You should read this discussion together with our financial statements and notes included elsewhere in this Report. In addition to historical information, the following discussion contains forward-looking information that involves risks and uncertainties. Our actual future results could differ materially from those presently anticipated due to a variety of factors, including those discussed in Item 1A of this Report.





General

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. We manufacture high-performance spintronic products including sensors and couplers to revolutionize data sensing and transmission. We also receive contracts for research and development and are a licensor of spintronic magnetoresistive random access memory technology, commonly known as MRAM.

Application of Critical Accounting Policies and Estimates

In accordance with SEC guidance, those material accounting policies that we believe are the most critical to an investor's understanding of our financial results and condition and require complex management judgment are discussed below.





Investment Valuation

Our investments consist primarily of corporate obligations. We have generally invested excess cash in high-quality investment grade long-term marketable securities with less than five years to maturity. We classify all of our marketable securities as available-for-sale, thus securities are recorded at fair value and any associated unrealized gain or loss, net of tax, is included as a separate component of shareholders' equity, "Accumulated other comprehensive income." If we judged a decline in fair value for any security to be other than temporary, the cost basis of the individual security would be written down and a charge recognized to net income. The fair values for our securities are determined based on quoted market prices as of the valuation date and observable prices for similar assets. We consider a number of factors in determining whether other-than-temporary impairment exists, including credit market conditions; the credit ratings of the securities; historical default rates for securities of comparable credit rating; the presence of insurance of the securities and, if insured, the credit rating and financial condition of the insurer; the effect of market interest rates on the value of the securities; and the duration and extent of any unrealized losses. We also consider the likelihood that we will be required to sell the securities prior to maturity based on our financial condition and anticipated cash flows. If any of these conditions and estimates change in the future, or, if different estimates are used, the fair value of the investments may change significantly and could result in other-than-temporary decline in value, which could have an adverse impact on our results of operations.

Inventory Valuation

Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first in, first out method. Where there is evidence that inventory could be disposed of at less than carrying value, the inventory is written down to the net realizable value in the current period. Additionally, we periodically examine our inventory in the context of inventory turnover, sales trends, competition, and other market factors, and we record provisions to inventory reserve when we determine certain inventory is unlikely to be sold. If reserved inventory is subsequently sold, corresponding reductions in inventory and inventory reserves are made. Our inventory reserve was $215,000 as of March 31, 2023 and March 31, 2022.

Deferred Tax Assets Estimation

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. No valuation allowance was recorded as we believe it is more likely than not that all of the deferred tax assets will be realized.

We had $572,038 of net deferred tax assets as of March 31, 2023, and $483,469 as of March 31, 2022. Net deferred tax assets included $71,734 in deferred tax assets for stock-based compensation deductions as of March 31, 2023 and $88,710 as of March 31, 2022.





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Results of Operations

The following table summarizes the percentage of revenue and year-to-year changes for various items for the last two fiscal years:





                                        Percentage of Revenue          Year-
                                        Year Ended March 31,          to-Year
                                         2023           2022          Change
Revenue
Product sales                             97.2  %         95.9 %      43.8   %
Contract research and development          2.8  %          4.1 %      (5.6 ) %
Total revenue                            100.0  %        100.0 %      41.7   %
Cost of sales                             21.1  %         23.2 %      28.7   %
Gross profit                              78.9  %         76.8 %      45.7   %
Expenses
Research and development                   6.8  %         10.8 %     (11.7 ) %
Selling, general, and administrative       5.1  %          5.5 %      33.6   %
Total expenses                            11.9  %         16.3 %       3.5   %
Income from operations                    67.0  %         60.5 %      57.0   %
Interest income                            3.8  %          4.3 %      23.7   %
Income before taxes                       70.8  %         64.8 %      54.8   %
Provision for income taxes                11.5  %         11.0 %      47.0   %
Net income                                59.3  %         53.8 %      56.4   %

Total revenue for fiscal 2023 increased 42% compared to fiscal 2022 due to a 44% increase in product sales, partially offset by a 6% decrease in contract research and development revenue. The increase in product sales was primarily due to increased purchases by existing customers, and sales increased in most of our markets and product lines. The decrease in contract research and development revenue was due to the completion of certain contracts.

Gross profit as a percentage of revenue increased to 79% for fiscal 2023 from 77% for fiscal 2022. The increase was primarily due to economies of scale from increased production and increased prices, partially offset by increased material and labor costs.

Total expenses increased 4% for fiscal 2023 compared to fiscal 2022 due primarily to a 34% increase in selling, general, and administrative expense, partially offset by a 12% decrease in research and development expense. The decrease in research and development expense was primarily due to the reallocation of resources to revenue-generating activities. The increase in selling, general, and administrative expense was primarily due to staffing changes and increased employee compensation.

Interest income for fiscal 2023 increased 24% due to an increase in our available-for-sale securities and an increase in the average interest rates on those securities.

Our effective tax rate for fiscal 2023 decreased to 16% of income before taxes from 17% for fiscal 2022. The decrease was due to $197,008 in investment tax credits under the CHIPS and Science Act of 2022. Such credits require qualifying investments, and eligibility criteria are subject to changes in Federal tax policies. Therefore, our effective tax rate in fiscal 2023 may not be indicative of the rate for future periods.

The 56% increase in net income in fiscal 2023 compared to the prior year was primarily due to increased product sales, increased gross profit margin, and increased interest income.

Liquidity and Capital Resources

Overview

Our liquidity and operating capital requirements are primarily for purchases of raw materials such as foundry wafers, purchases of packaging services, and the maintenance of work-in-process inventories. We maintain most of our marketable securities as long-term to maximize yield and fund future dividends.

Cash and cash equivalents were $1,669,896 as of March 31, 2023, compared to $10,449,510 as of March 31, 2022. The $8,779,614 decrease in cash and cash equivalents was due to $19,344,004 net cash used in financing activities and $8,527,108 net cash used by investing activities, partially offset by $19,091,498 in net cash provided by operating activities.


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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 fiscal 2023 and 2022. Net cash provided by operating activities was $19,091,498 for fiscal 2023 and $12,503,679 for fiscal 2022.

Accounts receivable increased $1,818,515 primarily due to increased product sales and the timing of sales to customers.

Inventory increased $1,328,375 primarily due to our decisions to increase inventories to support increased product sales and to mitigate supply-chain risks.





Investing Activities

Net cash used in investing activities in fiscal 2023 was due to marketable securities purchases of $28,441,317 and fixed assets purchases of $935,791, partially offset by marketable securities maturations of $20,750,000 and the receipt of a $100,000 tenant-improvement allowance.

The $935,791 of fixed asset purchases in fiscal 2023 was a significant increase from $484,579 in fiscal 2022. Purchases in fiscal 2023 and 2022 were primarily for capital equipment to increase our production throughput and capacity and were financed with cash provided by operating activities. Our capital expenditures can vary significantly from year to year depending on our needs and equipment purchasing opportunities.

Financing Activities

Net cash used in financing activities in fiscal 2023 was due to $19,323,304 in cash dividends to shareholders and $20,700 of common stock repurchases.

In addition to cash dividends to shareholders paid in fiscal 2023, on May 3, 2023, we announced that our Board had declared a cash dividend of $1.00 per share of Common Stock, or $4,830,826 based on shares outstanding as of April 28, 2023, to be paid May 31, 2023. We plan to fund dividends through cash provided by operating activities and proceeds from maturities 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, the impacts of supply-chain shortages, the impacts of cost inflation, and other factors the Board may deem relevant. Furthermore, dividends may be modified or discontinued at any time without notice.

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