# NVE Corp: Form 10-K for the period ended Mar 31, 2018 - Company: [NVE Corp](/companies/nvec.md) (CIK 724910) - Form: 10-K - Filed: 2018-05-02 - Accepted by EDGAR: May 2, 2018, 20:21 ET - Period: 2018-03-31 - Accession: 0000724910-18-000008 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/724910/000072491018000008/NVE_2018_10K.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/724910/000072491018000008/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2018-03-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 12 months, 2017-04-01 to 2018-03-31 | $29.9m | us-gaap:Revenues | | Cost of revenue | 12 months, 2017-04-01 to 2018-03-31 | $6.3m | us-gaap:CostOfRevenue | | Gross profit | 12 months, 2017-04-01 to 2018-03-31 | $23.6m | us-gaap:GrossProfit | | Research and development | 12 months, 2017-04-01 to 2018-03-31 | $3.7m | us-gaap:ResearchAndDevelopmentExpense | | Selling, general and administrative | 12 months, 2017-04-01 to 2018-03-31 | $1.4m | us-gaap:SellingGeneralAndAdministrativeExpense | | Operating income | 12 months, 2017-04-01 to 2018-03-31 | $18.5m | us-gaap:OperatingIncomeLoss | | Income tax | 12 months, 2017-04-01 to 2018-03-31 | $6.1m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 12 months, 2017-04-01 to 2018-03-31 | $13.9m | us-gaap:NetIncomeLoss | | Diluted EPS | 12 months, 2017-04-01 to 2018-03-31 | $2.87 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 12 months, 2017-04-01 to 2018-03-31 | $2.87 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 12 months, 2017-04-01 to 2018-03-31 | 4,846,212 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 12 months, 2017-04-01 to 2018-03-31 | $15.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2017-04-01 to 2018-03-31 | $604.8k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 12 months, 2017-04-01 to 2018-03-31 | $19.4m | us-gaap:PaymentsOfDividendsCommonStock | | Cash and equivalents | at 2018-03-31 | $4.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2018-03-31 | $32.7m | us-gaap:AssetsCurrent | | Total assets | at 2018-03-31 | $87.4m | us-gaap:Assets | | Current liabilities | at 2018-03-31 | $989.7k | us-gaap:LiabilitiesCurrent | | Shareholders' equity | at 2018-03-31 | $86.4m | us-gaap:StockholdersEquity | ## Business As filed, 18,166 characters. ### 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. We have also licensed our spintronic magnetoresistive random access memory technology, commonly known as MRAM. ### 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. 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 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, small, 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 We operate in a single business segment that includes research, design, and manufacture of spintronics for commercial and military 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 “IsoLoop” 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. We have five lines of coupler products: cost-effective IL500-Series couplers; IL600-Series passive-input couplers; IL700/IL200-Series high-speed couplers; IL4/IL3-Series isolated network couplers; and IL800-Series top-of-the-line couplers. Our major coupler market is the Industrial Internet of Things (IIoT) for factory automation. ### 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 memories 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. 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., Digi-Key Corporation, and Premier Farnell plc companies. 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 products, including: - smaller sensors and couplers; - low-power sensors and couplers; - new angle sensor models for energy and resource management; and - new antitamper sensors. Long-term product development programs in fiscal 2018 included: - biosensors for food safety and medical diagnostics; - “smart sensor” interfaces for connection to the “Internet of Things”; and - sensors for antitamper and security applications. ### 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. ### Intellectual Property ### Patents As of March 31, 2018 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. 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. Certain of our patents cover inventions we believe may be necessary for successful high-density, high-performance MRAMs. We believe U.S. patents 6,538,921 titled “Circuit selection of magnetic memory cells and related cell structures,” and 6,744,086 titled “Current switched magnetoresistive memory cell” are particularly important. The 6,744,086 patent has been reissued as RE 44,878 and expires May 15, 2022. The 6,538,921 patent expires August 14, 2021. We also 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. ### Trademarks “NVE” and “IsoLoop” are our registered trademarks. Other trademarks we claim include “GMR Switch” and “GT Sensor.” ### Seasonality In some years we have observed weak product sales late in the calendar year, possibly due to ordering patterns or customer vacations and shutdowns. We cannot predict whether this seasonal pattern will occur in future years. ### Working Capital Items Like other companies in the electronics industry, we have historically invested in capital equipment for manufacturing and testing our products, as well as research and development equipment. We have also deployed significant capital in inventories to have finished products available from stock, to receive more favorable pricing for raw materials, and to guard against raw material shortages. ### 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. ### Firm Backlog As of March 31, 2018 we had $527,118 of contract research and development backlog we believed to be firm, compared to $886,156 as of March 31, 2017. We expect the firm backlog as of March 31, 2018 to be filled in fiscal 2019. Certain contracts have performance requirements and milestones, and there can be no assurance that backlog will result in future revenue. Our product sales are made primarily under standard purchase orders, which are generally cancellable. Therefore product order backlog is not included in “firm backlog,” and product sales backlog as of any particular date may not be indicative of future results. We also have certain agreements that require customers to forecast purchases; however, these agreements do not generally obligate the customer to purchase any particular quantity of products. Based on semiconductor industry practice and our experience, we do not believe that such agreements are meaningful for determining backlog amounts. ### Research and Development Activities Over the past three fiscal years our research and development activities have included development of new sensors, couplers, and memories, as well as related underlying technologies. We spent $3,573,129 for fiscal 2018, $3,003,656 for fiscal 2017, and $2,691,303 for fiscal 2016 in company-sponsored research and development activities. Additionally, we spent $1,265,463 for fiscal 2018, $1,830,857 for fiscal 2017, and $2,762,406 for fiscal 2016 on customer-sponsored research and development contract activities. These research and development contracts were with various agencies of the U.S. Government as well as non-government entities. ### Environmental Matters We are subject to environmental laws and regulations, particularly with respect 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. ### Number of Employees We had 45 employees as of March 31, 2018. Our employment can fluctuate due to a variety of factors. 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. ### Financial Information About Geographic Areas Foreign sales accounted for approximately 50% of our revenue in fiscal 2018. More information about geographic areas is contained in “Note 8 – Concentrations” to the Financial Statements included in this report. ### 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). We make those filings available as soon as reasonably practicable after filing. These filings are also accessible through the SEC’s Website (www.sec.gov). ## Risk factors As filed, 23,159 characters. 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. ***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. Any decreases in purchase quantities or purchase prices, 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. Known product competitors include Analog Devices, Inc.; Broadcom Limited; Fairchild Semiconductor International; Hermetic Switch, Inc.; Linear Technology Inc.; Maxim Integrated Products, Inc.; Meder Electronic AG; Memscap SA; NEC Corporation; Sharp Corporation; Silicon Laboratories, Inc.; Texas Instruments Incorporated; Toshiba Corporation; Vishay Intertechnology; and others. Many of our competitors and potential competitors 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. ### We may lose revenue if we are unable to renew customer agreements. We have agreements with certain customers, including a Supply Agreement, as amended, with Sonova AG, which expires March 1, 2020, and a Supplier Partnering Agreement, as amended, with Abbott Laboratories expires January 1, 2021. 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 these customers could have a significant adverse impact on our revenue and our profitability. ***We will lose revenue if government contract funding is reduced, delayed, or eliminated.*** Although our revenue from agencies of the U.S. Government was less than 10% of our total revenue in each of the past three fiscal years, a material 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 affected by Government budgets and priorities that can change and over which we have no control, and delays in such funding can occur for a number of reasons. Interruptions in the Government funding process such as federal budget delays, debt ceiling limitations, shutdowns, or sequestration may impact Government contract funding. 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. ***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. In addition, we could expend substantial amounts in defending against such charges and in damages, fines and penalties if such charges are proven or result in negotiated settlements. 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. ***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. ***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 could be subject to claims based on warranty, product liability, or delivery failures.*** Claims based on warranty, product liability, or delivery failures that could lead to significant expenses as we defend such claims or pay damage awards. We may also incur costs if we decide to compensate the affected customer or end consumer for such claims. In addition, if our customers recall products containing our products, we may incur costs and expenses relating to the recall. Costs or payments we may make in connection with warranty, delivery claims or product recalls may adversely affect our business and financial condition. ***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. ***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. ***Any malfunction of our products in existing 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.*** Any malfunction of our products could lead to the need to recall existing medical devices incorporating our products from the market, which may be harmful to our reputation because it is dependent on 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 our 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 impact our ability to produce and deliver products and cause loss of revenue.*** 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. Increased industry demand or other factors beyond our control or ability to predict could cause or exacerbate wafer supply shortages. Wafer supply interruptions for any reason, including acts of God such as floods, typhoons, cyclones, or earthquakes, 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 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, and the high isolation voltage specifications of our couplers, 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. We have alternate vendors or potential alternate vendors for the substantial majority of our product sales, but it could prove expensive, time-consuming, or technically challenging to convert certain products to an alternate vendor. We might not be able to recover work in process or finished goods in their possession if one of our packaging vendors were to become insolvent or disrupted by acts of God, including floods, typhoons, or earthquakes. Furthermore, an alternate vendor may not have sufficient capacity available to meet our requirements. 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. 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 were approximately 50% of our revenue for fiscal 2018, and we expect foreign sales to continue to represent a significant portion of our revenue. Furthermore, 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; difficulties in enforcement of contractual obligations and intellectual property rights; changes in regulatory requirements, tariffs, customs, duties, and other trade barriers; transportation delays; acts of God, including floods, typhoons, cyclones and earthquakes; 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. ***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. ### 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. We have filed a patent infringement lawsuit against Everspin and at least several other companies have described designs that we believe may infringe on our patents if such designs were commercialized. 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. ### We could incur losses on our marketable securities. As of March 31, 2018, we held $73,603,967 in short-term and long-term marketable securities, representing approximately 84% of our total assets. A number of the securities we hold have been downgraded by Moody’s or Standard and Poor’s indicating a possible increase in default risk. Conditions and circumstances beyond our control or ability to anticipate can cause downgrades and increases in 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. ***The impacts of the Tax Reform Act could be materially different from our current estimates.*** The Act “To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (the “Tax Reform Act”) was enacted December 22, 2017. The Tax Reform Act reduced Federal corporate income tax rates effective January 1, 2018 and changed certain other provisions. We expect the law to significantly reduce our effective tax rate, but our expectations are based on our current knowledge and assumptions, and recognized impacts could be materially different from current estimates based on our actual results and further analysis of the Act. ***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. ***Any decisions to reduce or discontinue paying cash dividends to our shareholders could cause the market price of our common stock to decline.*** While we currently plan to pay quarterly dividends indefinitely, our payment of cash dividends will be subject to, among other things, our results of operations, cash and marketable security balances, the timing of securities maturations, estimates of future cash requirements, fixed asset requirements, and other factors our Board may deem relevant. Because they are significantly 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: - technological innovations by us or our competitors; - 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 operating results, revenue, or revenue growth rates; - changes in revenue estimates, earnings estimates, or market projections by market analysts; - 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; and - our stock repurchase and dividend policies and decisions. ## Properties As filed, 481 characters. Our principal executive offices and manufacturing facility are located at 11409 Valley View Road, Eden Prairie, Minnesota, 55344, and leased under an agreement expiring December 31, 2020. The space consists of 21,362 square feet of offices, laboratories, and production areas. The facility is currently being utilized at less than maximum capacity to allow for growth, and we believe the facility is adequate to meet our current requirements. We hold no investments in real estate. ## Legal proceedings As filed, 332 characters. In the ordinary course of business we may become involved in litigation. At this time we are not aware of any material pending or threatened legal proceedings or other proceedings contemplated by governmental authorities that we expect would have a material adverse impact on our future results of operation and financial condition. ## Management's discussion and analysis As filed, 14,693 characters. You should read this discussion together with our financial statements and notes included elsewhere in this Report. In addition to historical information, the following discussion contains forward-looking information that involves risks and uncertainties. Our actual future results could differ materially from those presently anticipated due to a variety of factors, including those discussed in Item 1A of this Report. ### General We develop and sell devices that use “spintronics,” a nanotechnology that relies on electron spin rather than electron charge to acquire, store, and transmit information. We manufacture high-performance spintronic products including sensors and couplers to revolutionize data sensing and transmission. We also receive contracts for research and development and are a licensor of spintronic magnetoresistive random access memory technology, commonly known as MRAM. ### Application of Critical Accounting Policies and Estimates In accordance with SEC guidance, those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition and require complex management judgment are discussed below. ### Investment Valuation Our investments consist primarily of corporate and municipal obligations. We have generally invested excess cash in high-quality investment grade long-term marketable securities with less than five years to maturity. We classify all of our marketable securities as available-for-sale, thus securities are recorded at fair value and any associated unrealized gain or loss, net of tax, is included as a separate component of shareholders’ equity, “Accumulated other comprehensive income (loss).” If we judged a decline in fair value for any security to be other than temporary, the cost basis of the individual security would be written down and a charge recognized to net income. The fair values for our securities are determined based on quoted market prices as of the valuation date and observable prices for similar assets. We consider a number of factors in determining whether other-than-temporary impairment exists, including: credit market conditions; the credit ratings of the securities; historical default rates for securities of comparable credit rating; the presence of insurance of the securities and, if insured, the credit rating and financial condition of the insurer; the effect of market interest rates on the value of the securities; and the duration and extent of any unrealized losses. We also consider the likelihood that we will be required to sell the securities prior to maturity based on our financial condition and anticipated cash flows. If any of these conditions and estimates change in the future, or, if different estimates are used, the fair value of the investments may change significantly and could result in other-than-temporary decline in value, which could have an adverse impact on our results of operations. ### Inventory Valuation Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first in, first out method. Where there is evidence that inventory could be disposed of at less than carrying value, the inventory is written down to the net realizable value in the current period. Additionally, we periodically examine our inventory in the context of inventory turnover, sales trends, competition and other market factors, and we record provisions to inventory reserve when we determine certain inventory is unlikely to be sold. If reserved inventory is subsequently sold, corresponding reductions in inventory and inventory reserves are made. Our inventory reserve was $190,000 as of March 31, 2018 and $225,000 as of March 31, 2017. ### Deferred Tax Assets Estimation In determining the carrying value of our net deferred tax assets, we must assess the likelihood of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions to realize the benefit of these assets. We evaluate the realizability of the deferred assets quarterly and assess the need for valuation allowances or reduction of existing allowances quarterly. No valuation allowance was recorded as we believe it is more likely than not that all of the deferred tax assets will be realized. We had $572,655 of net deferred tax assets as of March 31, 2018, and $357,055 of net deferred tax assets as of March 31, 2017. Net deferred tax assets included $55,886 in deferred tax assets for stock-based compensation deductions as of March 31, 2018 and $86,335 as of March 31, 2017. ### Results of Operations The following table summarizes the percentage of revenue and year-to-year changes for various items for the last three fiscal years: *Revenue* | 2018 | Percentage of Revenue Year Ended March 31 | 2017 | 2016 2017 to 2018 | Year-to-Year Change Years Ended March 31 2016 to 2017 | | | --- | ---: | ---: | ---: | ---: | ---: | | Product sales | 91.5% | 92.4% | 88.1% | 4.4% | 7.3% | | Contract research and development | 8.5% | 7.6% | 11.9% | 18.6% | (35.2)% | | Total revenue | 100.0% | 100.0% | 100.0% | 5.4% | 2.2% | | Cost of sales | 21.0% | 21.5% | 23.9% | 3.2% | (8.1)% | | Gross profit | 79.0% | 78.5% | 76.1% | 6.0% | 5.4% | | Expenses | | | | | | | Selling, general, and administrative | 4.8% | 5.1% | 6.3% | (1.6)% | (16.8)% | | Research and development | 12.4% | 11.8% | 11.0% | 10.7% | 9.2% | | Total expenses | 17.2% | 16.9% | 17.3% | 7.0% | (0.2)% | | Income from operations | 61.8% | 61.6% | 58.8% | 5.8% | 7.1% | | Interest income | 5.2% | 5.8% | 6.8% | (5.6)% | (12.7)% | | Income before taxes | 67.0% | 67.4% | 65.6% | 4.8% | 5.1% | | Income tax provision | 20.4% | 21.7% | 21.3% | (0.8)% | 4.5% | | Net income | 46.6% | 45.7% | 44.3% | 7.4% | 5.3% | Total revenue for fiscal 2018 increased 5% compared to fiscal 2017, due to a 4% increase in product sales and a 19% increase in contract research and development revenue. The increase in product sales for fiscal 2018 was due to new customers. The increase in contract research and development revenue for fiscal 2018 was due to new contracts. Total revenue for fiscal 2017 increased 2% compared to fiscal 2016, due to a 7% increase in product sales, partially offset by a 35% decrease in contract research and development revenue. The increase in product sales for fiscal 2017 compared to fiscal 2016 was due to new customers. The decrease in contract research and development revenue for fiscal 2017 was due to the completion of certain contracts. Gross profit margin was 79% of revenue for fiscal 2018 and fiscal 2017. Gross profit margin for fiscal 2017 increased from 76% for fiscal 2016 due to a more profitable revenue mix. Total expenses increased 7% for fiscal 2018 compared to fiscal 2017, due to an 11% increase in research and development expense, partially offset by a 2% decrease in selling, general, and administrative expense. The decrease in selling, general, and administrative expense was primarily due to decreased sales commissions. The increase in research and development expense was due to increased new product development activities. Total expenses were approximately the same for fiscal 2017 compared to fiscal 2016 as a 9% increase in research and development expense was offset by a 17% decrease in selling, general, and administrative expense. The increase in research and development expense for fiscal 2017 was due to increased new product development activities. The decrease in selling, general, and administrative expense for fiscal 2017 was primarily due to decreased sales commissions. Interest income decreased 6% in fiscal 2018 compared to fiscal 2017 and 13% in fiscal 2017 compared to fiscal 2016. Decrease in interest income both years were due to decreases in interest-bearing marketable securities because we used a portion of the proceeds from maturating securities to help fund cash dividends. The effective income tax rate was 30% of income before taxes for fiscal 2018, compared to 32% for fiscal 2017 and 2016. The decrease was due to the blended effect of a decrease in the Federal tax rate with the enactment of the Tax Reform Act in December 2017, partially offset by a $206,693 one-time increase in our provision for income taxes from the effect of the new rate on deferred tax assets. We currently expect our effective tax rate to be approximately 22% for the fiscal year ending March 31, 2019. See Note 7 to the financial statements for more information on income taxes. Net income increased 7% in fiscal 2018 compared to fiscal 2017, primarily due to increased product sales, increased contract research and development revenue, and a decrease in the provision for income taxes, partially offset by increased expenses and a decrease in interest income. Net income increased 5% in fiscal 2017 compared to fiscal 2016 primarily due to increased total revenue and increased gross profit margin as a percentage of revenue, partially offset by decreased interest income. ### Liquidity and Capital Resources ### Overview Cash and cash equivalents were $4,755,082 as of March 31, 2018 compared to $8,199,364 as of March 31, 2017. The $3,444,282 decrease in cash and cash equivalents was due to $15,151,928 in net cash provided by operating activities and $717,790 net cash provided by investing activities, less $19,314,000 net cash used in financing activities. ### Operating Activities Net cash provided by operating activities related to product sales and research and development contract revenue as our primary source of working capital for fiscal years 2016 through 2018. For fiscal 2018, net cash provided by operating activities was $15,151,928. Accounts receivable decreased $548,023 in fiscal 2018 primarily due to the timing of sales to and payments from certain customers. ### Investing Activities Net cash provided by investing activities in fiscal 2018 was primarily due to marketable security maturities of $19,540,000, partially offset by fixed assets purchases of $604,800 and marketable security purchases of $18,217,410. As of March 31, 2018 our marketable securities had remaining maturities between two days and 249 weeks (see “Note 4 – Marketable Securities” to the Financial Statements, included elsewhere in this Report for additional information). Our entire portfolio of short-term and long-term marketable securities is classified as available for sale. Purchases of fixed assets were $604,800 in fiscal 2018, $519,835 in fiscal 2017, and $287,275 in fiscal 2016. Purchases all three years were primarily for capital equipment and leasehold improvements to increase our production capacity and were financed with cash provided by operating activities. Our capital expenditures can vary significantly from year to year depending on our needs and equipment purchasing opportunities. ### Financing Activities Net cash used in financing activities in fiscal 2018 was due to $19,365,040 in cash dividends to shareholders, partially offset by net proceeds from the sale of common stock of $51,040 from stock option exercises. In addition to cash dividends to shareholders paid in fiscal 2018, on May 2, 2018 we announced that our Board had declared a cash dividend of $1.00 per share of Common Stock, or $4,842,010 based on shares outstanding as of April 27, 2018, to be paid May 31, 2018. We plan to fund dividends through cash provided by operating activities and proceeds from maturities of marketable securities. All future dividends will be subject to Board approval and subject to the company’s results of operations, cash and marketable security balances, estimates of future cash requirements, and other factors the Board may deem relevant. Furthermore, dividends may be modified or discontinued at any time without notice. We repurchased $1,695,466 of our Common Stock in fiscal 2016, and did not repurchase stock in fiscal 2017 or fiscal 2018. The repurchases were under a program announced January 21, 2009 authorizing the repurchase of up to $2,500,000 of our Common Stock and an additional $5,000,000 announced August 27, 2015. The remaining authorization was $4,540,806 as of March 31, 2018. We intend to finance any stock repurchases with cash provided by operating activities or maturating marketable securities. Additional information on our Stock Repurchase Program is contained in the section titled, “Stock Repurchase Program” under Part II, Item 5 of this Report. ### Contractual Obligations The following table provides aggregate information about our contractual payment obligations and the periods in which payments are due: | Contractual obligations | Payments Due by Period Total | \<1 Year | 1-3 Years | \>3 Years | | --- | ---: | ---: | ---: | ---: | | Operating lease obligations | $807,395 | $290,221 | $517,174 | $- | | Purchase obligations | 274,526 | 274,526 | - | - | | Total | $1,081,921 | $564,747 | $517,174 | $- | Operating lease obligations are primarily for our facility lease. “Note 9 – Commitments and Contingencies” to the Financial Statements, included elsewhere in this report, provides additional information about our lease obligations. Purchase obligations as of March 31, 2018 consisted of raw materials commitments. We expect to meet these obligations from cash provided by operating activities or proceeds from maturities of marketable securities. We plan to evaluate raw materials purchases based on a variety of factors including forecasted requirements and anticipated supply leadtimes, and our obligations could vary significantly in the future. We plan to evaluate capital expenditures as needs and opportunities arise, and our future capital expenditures and purchase obligations could vary significantly from expenditures and obligations in the past. We believe our working capital and cash generated from operations will be adequate for our needs at least through fiscal 2019. ### Inflation Inflation has not had a significant impact on our operations in any of our three most recent fiscal years. Prices for our products and for the materials and labor costs for those products are governed by market conditions. It is possible that inflation in future years could impact both materials and labor used for the production of our products. ### Changes In Accounting Standards See Note 2 to the financial statements for information on new accounting standards. ### Off-Balance-Sheet Arrangements Our off-balance sheet arrangements consist of purchase commitments and operating leases for our facility. We believe that our off-balance sheet arrangements do not have a material current or anticipated future effect on our profitability, cash flows, or financial position. ## Market risk As filed, 1,420 characters. We are exposed to financial market risks, primarily marketable securities and, to a lesser extent, changes in currency exchange rates. ### Marketable Securities The primary objective of our investment activities is to preserve principal while at the same time maximizing after-tax yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and marketable securities in securities including municipal obligations, corporate obligations, and money market funds. Short-term and long-term marketable securities are generally classified as available-for-sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income or loss, net of estimated tax. Our marketable securities as of March 31, 2018 had remaining maturities between two days and 249 weeks. Marketable securities had a market value of $73,603,967 as of March 31, 2018, representing approximately 84% of our total assets. We have not used derivative financial instruments in our investment portfolio. ### Foreign Currency Transactions We have some limited revenue risks from fluctuations in values of foreign currency due to product sales abroad. Foreign sales are generally made in U.S. currency, and currency transaction gains or losses in the past three fiscal years were not significant. ## Controls and procedures As filed, 3,322 characters. ### Disclosure Controls and Procedures Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has performed an evaluation of our disclosure controls and procedures that are defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Report. This evaluation included consideration of the controls, processes, and procedures that are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2018, our disclosure controls and procedures were effective. ### Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of March 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 *Internal Control—Integrated Framework.* Based on our assessment using the criteria set forth by COSO in the 2013 *Internal Control—Integrated Framework*, management concluded that our internal control over financial reporting was effective as of March 31, 2018. Our internal control over financial reporting as of March 31, 2018 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report contained in Item 8 included elsewhere herein. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within NVE have been detected. Our internal controls over financial reporting, however, are designed to provide reasonable assurance that the objectives of internal control over financial reporting are met. ### Changes in Internal Controls During the quarter ended March 31, 2018, there was no change in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Filed May 2, 2018. Source: SEC EDGAR, the filing index for accession 0000724910-18-000008. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.