Jul 21, 2011
Operator
Good day, ladies and gentlemen. And welcome to the NVE Conference Call on First Quarter Results.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions on how to participate will be given at that time.
(Operator Instructions) And as a reminder today’s conference is being recorded. And now I would like to turn the conference over to your host Daniel Baker.
Daniel Baker
Good afternoon and welcome to our conference call for the quarter ended June 30, 2011 which was the first quarter of fiscal 2012. As always, I’m joined by Curt Reynders, our Chief Financial Officer.
This call is being webcast live and being recorded. A replay will be available through our website, nve.com.
After my opening comments, Curt will present a financial review of the quarter, I will cover business items and we will open the call to questions. In the past hour following the close of market we filed our press release with quarterly results and our quarterly report on Form 10-Q with the SEC.
The filings are available through our website or the SECs website. We will also file [XPRL] data within 30 days in accordance with SEC rules.
Comments we may make that relate to future plans, events, financial results, or performance are forward-looking statements that are subject to certain risks and uncertainties including among others such factors as risks in continued growth in revenue and profits, risks related to developing marketable products, uncertainties relating to the revenue potential of new products as well as the risk factors listed from time to time in our filings with the SEC including our most recent Annual Report on Form 10-K. The company undertakes no obligation to update forward-looking statements we may make.
We are pleased to report strong earnings for the quarter driven by record product sales and record total revenue. Total revenue increased 13% to $8.21 million with a 13% increase in product sales and a 14% increase in contract research and development revenue.
Net income increased 11% to $0.70 per diluted share compared to the $0.64 for the prior year quarter. Now I’ll turn the call over to Curt for details of our financial results.
Curt Reynders
Thanks Dan. As Dan mentioned total revenue for the first quarter of fiscal 2012 increased 13% to $8.21 million due to a 13% increase in product sales and a 14% increase in contract, research and development revenue.
Product sales were a record $7.02 million with strong sales into both industrial and medical device markets. Contract R&D revenue increased 14% to $1.19 million due to new contracts and increased activity on certain contracts.
Gross margin remained strong although it decreased to 68% of revenue compared to 71% last year due to a less favorable product mix and increased labor cost. The increased labor costs were from adding production personnel needed to support the ramp up of future products.
Total expenses increased 14% for the first quarter of fiscal 2012 compared to the first quarter of fiscal 2011 due to a 45% increase in research and development expense. The increase in research and development expense was due to increased product development activities.
We believe the investment in R&D will pay off in future revenues. Dan will highlight our R&D efforts in a few minutes.
Interest income increased 19% due to an increase in interest bearing marketable securities. Income before taxes for the quarter increased 9% compared to the first quarter of fiscal 2011 to $5.07 million and pre-tax margin was 62%.
The provision for income taxes was a lower percentage from the prior year quarter 32% of income before taxes compared to 34% last year because of slightly lower state and federal effective tax rates. Net income for the first quarter increased 11% to $3.44 million or $0.70 per diluted share compared to $0.64 last year and net margin was 42%.
Cash flow strengthened our balance sheet considerably and a strong balance sheet allows us to defend our intellectual property of necessary and allows for contingencies. Operating cash flow was $5.07 million for the quarter.
As of June 30th, cash plus marketable securities was $67.2 million an increase of $5.04 million in the quarter. Income taxes payable increased $1.37 million because we have now estimated income taxes payments due in the most recent quarters.
We have two payments due in the quarter ending September 30th. Purchases of fixed assets were just under $200,000 for the quarter primarily for a production equivalent.
In addition to equipment purchases we are looking at optimizing our facilities. We are exploring the possibility of either extending our building lease or expanding to another building as part of our long-term expansion strategy.
We have the right to opt out of our lease at the end of 2012. Possible capacity investments include a larger production clean room which we could start as soon as next month.
Now I will turn it over to Dan for his perspective on our business. Dan?
Daniel Baker
Thanks Curt. I will cover research and development, patents and governance.
As Curt said, we have significantly increased our R&D investments over the past year. Three research areas we have highlighted include biosensors, consumer electronics and MRAM memory.
We have said before we have a customer who is planning to use a customs spintronic biosensor in a new medical diagnostic instrument. Our device will part of a disposables so there is good volume potential.
We are pleased to report that we delivered a number of pre-production units in the past quarter which was a goal we talked about on our last call. We are preparing for production late this year and this could be the start of an important new market for us.
The goal of the spintronic compass (inaudible) heading using low field tunnel junction sensors to measure the angle of the earth’s magnetic field. Spintronic tunnel junction just don’t have the limitations of conventional CMOS transistor based electronics.
We continue to evaluate customer needs and we will continue to develop the technology. We previously announced we have successfully completed the technology demonstration for the National Science Foundation with a goal of reducing the size of sensors with applicability to navigation and consumer electronics.
We plan to pursue commercialization of that miniaturization technology. MRAM is spintronic magnetoresistive memory which is fabricated with nano technology and which uses electrons spin to store data.
Our MRAM strategy is to build small MRAMs for demanding applications such as anti-tamper and use what we learned to strengthened to our MRAM technology portfolio applicable to large scale memory. There is a good deal of interest in our anti-tamper technology.
In the current quarter we hope to complete feasibility demonstration contract awarded in late 2010 with the office of the Secretary of Defense titled Field Programmable Gate Array Physical Unclonable Functions. Physical Unclonable Functions or PUF is a function that some bodies in a physical structure that’s easy to evaluate but hard to predict.
Possible applications of particular interest are commercial high speed encryption such as high speed cryptographic key exchange for quantum cryptography. Unlike non-quantum or a so called classical method, quantum data is distributed when improperly read.
The project was based on both our MRAM and spintronic coupler technology, there is a link to the contract abstract from the in the news page of our website. In the past quarter we were granted a patent titled Inverted Magnetic Isolator.
The inventors are John Myers are Vice President of Development and Jim Daughton our Founder. Isolators are also known as couplers because they transmit data between electronic systems.
[NVEC] make spintronic couplers which transmit information faster than the fastest optical couplers. Turning to governance our annual meeting has been scheduled for August 15th here in Eden Prairie.
The materials are proxy statement, letter to shareholders and annual report on Form 10-K had been filed with the SEC, sent to shareholders and are available from the investor section of our website. Our annual meetings have been lively and well attended and we look forward to seeing many of you.
For a good corporate practice our entire Board of Directors stands for election every year. We are fortunate to have an exceptionally experienced, successful and hard working board, our Chairman, Terry Glarner for example has made the Minneapolis St.
Paul Business Journals list of hardest working Board Directors for many year's including the most recent list which was published last month. There are new proxy rules this year relating to executive compensation including a shareholder stay on pay resolution which is included in our proxy.
Our compensation criteria is at high standard for performance which we believed is how it should be. Independent data compiled by DeMarche Associates, The Star Tribune and the Minneapolis St.
Paul Business Journal support the prudence of pay policies. In the letter to shareholders with our proxy mailing I noted some past fiscal year highlights.
We extended contracts with Avago Technologies, Phonak AG, and St. Jude Medical.
Return on revenue ranked second among the 100 largest public companies in the state according to the Star Tribune. And we received the 2011 Frost & Sullivan North American Technology Innovation of the Year award for magnetic sensors.
The letter also summarizes our financial performance for fiscal year 2007 through 2011 the period of the financial data in our 10-K. In just that four year span, total revenue increased 90%, net income increased to 179% and cash and marketable securities more than tripled.
Now I’d like to open the call for questions. Matthew?
Operator
Thank you. (Operator Instructions) Our first question comes from Steven Crowley of Craig-Hallum Capital.
Your line is open.
Steven Crowley
In terms of understanding some of the things that transpired looking and then we will shift gears to looking forward. Looking through your 10-Q that you were nice enough to file, want to know with the release you talked about mix being less favorable thus the year-over-year decline in gross profit margin.
The typical inference from that, is that some of your custom sensors in parts may not have been a strong as some of your standard parts and the inference of that is medical being a little weak, there has been noise and some of the major end markets for Cardiac Rhythm Management devices, is that the whole picture that we should be processing that the contact has been challenging in one of your vertical?
Curt Reynders
The Cardiac Rhythm Management may have been dampened a little bit in the quarter. There have been reports that is been pretty flat, but overall within both medical as well as industrial customers our margins tend to fluctuate depending on the particular part and we may have had some higher margined parts in last year's first fiscal quarter than this year's first fiscal quarter.
Steven Crowley
Is there anything that’s changed the range at which you can fluctuate in? That range has been anywhere from mid-60s to lower 70s is that still the right way for us to think about the range?
Curt Reynders
I think so. You look back at our most completed fiscal year ‘11 our margin for the year was about 68.6% and this quarter we were a 68.4.
So, we were within the 20 basis points of last year.
Steven Crowley
Okay. And then in terms of your market position in any of the segments, should we be concerned at all about your market position with customers or within major verticals?
Or is there nothing real tell tale in the results as it pertains to that question?
Curt Reynders
I don’t think there is anything really within our results related to that question. We are expecting our sales were up and that’s our goal.
And I think we have some great prospects in the future. We have some great feedback from customers as far as the performance of our part and our products are in demand.
Steven Crowley
Along those lines, you gave us an update on several of the highlight new areas. I'm trying to decode a bit what you were trying to tell us there and how it relates to what you told us a quarter ago.
In terms of the ultra precise magnetic compass, last quarter you said you were delivering additional parts to a large prospective customer building demonstration prototypes to shop to their customers. What kind of progress have you made relative to that statement last quarter?
Daniel Baker
We are certainly pleased with our progress there and the parts based on our test work extremely well and we are already looking at as I mentioned in our prepared remarks, we are already looking at technology to miniaturize even further the technology, particularly what we talked about before is the z-axis, which is the third axis and controls the height or can limit the height of the sensors. So, we continue to see this is a very promising area and there has been some discussion in the industry about the limitation of conventional CMOS or transistor based compasses in terms of size, in terms of power consumption and in terms of sensitivity.
So, we certainly feel that our non-CMOS or non-conventional transistor based our tunnel junction based approach has some significant advantages that make it a good fit or consumer electronics such as navigation systems as well as some other areas, but spintronic compasses is a very intriguing area.
Steven Crowley
Are you in a position with a current censor prior to this additional miniaturization to garner meaningful orders in volume or do you think it’s dependent on you taking this next step with the form factor?
Daniel Baker
No, we think the current product is an excellent product that can provide an excellent solution in consumer application, but our goal is to make sure that we continue to work on making the technology the best and extent our advantages. So, we believe we have an advantage in the accuracy or the precision of the compass.
We believe we have an advantage compared to conventional electronics in terms of the size and the power consumer and we would like to continue to extent those advantages and make the part even smaller. And so that was the reason for pursuing the NSF grant, the contract.
NSF is very selective and it's a very prestigious contract and we are certainly pleased with the results there that’s a little bit farther out, but we believe that that has commercial applications and the miniaturization could be an important part of our technology portfolio.
Steven Crowley
So, it sounds like you were able to deliver more parts to your partner/customer into the wireless market and is it safe for us to infer that your partner is out there hunting for orders for your current part? And could that happen any time?
Has that happened so far?
Daniel Baker
Well we weren’t able to report on this call any specific design wins or design ins, but our goal is to make that happen as quickly as possible as e talked about before there may have to be applications and other platform changes that are beyond our control to really take advantage of the more accurate compass. But we believe that there is a market need and we believe we have a very good partner to do that.
Steven Crowley
Okay, as you go through the process of delivering parts to this partner, who is bringing them to prospective customers, the bill for those parts, does that hit your R&D line or do they sit in inventory or does the partner by them?
Daniel Baker
The partner is a customer, so they buy them. And they are looking to add value in terms of either adding other navigation components such as perhaps GPS or accelerometers, gyroscopes, perhaps interface signal processing.
But they are customers, so they are willing to pay for the parts and we think that’s a validation of the technology and the value of the technology as well.
Steven Crowley
That's helpful. What I'm trying to do here, to a degree, is understand in the context of these efforts, relatively sizable jump in R& D up $200,000 sequentially.
In 150 and those are big percentage gains year-over-year. And also work in progress in your inventory line also going up rather significantly.
I think of the R&D jump as potentially something that happens in the late stage of final product development and I think of the work in progress and inventory jump is something that happens before you launch a major new product. Are those reasonable inferences on my part?
Curt Reynders
Well Steve as far as the inventories go that inventories can vary based on a number of factors such as future sales expectations is a big reason for increased inventories. Also a couple of other items could be purchasing opportunities or to mitigate some supply risk, but it's primarily to be able to meet customer demands.
Steven Crowley
Okay, on the R&D side, that's relatively bold stroke by a relatively conservative organization. I'm just trying to understand how to interpret that.
Daniel Baker
Well, we expect those investments to pay off. We as you say we want any investment that we make of our shareholders money to have a good pay back and that’s our job.
So, we look at R&D the same way as any other investment that we make. So, when we make those investments in R&D we are making them with the expectation that they are going to result in future sales and that they are going to result in future products that we can sell and pay back those investment dollars and then some.
Steven Crowley
Was there much of a timing issue that came into play with timing of contract R&D revenue recognition and where those expenses fell or not so much this quarter?
Curt Reynders
That’s so much this quarter Steve. The contract R&D was down a little bit from the fourth quarter but it was up compared to the first quarter of last year.
So, our contract R&D revenue as well as our R&D expense was higher than a year ago quarter.
Steven Crowley
When you walk into the year with a pretty healthy backlog of contract R&D so, I kind of look at the first quarter numbers maybe toward the lower end of the new quarterly range for contract R&D. How can you help us their understanding what might happen?
Curt Reynders
Well, that’s really tough to predict contract R&D can fluctuate quarter-to-quarter can be based on timing of contract wins contract awards be based on government as well as commercial customer budgets as well as results of the research.
Daniel Baker
What I might add is that we are pursuing a number of significant contracts there is no guarantee that we were going to win them of course, but we see a lot of opportunities for contract R&D that are synergistic. We don’t look at R&D contract R&D as we said before, we really don’t look at as it is a scalable revenue source.
We look at it is a way to fund development where we often have customers who are interested enough to pay for their contract R&D and particularly in our anti-tamper technology and our MRAM technology we are seeing some excellent opportunities there. So, we will have to see and we hope to update you as we go along, but in the long-term I think we see a fair amount of interesting contract R&D.
Steven Crowley
Thanks for taking my questions. I'm going to hop back in the queue and let somebody else jump in and make sure we touch on some other stuff.
Thanks.
Operator
Thank you. (Operator Instructions) Our next question in queue is from Bruce Foster of Austel and your line is open.
Bruce Foster
Thank you and thank you for the explanation, and the excellent quarter. We have been shareholders for ourselves and the clients for many years and I'm interested in knowing what the outlook is for the possible widespread use of MRAM technology.
It's something that's been discussed for a long time, many years, but we have never seen any widespread licensing as near as I can tell. Could you elaborate on that?
Daniel Baker
Certainly, well the promise of MRAM as you may know is the promise of replacing some of the best functions of different types of semi-conductor memory potentially the speed of SRAM, the density of DRAM and the non-volatility of flash. And many applications that we are seeing that are becoming more and more ubiquitous consumer electronics, smart phones, tablets we can see how that technology in long-term could benefit from MRAM.
There is development to be done I think of the areas that we have highlighted that has a great deal of potential is what’s called spin momentum transfer. And that technology that we have developed it hasn’t been commercialized yet, but we are seeing a great deal of activity in both what’s called conventional or classical MRAM as well as spin momentum or spin transfer MRAM.
So, we see it as a very bright potential area, it's hard to predict the specifics of when the technology will be adopted, I think the approach that we tend to take is the best way to predict the future to invent it and our team has been doing a great job of that. We have a great technology portfolio, some recent patents in the area and we believe this technology with great deal of potential in the near-term for some of the specialized applications that we talked about and potential in the long-term.
Bruce Foster
Will we see revenue begin to show up for the specialized applications within say a year?
Daniel Baker
Well, we talked about on past calls a small quantities of some specialized MRAM anti-tamper MRAM. So, we are seeing some revenue from that admittedly a relatively small number but I think it bodes very well.
We have been able to make the technology work in these applications, e have customers who are interested in it. So, we are hopeful that that will grow as we gain more customers and as those customers deploy the technology across more and more platform.
Bruce Foster
But there's no way to anticipate a larger scale commercial application?
Daniel Baker
It's hard to anticipate that, we provide technology at the cellular level primarily at the memory cell level. And other companies are looking at ways of combining cells into larger scale memories.
So, to a certain extent it's a bit beyond our control. It's not an area that we believe that it makes sense for us to participate ourselves.
In other words it's not our plan to make or have made large scale MRAM. We have been concentrating on the technology.
So, it is hard for us to predict when that will happen, but there is a fair amount of activity in the area. And there is a demand for this type of memory.
Bruce Foster
Okay. Just one other question, is there a competing technology that can supplant this?
Daniel Baker
There's been a great deal of interest in next-generation memory technologies including what's been called universal memories which would be memories that could replace the functions of SRAM, DRAM, flash, the semiconductors, the main semiconductor memories. We think that MRAM has significant advantages that the technology is more proven.
It’s more scalable and more compatible with existing fabrication investments than other types of emerging memory technology. So we see tremendous promise in MRAM, but as you can imagine, the potential to replace semiconductor memories is one of those huge markets, almost incalculably large.
It attracts a great deal of interest and a great deal of research. We feel that we have excellent technology that has a number of advantages in that area.
Bruce Foster
I see. All right, thank you very much for the explanation again, appreciate the fine quarter.
Thank you.
Operator
Thank you. Our next question comes from Kevin Sonich of RK Capital.
Your line is open.
Kevin Sonich
Curt, from the hiring side, did you mentioned earlier that all the hiring, or just about all the hiring, was along the lines of additional Production personnel?
Curt Reynders
Primarily product as well as some R&D staff, our goal is to increase our capacity as well as decrease cost. We have some higher cost now with the new people we have added, but we expect to reap the benefits in the future.
Kevin Sonich
You have a fairly thin staff overall, the headcount really hasn't changed much in the last several years. Looking at the increase in overall expenses it looks like you've added maybe a handful of people 4, 5, 6 heads?
Curt Reynders
Well, over the past year we have added about 10 people, we currently have about 62 employees compared to we reported that 352 on our 10-K in fiscal year ‘10.
Kevin Sonich
How many did you add in the area of production and how many did you have in production?
Curt Reynders
We really don’t have a line there, we have a lot of people that wear a lot of hats. So, we don’t necessarily have a specific number within production and within this other areas.
Kevin Sonich
Can you give me some sense of the increase in the production personnel capacity so if it went from the equivalent of 10 folks to 15 folks, it is a 50% increase or something along those lines?
Curt Reynders
Kevin, I’d really just be guessing and I don’t think I want to go there.
Kevin Sonich
Okay. And then you clearly have a lot of irons in the fire and it seems that the biosensors is the biggest of the near-term opportunities.
Dan, you mentioned you were unable to report any design wins or design ins on the digital compass side. I don't know if it’s equivalent to being disappointed that you were unable to report any design wins, but if we fast-forward a year or so, if you still haven't been able to report any design wins there by your customer or partner, would that be disappointing?
Daniel Baker
We view this is a long-term opportunity and as we have discussed before it's kind of a chicken in an egg thing, where in some cases the take advantage of the increased accuracy you need applications that can do that. And those applications are being talked about and explored and so we do view this as a long-term opportunity.
We are always looking to try to get products to market as quickly as possible. And so we respond urgently to customer request.
We provide excellent products and support and we make sure that we are responsive to customer needs and then we work to make sure that we can do this as urgently as possible, but it is a long-term, it's one of these game changing markets that we are willing to be patient, we are willing to make sure that we have the right product. And so we don’t have a specific timeframe where we are going to look at it and say this is when it has to be done.
We are looking at it as a longer term opportunity to really make a dramatic change in the accuracy of a key function of consumer electronics.
Operator
Thank you. Our next question in queue comes from Steven Crowley of Craig-Hallum Capital.
Your line is open.
Steven Crowley
Hey guys, thanks again for taking my questions. I want to come back and just get a clarification and maybe a little more information.
In terms of the pace of preproduction shipments for your in vitro diagnostics customer, have those been consistent with what you were expecting and it sounds like the timeline for that moving into full production is pretty much as you advertised last quarter.
Daniel Baker
Yes, we haven't seen any changes in that. One key milestone was preproduction units.
Our goal was to ship them this past quarter, the quarter that just ended and we were able to report that we did deliver those preproduction units. So that was an important milestone.
There are additional preproduction units that we are working on delivering and then we have the production units which we've talked about for late 2011 and that's still be scheduled. We are certainly pleased with how that's going.
Steven Crowley
Great. Great.
At this point we think your over most all of the technological hurdles with that product since you are shipping preproduction on the quick path to production. But I guess the longer you go here and say the schedule the better the news is.
Daniel Baker
We think so. There are always things that can go wrong.
Our guys have been working very hard in scaling up the process of that we can make very high volumes. This is part of a disposable so there is very good volume potential but it also has to be an assured supply because our customer is depending on us for every time they do a test they need one of our sensors.
So we need to be sure that we have plenty of capacity that our product quality is superb, that our designs are robust, and we are very pleased with where we are on that.
Steven Crowley
Is it likely that these guys are go into full launch mode that they will carry a meaningful amount of inventory of your parts that are key component of the consumable portion of the system or are you going to hold any inventory? How do you think that's going to work?
Daniel Baker
I would expect both of us would be holding inventory because of the importance of having consumables available for test and for replacements. So my assumption would be, our assumption would be that our customer would have inventory we would also want to have inventory.
We are optimistic about the prospects with this customer and other customers so we want to be sure that we have the capacity to meet the demand. So the great thing is that it’s potential high-volume because it’s consumable, it is potentially better test, better in terms of its specificity, its accuracy and its speed as well as reducing the size, potentially reducing the size of the machine.
And our customer is sourcing it with us so that carries with it some responsibilities. But we are confident that we are going to be able to meet their needs both for the consumable demand and for the inventory build.
Realistically they are going to have to get the machines out. They are going to have to get them placed.
So, there's going to be a ramp-up time there, but we want to be prepared for success and we will be.
Steven Crowley
Can you tell us any more about the type of platform this is or the customer might you be in that position if not now in the not-to-distant future? How do you think that's going to play out?
Daniel Baker
Well, we would like to be able to say as much as we can, but often our customers have an expectation of confidentiality. They do in this case.
We believe that we are providing some tremendous value added and so our customer doesn't want their competitors to know where they are getting their sensor technology. So we have to respect that, but we'd like to be able to say as much as possible.
In terms of the type of test that's more of our customers call, but one of the areas that we've been that's gotten a lot of interest is in protein compliments that are relating to acute disease processes. For example rather than an infection, something like a heart attack or a stroke where our bodies create protein markers that can indicate that we've had that type of event.
And it’s extremely important to be able to detect levels of that and to be able to do those kind of tests quickly because in the case of heart attack or stroke minutes matter. So that's an area where we think we have a great advantage with the speed of our technology and the ability to protect the protein compliment meaning that there's a protein that shouldn't be there or shouldn't be there in the concentrations that it is.
And our technology is well suited to that and well suited to detect those protein compliments very quickly.
Steven Crowley
In prior discussions it's been our sense that this is an established player in the industry who is upgrading their capability of their instruments. Are they selling an upgrade to an existing system?
Are they placing systems out there as replacements to a prior generation and then hopefully they consume a lot of razor blades which are in your cash register, is that the right way for us to think about it?
Daniel Baker
They are looking at a way to have a significantly better product and one of the areas that we talked about is the speed. We talked about the size.
So while this isn't the sort of hand-held alter miniature device that we talked about as a long-term vision for this technology, our understanding is it is going to have significant advantages. It is not just going to be a replacement for an existing machine with incremental advantages.
Our expectation is that the advantages that our technology will provide along with what our customer is doing have the potential to have a significantly better machine in one or more respects. We don't view it as a drop-in replacement.
I think it’s what you might have been getting at. We view it as a potentially significant upgrade over what's possible with conventional technology.
Perhaps not the Star Trek type of diagnostic instrument that would be hand-held in the near-term, but a significant advantage.
Steven Crowley
That's actually good, interesting color because the angle my question was less about this being (inaudible) upgrade, but something that could be a high velocity upgrade for this customer's customer base because (inaudible) NVE razor blades as possible. And it sounds like what you're saying is it should be a compelling upgrade, but at the same time this company has an existing presence in customer base out there so that they are just not starting from square one with new technology trying to build a market presence?
Daniel Baker
They are credible company in this marketplace. We think they are an excellent customer and an excellent partner.
And yes, we want to see them be successful not just from a business standpoint although that's obviously a big part of it, but also just the idea of being able to have better diagnostic to improve people's quality of life and that's what's more compelling than that.
Steven Crowley
Final question from me. I just want to understand what you were trying to tell us or were telling us with your decision on capacity/facility expansion.
Is the fork in the road whether or not materially expand in your current facility and whether that's possible or might that not be sufficient in you need to go beyond your current facility?
Daniel Baker
What we are looking at is if we make a major expansion in our current building we wanted to be part of a long-term capacity plan. So, we have the right to opt out of our lease at the end of next year as Curt mentioned.
So, that’s probably the fork in the road. Now one has to back up from that for quite a bit because as you know we have a significant production area here, we have a clean room we have all of the infrastructure that goes with having a clean room.
So, we want to have plenty of time to move if we are going to. So, our options would be to expand into another building or stay put and expand here.
If we expanded here, we have room to expand our production area quite a bit. What might happen is that we might then move out some areas that could be easily separated such as R&D or perhaps some administrative function.
But the decision that we are looking at in the relative near-term is whether it make sense to expand our production area in the current building or whether it make sense to expand in a different building. So, as we said as Curt said we could begin an expansion as soon as next month and if we did that it would likely be in the current building and we would hope that it would be with a longer term lease so that we could commit to this building and make the investments without having to worry about having to loose those investments or have to make those investments again when our lease is [done].
Steven Crowley
Okay. Seems like it’s just a good business practice try to get your dots in line here.
Appreciate the color. Thanks for taking my question.
Operator
Thank you. I’m showing no other questions in queue at this time.
Daniel Baker
Well thank you then we were pleased to report record product sales and revenue for the quarter. We look forward to seeing some of you at our annual meeting next month and we plan to speak with you again in October to report our second quarter results.
Thank you for participating in the call.
Operator
Ladies and gentlemen, thank you for joining today’s conference. This does conclude the program and you may now disconnect.
Everyone have a great day.