Item 1A. Risk Factors
ITEM 1A. RISK FACTORS.
We caution readers that the following important
factors, among others, could affect our financial condition, operating results,
business prospects or any other aspect of NVE, and could cause our actual results
to differ materially from that projected or estimated by us in the forward-looking
statements made by us or on our behalf. Although we have attempted to list below
the important factors that do or may affect our financial condition, operating
results, business prospects, or any other aspect of NVE, other factors may in
the future prove to be more important. New factors emerge from time to time and
it is not possible for us to predict all of such factors. Similarly, we cannot
necessarily assess or quantify the impact of each such factor on the business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in forward-looking statements.
Risks Related to our Business
We may lose revenue if any of our large customers cancel, postpone, or reduce
their purchases.
We rely on several large customers for a significant
percentage of our revenue. These large customers include Abbott Laboratories,
Sonova AG, certain other medical device manufacturers, and certain distributors.
Although we have agreements with certain large customers, these agreements do
not obligate customers to purchase from us and may not prevent price reductions.
Furthermore, orders from our large customers can generally be reduced, postponed,
or canceled, and some orders were delayed or canceled due to the effects of the
COVID-19 pandemic. Any decreases in purchases,
or the loss of any of our large customers, could have a significant impact on
our revenue and our profitability.
We risk losing business to our competitors.
We have a number of competitors and potential competitors,
many of whom have significantly greater financial, technical, and marketing resources
than us. We believe that our competition is increasing as the technology and markets
mature. This has meant more competitors and more severe pricing pressure. In addition,
our competitors may be narrowing or eliminating our performance advantages. We
expect these trends to continue, and we may lose business to competitors or it
may be necessary to significantly reduce our prices in order to acquire or retain
business. These factors could cause a material adverse impact on our financial
condition, revenue, gross profit margins, or income.
Failure to meet stringent customer requirements could result in the loss
of key customers and reduce our sales.
Some of our customers, including certain medical
device manufacturers, have stringent technical and quality requirements that require
our products to meet certain test and qualification criteria or to adopt and comply
with specific quality standards. Certain customers also periodically audit our
performance. Failure to meet technical or quality requirements or a negative customer
audit could result in the loss of current sales revenue, customers, and future
sales.
We may lose revenue if we are unable to renew customer agreements.
We have agreements with certain customers, including
a Supplier Partnering Agreement, as amended, with Abbott Laboratories, which expires
November 30, 2021, and Supply Agreement, as amended, with Sonova AG,
which expires March 31, 2025. We cannot predict if these agreements will
be renewed, or if renewed, under what terms. Although it is possible we could
continue to sell products to these customers without formal agreements, an inability
to agree on mutually acceptable terms or the loss of these customers could have
a significant adverse impact on our revenue and our profitability.
Changes in tax law, in our tax rates or in exposure to additional income
tax liabilities may materially and adversely affect our financial condition, results
of operations, and cash flows.
Changes in law and policy relating to taxes
may materially and adversely affect our financial condition, results of operations
and cash flows. For example, the 2017 Federal Tax Reform Act significantly decreased
our Federal income tax rate. The current administration and Congress could make
changes to existing tax law such as an increase in the corporate tax rate. Changes
to existing Federal or state tax laws could adversely affect our financial condition
and results of operations.
We will lose revenue if government contract funding is reduced, delayed,
or eliminated.
A decrease in U.S. Government funded research or
disqualification as a vendor to the U.S. Government for any reason could hamper
future research and development activity and decrease related revenue. In addition
to direct Government funding, certain of our non-Government customers and prospective
customers depend on Government support to fund their contracts with us. Our direct
and indirect Government funding depends on adequate continued funding of the agencies
and their programs. Such funding is subject to the availability of Congressional
appropriations and that, as a result, long-term government contracts are partially
funded initially with additional funds committed only as Congress makes further
appropriations. Certain contracts require us to maintain facilities and personnel
security clearances to protect classified information. Such clearances are subject
Government audits and investigations, and any deficiencies or illegal activities
identified during the audits or investigations could result in the forfeiture
or suspension of payments and civil or criminal penalties. Furthermore, some of
our Government funding has been through Small Business Innovation Research (SBIR)
or Small Business Technology Transfer Research (STTR) contracts. SBIR and STTR
budgets, eligibility, or funding limits may be changed by legislation or by agencies
such as the Department of Defense.
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If we were barred for any reason from U.S. government contracts there could
be a significant adverse impact on our revenue and our ability to make research
and development progress.
If we were to be charged with violation of certain
laws or if the U.S. Government were to determine that we are not a presently
responsible contractor, we could be temporarily suspended or, in the event
of a violation, barred for up to three years from receiving new U.S. Government
contracts or government-approved subcontracts. Additionally, we are subject to
routine government audits and may be subject to investigations, and any deficiencies
or illegal activities identified during the audits or investigations may result
in the forfeiture or suspension of payments and civil or criminal penalties. Being
barred for any reason from U.S. Government contracts could have a material adverse
effect on our revenue, profits, and research and development efforts.
Some of our products are incorporated into medical devices, which could
expose us to a risk of product liability claims and such claims could seriously
harm our business and financial condition.
Certain of our products are used in medical devices,
including devices that help sustain human life. We are also marketing our technology
to other manufacturers of cardiac pacemakers and ICDs. Although we have indemnification
agreements with certain customers including provisions designed to limit our exposure
to product liability claims, there can be no assurance that we will not be subject
to losses, claims, damages, liabilities, or expenses resulting from bodily injury
or property damage arising from the incorporation of our products in devices sold
by our customers. Our indemnifying customers may not have the financial resources
to cover all liability. Existing or future laws or unfavorable judicial decisions
could limit or invalidate the provisions of our indemnification agreements, or
the agreements may not be enforceable in all instances. A successful product liability
claim could require us to pay, or contribute to payment of, substantial damage
awards, which would have a significant negative effect on our business and financial
condition.
We may lose revenue if we are unable to maintain important certifications.
Our quality management system is certified to the
ISO 9001 standard, and we have received a letter of conformance for the International
Automotive Task Force (IATF) 16949 automotive sector-specific standard. Our
products are also subject to independent certification and listings including
by the VDE Institute and UL LLC. These certifications are subject to
a number of rigorous conditions. Failure to achieve or maintain any of these certifications
or listings could cause us to be disqualified by one or more of our customers,
and could have a material adverse impact on our business and revenue.
Federal legislation may not protect us against liability for the use of
our products in medical devices and a successful liability claim could seriously
harm our business and financial condition.
Although the Biomaterials Access Assurance Act of
1998 may provide us some protection against potential liability claims, that Act
includes significant exceptions to supplier immunity provisions, including limitations
relating to negligence or willful misconduct. A successful product liability claim
could require us to pay, or contribute to payment of, substantial damage awards,
which would have a significant negative effect on our business and financial condition.
Any product liability claim against us, with or without merit, could result in
costly litigation, divert the time, attention, and resources of our management
and have a material adverse impact on our business.
The malfunction of our products in medical devices could lead to the need
to recall devices incorporating our products from the market, which may be harmful
to our reputation and cause a significant loss of revenue.
The malfunction of our products that are incorporated
in medical devices could lead to the recall of existing medical devices incorporating
our products. Such a recall could be harmful to our reputation for product safety
and efficacy. Even if assertions that our products caused or contributed to device
failure do not lead to product liability or contract claims, such assertions could
harm our reputation and customer relationships. Any damage to our reputation and/or
the reputation of our products, or the reputation of our customers or their products
could limit the market for our and our customers products and harm our results
of operations.
We may lose business and revenue if our critical production equipment fails.
Our production process relies on certain critical
pieces of equipment for defining, depositing, and modifying the magnetic properties
of thin films. Some of this equipment was designed or customized by us, and some
may no longer be in production. While we have an in-house maintenance staff, maintenance
agreements for certain equipment, some critical spare parts, and back-ups for
some of the equipment, we cannot be sure we could repair or replace critical manufacturing
equipment were it to fail.
The loss of supply from any of our key single-source wafer suppliers could substantially
impact our ability to produce and deliver products and seriously harm our business
and financial condition.
Our critical suppliers include suppliers of certain
raw silicon and semiconductor foundry wafers that are incorporated in our products.
We maintain inventory of some critical wafers, but we have not identified or qualified
alternate suppliers for many of the wafers now being obtained from single sources.
In the past fiscal year there have been industry-wide semiconductor
wafer shortages and leadtimes have increased for certain of our foundry wafers.
Wafer supply interruptions for any reason, including acts of God such as floods,
typhoons, cyclones, earthquakes, or pandemics could seriously jeopardize our ability
to provide products that are critical to our business and operations, and may
cause us to lose revenue.
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The loss of supply of any critical chemicals or supplies could impact our
ability to produce and deliver products and cause loss of revenue.
There are a number of critical chemicals and supplies
that we require to make products. These include certain gases, photoresists, polymers,
metals, and specialized alloys. We maintain inventory of critical chemicals and
materials, but in many cases we are dependent on single sources, and some of the
materials could be subject to shortages or be discontinued by their suppliers
at any time. Supply interruptions or shortages for any reason could seriously
jeopardize our ability to provide products that are critical to our business and
operations and may cause us to lose revenue.
The loss of supply from any of our packaging vendors could impact our ability
to produce and deliver products and cause loss of revenue.
We are dependent on our packaging vendors. Because
of the unique materials our products use, the complexity of some of our products,
unique magnetic requirements, and high isolation voltage specifications, many
of our products are more challenging to package than conventional integrated circuits.
Some of our products use processes or tooling unique to a particular packaging
vendor, and it might be expensive, time-consuming, or impractical to convert to
another vendor in the event of a supply interruption due to vendors business
decisions, business condition, or acts of God, including floods, typhoons, earthquakes,
or pandemics. Leadtimes for packaging services have increased during the COVID-19
pandemic and there have been shortages of raw materials and equipment our packaging
vendors need for their process. One of our packaging vendors in India was forced
to suspend its factory operations from late March 2020 until mid-May 2020 and
was permitted only limited operation from mid-May through August 2020 pursuant
to COVID-19 government orders, and is still not fully operational. Restrictions
on our packaging vendors could be reimposed in the future. Additionally, certain
of our packaging vendors are in flood-susceptible areas. Flooding risks to such
vendors may increase in the future due to possible higher ocean levels, extreme
weather, and other potential effects of climate change. We have alternate vendors
or potential alternate vendors for the majority of our products, but it can be
expensive, time-consuming, and technically challenging to convert to alternate
vendors. Furthermore, we may not be able to recover work in process or finished
goods at a packaging vendor in the event of a disruption. Any supply interruptions
or loss of inventory could seriously jeopardize our ability to provide products
that are critical to our business and operations and may cause us to lose revenue.
We are subject to risks inherent in doing business in foreign countries
that could impair our results of operations.
Foreign sales are a significant portion of our revenue
and we rely on suppliers in China, India, Taiwan, Thailand, and other foreign
countries. Risks relating to operating in foreign markets that could impair our
results of operations include economic and political instability; acts of God,
including floods, typhoons, cyclones and earthquakes; public health crises including,
but not limited to, the COVID-19 pandemic; difficulties in enforcement of contractual
obligations and intellectual property rights; changes in regulatory requirements,
tariffs, customs, duties, and other trade barriers; transportation delays; and
other uncertainties relating to the administration of, or changes in, or new interpretation
of, the laws, regulations, and policies of jurisdictions where we do business.
Public health crises could have an adverse effect on our operations and
financial results.
Public health crises could adversely affect our
ongoing business operations. In particular, the COVID-19 pandemic has impacted
global economic activity, caused many of our important customers to delay or cancel
orders, and disrupted our supply chains. Any customer or supplier disruptions
could affect our ability to operate. These and other impacts of COVID-19 pandemic
or other public health crises could have a material adverse effect on our results
of operations or our financial condition.
We may not be able to enforce our intellectual property rights.
We protect our proprietary technology and intellectual
property by seeking patents, trademarks, and copyrights, and by maintaining trade
secrets through entering into confidentiality agreements with employees, suppliers,
customers, and prospective customers depending on the circumstances. We hold patents
or are the licensee of others owning patented technology covering certain aspects
of our products and technology. These patent rights may be challenged, rendered
unenforceable, invalidated, or circumvented. Additionally, rights granted under
the patents or under licensing agreements may not provide a competitive advantage
to us. Efforts to enforce patent rights can involve substantial expense and may
not be successful. Furthermore, others may independently develop similar, superior,
or parallel technologies to any technology developed by us, or our technology
may prove to infringe on patents or rights owned by others. Thus the patents held
by or licensed to us may not afford us any meaningful competitive advantage. Also,
our confidentiality agreements may not provide meaningful protection of our proprietary
information. Our inability to maintain our proprietary rights could have a material
adverse effect on our business, financial condition, and results of operations.
Our business success may be adversely affected if we are unable to attract
and retain highly qualified employees.
We have employment agreements with certain employees,
including our Chief Executive Officer and Chief Financial Officer, but those agreements
do not prevent employees from leaving the company. Competition for highly qualified
management and technical personnel can be intense and we may not be able to attract
and retain the personnel necessary for the development and operation of our business.
The loss of the services of key personnel could have a material adverse effect
on our business, financial condition, and results of operations.
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Our business
could be negatively impacted by cyber security events or information technology
disruptions.
We face various cyber security threats, including
threats to our information technology infrastructure and attempts to gain access
to our proprietary or classified information, and denial-of-service attacks. Additionally,
there is a risk of disruptions due to failures of our information technology infrastructure
or service provider outages. We maintain policies and procedures for the mitigation
of information technology risks, and we maintain data backups, backup hardware,
and some redundant systems. We have experienced cyber security events and disruptions
such as viruses, ransomware, hacker attacks, and limited server, Website, and
e-mail outages. Although these events did not materially impact our business,
future events could disrupt our operations, harm our reputation, expose us to
liability, compromise our eligibility for research and development contracts involving
sensitive or classified information, or have other effects including unpredictable
effects.
We could incur losses on our marketable securities.
As of March 31, 2021, we held $54,717,626 in
short-term and long-term marketable securities, representing approximately 75%
of our total assets. Conditions and circumstances beyond our control or ability
to anticipate, including the effects of the COVID-19 pandemic, can cause downgrades
and increased default risk, and such downgrades
or increases in default risk are possible at any time. Additionally, the assignment
of a high credit rating does not preclude the risk of default on any marketable
security. Defaults, default risks, or changes in market conditions could cause
us to incur losses on our marketable securities, which could have a material adverse
impact on our financial condition, income, or cash flows, and our ability to pay
dividends.
Risks Related to our Industry
We face an uncertain economic environment in the industries we serve, which
could adversely affect our business.
We sell our products into the semiconductor market,
which is highly cyclical. We cannot predict the timing, strength, or duration
of any economic slowdown or subsequent recovery, worldwide or in the industries
we serve. The economic environment could have a material adverse impact on our
business and revenue.
Our business and our reliance on intellectual property exposes us to litigation
risks.
If patent infringement claims or actions are asserted
against us, we may be required to obtain a license or cross-license, modify our
existing technology or design a new noninfringing technology. Such licenses or
design modifications can be costly or could increase the cost of our products.
In addition, we may decide to settle a claim or action against us, which settlement
could be costly. We may also be liable for any past infringement, and we may be
required to indemnify our customers against expenses relating to possible infringement.
If there is an adverse ruling against us in an infringement lawsuit, an injunction
could be issued barring production or sale of any infringing product. It could
also result in a damage award equal to a reasonable royalty or lost profits or,
if there is a finding of willful infringement, treble damages. Any of these results
would increase our costs or harm our operating results.
Risks Related to our Stock
Any decisions to reduce or discontinue paying cash dividends to our shareholders
could cause the market price of our common stock to decline.
Future dividends will be subject to Board approval
and will take into account factors including our results of operations,
cash and marketable security balances, the timing of
securities maturations, estimates of future cash requirements, fixed asset requirements,
the impacts of the COVID-19 pandemic, and other factors our Board may deem relevant.
Because they are generally more than our current cash flow from operations, recent
and declared dividend amounts may be unsustainable. Any reduction or discontinuance
by us of cash dividends could cause the market price of our common stock to decline.
The price of our common stock may be adversely affected by significant price
fluctuations due to a number of factors, many of which are beyond our control.
From time to time our stock price has decreased
sharply, and could decline in the future. The market price of our common stock
may be significantly affected by many factors, some of which are beyond our control,
including:
the announcement of new products, product enhancements, or contracts by us
or our competitors;
delays in our introduction of new products or technologies or market acceptance
of these products or technologies;
loss of customers, decreases in customers purchases, or decreases in
customers purchase prices;
changes in demand for our customers products;
quarterly variations in our financial results, revenue, or revenue growth
rates;
speculation in the press or analyst community about our business, potential
revenue, or potential earnings;
general economic conditions or market conditions specific to industries we
or our customers serve or may serve;
legal proceedings involving us, including intellectual property litigation
or class action litigation;
changes in Federal corporate income tax rates or changes in other tax provisions;
changes in tariffs, customs, duties, or other trade barriers in foreign jurisdictions
where we purchase raw materials or sell our products;
the impact or perceived impact of the COVID-19 pandemic on general economic
conditions, our industry, or our revenues or net income;
our stock repurchase and dividend policies and decisions.
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ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.