Forward-looking statements

Some of the statements made in this Report or in the documents incorporated by reference in this Report and in other materials filed or to be filed by us with the Securities and Exchange Commission ("SEC") as well as information included in verbal or written statements made by us constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to the safe harbor provisions of the reform act. Forward-looking statements may be identified by the use of the terminology such as may, will, expect, anticipate, intend, believe, estimate, should, or continue, or the negatives of these terms or other variations on these words or comparable terminology. To the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of NVE, you should be aware that our actual financial condition, operating results and business performance may differ materially from that projected or estimated by us in the forward-looking statements. We have attempted to identify, in context, some of the factors that we currently believe may cause actual future experience and results to differ from their current expectations. These differences may be caused by a variety of factors, including but not limited to risks related to our reliance on several large customers for a significant percentage of revenue, uncertainties related to the economic environments in the industries we serve, uncertainties related to future sales and revenues, risks related to changes in tariffs and other trade barriers, uncertainties related to future stock repurchases and dividend payments, and other specific risks that may be alluded to in this Report or in the documents incorporated by reference in this Report.

Further information regarding our risks and uncertainties are contained in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended March 31, 2019.

General

NVE Corporation, referred to as NVE, we, us, or our, develops and sells devices that use spintronics, a nanotechnology that relies on electron spin rather than electron charge to acquire, store and transmit information. We manufacture high-performance spintronic products including sensors and couplers that are used to acquire and transmit data.

Critical accounting policies

A description of our critical accounting policies is provided in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended March 31, 2019. As of December 31, 2019 our critical accounting policies and estimates continued to include investment valuation, inventory valuation, and deferred tax assets estimation.




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Quarter ended December 31, 2019 compared to quarter ended December 31, 2018

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



                                             Percentage of Revenue           Quarter-
                                           Quarter Ended December 31        to-Quarter
                                                                              Change
                                          2019                      2018
Revenue
Product sales                               95.3 %                  95.6 %       2.8 %
Contract research and development            4.7 %                   4.4 %       9.2 %
Total revenue                              100.0 %                 100.0 %       3.1 %
Cost of sales                               19.5 %                  18.7 %       8.1 %
Gross profit                                80.5 %                  81.3 %       2.0 %
Expenses
Research and development                    12.0 %                  17.9 %     (31.5 )%
Selling, general, and administrative         5.1 %                   4.3 %      22.0 %
Total expenses                              17.1 %                  22.2 %     (21.2 )%
Income from operations                      63.4 %                  59.1 %      10.7 %
Interest income                              6.9 %                   7.3 %      (3.0 )%
Income before taxes                         70.3 %                  66.4 %       9.2 %
Provision for income taxes                  12.6 %                  11.8 %      10.0 %
Net income                                  57.7 %                  54.6 %       9.0 %

Total revenue for the quarter ended December 31, 2019 (the third quarter of fiscal 2020) increased 3% compared to the quarter ended December 31, 2018 (the third quarter of fiscal 2019). The increase was due to an 3% increase in product sales and a 9% increase in contract research and development revenue.

The increase in product sales from the prior-year quarter was primarily due to increased purchases by existing customers. The increase in contract research and development revenue the third quarter of fiscal 2020 was due to the timing of progress towards contract completion.

Total expenses decreased 21% in the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 due to a 32% decrease in research and development expense, partially offset by a 22% increase in selling, general, and administrative expense. The decrease in research and development expense was primarily due to staffing changes and the completion of certain product development activities. The increase in selling, general, and administrative expense was primarily due to staffing changes.

Interest income for the third quarter of fiscal 2020 decreased 3% due to a decrease in the average interest rates on our marketable securities and money market funds.

The 9% increase in net income in the third quarter of fiscal 2020 compared to the prior-year quarter was primarily due to a decrease in total expenses and an increase in total revenue.




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Nine months ended December 31, 2019 compared to nine months ended December 31, 2018

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



                                             Percentage of Revenue           Period-
                                           Nine Months Ended Dec. 31        to-Period
                                                                              Change
                                          2019                      2018
Revenue
Product sales                               95.7 %                  95.4 %     (7.4 )%
Contract research and development            4.3 %                   4.6 %    (14.4 )%
Total revenue                              100.0 %                 100.0 %     (7.8 )%
Cost of sales                               19.2 %                  18.8 %     (5.5 )%
Gross profit                                80.8 %                  81.2 %     (8.3 )%
Expenses
Research and development                    13.9 %                  14.8 %    (13.5 )%
Selling, general, and administrative         5.3 %                   4.6 %      5.3 %
Total expenses                              19.2 %                  19.4 %     (9.0 )%
Income from operations                      61.6 %                  61.8 %     (8.1 )%
Interest income                              7.0 %                   6.3 %      2.5 %
Income before taxes                         68.6 %                  68.1 %     (7.1 )%
Provision for income taxes                  10.7 %                  12.3 %    (20.1 )%
Net income                                  57.9 %                  55.8 %     (4.2 )%

Total revenue for the nine months ended December 31, 2019 decreased 8% compared to the nine months ended December 31, 2018, due to a 7% decrease in product sales and a 14% decrease in contract research and development revenue.

The decrease in product sales from the prior-year period was due to decreased purchase volumes by existing customers. The decrease in contract research and development revenue was due to the completion of certain contracts.

Total expenses decreased 9% for the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019 due to a 14% decrease in research and development expense, partially offset by a 5% increase in selling, general, and administrative expense. The decrease in research and development expense was primarily due to staffing changes and the completion of certain product development activities. The increase in selling, general, and administrative expense was primarily due to staffing changes.

Interest income for the first nine months of fiscal 2020 increased 3% due to an increase in the average interest rates on our marketable securities.

The provision for income taxes for the first nine months of fiscal 2020 decreased 20% due to tax benefits from the Federal Tax Reform Act enacted in 2017. We currently expect our tax rate for the fourth quarter of fiscal 2020 to be approximately 18%, and our rate for the full fiscal year to be approximately 16%.

The 4% decrease in net income in the first nine months of fiscal 2020 compared to the prior-year period was primarily due to a decrease in total revenue, partially offset by a decrease in research and development expense and a decrease in the provision for income taxes.

Comprehensive income increased 2% to $11,940,161 compared to $11,695,165 for the prior-year period. The increase in comprehensive income was due to an unrealized gain from marketable securities of $780,016 compared to $46,101 in the prior-year period, partially offset by a decrease in net income. The unrealized gain was due to strong bond market conditions in the first nine months of fiscal 2020.




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Liquidity and capital resources
Overview

Cash and cash equivalents were $10,153,173 as of December 31, 2019 compared to $6,877,304 as of March 31, 2019. The $3,275,869 increase in cash and cash equivalents during the nine months ended December 31, 2019 was due to $12,536,305 in net cash provided by operating activities and $5,277,594 of cash provided by investing activities, partially offset by $14,538,030 of cash used in financing activities. We currently believe our working capital and cash generated from operations will be adequate for our needs at least for the next 12 months.

Investing Activities

Cash provided by investing activities in the nine months ended December 31, 2019 was due to $12,500,000 of marketable security maturities, partially offset by $7,196,330 of marketable securities purchases and $26,076 of fixed asset purchases.

Financing Activities

Cash used in financing activities in the first nine months of fiscal 2020 was due to $14,538,030 of cash dividends paid to shareholders. In addition to the dividends already paid in fiscal 2020, on January 22, 2020 we announced that our Board had declared a cash quarterly dividend of $1.00 per share of common stock, or $4,846,010 based on shares outstanding as of January 17, 2020, to be paid February 28, 2020. 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.

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