UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______________to______________
Commission file number 000-12196
NVE Corporation
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1424202
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11409 Valley View Road, Eden Prairie, Minnesota 55344
(Address of principal executive offices)
(952) 829-9217
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock, $.01 Par Value - 4,496,595 shares outstanding as of July 19, 2004
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
NVE CORPORATION
BALANCE SHEET
JUNE 30, 2004
Current assets:
Cash and cash equivalents $ 1,098,458
Investment securities 6,346,690
Accounts receivable, net of allowance for
uncollectible accounts of $15,000 1,950,965
Inventories 1,119,633
Deferred tax asset 250,000
Prepaid expenses and other assets 323,207
------------
Total current assets 11,088,953
Fixed assets:
Machinery and equipment 3,585,342
Leasehold improvements 365,187
------------
3,950,529
Less accumulated depreciation 2,392,402
------------
Net fixed assets 1,558,127
------------
Total assets $12,647,080
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 352,138
Accrued payroll and other 610,536
Deferred revenue 393,136
Capital lease obligations 98,205
------------
Total current liabilities 1,454,015
Capital lease obligations, less current portion 84,392
------------
Total liabilities 1,538,407
Shareholders' equity:
Common stock 44,962
Additional paid-in capital 13,347,683
Accumulated other comprehensive loss (67,875)
Accumulated deficit (2,216,097)
------------
Total shareholders' equity 11,108,673
------------
Total liabilities and shareholders' equity $12,647,080
============
SEE ACCOMPANYING NOTES.
NVE CORPORATION
STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
Three Months Ended June 30
2004 2003
--------------------------
Revenue:
Contract research and development $ 1,526,087 $ 1,720,906
Product sales 1,363,140 1,098,943
------------ ------------
Total revenue 2,889,227 2,819,849
Cost of sales 1,625,881 1,908,995
------------ ------------
Gross profit 1,263,346 910,854
Expenses:
Research and development 361,259 178,669
Selling, general & administrative 484,596 450,863
------------ ------------
Total expenses 845,855 629,532
------------ ------------
Income from operations 417,491 281,322
Interest income 54,869 49,013
Interest expense (4,457) (7,691)
Other income 15,768 11,774
------------ ------------
Net income $ 483,671 $ 334,418
============ ============
Net income per share-basic $ .11 $ .08
============ ============
Net income per share-diluted $ .10 $ .07
============ ============
Weighted average shares outstanding:
Basic 4,493,180 4,174,913
Diluted 4,977,489 4,571,254
SEE ACCOMPANYING NOTES.
NVE CORPORATION
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
Three Months Ended June 30
2004 2003
------------ ------------
OPERATING ACTIVITIES
Net income $ 483,671 $ 334,418
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 118,587 119,164
Changes in operating assets and liabilities:
Accounts receivable (211,486) (87,380)
Inventories 30,221 (100,399)
Prepaid expenses and other (26,670) 72,323
Accounts payable and accrued expenses (76,442) 19,171
Deferred revenue (31,040) (11,938)
------------ ------------
Net cash provided by operating activities 286,841 345,359
INVESTING ACTIVITIES
Purchases of fixed assets (233,666) (304,630)
Purchases of investment securities (19,922) 847,837
------------ ------------
Net cash (used in) provided by investing activities (253,588) 543,207
FINANCING ACTIVITIES
Net proceeds from sale of common stock 50,003 8,285
Repayment of capital lease obligations (40,594) (37,360)
------------ ------------
Net cash provided by (used in)
financing activities 9,409 (29,075)
------------ ------------
Increase in cash and cash equivalents 42,662 859,491
Cash and cash equivalents at beginning of period 1,055,796 595,768
------------ ------------
Cash and cash equivalents at end of period $ 1,098,458 $ 1,455,259
============ ============
SEE ACCOMPANYING NOTES.
NVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
1. 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 SEC 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
condensed financial statements be read in conjunction with the audited
financial statements and the notes included in our latest annual financial
statements included in our report on Form 10-KSB. The results of operations
for the three month period ended June 30, 2004 are not necessarily indicative
of the results that may be expected for the full year ending March 31, 2005.
2. 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.
3. REVENUE RECOGNITION
Revenue from product sales is recognized when title transfers, generally upon
shipment. Revenue from licensing and technology development programs, which is
nonrefundable and for which no significant future obligations exist, is
recognized when the license is signed. Revenue from licensing and technology
development programs, which is refundable, recoupable against future
royalties, or for which future obligations exist, is recognized when we
complete our obligations under the terms of the agreements. Revenue from
royalties is recognized upon the shipment of product from our technology
license partners to direct customers. Certain research and development
activities are conducted for third parties and such revenue is recognized as
the services are performed. Payments received from licensing and technology
development programs relating to future obligations as well as prepayments for
future discounts on product sales are recorded as deferred revenue.
4. EARNINGS PER SHARE
We calculate our net income per share pursuant to SFAS No. 128, Earnings per
Share. Basic earnings per share is computed based upon the weighted average
number of common shares issued and outstanding during each year. Diluted net
income per share amounts assume conversion, exercise or issuance of all
potential common stock instruments (stock options and warrants). Stock options
were not included in the computation of diluted earnings per share if the
exercise prices of the options were greater than the market price of the
common stock.
5. INVESTMENTS
We classify and account for debt and equity securities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Our entire portfolio
consists of government-backed and corporate bonds and is classified as
available for sale; thus, securities are recorded at fair market value and any
associated unrealized gain or loss, net of tax, is included as a separate
component of shareholders' equity, "Accumulated other comprehensive income."
6. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three months ended
June 30 June 30
2004 2003
----------- -----------
Net income $ 483,671 $ 334,418
Change in unrealized gain or loss (158,245) 27,587
----------- -----------
Comprehensive income $ 325,426 $ 362,005
=========== ===========
7. INVENTORIES
Inventories consist of the following:
Raw materials $ 375,510
Work-in-process 544,119
Finished goods 440,004
-----------
1,359,633
Less obsolescence reserve (240,000)
-----------
$1,119,633
===========
8. STOCK-BASED COMPENSATION
We have adopted the disclosure-only provisions of SFAS Nos. 123 and 148,
Accounting for Stock-Based Compensation, but apply Accounting Principles Board
(APB) 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 3.1% and 2.7% for the three months ended June 30,
2004 and 2003, expected volatility of 55% to 99% and 55% for the three months
ended June 30, 2004 and 2003, 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:
Three Months Ended June 30
2004 2003
------------ ------------
Net income applicable to common shares:
As reported $ 483,671 $ 334,418
Pro forma adjustment
for stock options (132,564) (81,325)
------------ ------------
Pro forma net income $ 351,107 $ 253,093
============ ============
Earnings per share:
Basic - as reported $ 0.11 $ 0.08
Basic - pro forma $ 0.08 $ 0.06
Diluted - as reported $ 0.10 $ 0.07
Diluted - pro forma $ 0.07 $ 0.06
Item 2. Management's Discussion and Analysis or Plan of Operation.
Forward-looking statements
Some of the statements made in this Quarterly Report on Form 10-QSB
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 included in our most recent
Annual Report on Form 10-KSB.
General
We develop 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 which are used to acquire and transmit data in automated factories.
Critical accounting policies
It is important to understand our significant accounting policies in
order to understand our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
These accounting principles require us to make estimates and assumptions that
affect amounts reported in our financial statements and the accompanying
notes. Actual results are likely to differ from those estimates, but we do not
believe such differences will materially affect our financial position or
results of operations for the periods presented in this report.
Revenue Recognition
Revenue from product sales is recognized when title transfers, generally
upon shipment. Revenue from licensing and technology development programs,
which is nonrefundable and for which no significant future obligations exist,
is recognized when the license is signed. Revenue from licensing and
technology development programs, which is refundable, recoupable against
future royalties, or for which future obligations exist, is recognized when we
complete our
obligations under the terms of the agreements. Revenue from royalties is
recognized upon the shipment of product from our technology license partners
to direct customers. Certain research and development activities are conducted
for third parties and such revenue is recognized as the services are
performed. Payments received from licensing and technology development
programs relating to future obligations as well as prepayments for future
discounts on product sales are recorded as deferred revenue.
Bad Debt
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If
the financial condition of our customers were to deteriorate resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Inventory
We reduce the stated value of our inventory for excess quantities or
obsolescence in an amount equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand and market conditions. Additional reductions in stated value may be
required if actual future demand or market conditions are less favorable than
we projected.
Income Taxes
In determining the carrying value of our net deferred tax assets, we must
assess the likelihood of sufficient future taxable income in certain tax
jurisdictions, based on estimates and assumptions to realize the benefit of
these assets. We evaluate the realizability of the deferred assets quarterly
and assess the need for valuation allowances or reduction of existing
allowances quarterly.
The table below summarizes the percentage of revenue for the various
items for the periods indicated:
Three Months Ended June 30
2004 2003
------- -------
Revenue:
Research and development 52.8 % 61.0 %
Product sales 47.2 39.0
------- -------
Total revenue 100.0 100.0
Cost of sales 56.3 67.7
------- -------
Gross profit 43.7 32.3
Total expenses 27.0 20.4
------- -------
Net income 16.7 % 11.9 %
======= =======
Revenue for the three months ended June 30, 2004 (the first quarter of
fiscal 2005) was $2,889,227, an increase of 2% from revenue of $2,819,849, for
the three months ended June 30, 2003 (the first quarter of fiscal 2004). The
revenue increase was due to increases in commercial product sales partially
offset by a decline in research and development revenue.
Research and development revenue decreased 11% for the three months ended
June 30, 2004 to $1,526,087 from $1,720,906 for the three months ended June
30, 2003 due to a shift in resources from government-funded research contracts
to company-funded research in order to develop new and improved commercial
products. Commercial product sales increased 24% to $1,363,140 from
$1,098,943.
Gross profit margins increased to 44% for the three months ended June 30,
2004 as compared to 32% for the three months ended June 30, 2003. The increase
was due to manufacturing efficiencies on commercial products, and a more
favorable mix between product sales and contract research and development.
Research and development expenses increased by 102% to $361,259 for the
three months ended June 30, 2004 as compared to $178,669 for the three months
ended June 30, 2003. The increase was due to shifting resources from
government-funded research contracts to company-funded research in order to
develop new and improved commercial products.
Selling, general and administrative expenses for the three months ended
June 30, 2004 increased by 7% to $484,596 compared to $450,863 for the three
months ended June 30, 2003. The increase was due to higher intellectual
property legal expenses.
Net income totaled $483,671 for the three months ended June 30, 2004
compared to $334,418 for the three months ended June 30, 2003. The increase in
net income was due to higher gross profit margins partially offset by higher
expenses.
Liquidity and capital resources
At June 30, 2004 we had $7,445,148 in cash and available-for-sale
securities, consisting of marketable fixed-income investments. We believe our
working capital is adequate to meet our requirements for at least the next
twelve months.
Outlook
We have been shifting resources from government funded research contracts
to company funded research in order to develop new commercial products. This,
along with the possibility of increased MRAM development expenses could reduce
research and development revenue and increase research and development
expenses going forward. We expect this trend to continue in the remainder of
fiscal 2005.
Gross profit margins could decrease in fiscal 2005 as competitive
pressures could force us to decrease our selling prices.
We expect selling, general and administrative expenses to increase in
fiscal 2005 if we rollout MRAM manufactured under our technology agreement
with Cypress. We may also increase expenditures relating to MRAM license
procurement. Legal expenses relating to enforcing our MRAM intellectual
property may also increase. While we expect to remain profitable in the rest
of the fiscal year, there is a risk that these additional expenses could lead
to lower net income compared to the prior year or operating losses.
Our growth has required expanding our manufacturing capacity. We
purchased several new pieces of production equipment in the past quarter. We
plan to purchase additional production equipment and expand our clean-room
factory in the coming year to support continued growth in product sales, to
reduce labor costs and to increase manufacturing yields.
Item 3. Controls and Procedures.
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this report. Based on
such evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Company's
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act.
Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the
Exchange Act) during the quarter ended June 30, 2004 that have materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) 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).
32.1 Certification by Daniel A. Baker pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Richard L. George pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K.
We submitted a Form 8-K with a date of report of April 28, 2004
including our press release reporting summary financial results for the
quarter and fiscal year ended March 31, 2004, and a Form 8-K with a date of
report of April 30, 2004 including detailed financial statements for the
quarter and fiscal year ended March 31, 2004. The information for both Forms
was furnished under Item 12, Results of Operations and Financial Condition.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NVE CORPORATION
(Registrant)
Date July 21, 2004 /s/ Daniel A. Baker
------------- -------------------------------------
Daniel A. Baker
President and Chief Executive Officer
Date July 21, 2004 /s/ Richard L. George
------------- -------------------------------------
Richard L. George
Chief Financial Officer