Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
PART II
Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information and Dividends
Shareholders
Securities Authorized for Issuance Under Equity Compensation
Plans
Stock Repurchase Program
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
PART III
Item 10. Directors, Executive
Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and
Director Independence.
Item 14. Principal Accounting Fees and Services.
PART IV
Item 15. Exhibits, Financial
Statement Schedules.
SIGNATURES
FINANCIAL STATEMENTS
Reports of Independent Registered
Public Accounting Firm
Balance Sheets
Statements of Income
Statements of Comprehensive Income
Statements of Shareholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
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PART
I
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 of 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 the COVID-19 pandemic, risks and 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. For more information regarding our risks and uncertainties, see Item 1A
“Risk Factors” of this Report.
ITEM 1. BUSINESS.
In 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.
NVE History and Background
NVE is a Minnesota corporation headquartered in
a suburb of Minneapolis. We were founded in 1989 by James M. Daughton, Ph.D.,
a spintronics pioneer. Our common stock became publicly traded in 2000 through
a reverse merger and became NASDAQ listed in 2003. Since our founding, we have
been awarded more than $50 million in government research contracts. These
contracts have helped us develop products and build our intellectual property
portfolio. We have adopted a March 31 fiscal year, so fiscal years referenced
in this report end March 31.
Industry Background
Much of the electronics industry is devoted to the
acquisition, storage, and transmission of information. We have focused on three
applications for our spintronic technology: magnetic sensors, couplers, and memories.
Sensors acquire information, couplers transmit information, and memories store
information. In that sense, our technology can provide the eyes, nerves, and brains
of electronic systems.
Magnetic sensors can be used for a number of purposes
including detecting the position or speed of robotics and mechanisms, or for communicating
with implantable medical devices. We believe our spintronic sensors are smaller,
more precise, and more reliable than competing devices.
Couplers are widely used in factory automation,
providing reliable digital communication between electronic subsystems in factories.
For example, couplers are used to send high-speed data between robots and central
controllers. As manufacturing automation expands, there is a need for higher speed
data and more channel density. Because of their unique properties, we believe
our couplers transmit more data at higher speeds and over longer distances than
conventional devices.
Near-term potential MRAM applications include mission-critical
storage such as military, industrial, and antitamper applications. Long term,
MRAM could address the market for ubiquitous high-density memory.
Our Enabling Technology
Our designs are generally based on either giant
magnetoresistance or tunneling magnetoresistance. These structures produce a large
change in electrical resistance depending on the electron spin orientation in
a free layer.
In giant magnetoresistance (GMR) devices, resistance
changes due to conduction electrons scattering at interfaces within the devices.
The GMR effect is only significant if the layer thicknesses are less than the
mean free path of conduction electrons, which is approximately five nanometers.
Our critical GMR conductor layers may be less than two nanometers, or five atomic
layers, thick.
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The second type of spintronic structure we use is
based on tunneling magnetoresistance (TMR). Such devices are known as Spin-Dependent
Tunnel (SDT) junctions or Magnetic Tunnel Junctions (MTJs). SDT junctions use
tunnel barriers that are so thin that electrons can “tunnel” through
a normally insulating material to cause a resistance change. SDT barrier thicknesses
can be in the range of one to four nanometers (less than ten molecular layers).
In our products, the spintronic elements are connected
to integrated circuitry and encapsulated (“packaged”) in much the same way
as conventional integrated circuits.
Our Strategy
Our vision is to become the leading developer of
practical spintronics technology and devices. Our spintronic technology provides
eyes, nerves, and brains for electronic systems, breathing life and intelligence
into inanimate objects. Our unique products support global trends of smart, low-power
end nodes for the “Internet of Things.” We plan to monetize our technology
by selling the products described below and licensing our MRAM technology. To
grow product sales, we plan to broaden our sensor and coupler product lines, and
longer term to target larger markets such as automotive electronics.
Our Products and Markets
Sensor Products and Markets
Our sensor products detect the strength or gradient
of magnetic fields and are often used to determine position or speed. The GMR
changes its electrical resistance depending on the magnetic field. In our devices,
GMR is combined with conventional foundry integrated circuitry and packaged in
much the same way as conventional integrated circuits. We sell standard or catalog
sensors, and custom sensors designed to meet customers’ exact requirements.
Our sensors are quite small, very sensitive to magnetic fields, precise, and reliable.
Standard sensors
Our standard, or catalog, sensors are generally
used to detect the presence of a magnetic or metallic material to determine position
or speed. We believe our spintronic sensors are smaller, more precise, more reliable,
and lower power than competing devices. Our major market for standard sensors
is the Industrial Internet of Things (IIoT) for factory automation.
Custom and medical sensors
Our primary custom products are sensors for medical
devices, which are customized to our customers’ requirements and manufactured
under stringent medical device quality standards. Most are used to replace electromechanical
magnetic switches. We believe our sensors have important advantages in medical
devices compared to electromechanical switches, including no moving parts for
inherent reliability, and being smaller, more sensitive, and more precise. Our
sensors can be customized using customer-specific integrated signal processing
and design variations that can include the range and sensitivity to magnetic fields,
electrical resistance, and multisensor elements configuration. Future custom sensor
target markets include consumer electronics, automotive electronics, and biosensors.
Coupler Products and Markets
Our spintronic couplers combine a GMR sensor element
and an integrated microscopic coil. The coil creates a small magnetic field that
is picked up by the spintronic sensor, transmitting data almost instantly. Couplers
are also known as “isolators” because they electrically isolate the
coupled systems. Our IsoLoop couplers are faster than the fastest optical couplers.
Our major coupler market is currently the Industrial Internet of Things (IIoT)
for factory automation. We are targeting the automotive market longer term.
MRAM Products and Markets
MRAM uses spintronics to store data. It has been
called the ideal or universal memory because of its potential to combine the speed
of SRAM, the density of DRAM, and the nonvolatility of flash memory. Data is stored
in the spin of the electrons in thin metal alloy films, and read with spin-dependent
tunnel junctions. Unlike electrical charge, the spin of an electron is inherently
permanent. We have invented several types of MRAM memory cells including inventions
related to advanced MRAM designs and MRAM for tamper prevention or detection.
Our strategy is to develop, manufacture, and sell
low bit-density MRAM for applications such as tamper prevention and detection.
For high bit-density MRAM, our strategy is to license our technology to companies
with large-scale memory manufacturing capabilities.
Product Manufacturing
The heart of our fabrication facility is a cleanroom
area with specialized equipment to deposit, pattern, etch, and process spintronic
materials. Most of our products are fabricated in our facility using either raw
silicon wafers or foundry wafers. Foundry wafers contain conventional electronics
that perform housekeeping functions such as voltage regulation and signal conditioning
in our products.
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Each wafer may include thousands of devices. We
build spintronics structures on wafers in our fabrication facility. We either
saw wafers to be sold in die form, or send wafers to Asia for dicing and packaging.
Other production operations include wafer-level inspection and testing. Packaged
parts are returned to us to be tested, inventoried, and shipped.
Sales and Product Distribution
We rely on distributors who stock our products and
sell them in more than 75 countries. Distributors of our products include
America II Electronics, Inc., Angst+Pfister
Sensors and Power, Avnet companies, and Digi-Key
Corporation. Our distributor agreements generally renew annually. In addition,
we distribute versions of some of our products under private-brand partnerships
with large integrated device manufacturers. These private-brand partnerships broaden
our distribution and enhance our sales support, technical support, and brand awareness.
New Product Status
In the past year we began marketing a number of
new and improved products, including:
• new smart sensors for the Internet of Things;
• new TMR magnetic sensors and magnetic switches;
• data couplers with isolated power convertors; and
Long-term product development programs in fiscal
2021 included:
• new TMR sensors;
• custom integrated circuits for smart sensors; and
• power conversion integrated circuits.
Our Competition
Industrial Sensor Competition
Several other companies either make or may have
the capability to make GMR or TMR sensors. Also, several competitors make solid-state
industrial magnetic sensors including silicon Hall-effect sensors and anisotropic
magnetoresistive (AMR) sensors. We believe those types of sensors are not as sensitive
or power-efficient as our GMR or TMR sensors.
Medical Sensor Competition
Our sensors for medical devices face competition
from electromechanical magnetic sensors and from other solid-state magnetic sensors.
Electromechanical magnetic sensors such as reed and micro-electromechanical system
(MEMS) switches have been in use for several decades. Because our sensors have
no moving parts, we believe they are inherently more reliable than electromechanical
magnetic sensors. We also believe our sensors are smaller than the smallest electromechanical
magnetic sensors, more precise in their magnetic switch points, and more sensitive.
Compared to other solid-state sensors, our medical sensors may have advantages
in size, sensitivity to small magnetic fields, or electrical interface simplicity.
Coupler Competition
Competing coupler technologies include optical couplers,
inductive couplers (transformers), capacitive couplers, and radio-frequency modulation
couplers. Prominent optical coupler suppliers include Broadcom Limited, Fairchild
Semiconductor International, Lite-On Technology Corporation, Renesas Electronics
Corporation, Toshiba Corporation, and Vishay Intertechnology.
Our strategy is to compete based on product features
rather than to compete solely on price. IsoLoop couplers are smaller and therefore
require less circuit board space per channel than most competing couplers. Our
other advantages over competing technologies may include less signal distortion,
longer product life, and lower power consumption.
MRAM Competition
A number of companies compete or may compete with
us for MRAM research and development or service business, or may be attempting
to develop MRAM intellectual property for licensing to others. Emerging technologies
that could compete with MRAM include graphene and carbon nanotubes, phase-change
memory (PCM; also known as chalcogenide, 3D XPoint, or Ovonic memory), resistive
RAM (ReRAM or RRAM), conductive bridge RAM (CBRAM), memory resistors (“memristors”),
and conductive metal oxide (CMOx) memory. MRAM may have advantages over these
technologies in either manufacturability, speed, bit density, data retention,
or endurance.
Sources and Availability of Raw Materials
Our principal sources of raw materials include suppliers
of raw silicon and semiconductor foundry wafers that are incorporated into our
products, and suppliers of device packaging services. Our wafers sources are based
around the world; most of our packaging services take place in Asia.
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Intellectual Property
Patents
As of March 31, 2021 we had more than 50
issued U.S. patents assigned to us. We also have a number of foreign patents,
a number of U.S. and foreign patents pending, and we have licensed patents from
others. There are no patents we regard as critical to our current business owned
by us or licensed to us that expire in the next 12 months.
We have patents on advanced MRAM designs
that we believe are important, including patents that relate to magnetothermal
MRAM, spin-momentum MRAM, and synthetic antiferromagnetic storage. Although
it is not critical to our current business, we have identified U.S. patent 6,744,086
titled “Current switched magnetoresistive memory cell” as particularly
important for successful high-density, high-performance MRAMs. The patent has
been reissued as RE 44,878 and expires May 15, 2022.
Much of our intellectual property has been developed
with U.S. Government support. Under federal legislation, companies normally
may retain the principal worldwide patent rights to any invention developed
with U.S. Government support.
Trademarks
“NVE” and “IsoLoop” are our
registered trademarks. Other trademarks we claim include “GMR Switch”
and “GT Sensor.”
Dependence on Major Customers
We rely on several large customers for a significant
percentage of our revenue, including Abbott Laboratories,
Sonova AG, certain other medical device manufacturers, and certain distributors.
The loss of one or more of these customers could have a material adverse effect
on us.
Government Regulations
We are subject to government regulations including,
but not limited to, regulations related to environment, tax matters, securities,
conflict minerals, ethics and foreign corrupt practices, import and export controls,
product safety and liability, workplace health and safety, labor and employment,
and data privacy. We incur and expect to continue to incur costs and expenses
to comply with these regulations and may incur penalties for any failure to
do so.
Additionally, certain contracts required us 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.
Environmental Matters
We are subject to environmental laws and regulations
particularly state and local laws and regulations relating to industrial waste
and emissions. Compliance with these laws and regulations has not had a material
impact on our capital expenditures, earnings, or competitive position to date.
Existing and future environmental laws and regulations could result in expenses
related to emission abatement or remediation, but we are currently unable to
estimate such expenses.
Human Capital Resources
We had 44 employees as of March 31, 2021,
all of whom were full-time.
We have policies to prevent discrimination based
on gender, race, disability, ethnicity, nationality, religion, sexual orientation,
gender identity, or gender expression. We take affirmative action to ensure
that applicants are employed, and that employees are treated during employment,
without regard to their race, color, religion, sex, or national origin. We also
take affirmative action to employ and advance veterans in employment.
We offer employees free health risk assessments,
wellness programs, and financial incentives for healthy biometrics.
None of our employees are represented by a labor
union or are subject to a collective bargaining agreement, and we believe we
maintain good relations with our employees.
Available Information
All reports we file with the SEC, including our
annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports
on Form 8-K, and proxy statements
and additional proxy materials on Schedule 14A, as well as any amendments
to those reports and schedules, are accessible at no cost through the “Investors”
section of our Website (www.nve.com). These filings are also accessible through
the SEC’s Website (www.sec.gov).
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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.
9
Table