NOTES TO FINANCIAL STATEMENTS

(Unaudited)

We develop and sell devices that use spintronics, a nanotechnology that relies on electron spin rather than electron charge to acquire, store, and transmit information.

NOTE 2. INTERIM FINANCIAL INFORMATION BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited financial statements of NVE Corporation are prepared consistent with accounting principles generally accepted in the United States and in accordance 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, certain disclosures have been omitted as allowed, and 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-K10-K for the fiscal year ended March 31, 2017. 2022. The results of operations for the quarter or nine months ended December 31, 2017 June 30, 2022 are not necessarily indicative of the results that may be expected for the full fiscal year ending March 31, 2018.

2023.

Significant accounting policies

A description of our significant accounting policies is provided in Note 2 to the Financial Statements in our Annual Report on Form 10-K for the year ended March 31, 2022. As of June 30, 2022, there were no changes to our significant accounting policies.

NOTE 3. RECENTLY ISSUED ACCOUNTING STANDARDS

Accounting Pronouncements Recently Adopted Accounting Standard

In July 2015, May 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11,2021-04, Simplifying the MeasurementEarnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Inventory. Freestanding Equity-Classified Written Call Options. ASU 2015-11 requires inventory that is recorded using the first-in, first-out method to be measured at the lower2021-04 addresses issuers’ accounting for certain modifications or exchanges of cost or net realizable value.freestanding equity-classified written call options. We adopted ASU 2015-11 prospectively in2021-04 beginning with the first quarter of the current fiscal year, and theended June 30,2022. The adoption has not had a significantno material impact on our financial statements.


 

New Accounting Standard Not Yet Adopted

In MarchJune 2016, the FASB issued ASU No. 2016-09,2016-13, Compensation—Stock CompensationFinancial Instruments-Credit Losses (Topic 326), which simplifiesMeasurement of Credit Losses on Financial Statements. ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the accountingnet amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the taxes related to stock based compensation, including adjustments to how excess tax benefits and a company’s payments for tax withholdings should be classified. We adopted ASU 2016-09 prospectively in the first quarteramortized cost basis of the fiscal year ending March 31, 2018. The adoption did not have a significant impactfinancial asset(s) to present the net carrying value at the amount expected to be collected on ourthe financial statements.

Future Accounting Pronouncements
asset. In May 2014,November 2018 the FASB issued ASU No. 2014-09,2018-19,Codification Improvements to Topic326, Financial Instruments-Credit Losses, which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. ASU 2014-09 is based on the principle that revenue is recognized to depict the transferclarifies codification and corrects unintended application of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance, recognized at the date of initial application. In August 2015, and in November 2019, the FASB issued ASU No. 2015-14,2019-11, Revenue from Contracts with Customers: Deferral of the Effective DateCodification Improvements to Topic 326, Financial Instruments-Credit Losses, which deferredclarifies or addresses specific issues about certain aspects of ASU 2016-13. In November 2019 the FASB issued ASU No.2019-10,Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, and in February 2020 the FASB issued ASU No.2020-02,Financial Instruments—Credit Losses (Topic326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No.2016-02, Leases (Topic 842), both of which delay the effective date of ASU 2014-092016-13 by one year. As a result,three years for certain Smaller Reporting Companies such as us. In March 2020, the FASB issued ASU 2014-09No.2020-03,Codification Improvements to Financial Instruments; which modifies the measurement of expected credit losses of certain financial instruments. In accordance with ASU 2019-10 and ASU 2020-02, ASU 2016-13 is effective for certain Smaller Reporting Companies for financial statements issued for fiscal years beginning after December 15, 20172022 and interim periods within those fiscal years, which will be fiscal 20192024 for us. We plan to adopt the guidance retrospectively with any effect of initially applying the guidance recognized at the date of initial application. Under this approach,us if we would not restate prior financial statements presented. Based on an evaluation, we do not expect therecontinue to be classified as a materialSmaller Reporting Company, with early adoption permitted. We are evaluating the potential impact of ASU 2016-13 on our financial statements, because we do not expect to change the manner or timing of recognizing revenue. We have evaluated each of our revenue streams, product sales and contract research and development. We recognize revenue on product sales to customers and distributors when we satisfy our performance obligations as the products are shipped. We recognize contract research and development revenue pro-rata as work progresses using costs incurred relative to the total expected costs as the measurement basis for progress toward completion. We are currently evaluating the impact of new disclosure requirements required under the guidance.

     Information regarding all other applicable recently issued accounting standards, on which our position have not changed since our latest annual financial statements, are contained in the financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2017.


statements.

Net income per basic share is computed based on the weighted-average number of common shares issued and outstanding during each period. Net income per diluted share amounts assume exercise of all stock options. Stock options totaling 4,000 for the quarter and 6,000 for the nine months ended December 31, 2016 were not included in the computation of diluted earnings per share because the exercise prices were greater than the market price of the common stock. The following tables show the components of diluted shares:

	Quarter Ended Dec. 31
	2017		2016
Weighted average common shares outstanding – basic	4,841,369		4,836,336
Dilutive effect of stock options	5,921		3,441
Shares used in computing net income per share – diluted	4,847,290		4,839,777

	Nine Months Ended Dec. 31
	2017		2016
Weighted average common shares outstanding – basic	4,841,130		4,835,639
Dilutive effect of stock options	4,906		2,176
Shares used in computing net income per share – diluted	4,846,036		4,837,815

Contractual maturities of available-for-sale securities as of December 31, 2017, by maturity, wereJune 30, 2022 are as follows:

Total			<1 Year			1–3 Years			3–5 Years
$	75,537,933		$	18,808,203		$	29,512,416		$	27,217,314

     As

Total available-for-sale securities represented approximately 79% of December 31 and March 31, 2017, our marketabletotal assets. Marketable securities were as follows:

	As of December 31, 2017													As of March 31, 2017
	Adjusted Cost			Gross Unrealized Gains			Gross Unrealized Losses				Fair Market Value			Adjusted Cost			Gross Unrealized Gains			Gross Unrealized Losses				Fair Market Value
Corporate bonds	$	75,955,697		$	27,442		$	(445,206	)		$	75,537,933		$	75,158,087		$	187,001		$	(246,935	)		$	75,098,153
Municipal bonds	-			-			-				-			1,304,817			-			(214		)		1,304,603
Total	$	75,955,697		$	27,442		$	(445,206	)		$	75,537,933		$	76,462,904		$	187,001		$	(247,149	)		$	76,402,756

     Fifteen securities were in unrealized loss positions as of December 31, 2017. The following table shows the gross unrealized losses and fair value of our investments with unrealized losses, aggregated by investment category and length of time that individual securities June 30, 2022 had been in a continuous unrealized loss position as of December 31 and March 31, 2017:

		Less Than 12 Months							12 Months or Greater							Total
		Fair Market Value			Gross Unrealized Losses				Fair Market Value			Gross Unrealized Losses				Fair Market Value			Gross Unrealized Losses
As of December 31, 2017
	Corporate bonds	$	44,282,521		$	(325,912	)		$	9,224,878		$	(119,294	)		$	53,507,399		$	(445,206	)
	Municipal bonds	-			-				-			-				-			-
	Total	$	44,282,521		$	(325,912	)		$	9,224,878		$	(119,294	)		$	53,507,399		$	(445,206	)
As of March 31, 2017
	Corporate bonds	$	32,198,766		$	(246,935	)		$	-		$	-			$	32,198,766		$	(246,935	)
	Municipal bonds	1,304,603			(214		)		-			-				1,304,603			(214		)
	Total	$	33,503,369		$	(247,149	)		$	-		$	-			$	33,503,369		$	(247,149	)

     Three bonds, with a total fair market value of $9,224,878, had been in continuous unrealized loss positions for 12 months or greater as of December 31, 2017. For these securities, we also considered the severity of unrealized losses, which were less than 2% of adjusted cost for each security.

None of the securities were impaired at acquisition, and subsequent declines in fair value are classifiednot attributed to declines in credit quality. When evaluating for impairment we assess indicators that include, but are not limited to, earnings performance, changes in underlying credit ratings, market conditions, bona fide offers to purchase or sell, and ability to hold until maturity. Because we believe it is more likely than not we will recover the cost basis of our investments, we did not consider any of our marketable securities to be impaired as Level 3 financial instruments.

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, 2017.2022. As of December 31, 2017June 30, 2022 our critical accounting policies and estimates continued to include investment valuation, inventory valuation, and deferred tax assets estimation.

Quarter ended December 31, 2017June 30, 2022 compared to quarter ended December 31, 2016
June 30, 2021

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

	Percentage of Revenue Quarter Ended Dec. 31						Quarter- to-Quarter Change
	2017			2016
Revenue
Product sales	87.6	%		95.4	%		(9.4	)%
Contract research and development	12.4	%		4.6	%		163.8	%
Total revenue	100.0	%		100.0	%		(1.4	)%
Cost of sales	22.5	%		20.1	%		10.3	%
Gross profit	77.5	%		79.9	%		(4.3	)%
Expenses
Selling, general, and administrative	4.3	%		5.2	%		(18.5	)%
Research and development	11.6	%		11.1	%		3.1	%
Total expenses	15.9	%		16.3	%		(3.7	)%
Income from operations	61.6	%		63.6	%		(4.5	)%
Interest income	5.5	%		5.3	%		2.4	%
Income before taxes	67.1	%		68.9	%		(3.9	)%
Provision for income taxes	18.6	%		22.2	%		(17.5	)%
Net income	48.5	%		46.7	%		2.5	%

Total expenses decreased 24% for the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022 due to a less profitable revenue mix.

     Total expenses decreased 4% for the third quarter of fiscal 2018 compared to the third quarter of fiscal 2017, due to26% decrease in research and development expense and a 19%20% decrease in selling, general, and administrative expense, partially offset by a 3% increase in research and development expense. The decrease in selling, general, and administrative expense was due to decreased performance-based compensation and decreased legal expenses. The increase in research and development expense was due to increased new product development activities.

     Interest income for the third quarter of fiscal 2018 increased 2% due to an increase in the average interest rates on our marketable securities, partially offset by a decrease in our securities.

     Our effective tax rate was 27.7% of net income before taxes for the quarter, compared to 32.3% in the prior-year quarter. The decrease wasprimarily due to the blended effectreallocation of a decrease in the Federal tax rate with the enactment of the Tax Reform Act, partially offset by a $206,693 one-time increase in our provision for income taxesresources from the effect of the new rate on our deferred tax assets. Although we have not yet fully assessed the impact of the Tax Reform Act on our future taxes or net income, we currently expect our effective tax rate to be approximately 29% for the quarter ending March 31, 2018. See Note 8 to the financial statements for more information on income taxes.

     The 3% increase in net income in the third quarter of fiscal 2018 compared to the prior-year quarter was primarily due to increased contract research and development revenue, decreased selling, general, and administrative expense, and a decrease in the provision for income taxes, partially offset by decreased product sales, decreased gross profit margin, and increased research and development expense.

We believe revenues and a decreasecosts in the provision for income taxes, partially offsetquarter ended June 30, 2022 were unfavorably affected by increased research and development expense and decreased interest income.

continued supply chain disruptions related to the COVID-19 pandemic.

Liquidity and capital resources

Capital Resources

Overview

Cash and cash equivalents were $4,728,352$13,299,264 as of December 31, 2017June 30, 2022 compared to $8,199,364$10,449,510 as of March 31, 2017.2022. The $3,471,012 decrease$2,849,754 increase in cash and cash equivalents during the nine months ended December 31, 2017first quarter of fiscal 2023 was due to $14,471,990 cash used in financing activities and $320,965 cash used in investing activities, partially offset by $11,321,943$3,331,143 in net cash provided by operating activities. We currently believe our working capitalactivities and $4,349,437 of cash generated from operations will be adequate for our needs at least for the next 12 months.

provided by investing activities, partially offset by $4,830,826 of cash used in financing activities.

Operating Activities

Net cash provided by operating activities related to product sales and research and development contract revenue as our primary source of working capital for the current and prior-year quarters. Net cash provided by operating activities was $3,331,143 for first quarter of fiscal 2023 and $3,300,394 for the first quarter of fiscal 2022.

Accounts receivable asdecreased by $1,191,613 during the first quarter of December 31, 2017 decreased $1,270,936 compared to March 31, 2017,fiscal 2023 primarily due to the timing of sales to and payments from certain customers.

Investing Activities
     Cash used

Inventories increased $455,402 due primarily to our decisions to increase work in investing activitiesprocess in the nine months ended December 31, 2017order to mitigate longer vendor lead-times.

Accounts payable and accrued expenses decreased $1,371,168 due to a $689,317 decrease in accrued expenses, a $648,092 decrease in accounts payable, and a $33,759 net decrease in operating lease liabilities. The decrease in accounts payable was due to $16,256,210the timing of vendor payments. The decrease in purchasesaccrued expenses was due to decreases in accrued payroll and income taxes payable.

Investing Activities

Cash provided by investing activities during the quarter ended June 30, 2022 consisted of $9,250,000 in proceeds from maturities of marketable securities and $604,755 in purchasesthe receipt of fixed assets,a $100,000 buildout allowance, partially offset by $16,540,000$4,976,063 marketable securities purchases and $24,500 of marketable security maturities.

fixed asset purchases. Fixed asset purchases can vary from quarter to quarter depending on our needs and equipment purchasing opportunities. We have ordered and are in the process of deploying additional new production equipment to increase our capacity. Therefore, we currently expect significantly more fixed asset purchases during fiscal 2023 than the $484,579 we invested in fiscal 2022.

Financing Activities

Cash used in financing activities induring the first nine monthsquarter ended June 30, 2022 consisted of fiscal 2018 was primarily due to $14,523,030$4,830,826 of cash dividends paid to shareholders. In addition to cash dividends to shareholders paid in the first nine monthsquarter of fiscal 2018,2023, on January 17, 2018July 20, 2022 we announced that our Board had declared a cash quarterly dividend of $1.00 per share of common stock,Common Stock, or $4,842,010$4,830,826 based on shares outstanding as of January 12, 2018,July 15, 2022, to be paid February 28, 2018.August 31, 2022. We plan to fund dividends through cash provided by operating activities and proceeds from maturities and sales of marketable securities. 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, dividends may be modified or discontinued at any time without notice.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
     As discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017, we are exposed to financial market risks, primarily marketable securities and, to a lesser extent, changes in currency exchange rates.

Marketable Securities
     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, 2017 had remaining maturities between 12 days and 56 months. Marketable securities had a market value of $75,537,933 as of December 31, 2017, representing approximately 85% of our total assets. We have not used derivative financial instruments in our investment portfolio.