NOTE

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents

We consider all highly liquid investments with maturities of

three

months or less when purchased to be cash equivalents.

Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable approximates fair value because of the short maturity of these instruments. Fair values of marketable securities are based on quoted market prices.

Marketable Securities

All of the investments we have held the past

two

years were marketable securities. We classify securities with original maturities greater than

three

months and remaining maturities

one

year or less as short-term marketable securities and securities with remaining maturities greater than

one

year as long-term marketable securities. 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 (loss).” We use a specific-identification cost basis to determine gains and losses. The amortized cost of marketable securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in interest income.

We consider an other-than-temporary impairment of our marketable securities to exist if we determine it is probable that we will be unable to collect all amounts due according to the contractual terms of a debt security. 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 in net income. 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. We determined that

write-downs for other-than-temporary impairment were required on available-for-sale securities during fiscal

2017,

2016,

2015.

Concentration of Risk and Financial Instruments

Financial instruments potentially subject to significant concentrations of credit risk consist principally of cash equivalents, marketable securities, and accounts receivable.

Cash and cash equivalents have been maintained in financial institutions we believe have high credit quality, however these accounts are generally in excess of federally insured amounts. We have invested our excess cash in corporate-backed and municipal-backed bonds and money market instruments. Our investment policy prescribes purchases of only high-grade securities, and limits the amount of credit exposure to any

one

issuer.

Our customers are throughout the world. We generally do not require collateral from our customers, but we perform ongoing credit evaluations of their financial condition. More information on accounts receivable is contained in the paragraph titled “Accounts Receivable and Allowance for Doubtful Accounts” of this note.

Additionally, we are dependent on critical suppliers including our packaging vendors and suppliers of certain raw silicon and semiconductor wafers that are incorporated in our products.

Accounts Receivable and Allowance for Doubtful Accounts

We grant credit to customers in the normal course of business and at times

may

require customers to prepay for an order prior to shipment. Accounts receivable are recorded net of an allowance for doubtful accounts. We make estimates of the uncollectibility of accounts receivable. We specifically analyze accounts receivable, historical bad debts, and customer creditworthiness when evaluating the adequacy of the allowance. We had

charges or provisions to our allowance for doubtful accounts in fiscal

2017,

2016,

2015.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined by the

first

in,

first

out method. We record inventory reserves when we determine certain inventory is unlikely to be sold based on sales trends, turnover, competition, and other market factors.

Product Warranty

In general we warranty our products to be free from defects in material and workmanship for

one

year.

Fixed Assets

Fixed assets are stated at cost. Depreciation of machinery and equipment is recorded over the estimated useful lives of the assets, generally

five

years, using the straight-line method. Amortization of leasehold improvements is recorded using the straight-line method over the lesser of the lease term or

five

-year useful life. We record losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. We have

not

identified any indicators of impairment during fiscal

2017,

2016,

2015.

Depreciation and amortization expense related to fixed assets was

$798,300

for fiscal

2017,

$850,970

for

2016,

and

$934,371

for fiscal

2015.

Revenue Recognition

Product Sales Revenue Recognition

We recognize product sales revenue when evidence of an arrangement exists, the price to the buyer is fixed and determinable, collectability is reasonably assured and the product has shipped. Our sales are shipped FOB shipping point, meaning that our customers (end users and distributors) take title and assume the risks and rewards of ownership on shipment. Our customers

may

return defective products for refund or replacement under warranty, and have other very limited rights of return.

Shipping charges billed to customers are included in product sales and the related shipping costs are included in selling, general, and administrative expense. Such shipping costs were

$12,760

for fiscal

2017,

$20,721

for fiscal

2016,

and

$12,771

for fiscal

2015.

Our stocking distributors take title and assume the risks and rewards of product ownership. Payments from our distributors are not contingent on resale or any other matter other than the passage of time, and delivery of products is not dependent on the number of units resold to the ultimate customer. There are no other significant acceptance criteria, pricing or payment terms that would affect revenue recognition.

Accounting for Commissions and Discounts

We sometimes utilize independent sales representatives that provide services relating to promoting our products and facilitating product sales but do not purchase our products. We pay commissions to sales representatives based on the amount of revenue facilitated, and such commissions are recorded as selling, general, and administrative expenses. Under certain limited circumstances, our distributors

may

earn commissions for activities unrelated to their purchases of our products, such as for facilitating the sale of custom products or research and development contracts with

third

parties. We recognize any such commissions as selling, general, and administrative expenses.

We presume consideration given to a customer is a reduction in revenue unless both of the following conditions are met: (i) we receive an identifiable benefit in exchange for the consideration and the identifiable benefit is sufficiently separable from the customer’s purchase of our products such that we could have purchased the products or services from a

third

party; and (ii) we can reasonably estimate the fair value of the benefit received. We recognize discounts provided to our distributors as reductions in revenue.

Contract Research and Development Revenue Recognition

We recognize contract research and development revenue pro-rata as work progresses. Our research and development contracts do not contain post-shipment obligations. Contracts

may

be either firm-fixed-price or cost-plus-fixed-fee. Firm-fixed-price contracts provide for a price that is not subject to any adjustment based on our cost in performing the contract.

Cost-plus-fixed-fee contracts are cost-reimbursement contracts that also provide for payment to us of a negotiated fee that is fixed at the inception of the contract. The costs for which we earn reimbursement are the actual costs incurred and are recorded in the period in which they are incurred. We recognize the contract fees pro-rata as work progresses.

Income Taxes

We account for income taxes using the liability method. Deferred income taxes are provided for temporary differences between the financial reporting and tax bases of assets and liabilities. We provide valuation allowances against deferred tax assets if we determine that it is less likely than not that we will be able to utilize the deferred tax assets.

Research and Development Expense Recognition

Research and development costs are expensed as they are incurred.

Stock-Based Compensation

We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize the compensation expense over the requisite service period, which is generally the vesting period. We estimate pre-vesting option forfeitures at the time of grant by analyzing historical data and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the total expense recognized over the vesting period will only be for those awards that vest.

Net Income Per Share

Net income per basic share is computed based on the weighted-average number of common shares issued and outstanding during each year. Net income per diluted share amounts assume conversion, exercise or issuance of all potential common stock instruments. Stock options were the only such instruments for the

three

most recent fiscal years. Stock options totaling

4,000

for fiscal

2017,

6,000

for fiscal

2016,

and

4,000

for fiscal

2015

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 table shows the components of diluted shares:

	Year Ended March 31
	2017		2016		2015
Weighted average common shares outstanding – basic		4,836,602		4,850,209		4,855,504
Dilutive effect of stock options		1,787		2,393		16,431
Shares used in computing net income per share – diluted		4,838,389		4,852,602		4,871,935

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Recently Issued Accounting Standards

March

2017,

the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2017

08,

Nonrefundable Fees and Other Costs (Subtopic

310

20)—Premium

Amortization on Purchased Callable Debt Securities

. This ASU is intended to enhance the accounting for the amortization of premiums for purchased callable debt securities. ASU

2017

08’s

amendments are effective for fiscal years beginning after

December

15,

2018

and interim periods within those fiscal years, which will be fiscal

2020

for us. We do not expect adoption of ASU

2017

to have a significant impact on our financial statements.

In

August

2016,

the FASB issued ASU No.

2016

15,

Statement of Cash Flows (Topic

230),

Classification of Certain Cash Receipts and Cash Payments

, which will make

eight

targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU

2016

will be effective for fiscal years beginning after

December

15,

2017

and interim periods within those fiscal years, which will be fiscal

2019

for us. ASU

2016

requires retrospective adoption unless it is impracticable to apply, in which case it is to be applied prospectively as of the earliest practicable date. We do not expect adoption of ASU

2016

to have a significant impact on our financial statements.

In

June

2016,

the FASB issued ASU No.

2016

13,

Financial Instruments—Credit Losses (Topic

326),

Measurement of Credit Losses on Financial Statements

. This ASU requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The amendment is effective for financial statements issued for fiscal years beginning after

December

15,

2019

and interim periods within those fiscal years, which will be fiscal

2021

for us. We do not expect adoption of ASU

2016

to have a significant impact on our financial statements.

In

March

2016,

the FASB issued ASU No.

2016

09,

Compensation—Stock Compensation

, which simplifies the accounting for 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. The guidance is effective for fiscal years beginning after

December

15,

2016

and interim periods within those fiscal years, which will be fiscal

2018

for us. We do not expect adoption of ASU

2016

to have a significant impact on our financial statements.

In

February

2016,

the FASB issued ASU No.

2016

02,

Lease Accounting

. ASU

2016

requires recognition of lease assets and lease liabilities on the balance sheet of lessees. This update is effective for financial statements issued for fiscal years beginning after

December

15,

2018

and interim periods within those fiscal years, which will be fiscal

2020

for us. ASU

2016

requires a modified retrospective transition approach and provides certain optional transition relief. We have not yet evaluated the impact of ASU

2016

on our financial statements.

In

January

2016,

the FASB issued ASU No.

2016

01,

Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities

. The amendment changes the accounting for and financial statement presentation of equity investments, other than those accounted for under the equity method of accounting or those that result in consolidation of the investee. The amendment provides clarity on the measurement methodology to be used for the required disclosure of fair value of financial instruments measured at amortized cost on the balance sheet and clarifies that an entity should evaluate the need for a valuation allowance on deferred tax assets related to available-for-sale securities in combination with the entity’s other deferred tax assets, among other changes. The amendment is effective for financial statements issued for fiscal years beginning after

December

15,

2017

and interim periods within those fiscal years, which will be fiscal

2019

for us. We do not expect adoption of ASU

2016

to have a significant impact on our financial statements.

In

July

2015,

the FASB issued ASU No.

2015

11,

Simplifying the Measurement of Inventory

. ASU

2015

requires inventory that is recorded using the

first

-in,

first

-out method to be measured at the lower of cost or net realizable value. ASU

2015

will be effective prospectively for our fiscal

2018,

with early adoption permitted. We do not expect adoption of ASU

2015

to have a significant impact on our financial statements.

May

2014,

the FASB issued ASU No.

2014

09,

which supersedes the revenue recognition requirements in Accounting Standards Codification

605,

Revenue Recognition

. ASU

2014

is based on the principle that revenue is recognized to depict the transfer 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,

the FASB issued ASU No.

2015

14,

Revenue from Contracts with Customers: Deferral of the Effective Date

, which deferred the effective date of ASU

2014

one

year. As a result, ASU

2014

is effective for fiscal years beginning after

December

15,

2017

and interim periods within those fiscal years, which will be fiscal

2019

for us. Based on our preliminary assessment, we do not expect adoption of ASU

2014

to have a significant impact on our financial statements, because we do not expect to change the manner or timing of recognizing revenue. 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, and our research and development contracts do not contain post-shipment obligations.