primarily due to purchases of foundry wafers
either to secure more favorable pricing or to guard against a possible supply
shortage. The risk of a foundry wafer supply shortage appears to have since
abated.
We currently have no material commitments for capital expenditures. We
believe our working capital is adequate for our needs at least for the next 12
months.
Our Outlook
Electronic component industry conditions appeared to improve in the first
half of calendar 2005 after a weak second half of calendar 2004, as excess
inventories in the electronic component distribution channel were burned off.
We are therefore cautiously optimistic for product sales in fiscal 2006
compared to fiscal 2005.
We expect research and development revenue to continue to decline in
fiscal 2006 due to more limited availability of government research funds, our
shift in emphasis from government-funded to company-funded research,
particularly new product development, and our focus of contract research on
certain strategic areas.
We expect gross profit margin to continue to tend to increase in fiscal
2006 due to a continued shift in our revenue mix to product sales from research
and development revenue, and as a result of lower-cost product designs
completed in fiscal 2005. These increases could be offset, however, by
competitive pressures that could cause us to decrease our product selling
prices, and by our shift from sales representatives to distributors.
Selling, general and administrative expenses could increase as we attempt
to acquire additional MRAM license agreements or if we need to enforce existing
MRAM license agreements.
We expect research and development expenses to increase in fiscal 2006 as
we develop new products and continue to shift from government-funded to
company-funded research and development. A shortage of budget funds in the last
quarter of the government fiscal year could also lead to a decrease in
government revenue in the quarter ending September 30, 2005.
We do not expect to pay any significant income taxes in fiscal 2006 due to
our stock based compensation deductions, however we expect to recognize
provisions for income taxes at an effective rate of approximately 37% percent
of net income. Unlike net operating loss carryforwards, stock based
compensation deductions do not reduce taxes reported for book purposes when
realized.
Although we anticipate being profitable in fiscal 2006, no assurance can
be given that we will be successful in achieving this goal.
We are not currently planning any significant capital expenditures in
fiscal 2006, although we evaluate capital investments as needs and
opportunities arise. We would likely fund any capital expenditures from
operating profits, our cash and cash equivalents, or from the sale of a portion
of our investments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our interest income is subject to interest rate risks on cash, cash
equivalents, and investments. Our investments in fixed-rate debt securities,
which were classified as available-for-sale as of June 30, 2005, have remaining
maturities from one to 60 months, and are exposed to the risk of fluctuating
interest rates. Available-for-sale securities had a market value of $7,028,878
at June 30, 2005, representing 47% of our total assets. The primary objective
of our investment activities is to preserve capital. We have not used
derivative financial instruments in our investment portfolio.
We performed a sensitivity analysis assuming a hypothetical 10% adverse
movement in interest rates applicable to fixed rate instruments maturing during
the next 12 months that are subject to reinvestment risk. As of June 30, 2005,
the analysis indicated that these hypothetical market movements would not have
a material effect on our financial position, results of operations, or cash
flow.
Item 4. Controls and Procedures.
As of the end of the period covered by this Report, we conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of our disclosure controls
and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this
evaluation, the principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms. There was no change
in our internal control over financial reporting during our most recently
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
PART II--OTHER INFORMATION
Item 6. Exhibits.
31.1 Certification by Daniel A. Baker pursuant to
Rule 13a-14(a)/15d-14(a).
31.2 Certification by Richard L. George pursuant to
Rule 13a-14(a)/15d-14(a).
32 Certification by Daniel A. Baker and Richard L. George pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99 Cautionary statements for purposes of the "safe harbor" provisions of
The Private Securities Litigation Reform Act.
SIGNATURES
Pursuant to the requirements 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)
July 20, 2005 /s/ Daniel A. Baker
------------- -------------------------------------
Date Daniel A. Baker
President and Chief Executive Officer
July 20, 2005 /s/ Richard L. George
------------- -------------------------------------
Date Richard L. George
Chief Financial Officer