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 December 31, 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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
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 - 4,582,903 shares outstanding as of
January 13, 2006
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
NVE CORPORATION
BALANCE SHEETS
DECEMBER 31, 2005 AND MARCH 31, 2005
(Unaudited)
Dec. 31, 2005 March 31, 2005*
------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 1,111,009 $ 1,240,205
Short-term investments 998,205 252,775
Accounts receivable, net of allowance for
uncollectible accounts of $15,000 1,741,367 2,285,472
Inventories 2,033,941 1,572,759
Deferred tax assets 1,042,877 756,074
Prepaid expenses and other assets 138,311 130,873
-------------- --------------
Total current assets 7,065,710 6,238,158
Fixed assets
Machinery and equipment 4,122,662 4,140,307
Leasehold improvements 413,482 413,482
-------------- --------------
4,536,144 4,553,789
Less accumulated depreciation 3,205,085 2,826,227
-------------- --------------
Net fixed assets 1,331,059 1,727,562
Long-term investments 7,669,263 6,224,284
-------------- --------------
Total assets $ 16,066,032 $ 14,190,004
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 270,447 $ 319,427
Accrued payroll and other 503,991 465,930
Deferred revenue 99,015 267,355
Capital lease obligations 50,685 67,430
-------------- --------------
Total current liabilities 924,138 1,120,142
Capital lease obligations, less current portion - 33,281
-------------- --------------
Total liabilities 924,138 1,153,423
Shareholders' equity:
Common stock 45,765 45,698
Additional paid-in capital 14,983,963 14,064,625
Accumulated other comprehensive loss (124,322) (132,228)
Retained earnings (deficit) 236,488 (941,514)
-------------- --------------
Total shareholders' equity 15,141,894 13,036,581
-------------- --------------
Total liabilities and shareholders' equity $ 16,066,032 $ 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 DECEMBER 31, 2005 AND 2004
(Unaudited)
Quarter Ended December 31
2005 2004
------------ ------------
Revenue
Product sales $ 1,742,163 $ 1,118,210
Contract research and development 868,119 1,440,262
------------ ------------
Total revenue 2,610,282 2,558,472
Cost of sales 1,308,752 1,570,826
------------ ------------
Gross profit 1,301,530 987,646
Expenses
Research and development 342,616 257,284
Selling, general, and administrative 434,183 437,839
------------ ------------
Total expenses 776,799 695,123
------------ ------------
Income from operations 524,731 292,523
Interest income 88,168 60,177
Interest expense (1,336) (2,796)
Other income 3,101 25,268
------------ ------------
Income before taxes 614,664 $ 375,172
Provision for income taxes 213,279 -
------------ ------------
Net income $ 401,385 $ 375,172
============ ============
Net income per share - basic $ 0.09 $ 0.08
============ ============
Net income per share - diluted $ 0.09 $ 0.08
============ ============
Weighted average shares outstanding
Basic 4,576,454 4,501,345
Diluted 4,677,712 4,883,402
See accompanying notes.
NVE CORPORATION
STATEMENTS OF INCOME
NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
(Unaudited)
Nine Months Ended Dec. 31
2005 2004
------------ ------------
Revenue
Product sales $ 5,548,085 $ 3,931,402
Contract research and development 3,139,667 4,612,011
------------ ------------
Total revenue 8,687,752 8,543,413
Cost of sales 4,617,543 5,157,504
------------ ------------
Gross profit 4,070,209 3,385,909
Expenses
Research and development 1,237,355 925,136
Selling, general, and administrative 1,238,757 1,404,083
------------ ------------
Total expenses 2,476,112 2,329,219
------------ ------------
Income from operations 1,594,097 1,056,690
Interest income 233,606 173,543
Interest expense (5,084) (10,858)
Other income 39,667 62,766
------------ ------------
Income before taxes 1,862,286 1,282,141
Provision for income taxes 684,284 -
------------ ------------
Net income $ 1,178,002 $ 1,282,141
============ ============
Net income per share - basic $ 0.26 $ 0.29
============ ============
Net income per share - diluted $ 0.25 $ 0.26
============ ============
Weighted average shares outstanding
Basic 4,573,173 4,497,919
Diluted 4,674,431 4,879,976
See accompanying notes.
NVE CORPORATION
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
(Unaudited)
Nine Months Ended Dec. 31
2005 2004
------------ ------------
OPERATING ACTIVITIES
Net income $ 1,178,002 $ 1,282,141
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 426,450 409,530
Gain on sale of fixed assets (25,500) -
Deferred income taxes 668,334 -
Changes in operating assets and liabilities:
Accounts receivable 544,105 (526,851)
Inventories (461,182) (601,135)
Prepaid expenses and other assets (7,438) 164,914
Accounts payable and accrued expenses (10,919) 52,920
Deferred revenue (168,340) (107,762)
------------ ------------
Net cash provided by operating activities 2,143,512 673,757
INVESTING ACTIVITIES
Proceeds from the sale of fixed assets 25,500 -
Purchases of fixed assets (20,573) (805,148)
Purchases of investment securities (2,255,922) (226,320)
------------ ------------
Net cash used in investing activities (2,250,995) (1,031,468)
FINANCING ACTIVITIES
Net proceeds from sale of common stock 28,313 79,147
Repayment of capital lease obligations (50,026) (106,507)
------------ ------------
Net cash used in financing activities (21,713) (27,360)
------------ ------------
Decrease in cash and cash equivalents (129,196) (385,071)
Cash and cash equivalents at beginning of period 1,240,205 1,055,796
------------ ------------
Cash and cash equivalents at end of period $ 1,111,009 $ 670,725
============ ============
See accompanying notes.
NVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
(Unaudited)
NOTE 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.
NOTE 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 December 31, 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 December 31
2005 2004
------------ ------------
Net income $ 401,385 $ 375,172
Unrealized (loss) gain from investments (19,568) (41,902)
------------ ------------
Comprehensive income $ 381,817 $ 333,270
============ ============
Nine Months Ended December 31
2005 2004
------------ ------------
Net income $ 1,178,002 $ 1,282,141
Unrealized gain (loss) from investments 7,906 (126,997)
------------ ------------
Comprehensive income $ 1,185,908 $ 1,155,144
============ ============
NOTE 5. INVENTORIES
Inventories consisted of the following:
December 31 March 31
2005 2005
------------ ------------
Raw materials $ 646,153 $ 754,456
Work-in-process 850,643 614,337
Finished goods 717,145 383,966
------------ ------------
2,213,941 1,752,759
Less obsolescence reserve (180,000) (180,000)
------------ ------------
$ 2,033,941 $ 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 3.9% for the three and nine months ended
December 31, 2005 and 2004; expected volatility of 55% to 99% for the three and
nine months ended December 31, 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 December 31
2005 2004
------------ ------------
Net income applicable to common shares:
As reported $ 401,385 $ 375,172
Pro forma adjustment for stock options (92,474) (186,761)
------------ ------------
Pro forma net income $ 308,911 $ 188,411
============ ============
Earnings per share:
Basic - as reported $ 0.09 $ 0.08
Basic - pro forma $ 0.07 $ 0.04
Diluted - as reported $ 0.09 $ 0.08
Diluted - pro forma $ 0.07 $ 0.04
Nine Months Ended Dec. 31
2005 2004
------------ ------------
Net income applicable to common shares:
As reported $ 1,178,002 $ 1,282,141
Pro forma adjustment for stock options (207,877) (570,779)
------------ ------------
Pro forma net income $ 970,125 $ 711,362
============ ============
Earnings per share:
Basic - as reported $ 0.26 $ 0.29
Basic - pro forma $ 0.21 $ 0.16
Diluted - as reported $ 0.25 $ 0.26
Diluted - pro forma $ 0.21 $ 0.15
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 reversed $137,463 and $469,776 of our valuation allowance for the
quarter and nine months ended December 31, 2004 due to the utilization of
net operating loss carryforwards, resulting in no income tax expense for the
quarter and nine months ended December 31, 2004.
We do not expect to pay taxes in the near future, other than possibly
alternative minimum tax, because we have stock-based compensation
deductions. However, we began recognizing tax expenses for reporting
purposes in fiscal 2006 because under SFAS No. 109, Accounting for Income
Taxes, stock-based compensation deductions do not reduce provision for
income taxes reported for book purposes. Tax provisions of $668,334 have
been credited to "Additional paid-in capital" in fiscal 2006. Regardless of
our expectations, there can be no assurance that we will generate any
specific level of continuing earnings.
NOTE 8. SUBSEQUENT EVENT
Termination of our Employee Stock Purchase Plan
Effective January 1, 2006 the NVE Corporation 2001 Employee Stock Purchase
Plan was terminated. This was an implementation of our Board of Directors' vote
on October 17, 2005 to terminate the Plan effective January 1, 2006. The
termination of the Plan did not affect participants' options to purchase shares
under the Plan on December 31, 2005. The termination was in anticipation of the
impact of Financial Accounting Standards Board Statement of Financial
Accounting Standards ("SFAS") No. 123(R), which we believe would have required
recognizing expenses associated with the issuance of shares under the Plan.
Public entities that do not file as small business issuers will be required to
apply SFAS No. 123(R) as of the first annual reporting period beginning after
June 15, 2005.
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, 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, our dependence on significant suppliers, 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 December 31, 2005 compared to the quarter ended December 31, 2004
The table below summarizes certain summary information for various items
for the periods indicated:
Percentage of Revenue Period-
Quarter Ended December 31 to-Period
2005 2004 Change
------- ------- ---------
Revenue
Product sales 66.7 % 43.7 % 55.8 %
Research and development 33.3 % 56.3 % (39.7)%
------- -------
Total revenue 100.0 % 100.0 % 2.0 %
Cost of sales 50.1 % 61.4 %
------- -------
Gross profit 49.9 % 38.6 %
Total expenses 29.8 % 27.1 % 11.7 %
------- -------
Income from operations 20.1 % 11.5 % 79.4 %
Net interest and other income 3.5 % 3.2 % 8.8 %
------- -------
Income before taxes 23.6 % 14.7 % 63.8 %
Provision for income taxes 8.2 % - -
------- -------
Net income 15.4 % 14.7 % 7.0 %
======= =======
Total revenue for the quarter ended December 31, 2005 (the third quarter
of fiscal 2006) was $2,610,282, an increase of 2% from $2,558,472 for the
quarter ended December 31, 2004 (the third quarter of fiscal 2005). The
increase was due to a 56% increase in product sales to $1,742,163 from
$1,118,210, partially offset by a 40% decrease in contract research and
development revenue to $868,119 from $1,440,262. The decrease in contract
research and development revenue was due to a shift to company-funded research
from contract-funded research and a decrease in U.S. Government contract awards
to us. The increase in product sales was due to increased sales of spintronic
couplers and other products.
Gross profit margin increased to 50% of revenue for the third quarter of
fiscal 2006 from 39% for the same quarter of fiscal 2005. The increase was due
a more profitable revenue mix consisting of a higher percentage of product
sales, and higher product margins due primarily to lower-cost coupler designs.
Research and development expense increased 33% to $342,616 for the quarter
ended December 31, 2005 compared to $257,284 for the quarter ended
December 31, 2004. The increase was due to efforts to develop new and improved
products and a shift to company-funded research from contract-funded research.
Net interest and other income increased 9% to $89,933 for the quarter
ended December 31, 2005 from $82,649 for the quarter ended December 31, 2004.
The increase was mostly due to an increase in interest-bearing investments.
Income before taxes increased 64% to $614,664 for the quarter ended
December 31, 2005 from $375,172 for the quarter ended December 31, 2004. The
increase was due to an increase in revenue and an increase in gross profit
margin. These changes were partially offset by an increase in research and
development expense.
The provision for income taxes for the quarter ended December 31, 2005 was
due to the exhaustion of our net operating losses in fiscal 2005. We do not
expect to pay significant cash taxes in the near future because we have
significant stock-based compensation deductions. Under SFAS No. 109,
Accounting for Income Taxes, stock-based compensation deductions do not
reduce provision for income taxes reported for book purposes.
Net income totaled $401,385 for the quarter ended December 31, 2005
compared to $375,172 for the quarter ended December 31, 2004. The increase in
net income was primarily due to an increase in revenue and an increase in gross
profit partially offset by an increase in research and development expense and
a provision for income tax in the quarter ended December 31, 2005.
Weighted average diluted shares outstanding decreased to 4,677,712 shares
for the quarter ended December 31, 2005 from 4,883,402 shares for the quarter
ended December 31, 2004. The decrease was due to the expiration of a warrant
issued to Cypress Semiconductor Corporation for the purchase of up to 400,000
shares of our common stock.
Earnings per diluted share were $0.09 for the quarter ended
December 31, 2005 compared to $0.08 for the quarter ended December 31, 2004.
The increase was due to an increase in net income and a decrease in diluted
weighted average shares outstanding, and despite a provision for income tax in
the quarter ended December 31, 2005.
Nine months ended December 31, 2005 compared to the nine months ended
December 31, 2004
The table below summarizes certain summary information for various items
for the periods indicated:
Percentage of Revenue Period-
Nine Months Ended December 31 to-Period
2005 2004 Change
------- ------- ---------
Revenue
Product sales 63.9 % 46.0 % 41.1 %
Research and development 36.1 % 54.0 % (31.9)%
------- -------
Total revenue 100.0 % 100.0 % 1.7 %
Cost of sales 53.2 % 60.4 %
------- -------
Gross profit 46.8 % 39.6 %
Total expenses 28.5 % 27.2 % 6.3 %
------- -------
Income from operations 18.3 % 12.4 % 50.9 %
Net interest and other income 3.1 % 2.6 % 19.0 %
------- -------
Income before taxes 21.4 % 15.0 % 45.2 %
Provision for income taxes 7.9 % - -
------- -------
Net income 13.5 % 15.0 % (8.1)%
======= =======
Total revenue for the nine months ended December 31, 2005 was $8,687,752,
an increase of 2% from revenue of $8,543,413 for the nine months ended
December 31, 2004. The increase was due to a 41% increase in product sales to
$5,548,085 from $3,931,402 partially offset by a 32% decrease in contract
research and development revenue to $3,139,667 from $4,612,011. The decrease in
contract research and development revenue was due to a shift to company-funded
from contract-funded research and a decrease in U.S. Government contract awards
to us. The increase in product sales was due to increased sales of spintronic
couplers and other products.
Gross profit margin increased to 47% of revenue for the first nine months
of fiscal 2006 from 40% for the first nine months fiscal 2005. The increase in
gross profit margin was due to a more profitable revenue mix and higher product
margins due primarily to lower-cost coupler designs.
Research and development expense increased by 34% to $1,237,355 for the
nine months ended December 31, 2005 compared to $925,136 for the nine months
ended December 31, 2004. The increase was due to efforts to develop new and
improved products and a shift to company-funded research from contract-funded
research.
Selling, general and administrative expense for the nine months ended
December 31, 2005 decreased 12% to $1,238,757 compared to $1,404,083 for the
nine months ended December 31, 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
manufacturers' representatives.
Net interest and other income increased 19% to $268,189 for the nine
months ended December 31, 2005 from $225,451 for the nine months ended
December 31, 2004. The increase was due to an increase in interest-bearing
investments.
Income before taxes increased 45% to $1,862,286 for the nine months ended
December 31, 2005 from $1,282,141 for the nine months ended December 31, 2004.
The increase was due to an increase in revenue, an increase in gross profit
margin, and a decrease in selling, general and administrative expense. These
changes were partially offset by an increase in research and development
expense.
The provision for income taxes for the for the nine months ended
December 31, 2005 was due to the exhaustion of our net operating losses in
fiscal 2005. We do not expect to pay significant cash taxes in the near future
because we have significant stock-based compensation deductions. Under SFAS
No. 109, Accounting for Income Taxes, stock-based compensation deductions do
not reduce provision for income taxes reported for book purposes.
Net income totaled $1,178,002 for the nine months ended December 31, 2005
compared to $1,282,141 for the nine months ended December 31, 2004. The
decrease in net income was due to provisions for income taxes.
Weighted average diluted shares outstanding decreased to 4,674,431 shares
for the nine months ended December 31, 2005 from 4,879,976 shares for the nine
months ended December 31, 2004. The decrease was due to the expiration of a
warrant issued to Cypress Semiconductor Corporation for the purchase of up to
400,000 shares of our common stock.
Earnings per diluted share were $0.25 for the nine months ended
December 31, 2005 compared to $0.26 for the nine months ended
December 31, 2004. The decrease was due to provisions for income taxes in the
nine months ended December 31, 2005.
Liquidity and capital resources
At December 31, 2005 we had $9,778,477 in cash plus investments compared
to $7,717,264 at March 31, 2005. The increase was due to cash generated from
operations and non-operating income. Our entire portfolio of short-term and
long-term investments is classified as available for sale.
Inventories increased $461,182 to $2,033,941 at December 31, 2005 compared
to $1,572,759 at March 31, 2005. The increase was primarily due to increases in
finished goods and work-in-process product inventories to support increased
product sales. In the future we expect inventories to tend to increase roughly
in line with product sales.
Working capital and long-term investments increased to $13,810,835 from
$11,342,300. The increase was due to cash provided by operating activities.
Working capital consists of current assets less current liabilities.
We currently have a commitment of approximately $100,000 for capital
expenditures for equipment to process even smaller products than we currently
sell. We believe our working capital is adequate for our needs at least for the
next 12 months.
Our outlook
We expect product revenue to increase in the fourth quarter fiscal 2006
compared to fiscal 2005 due to sales of new coupler and sensor products,
anticipated growth of our sales into the medical device market, and price
increases for certain of our products that will go into effect in calendar year
2006.
Research and development revenue may continue to decrease in fiscal 2006
compared to the prior year due to more limited availability of Government
research funds, our shift in emphasis from contract-funded to company-funded
research, particularly new product development, and our focus of contract
research on certain strategic areas.
We expect gross profit margins to continue to increase in the remainder of
fiscal 2006 compared to the prior year due to lower-cost product designs
completed in fiscal 2005, price increases for certain of our products that will
go into effect in calendar year 2006, and a planned continued shift in our
revenue mix to product sales from research and development revenue. Our product
sales have generally had higher gross profit margins than our research and
development revenue.
Selling, general and administrative expenses could increase in the future
as we attempt to acquire additional MRAM license agreements and enforce
existing MRAM license agreements.
Research and development expense may increase in fiscal 2006 compared to
the prior year as we develop new products and continue to shift to company-
funded research and development from contract-funded research and development.
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. Unlike net operating loss carryforwards, stock-
based compensation deductions do not reduce taxes reported for book purposes
when realized.
We anticipate being profitable in the fourth quarter of fiscal 2006,
although no assurance can be given that we will be successful in achieving this
goal.
We currently have a commitment of approximately $100,000 for capital
expenditures for equipment to process even smaller products than we currently
sell. We are planning certain other smaller expenditures to increase our
capacity. We evaluate capital investments as needs and opportunities arise so
our capital expenditures could deviate significantly from our expectations. We
will likely fund capital expenditures from operating profits or our cash and
cash equivalents.
New accounting pronouncements
In June 2005 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes
and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes,
and Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements. SFAS No. 154 applies to all voluntary changes in accounting
principle, and it changes the requirements for the accounting for and reporting
of a change in accounting principle. SFAS No. 154 requires retrospective
application to prior periods' financial statements of a voluntary change in
accounting principle unless it is impracticable. APB Opinion No. 20 previously
required that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect of
changing to the new accounting principle. SFAS No. 154 also requires that a
change in method of depreciation, amortization, or depletion for long-lived,
nonfinancial assets be accounted for as a change in accounting estimate that is
effected by a change in accounting principle. APB Opinion No. 20 previously
required that such a change be reported as a change in accounting principle.
SFAS No. 154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. We do not expect that
adoption of SFAS No. 154 will have a material effect on our financial position,
results of operations, or liquidity.
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 December 31, 2005, have
remaining maturities from four to 60 months, and are exposed to the risk of
fluctuating interest rates. Available-for-sale securities had a market value of
$8,667,468 at December 31, 2005, representing 54% 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
December 31, 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 Curt A. Reynders pursuant to
Rule 13a-14(a)/15d-14(a).
32 Certification by Daniel A. Baker and Curt A. Reynders 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)
January 18, 2006 /s/ Daniel A. Baker
---------------- -------------------------------------
Date Daniel A. Baker
President and Chief Executive Officer
January 18, 2006 /s/ Curt A. Reynders
---------------- -------------------------------------
Date Curt A. Reynders
Chief Financial Officer