CYBE Cyberoptics Corp - 10-K

ITEM 1A. RISK FACTORS

Our operations are subject to a number of risks and uncertainties that may affect our financial results, and the accuracy of the forward looking statements we make in this Annual Report on Form 10-K. We make statements regarding anticipated product introductions and performance, changes in markets, customers and customer order rates, expenditures in research and development, growth in revenue, improvements to and changes in gross profit margins and profits, taxation levels, the effects of product pricing, and competition, all of which represent our expectations and beliefs about future events. Our actual results may vary from these expectations because of a number of factors that affect our business. The most important of these factors include the following:

Risks Related to the Global Economy and Public Health Crises

The Covid-19 pandemic has significantly and negatively impacted worldwide economic conditions that could have a material adverse effect on our operations and business in the future. The Covid-19 pandemic is affecting our customers, suppliers, service providers and employees to varying degrees, and the ultimate impacts of Covid-19, including the potential impact of known and future variants, on our business, results of operations, liquidity and prospects are not fully known at this time. Covid-19 is likely to continue to affect our business, especially if government authorities re-impose mandatory closures, shelter-in-place mandates and social distancing protocols, and seek voluntary facility closures or impose other restrictions. Recently, some domestic and foreign governments have taken actions to re-open their economies. However, as a result of increased cases of Covid-19 infections and deaths, certain domestic and foreign governments have taken steps to reverse some of these re-opening initiatives. Actions to impede spread of Covid-19 could materially adversely affect our ability to adequately staff and maintain our operations and negatively impact long-term research and development projects. Global travel restrictions could hinder our ability to obtain timely customer acceptance for some product sales, thereby negatively impacting our revenue and operating results. Our global supply chain has been and will most likely continue to be disrupted, which could negatively affect our sales, ability to provide products to our customers and ability to service our customers. In addition, the economic disruptions caused by the Covid-19 outbreak could prevent customers from paying us for our products and result in significant credit losses. A prolonged global recession or depression resulting from the Covid-19 pandemic most likely would have a significant negative impact on our revenue and operating results, and could lead to asset impairment charges. As we cannot predict the duration or scope of the Covid-19 pandemic, the anticipated negative financial impact to our operating results cannot be reasonably estimated, but could be material and last for an extended period of time.

The Covid-19 pandemic has caused disruptions in the global supply chain, including shortages of raw materials, parts and labor, and shipping and logistics issues, including delays in ocean freight and port congestion. A continuation of these disruptions for an extended period could have a material adverse effect on our operations and business in the future.  It has become increasingly difficult to obtain adequate supplies of certain key components and labor for product assembly. Port congestion and tight bookings for global sea freight have caused delays in product deliveries. These issues have increased the prices we pay for labor and freight, and in some cases the key components for our products. Increases in the cost of components, labor and freight negatively impact our profitability. Delays in product deliveries, th e inability to obtain adequate supplies of components or labor, an interruption in a supply relationship or reduced production capacity,  could result in the inability to meet customer demands and deliver   one   or more of our products for a period of several months or longer, negatively impacting our revenue and profitability.

Our business has been and will continue to be significantly impacted by the global economy and uncertainty in the outlook for the global economy makes it more likely that our actual results will differ materially from expectations.   Economic uncertainties affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities, and negatively impacting our operating results. Economic instability or uncertainty could cause tightening of credit in financial markets, may lead consumers and businesses to postpone spending, and may cause our customers to cancel, decrease or delay their existing and future orders with us. In addition, financial difficulties experienced by our suppliers, distributors or customers could result in product delays, increased accounts receivable defaults and inventory challenges. The   OEMs, system integrators and equipment manufacturers that purchase our sensors, and the semiconductor and SMT manufacturers that purchase our   WaferSense® and inspection and metrology system products, are largely dependent on continued demand for consumer and commercial electronics, including smartphones, tablets and computers. Demand for electronics is a function of the health of the economies in the United States and around the world. Sales of our general purpose metrology products and services are also dependent upon the health of the global economy and the competitiveness of the end products manufactured by the customers we serve. Our results would be adversely affected in the future if these economies were to experience recessions, or if the products manufactured by our end customers are not successful in the marketplace.

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We must attract, retain and integrate employees of all types and abilities in order to be successful, ranging from direct labor for product assembly to key research and development employees. The labor market has become increasingly competitive, causing us to increase our costs which negatively impacts our profitability. The inability to attract and retain the employees we need could have a material adverse effect on our ability to grow our business in the future. Identifying, hiring, developing, training and retaining employees is critical to our future success, and competition for all types of employees is becoming more intense. It has become increasingly difficult to find, hire and retain the employees we need to operate and grow our business, causing us to increase pay levels for current and prospective employees, which has a negative impact on our costs and profitability. Failure to successfully hire key research and development employees or the loss of key research and development employees could have a significant negative impact on our ability to create innovative new products, effectively compete in the markets we serve, and on our ability to profitably grow our business.  The inability to find the direct labor we need for product assembly could impact our ability to deliver products in a timely manner, negatively impacting our revenue and profitability.

World events beyond our control, including the current crisis in Ukraine, may affect our operations.   Our operations and markets could be negatively affected by world events that effect economies and commerce in specific countries, such as China, Singapore, Taiwan and Japan, in which we do business, or indirectly by events in other countries, such as Ukraine, in which we do not do business. Natural disasters have affected travel patterns and accessibility in these countries in the past and other natural occurrences could affect the business we do in these countries in the future. Terrorist activity or other armed conflicts, labor disputes that impact complex international shipping arrangements, increases in energy prices or other unanticipated actions could negatively impact our business. Many of the countries in which we do business can be affected by economic forces that are different from the forces that affect the United States and change the amount of business we conduct.

Global trade conflicts may negatively impact our sales and results of operations. Ongoing trade conflicts with other countries, particularly China, may impact our sales and results of operations. Concerns over the impact of the U.S. and China trade war on the global economy may cause our customers to refrain from making investments in capital equipment, which would negatively impact our sales. We or our suppliers source certain raw materials and components from China. If the United States were to increase existing tariff levels or impose new tariffs, our supply chain and costs would be negatively impacted, resulting in an increase in our cost structure and negatively impacting our operating profits.

We generate over 80% of our revenue from export sales that are subject to risks of international operations.   Our export sales are subject to many of the risks of international operations, including:

currency controls and fluctuations in currency exchange rates;

changes in local market business requirements and increased cost and development time required to modify and translate our products for local markets;

inability to recruit qualified personnel in a specific country or region;

difficulty in establishing and maintaining relationships with local vendors;

differing foreign technical standards;

differing regulatory requirements;

export restrictions and controls, tariffs and other trade barriers;

reduced protection for intellectual property rights;

changes in political and economic conditions;

potentially adverse tax assessments; and

terrorism, pandemics, war or other events that may affect local economies and our access to markets outside the U.S.

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Exchange rate fluctuations may have a significant negative impact on our revenue and results of operations.  Most of our international export sales are negotiated, invoiced and paid in U.S. dollars. Significant fluctuations in the value of the U.S. dollar relative to other currencies could have a negative impact on the price competitiveness of our products relative to foreign competitors and the willingness of customers to purchase our products. A significant portion of our cost of revenues, research and development and sales and marketing costs are denominated in the Singapore dollar. In addition, other sales and marketing costs are denominated in British Pounds Sterling, the new Taiwan dollar and the Chinese Yuan. Our costs will increase and our results will be negatively impacted in future periods, if the U.S. dollar weakens relative to the currencies of these countries. Fluctuations in the relationship between the U.S. dollar and the currencies of other geographies could have a significant negative impact on our future revenue, costs and results of operations.

Risks Related to Our Products and Customer Preferences

The markets for capital equipment in the SMT and semiconductor industries in which we operate are cyclical, and market downturns have occurred, such as the industry-wide slowdown in demand for SMT and semiconductor capital equipment that we experienced in 2019.   We operate in cyclical markets – the SMT and semiconductor capital equipment markets – that periodically adjust independent of global economic conditions. For example, sluggish conditions in the markets for SMT and semiconductor capital equipment emerged late in the fourth quarter of 2018 and continued through the third quarter of 2019. In the past, we have not been able to predict with accuracy the timing or magnitude of periodic downturns in these markets. Some of these downturns have severely affected our operations and resulted in several years of unprofitable operations. Ultimately, we have difficulty determining the duration or severity of any market downturns, the strength of any subsequent recoveries, and the long-term impact that economic conditions may have on our business.

We have recently introduced or are in the process of introducing a number of products based upon our 3 D MRS ™ technology, the failure of new products employing this technology to achieve acceptance in the marketplace would materially adversely affect our future anticipated operating results. We have incorporated our MRS technology into various products, including our next generation ultra-high resolution 3-micron pixel 3D NanoResolution MRS ™ sensor, other 3D MRS sensor offerings, WX3000 ™ system, MX3000 ™ system and SQ3000™ and SQ3000+™ Multi-Function systems. We also expect to use this technology in other new products, including next generation sensors and systems for semiconductor component package inspection, semiconductor wafer and advanced packaging inspection and metrology. If the products we have introduced or are about to introduce based upon the MRS technology do not operate up to specifications, if the market otherwise does not find these products attractive, or if we are unable to efficiently identify new customers and new applications for these products given our current sales channels, our operating results for 2022 and longer-term growth in revenue and operating results would be materially adversely affected.

Sales of sensors to  five  OEM customers constituted over 25% of our revenues in 2021, and the loss of any of these customers could have a materially adverse impact on our results of operations.  If the order rates from these  five  OEM customers are negatively impacted by global economic events or competitive factors, if they choose sensors manufactured by other suppliers, or otherwise terminate their relationships with us, our results of operations could be adversely affected.

Our products could become obsolete. Our current products, as well as the products we have under development, are designed to operate with the technology that we believe currently exists or may exist for electronic components, printed circuit boards, memory modules and semiconductor manufacturing markets, including semiconductor component packaging, semiconductor wafer and advanced packaging inspection and metrology. The products we develop to meet customer needs and requirements are subject to rapid technological change and, because it takes considerable time to develop new products, we must anticipate industry trends, as well as technological developments, in order to effectively compete. Further, because we do not have unlimited development resources, we might choose to forgo the pursuit of what becomes a leading technology or market and devote our resources to technologies and markets that are less successful. If we incorrectly anticipate technology developments or market trends, or have inadequate resources to develop our products to deal with changes in technology and markets, our products could become obsolete, and our future revenue and operating results would be negatively impacted.

The market for most SMT capital equipment has become more mature and price competitive. The electronics capital equipment market for surface mount technologies is becoming more mature, resulting in increased price pressure on suppliers of this type of equipment. Consequently, our AOI and SPI inspection and metrology systems and SMT electronic assembly alignment sensor products have become subject to increased levels of price competition and competition from other suppliers, which may or may not utilize different technology, including lower cost Asian based suppliers.

The market for 3D AOI equipment for printed circuit board inspection has become more price competitive, which has negatively impacted our margins.   Pricing for 3D AOI equipment for inspection of printed circuit boards with less demanding features and complexity has become more competitive, resulting in increased price pressure. In some instances, our SQ3000 Multi-Function systems compete in the marketplace for inspection of printed circuit boards in which the inspection requirements are less complex and stringent. In this segment of the market, we have experienced competitive pressures that have reduced the sales prices, which in turn has negatively impacted our revenue and gross margins. If this level of competition were to increase in the future, our revenue and gross margins would be negatively impacted.

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Because of the high cost of changing equipment, customers in our markets are sometimes resistant to purchasing our products even if they are superior. We believe that, because of the high cost of installation and integration of new inspection equipment into production lines, once an SMT customer has selected a vendor’s equipment, the customer generally relies upon that equipment and, to the extent possible, subsequent generations of the same vendor’s equipment. Accordingly, unless our systems offer performance or cost advantages that outweigh the expense of installing and integrating new systems, it may be difficult for us to achieve significant sales to a customer that currently uses a competitor’s equipment.

An increase in competition in the marketplace for our WaferSense products could negatively impact our future revenue and profitability . Our WaferSense products generate a high gross margin and are very profitable. As our WaferSense products become more established in the marketplace, we may attract competitors, some of which may be larger than us with better sales channels and more resources for product development. An increase in competition for our WaferSense products could cause us to lose future sales, reduce sales prices, or increase our costs for enhanced sales channels or product development in order to compete, thereby negatively impacting our revenue and profitability.

Risks Related to Our Business

Our operating results have varied, and will likely continue to vary significantly, from quarter to quarter.   Our quarterly operating results have varied in the past and will likely continue to vary significantly from quarter to quarter. Some of the factors that may influence our operating results include the following: changes in customer demand for our sensors, inspection and metrology systems, which is influenced by economic conditions in our markets and the overall health of the global economy; demand for products that use circuit boards and semiconductors; market acceptance of our products and those that have integrated our 3D MRS sensors into their product offerings, including  OEM's  and system integrators; competition; seasonal variations in customer demand; the timing, cancellation or delay of customer orders, particularly our   SQ3000 and SQ3000+ Multi-Function systems and MX systems for  memory module inspection; the timing of product shipments and related customer acceptances; and product development and other costs, including increased research, development, engineering and marketing expenses associated with our introduction of new products and product enhancements, and ongoing sales and marketing activities.

Our development and assembly operations in Singapore, and our sales operations in Asia and Europe, are subject to unique risks because of the remote nature of the operations.  Our Singapore development and manufacturing operations, and our Asian and European sales operations, present a number of risks. These risks relate to the retention of personnel, management of product development and operations, management and access to customer and distributor interactions, control over administrative and business processes, regulatory and legal issues and other matters relating to foreign operations. Our financial performance, ability to serve our customers and ability to manufacture and sell products in Asia and Europe could be negatively impacted if we are unable to retain our Asian and European based employees, if it costs more than expected to retain these employees or hire other experienced employees in a timely manner, if we are unable to manage these employees appropriately, or if we are unable to locate suitable sources of components for our products manufactured in Asia.

Our ability to compete in the markets for our products is dependent upon our ability to recruit new capable channel partners and direct sales employees and the sales skills of our channel partners and employees. In order to generate significant incremental revenue in the future, we need to expand and enhance our sales capabilities by recruiting new, high quality channel partners and sales employees. Our efforts to increase the size and capability of our direct sales team and channel partners will increase our cost structure. If we are unable to successfully improve our direct sales team and sales channel, our future sales will be negatively impacted, and we will not obtain an adequate return on the increase in our cost structure, including obtaining an adequate return on our investment in research and development. To the extent our competitors have relationships with stronger channel partners, it may be difficult for us to achieve significant incremental revenue, even if our products are technologically superior.

Competitors in Asia may be able to compete favorably with us based on lower production and employee costs, greater financial resources and larger sales distribution networks.   We compete with large multinational companies when selling our inspection and metrology system products. These competitors are able to take advantage of greater financial resources and larger sales distribution networks. We also compete with new Asian based suppliers, many of which may have lower overall production and employee costs and are willing to offer their products at lower selling prices to customers.

We are exposed to credit risk through sales to our OEM customers and distributors of our inspection and metrology system products. We sell our products through key OEM customers, and usually have significant credit exposure with respect to these customers. In addition, we sell our inspection and metrology system products through a network of international distributors. These distributors tend to be small and have limited financial resources and access to capital. Although these distributors do not hold our products in inventory for re-sale, we are exposed to credit risk and would incur losses if they are unable to pay for the products they have purchased from us.

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We are dependent upon outside suppliers and contractors for components of our products, and delays in or unavailability of those components would adversely affect our results. We use outside contractors to manufacture the components used in many of our products and some of the components we order require significant lead times that could affect our ability to sell our products if the components are not available. In addition, if these components do not meet stringent quality requirements or become obsolete, there could be delays in the availability of our products, and we could be required to make significant investments in designing replacement components.

Breaches of our network security could expose us to losses. We manage and store on our network systems various proprietary information and sensitive or confidential data relating to our operations and products. There has been an increasing incidence of unauthorized access to the computer networks of various technology companies. Computer programmers and hackers may be able to gain unauthorized access to our network system and steal proprietary information, compromise confidential information, create system disruptions, or cause shutdowns. These parties may also be able to develop and deploy viruses, worms, and other malicious software programs that disrupt our operations and create security vulnerabilities. Attacks on our network systems could result in significant losses, compromise our competitive advantages and damage our reputation with customers.

We are dependent on several key employees, including Dr.   Subodh   Kulkarni, our President and Chief Executive Officer, for new product innovation and much of the sales, marketing and business development activity related to our products (especially our MRS sensors). These key employees perform a critical role for us with respect to product strategy and new product development. Also, they have been instrumental in development and expansion of our relationships with key OEM customers, system integrators and others. If the employment of Dr.   Kulkarni   and other key employees with   CyberOptics   were to end for any reason, our ability to develop innovative products and achieve sustained long-term revenue growth may be negatively impacted.

Risks Related to Legal and Regulatory Proceedings

Our efforts to protect our intellectual property may be less effective in certain foreign countries, where intellectual property rights are not as well protected as in the United States. The laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the U.S., and many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement abroad. Consequently, there is a risk that we may be unable to adequately protect our proprietary rights in certain foreign countries. If this occurs, it would be easier for our competitors to develop and sell competing products in these countries.

We may fail to adequately protect our intellectual property and therefore lose our competitive advantage. Our future success and competitive position depend in part upon our ability to obtain and maintain proprietary technology for our principal product families, and we rely, in part, on patent and trade secret law and confidentiality agreements to protect that technology. If we fail to adequately protect our intellectual property, our competitors may be able to duplicate and enhance the products we have developed. We own or have licensed a number of patents, and have filed applications for additional patents. Any of our pending patent applications may be rejected, and we may be unable to develop additional proprietary technology that is patentable in the future. In addition, the patents that we do own or that have been issued or licensed to us may not provide us with competitive advantages and may be challenged by third parties. Further, third parties may also design around these patents. In addition to patent protection, we rely upon trade secret protection for our confidential and proprietary information and technology. We routinely enter into confidentiality agreements with our employees and other third parties. Even though these agreements are in place, there can be no assurance that trade secrets and proprietary information will not be disclosed, that others will not independently develop technology substantially equivalent to our proprietary technology or otherwise gain access to our trade secrets, or that we can fully protect our trade secrets and proprietary information. Violations by others of our confidentiality agreements and the loss of employees who have specialized knowledge and expertise could harm our competitive position and cause our sales and operating results to decline as a result of increased competition. Our failure to obtain or maintain trade secret protection might adversely affect our ability to continue our research or bring products to market.

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Protection of our intellectual property rights, or the efforts of third parties to enforce their own intellectual property rights against us, may result in costly and time-consuming litigation, substantial damages, lost product sales and/or the loss of important intellectual property rights. We may be required to initiate litigation in order to enforce any patents issued to or licensed by us, or to determine the scope or validity of a third party’s patent or other proprietary rights. Any litigation, regardless of outcome, could be expensive and time consuming, and could subject us to significant liabilities or require us to re-engineer our products or obtain expensive licenses from third parties. There can be no assurance that any patents issued to or licensed by us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide us with a competitive advantage. In addition, our commercial success depends in part on our ability to avoid infringing or misappropriating patents or other proprietary rights owned by third parties. We periodically receive communications from third parties asserting that our products infringe, or may infringe, the proprietary rights of these third parties or others. These claims of infringement may lead to protracted and costly litigation, which could require us to pay substantial damages or have the sale of our products stopped by an injunction. Infringement lawsuits or claims could also cause product delays or require us to redesign our products and these delays could result in the loss of substantial revenues. We may also be required to obtain a license from the third party or cease activities utilizing the third party’s proprietary rights. We may not be able to enter into such a license or such a license may not be available on commercially reasonable terms. Accordingly, the patent infringement litigation or claims could hinder our ability to sell our products, or make the sale of these products more expensive.

Risks Related to Financial and Capital Markets and Tax Matters

We have significant deferred tax assets recorded on our balance sheet, and our ability to utilize these deferred tax assets is dependent on our ability to generate sufficient profits in future periods.  A change in income tax laws or a further reduction in income tax rates in the future could require us to write-down the value of our deferred tax assets. The amount of any write-down could be large and may result in a significant charge against future earnings. Our ability to utilize our deferred tax assets and realize their value is dependent upon our ability to generate sufficient levels of profitability and taxable income in future periods. If we do not generate sufficient profits and taxable income in future periods, we most likely would be required to record a valuation allowance against our deferred tax assets, resulting in a significant charge against earnings.

Our stock price is highly volatile. The trading price of our common stock fluctuates significantly in response to, among other risks, the risks described elsewhere in this Annual Report on Form 10-K, as well as:

conditions or trends in the industries in which we operate;

quarterly variations in our operating results;

fluctuations in the stock market in general and market prices for the stock of companies that provide sensing technology solutions and inspection and metrology systems in particular;

changes in financial estimates by us or securities analysts and recommendations by securities analysts;

changes in capital structure, including issuance of additional debt or equity to the public; and

transactions in our common stock by major investors and certain analyst reports, news and speculation.

The absence of significant market liquidity in our common stock could impact the ability of our shareholders to purchase and sell larger blocks, the attractiveness of our stock to institutional shareholders, and the market value of our common stock. There were 7,391,906 shares of our common stock outstanding as of December 31, 2021. Although our common stock is traded on the NASDAQ Stock Market, in part because of the number of shares we have outstanding and available for trading, the daily trading volume in our stock is low, averaging less than 100,000 shares per day. Shareholders wishing to purchase or sell larger blocks of stock may not be able to do so quickly, and disposal by any shareholder of a significant block of stock could adversely affect the sale price in the marketplace. Further, institutional investors often have policies against investment in stock that is illiquid, and many institutional investors may elect not to purchase or hold our stock because of the inability to dispose of it. Lack of institutional interest in our common stock can negatively impact its market price and liquidity.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a leading global developer and manufacturer of high precision 3D sensors and system products for inspection and metrology. We also develop and manufacture our WaferSense ® products, which is a family of wireless, wafer-shaped sensors that provide measurements of critical factors in the semiconductor fabrication process. We intend to leverage our sensor technologies in the surface mount technology (SMT) and semiconductor industries to deliver profitable growth. A key element of our strategy is the continued development and sale of high precision 3D sensors and system products based on our proprietary Multi-Reflection Suppression™ (MRS™) technology. We believe that our MRS technology is a breakthrough 3D optical technology for high-end inspection and metrology with the potential to significantly expand our markets. Another key element in our strategy is the continued development and introduction of new sensor applications for our WaferSense family of products.

We believe that conditions in the SMT and semiconductor capital equipment markets are favorable, and we believe this market strength will continue in 2022. Over the longer-term (i.e., the next several years), we expect a growing number of opportunities in the markets for SMT and semiconductor inspection and metrology. We believe that our 3D MRS sensor and system products and our WaferSense  family of products have the potential to expand our presence in the markets for SMT and semiconductor capital equipment.

Manufacturing yield challenges as electronics and semiconductors become more complex are driving the need for more precise inspection and metrology. We believe 3D inspection and metrology represent high-growth segments in both the SMT and semiconductor capital equipment markets . We believe our 3D MRS technology platform is well suited for many applications in these markets, particularly with respect to complex circuit boards, semiconductor component package inspection and semiconductor wafer and advanced packaging inspection and metrology applications.  We are taking advantage of current market trends by deploying our 3D MRS sensor technology in the following products:

Our SQ3000™ and SQ3000™+ Multi-Function systems for Automated Optical Inspection (AOI), Solder Paste Inspection (SPI) and coordinate measurement (CMM) applications ,  which are designed to expand our presence in markets requiring high precision inspection and metrology. In these markets, identifying defects has become highly challenging and critical due to smaller semiconductor and electronics packaging and increasing component density on circuit boards. The SQ3000+ Multi-Function system with its higher resolution MRS sensor that inhibits reflection-based distortions caused by shiny components and surfaces is capable of measuring feature sizes down to 50 microns and is specifically designed for high-end inspection and metrology applications including advanced packaging, mini-LED and advanced SMT for high-end electronics. We believe our 3 D MRS sensor technology is uniquely suited for many of these applications because of its ability to offer microscopic image quality and superior measurement performance at production line speeds.

Our next generation ultra-high resolution three micron pixel 3D NanoResolution MRS ™ sensor, which is capable of measuring feature sizes down to 25 microns accurately and at high speeds, and is suitable for many semiconductor wafer and advanced packaging inspection and metrology applications.   We have adapted the   software   used in our  SQ3000 M ulti-Function systems  to work with wafer handling equipment to facilitate sales of our 3D NanoResolution  MRS sensor to  OEM's  and system integrators.

Our next generation  MX3000™  AOI  system for 3D inspection of memory modules following the singulation step of the manufacturing process.  We recognized our first revenue from the sale of the MX3000 in the first quarter of 2020, and t wo of the world’s three largest memory manufacturers and their subcontractors have now purchased our MX3000 system. Additional orders for memory module inspection are expected in future periods, and we believe the potential market opportunity for our MX3000 system and 3D MRS sensors for memory module inspection is significant.

O ur WX3000 ™ metrology and inspection system for semiconductor wafer and advanced packaging applications, which incorporates our next generation ultra-high resolution 3D NanoResolution MRS sensor, performs 100% 3D and 2D inspection and metrology simultaneously at high speeds and delivers throughput of more than 25 wafers per hour. We believe the WX3000 performs two to three times faster than alternate technologies at data processing speeds in excess of 75 million 3D data points per second. The WX3000 is suitable for many high volume semiconductor wafer and advanced packaging inspection and metrology applications for feature sizes down to 25 microns. We recently received our first purchase order for the WX3000, with delivery of the system and recognition of the revenue expected in the first half of 2022. We anticipate that sales of sensors and systems based on our 3D MRS technology for semiconductor wafer and advanced packaging inspection and metrology will provide us with long-term growth opportunities.

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Revenue from MRS based products, including 3D AOI systems and high precision 3D MRS sensors, increased by $16.4 million or 52% to $48.2 million in 2021, from $31.8 million in 2020. Over the long term, we anticipate continued increases in sales of products based on our MRS technology in the SMT and semiconductor capital equipment markets. In particular, we believe inspection and metrology for mini and micro-LED, memory modules and semiconductor wafer and advanced packaging applications represent significant long-term growth opportunities. We anticipate increasing sales of MRS-based products by selling them to new OEM customers and system integrators, and by expanding direct sales of inspection and metrology system products to end-user customers.

We have continued to invest in our WaferSense family of products, because fabricators of semiconductors and other customers view these products as valuable tools for improving yields and productivity. We have recently introduced several new WaferSense  products to further increase our revenue growth, including the WaferSense  300mm Auto Resistance Sensor (ARS) t hat enables real-time resistance measurements of plating cell contacts in semiconductor ECD applications.  Additional WaferSense applications are under development, including Automatic Teaching Sensors (ATS) in both wafer and reticle formats, products for wafer edge detection and products that measure temperature during semiconductor fabrication.  Over the long-term, strong  future sales growth is anticipated for our WaferSense family of products.

Our backlog was $47.3 million at December 31, 2021, an increase from $44.2 million at September 30, 2021, and $ 23.0 million at December 31, 2020.  We are forecasting sales of $22.0 to $24.0 million for the first quarter of 2022, a significant increase from revenue of $17.7 million in the first quarter of 2021. We believe that conditions in the SMT and semiconductor capital equipment markets are favorable, and we believe this market strength will continue in 2022. However, an increase in the severity of the current Covid-19 pandemic, an escalation in the Ukraine conflict, and a resulting economic recession or depression, could cause a slow-down in demand for SMT and semiconductor capital equipment. Over the long term, we believe anticipated sales growth of our products based on 3D MRS technology and WaferSense sensors should increase revenues and net income. We believe that we have the resources required to attain our growth objectives, given our available cash and marketable securities balances totaling $38.3 million at December 31, 2021.

Impact from Covid-19

Effect of Covid-19 Outbreak on Business Operations

Covid-19 was first identified in December 2019, and in March 2020, the World Health Organization categorized Covid-19 as a pandemic. The Covid-19 pandemic is affecting our customers, suppliers, service providers and employees to varying degrees, and the ultimate impacts of Covid-19, including the potential impact of known and future variants, on our business, results of operations, liquidity and prospects are not fully known at this time. Overall, the Covid-19 outbreak has had a relatively minimal impact on our business to date. Our revenues increased by 32% to $92.8 million in 2021, from $70.1 million in 2020. We are forecasting strong revenue growth on a year-over-year basis in the first quarter of 2022. Our forecast for the first quarter of 2022 could change if the Covid-19 pandemic worsens, or if unforeseen events related to the pandemic occur. The most significant impacts on our business from the Covid-19 pandemic include the following:

Our key factories are located in Minnesota and Singapore. Both of these locations have been subject to government mandated shelter-in-place orders. Because our operations have been deemed essential, we were able to keep our factories up and running while the shelter-in-place mandates were in effect. If the pandemic worsens, it is possible that our operations may not be deemed essential under future government mandated shelter-in-place orders, and we may be required to shut-down factory operations. We have periodically implemented split-shifts for our factory operations to minimize the number of employees in our facilities at any given time, but these measures have not affected our production capacity. Since the start of the pandemic, many of our non-factory employees have spent the majority of their time working remotely. To date, the shelter-in-place mandates and remote work arrangements have had a minimal impact on operations, but that could change if the pandemic worsens and is more than temporary.

Sales of some products, mainly our SQ3000 Multi-Function systems and MX memory module inspection products, require customer acceptance due to performance or other criteria that is considered more than a formality. Most of our customer’s factories have remained open during the Covid-19 pandemic because they are deemed to be essential under government shelter-in-place mandates. However, global travel restrictions and quarantine measures have hindered our ability to obtain some customer acceptances for certain of our products at various times during the Covid-19 pandemic. Continuing or new global travel restrictions and quarantine measures could hinder our ability to obtain customer acceptances in a timely manner in the future, and therefore impact the timing of revenue recognition.

Certain operating expenses were reduced in 2021 and 2020 due to the  Covid -19 pandemic. Travel, trade show expenses and other costs were reduced due to changes in employee travel patterns and trade show cancellations.  Travel, trade show and other costs may increase in the future once the Covid-19 pandemic starts to ease.

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The Covid- 19 pandemic has caused disruptions in the global supply chain, including shortages of raw materials, parts and labor, and shipping and logistics issues, including delays in ocean freight and port congestion. Key supply chain disruptions impacting our business have been resolved to date. On-hand inventories have been sufficient to enable us to mitigate any supply disruptions with minimal impact on our sales or ability to service customers. Cost increases related to these issues have not had a significant impact on our results of operations. However, it has become increasingly difficult to obtain adequate supplies of certain key components and labor for product assembly. Port congestion and tight bookings for global sea freight have caused delays in product deliveries. Continued increases in the cost of components, labor and freight could negatively impact our profitability in the future if we are unable to recover these costs by charging more for the products we sell. The inability to obtain adequate supplies of components or labor could result in the inability to meet customer demands and deliver one or more of our products for a period of several months or longer, negatively impacting our revenue and profitability. Supply chain disruptions are expected to continue for the foreseeable future and may increase if the pandemic worsens or continues for an extended period of time.

We currently do not anticipate any significant credit losses or asset impairments resulting from the Covid-19 pandemic. As of December 31, 2021, our available balances of cash and marketable securities totaled $38.3 million. We believe that we have the resources required to attain our growth objectives and to meet any unforeseen difficulties resulting from the Covid-19 pandemic. We will continue to closely monitor the Covid-19 pandemic and its impact on our business in the coming months.

Singapore Jobs Support Program

The Singapore Government implemented a jobs support program in 2020 that was intended to support businesses and encourage retention of employees during the period of economic uncertainty caused by the Covid-19 pandemic. Under the jobs support program, the Singapore Government co-funded a portion of the gross monthly wages paid to local employees, which reduced our operating expense by $410,000 in 2020. We did not receive any material benefit from the Singapore jobs support program in 2021, nor do we expect to receive any material benefits in future periods.

Our ability to implement our strategy effectively is subject to numerous uncertainties and risks, including the risks identified in Item   1 A of this Annual Report on Form 10-K.

Revenues

Our revenues increased by 32% to $92.8 million in 2021, from $70.1 million in 2020,  and increased by 18% to $70.1 million in 2020, from $59.3 million in 2019.  The following table sets forth, for the years indicated, revenues by product line:

(In thousands)

High precision 3D and 2D sensors

Inspection and metrology systems

Semiconductor sensors

Total

Revenues from sales of high precision 3 D and 2 D sensors increased by $8.4 million or 48% to $25.9 million in 2021, from $17.5 million in 2020, and increased by $4.9 million or 39% to $17.5 million in 2020, from $12.6 million in 2019. The revenue increases were due to higher sales of 3D MRS sensors and legacy 2D sensors resulting from improving conditions in the global semiconductor and SMT capital equipment markets and higher adoption rates for 3D MRS sensors by existing OEM customers. Sales of 3D MRS sensors increased by $5.6 million or 48% to $17.2 million in 2021, from $11.6 million in 2020, and increased by $5.6 million or 93% in 2020, from $6.0 million in 2019.

Sales of high precision 3D and 2D sensors are dependent on the success of our OEM customers and system integrators selling products that incorporate our sensors. We believe sales of our 3D MRS sensors, including our next generation ultra-high resolution three micron pixel 3D NanoResolution MRS sensor, will represent an increasing percentage of our total high precision 3D and 2D sensor sales in the future. Sales of high precision 3 D and 2 D sensors, including 3D MRS sensors, are prone to significant quarterly fluctuations  due to variations in market demand and customer inventory levels.

Revenues from sales of inspection and metrology systems increased by $5.4 million or 14% to $43.0 million in 2021, from $ 37.5 million in 2020, and increased by $4.8 million or 15% to $37.5 million in 2020, from $32.7 million in 2019 . The revenue increases in both periods were mainly due to higher sales of SQ3000 Multi-Function systems and MX memory module inspection systems resulting from improving market conditions, and increasing sales for more complex applications such as inspection and metrology for mini-LED and memory modules. Sales of SQ3000 Multi-Function systems increased by $3.5 million or 19% to $22.4 million in 2021 , from $18.9 million in 2020 , and increased by $1.4 million or 8 % to $18.9 million in   2020 , from $17.5 million in 2019 . Sales of 2D and 3D MX memory module inspection systems totaled $8.3 million in 2021, compared to $ 6.7 million in 2020 and $ 3.3 million in 2019.

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In addition to improving market conditions, the increase in sales of SQ3000 Multi-Function systems was due to the competitive advantages offered by our 3D MRS sensor technology and many companies transitioning from 2D to 3D AOI systems to meet the increasingly demanding product inspection and metrology requirements in the SMT and semiconductor markets. The market transition away from 2D AOI systems is expected to result in an industry-wide compound annual rate of growth in global sales of 3D AOI systems of almost 20% through 2028. In addition, we believe the performance advantages of our SQ3000 Multi-Function systems have allowed us to attain a leading position in the high growth mini-LED inspection and metrology market. Sales of SQ3000 Multi-Function systems for mini-LED inspection and metrology applications totaled $8.0 million in 2021, compared to $4.6 million in 2020 and $2.2 million in 2019. Given these market dynamics and because of the competitive advantages of our 3D MRS sensor technology, we anticipate sales of SQ3000 Multi-Function systems will represent an increasing percentage of our total inspection and metrology system sales in the future.

We believe memory manufacturers have determined that post singulation automated optical inspection of memory modules is an important step in their manufacturing process to improve yields and product quality. We recognized our first revenue from the sale of the 3D MX3000™ memory module inspection system in the first quarter of 2020, and t wo of the world’s three largest memory manufacturers and their subcontractors have now purchased the MX3000 system. At December 31, 2021 our backlog of orders for memory module inspection totaled $3.5 million, and we expect to recognize these orders as revenue primarily in the first half of 2022. Additional orders for memory module inspection are expected in future periods, and we believe the potential market opportunity for our MX3000 system and 3D MRS sensors for memory module inspection is significant.

Revenues from sales of semiconductor sensors, principally our WaferSense line of products , increased by $8.8 million or 59% to $23.9 million in 2021, from $15.0 million in 2020, and increased by $1.1 million or 8% to $15.0 million in 2020, from $14.0 million in 2019. The revenue increases were due to construction of new semiconductor fabs, favorable market conditions for semiconductor capital equipment spending, and growing acceptance of our WaferSense products as important productivity enhancements tools by semiconductor manufacturers and capital equipment suppliers. Over the longer-term, w e anticipate that the benefits from growing market awareness of our WaferSense products, improved account penetration at major semiconductor manufacturers and capital equipment suppliers and new product introductions will lead to additional WaferSense   product sales.

Export revenues totaled $77.4 million or 83% of our revenues in 2021, compared to $56.0 million or 80% of total revenues in 2020, and $44.8 million or 76% of total revenues in 2019. Export revenues as a percentage of total revenues increased in 2021 and 2020 due to higher sales of 3D and 2D high precision sensors, semiconductor sensors, SQ3000 Multi-Function systems for mini-LED inspection and metrology and MX3000™ memory module inspection systems. A higher proportion of these products are generally sold outside the United States as compared to our other products.

Cost of Revenues and Gross Margin

Cost of revenues increased by $10.7 million or 28% to $49.6 million in 2021, and increased by $5.9 million or 18% to $38.9 million in 2020, from $33.0 million in 2019. Increases in cost of revenues in 2021 and 2020 were primarily due to the corresponding increases in revenue levels. Total revenues increased by 32% in 2021 and increased by 18% in 2020. Items included in cost of revenues that fluctuate with the level of sales include raw materials, direct labor and factory overhead costs. Revenue mix also contributed to the changes in cost of revenues.

Total gross margin as a percentage of revenue was 46.5% in 2021, 44.5% in 2020, and 44.4% in 2019. Our gross margin percentage in 2021 was favorably impacted by proportionately higher sales of semiconductor sensors which generate a higher gross margin percentage than our other products, offset in part by sales of lower gross margin MX3000 systems. There was no significant change in our total gross margin as a percentage of revenue in 2020, when compared to 2019.

Our markets are highly price competitive, particularly in the electronics assembly and SMT markets. As a result, we have experienced continual pressure on our gross margins. We compensate for the pressure to reduce the price of our products by introducing new products with more features and improved performance and through manufacturing cost reduction programs. Sales of many products that we have recently introduced or are about to introduce, including our SQ3000+ Multi-Function system , WX3000 system for semiconductor wafer and advanced packaging inspection and metrology, next generation 3D MRS sensors and semiconductor sensors, (consisting primarily of our WaferSense   line of products) have, or are expected to have, more favorable gross margins than many of our existing products. Our next generation 3D MRS sensor and system products are being designed for more complex and demanding inspection and metrology applications in the SMT and semiconductor markets. Sales prices and gross profit margins for these applications tend to be higher than margins for products sold in the general purpose SMT market. However, the gross margin percentage for our 3D MX3000 system for inspection of memory modules is lower than our current total gross margin percentage due to the significant costs for material handling and automation required for this product. Our total gross margin percentage would most likely be negatively impacted in the future if sales of our 3D MX3000 become a larger share of our total revenue mix.

The Covid-19 pandemic has caused disruptions in the global supply chain, including shortages of raw materials, parts and labor, and shipping and logistics issues, including delays in ocean freight and port congestion. Cost increases related to these issues have not had a significant impact on our results of operations. However, continued  increases in the cost of components, labor and freight could negatively impact our gross margins in the future if we are unable to recover these costs by charging more for the products we sell. Supply chain disruptions are expected to continue for the foreseeable future and may increase if the Covid-19 pandemic worsens or continues for an extended period of time.

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Operating Expenses

Research and development (R&D) expenses were $10.9 million or 12% of revenues in 2021, $9.6 million or 14% of revenues in 2020, and $9.4 million or 16% of revenues in 2019. The increase in R&D expenses in 2021 was due to higher compensation costs for new and existing R&D employees, including incentive compensation, engineering prototypes and consulting services.  In 2020, higher compensation costs for new and existing R&D employees, including higher incentive compensation accruals, were mostly offset by the  $340,000 favorable impact from the Singapore Government's jobs support program on wage costs discussed above. Current R&D expenditures are primarily focused on development of 3D MRS sensor and system products, including enhancements to existing products and development of next generation products, and continued R&D work on new and next generation WaferSense products.

S elling, general and administrative ("S,G&A") expenses were $18.0 million or 19% of revenues in 2021, $15.6 million or 22% of revenues in 2020, and $16.0 million or 27% of revenues in 2019. The increase in S,G&A expenses in 2021 was due to higher third party channel commissions resulting from the 32% increase in our revenues and higher compensation costs for new and existing S,G&A employees, including incentive compensation due to our improved financial performance. An increase in our allowance for doubtful accounts and bad debt expense also contributed to the increase. The decrease in S,G&A expenses in 2020 was due to lower costs for travel and trade shows resulting from the Covid-19 pandemic, lower costs for professional fees and a $70,000 benefit from the Singapore Government's jobs support program, offset in part by higher compensation costs, including higher incentive compensation accruals due to our improved financial performance.

We anticipate that operating expenses will increase modestly in 2022 when compared to 2021. We have added incrementally to both R&D and sales employees throughout 2021, which will increase our costs in 2022. We also expect travel and trade show costs to increase once the Covid-19 pandemic begins to ease. These anticipated cost increases in 2022 may be partially offset by lower incentive compensation due to significant bonus over-achievement in 2021 and the higher levels of revenue and profitability required to earn a bonus in 2022.

Interest Income and Other

Interest income and other includes interest earned on investments and gains and losses associated with foreign currency transactions, primarily intercompany financing transactions associated with our subsidiaries in the United Kingdom, Singapore, China and Taiwan. We recognized foreign currency transaction losses of $11,000 in 2021, compared to foreign currency transaction gains of $ 27,000 in 2020.

Provision for Income Taxes

We recorded income tax expense of $1.7 million in 2021, compared to income tax expense of $612,000 in 2020 . The increase in income tax expense in 2021 was mainly due to higher levels of income. Our income tax expense reflected an effective income tax rate of approximately 12% in 2021 and 10% in 2020. Our effective tax rate in 2021 was favorably impacted by Global Intangible Low-Taxed Income (GILTI), Foreign Derived Intangible Income (FDII), $605,000 of excess tax benefits from employee share-based compensation and favorable benefits from U.S. federal R&D tax credits and foreign tax credits. Our effective tax rate in 2020 was favorably impacted by $497,000 of excess tax benefits from employee share-based compensation and   favorable benefits from U.S. federal R&D tax credits and foreign tax credits, offset in part by a negative impact from  GILTI. All of our remaining federal net operating loss carry forwards were fully utilized in 2020.  Credits and excess tax benefits have a reduced effect on our effective tax rate as income levels increase.

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Liquidity and Capital Resources

Our cash and cash equivalents increased by $5.3 million in 2021. Cash provided by operating activities of $10.1 million and proceeds of $10.8 million from maturities and sales of marketable securities were partially offset by purchases of marketable securities totaling $13.6 million and purchases of fixed assets and payment of capitalized patent costs totaling $1.9 million . Proceeds from stock option exercises and share purchases under our Employee Stock Purchase Plan totaling $675,000, were more than offset by $787,000 of cash used to make employee withholding tax payments for shares withheld related to stock option exercises and vesting of restricted stock units. Our cash and cash equivalents fluctuate in part because of sales and maturities of marketable securities and investment of cash balances in marketable securities, and from other sources of cash. Accordingly, we believe the combined balances of cash and marketable securities provide a more reliable indication of our available liquidity than cash balances alone. Combined balances of cash and marketable securities increased by $7.7 million to $38.3 million as of December 31, 2021 , from $ 30.6 million as of December 31, 2020 .

Our cash flow from operating activities increased to $10.1 million in 2021 from $6.0 million in 2020, primarily due to an increase in our profitability, offset in part by use of cash for working capital, including inventory and receivables, reflecting the 32% increase in our sales and anticipated customer demands in the future.

Operating activities provided $10.1 million of cash in 2021 . The amount of cash provided by operations was favorably impacted by our net income of $12.8 million. Net income was affected by non-cash expenses totaling $5.6 million for depreciation and amortization, non-cash operating lease expense, provision for doubtful accounts, deferred taxes, non-cash gains from foreign currency transactions, share-based compensation costs and an unrealized gain on our available-for-sale equity security. Changes in operating assets and liabilities providing cash included an increase in accounts payable of $5.2 million and an increase in accrued expenses of $589,000. Changes in operating assets and liabilities using cash included an increase in accounts and trade notes receivable of $4.8  million, an increase in inventories of $8.2 million, a decrease in advance customer payments and other of $177,000 and a decrease in operating lease liabilities of $830,000. Increases in accounts payable and inventories at December 31, 2021 were due to planned purchases of raw materials to meet anticipated customer demand. The increase in accrued expenses was mainly due to higher accruals for wages and benefits, including incentive compensation, warranty and income taxes, mainly due to higher sales and our improved financial performance. Accounts and trades notes receivable increased due to higher sales in the fourth quarter of 2021 compared to the fourth quarter of 2020. Advance customer payments and other was down due to a decrease in deposits for equipment prior to transfer of control. The decrease in operating lease liabilities was due to monthly rental payments for our facility leases.

Operating activities provided $6.0 million of cash in 2020. The amount of cash provided by operations was favorably impacted by our net income of $5.7 million. Net income was affected by non-cash expenses totaling $4.6 million for depreciation and amortization, non-cash operating lease expense, provision for doubtful accounts, deferred taxes, non-cash gains from foreign currency transactions, share-based compensation costs and an unrealized loss on our available-for-sale equity security. Changes in operating assets and liabilities providing cash included a decrease in accounts and trade notes receivable of $1.9 million, an increase in accrued expenses of $1.3 million and an increase in advance customer payments of $247,000. Changes in operating assets and liabilities using cash included an increase in inventories of $5.2 million, a decrease in accounts payable of $1.9 million and a decrease in operating lease liabilities of $772,000. Accounts and trade notes receivable decreased due to an improvement in the rate of collections. Sales of sensor products, which typically have shorter collection cycles than sales of our inspection and metrology system products, were higher in the fourth quarter of 2020, when compared to the fourth quarter of 2019. The increase in accrued expenses was mainly due to bonus accruals resulting from our improved financial performance. Advance customer payments were up due to an increase in deposits for equipment prior to transfer of control. The increase in inventories was due to planned purchases of raw materials in the third quarter of 2020 to meet anticipated customer demand for SQ3000 Multi-Function systems. The decrease in accounts payable was due to the timing of raw material purchases, with lower purchases of raw materials in the fourth quarter of 2020, when compared to the fourth quarter of 2019. Operating lease liabilities decreased due to monthly rental payments under our facility leases.

Investing activities used $4.7 million of cash in 2021 and  $3.3 million of cash in 2020.  Changes in the level of investment in marketable securities, resulting from the purchases, sales and maturities of those securities used $2.8 million of cash in 2021 and $1.6 million of cash in 2020. We used $1.9 million of cash in 2021 and $1.7 million of cash in 2020 for the purchase of fixed assets and capitalized patent costs.

Financing activities used $112,000 of cash in 2021 and $ 23,000  of cash in 2020 . Proceeds from the exercise of stock options and share purchases under our employee stock purchase plan provided $675,000 of cash in 2021 and $ 582,000 of cash in 2020. Tax payments for shares withheld related to stock option exercises and vesting of restricted stock units used $787,000 of cash in 2021 and $ 605,000 of cash in 2020. In July 2019, our Board of Directors authorized a $3.0 million share repurchase program which expired on June 30, 2020. No shares were repurchased under this program in 2020 prior to its expiration.

At December 31, 2021, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. These entities are established by some companies for the purpose of establishing off-balance sheet arrangements or for other contractually narrow or limited purposes.

In February 2020, we finalized a new lease for our existing 19,805 square foot mixed office and warehouse facility in Singapore, which serves as a sales, development and final assembly and integration facility for our inspection and metrology system products. The new lease does not contain any incentives or renewal options and runs through July 24, 2023. Rent and facility operating costs under the new lease remain unchanged when compared to the old lease that expired in July 2020.

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Except for obligations under facility leases and purchase contracts, we had no material commitments for expenditures as of December 31, 2021. Purchase commitments for raw materials and other inventory can vary based on the volume of revenue and resulting inventory requirements.

Our cash, cash equivalents and marketable securities totaled $38.3  million at December 31, 2021. We believe that on-hand cash, cash equivalents and marketable securities, coupled with anticipated future cash flow from operations, will be adequate to fund our cash flow needs for the foreseeable future, including the contractual obligations mentioned above.

Inflation and Foreign Currency Transactions

Changes in our revenues have resulted primarily because of changes in the level of unit shipments due to competitive factors and the relative strength or weakness of the worldwide SMT and semiconductor capital equipment markets. We do not believe that inflationary pressures and cost increases had a significant effect on our operations in 2021. Cost increases for material components, freight and employee wages could have an impact on our operations in future periods if inflationary pressures continue for an extended period of time and if we are unable to recover these costs by charging more for the products we sell.

Most of our international export sales are negotiated, invoiced and paid in U.S. dollars. We manufacture our inspection and metrology system products in Singapore and a portion of our raw material purchases are denominated in Singapore dollars. We also have R&D and sales personnel located in Singapore and sales offices located in other parts of the world. Although currency fluctuations do not significantly affect our revenue, they can impact our costs and influence the price competitiveness of our products and the willingness of existing and potential customers to purchase our products.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including estimates related to revenue recognition, bad debts, warranty obligations, inventory valuation, intangible assets, and income taxes. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that we believe have the most effect on our reported financial position and results of operations are as follows:

Revenue Recognition.

Revenue is measured based on the consideration specified in a contract with a customer.   A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for purposes of revenue recognition. Revenue from all customers, including distributors, is recognized when a performance obligation is satisfied by transferring control of a product or service to a customer. Amounts billed to customers for shipping and handling are included in revenue. Taxes collected from customers and remitted to governmental authorities are excluded from revenue on the net basis of accounting. Accounts receivable are due under normal trade terms, generally 150 days or less.

Sales involving multiple performance obligations typically include the sale of an inspection or metrology systems product, installation and training, and in some cases, an extended warranty. When a sale involves multiple performance obligations, we account for individual products and services separately if the customer can benefit from the product or service on its own or with other resources that are readily available to the customer and the product or service are separately identifiable from other promises in the arrangement. The consideration is allocated between separate performance obligations in proportion to their estimated stand-alone selling price. If the stand-alone selling price is not directly observable, we use the cost plus margin approach to estimate stand-alone selling price. Costs related to products delivered are recognized in the period revenue is recognized, including product warranties for periods ranging from 1 to 3 years.

Our performance obligations are satisfied at a point in time or over time as work progresses. Revenue from products and services transferred to customers at a point in time totaled $90.5 million, or 97.6% of our total revenue in 2021, and $68.4 million, or 97.6% of our total revenue in 2020. Revenue from these contracts is recognized when obligations under the terms of the contract with our customers are satisfied, which is generally with the transfer of control upon shipment. Sales of some products may require customer acceptance due to performance or other acceptance criteria that is considered more than a formality. For these product sales, revenue is recognized upon notification of customer acceptance.

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Revenue from products and services transferred to customers over time totaled $2.3 million, or 2.4% of our total revenue in 2021, and $1.7 million, or 2.4% of our total revenue in 2020 . Periodically, sensor product arrangements with our OEMs will create an asset with no alternative use and include an enforceable right to payment. For these arrangements, control is transferred over the manufacturing process; therefore, revenue is recognized over time utilizing an input method based on actual costs incurred in the manufacturing process to date relative to total expected production costs. For certain longer duration 3D scanning service projects, we progress bill as the services are performed. These arrangements create an asset with no alternative use and include an enforceable right to payment. For these arrangements, control is transferred over the hours incurred to complete the scanning project; therefore, revenue is recognized over time utilizing an input method based on actual hours incurred relative to total projected project hours. For maintenance and extended warranty contracts, revenue is recognized over time on a straight-line basis over the term of the contract as the customer simultaneously receives and consumes the benefits of the coverage.

Allowance for Doubtful Accounts and Trade Notes.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In making the determination of the appropriate allowance for doubtful accounts, we consider specific accounts, historical write-offs, changes in customer relationships and credit worthiness and concentrations of credit risk. Specific accounts and trade notes receivable are written-off once a determination is made that the account is uncollectible. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. If our accounts and trade notes receivable were to increase by $2.0 million, we estimate that our allowance for doubtful accounts would increase by $36,000. The allowance for doubtful accounts and trade notes was $355,000 at December 31, 2021 and $302,000 at December 31, 2020.

Allowance for Warranty Expenses.

We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of components provided by suppliers, warranty obligations do arise. These obligations are affected by product failure rates, the costs of materials used and service delivery expenses incurred in correcting a product failure. If actual product failure rates and material or service delivery costs differ from our estimates, revisions to the estimated warranty liability are required and could be material. If our sales were to increase by $10 million, we estimate that our allowance for warranty expenses would increase by $110,000. The allowance for warranties was $991,000 at December 31, 2021 and $839,000 at December 31, 2020.

Inventory Write Downs .

We write down inventory for estimated obsolescence or lack of marketability equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. We formulate our assumptions regarding future demand and market conditions based on order trends and input from customers regarding their future requirements. If actual market conditions are less favorable than those projected, or if in the future we decide to discontinue sales and marketing of any of our products, additional inventory write-downs may be required. For some products, we typically carry on-hand inventories of $1 million or more. If these products were to become obsolete or otherwise non-saleable, we could be required to write down the value of the inventory by $1 million or more, depending upon the amount of inventory being carried. Excess and obsolete inventories were written down by $812,000 at December 31, 2021 and $752 ,000 at December 31, 2020.

Valuation of Intangible and Long-Lived Assets.

We evaluate the carrying value of goodwill annually on December 31 , and more frequently if management believes indicators of impairment exist. We assess the impairment of identifiable intangible assets, long lived assets and related goodwill whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors we consider important, which could trigger an impairment review and that we consider when performing our annual goodwill impairment assessment, include the following:

Significant under-performance relative to expected historical or projected future operating results.

Significant changes in the manner of our use of the acquired assets or the strategy for our overall business.

Significant negative industry or economic trends.

Significant decline in the price of our common stock for a sustained period, and the size of our market capitalization relative to our net book value.

For intangible and long-lived assets, if the carrying value exceeds the undiscounted cash flows from such asset.

When we determine that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any potential impairment based on a projected discounted cash flow method using a discount rate that we believe is commensurate with the risk inherent in our current business model. We utilize the income approach to estimate our fair value. The income approach is a valuation technique under which we estimate future cash flows using financial forecasts. Future estimated cash flows are discounted to their present value to calculate fair value. When determining fair value, we also give consideration to the control premium in excess of our current market capitalization that might be obtained from a third party acquirer. These assumptions require significant judgment and actual results may differ from assumed or estimated amounts.

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At December 31, 2021, we had goodwill of $1.4 million. Our recent analysis performed as of December 31, 2021 indicates that our goodwill is not impaired. However, our conclusion could change in the future, if our assumptions about future economic conditions, revenue growth or profitability change. Any resulting impairment charge could have a material effect on our financial position and results of operations in the future.

Income Taxes.

Significant judgment is required in determining worldwide income tax expense based upon tax laws in the various jurisdictions in which we operate. We have established reserves for uncertain tax positions by applying the “more likely than not” threshold (i.e., a likelihood of occurrence greater than fifty percent). The recognition threshold is met when an entity concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by the relevant taxing authority. Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely than not standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. De-recognition of a tax position that was previously recognized occurs when an entity subsequently determines that a tax position no longer meets the more likely than not threshold of being sustained. All tax positions are analyzed periodically and adjustments are made as events warrant modification, such as the completion of audits or the expiration of statutes of limitations, which may result in future charges or credits to income tax expense.

As part of the process of preparing our consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating the current tax liability, as well as assessing temporary differences arising from the different treatment of items for financial statement and tax purposes. These differences result in deferred tax assets and liabilities, which are recorded on our consolidated balance sheet.

We have significant deferred tax assets as a result of temporary differences between the taxable income on our tax returns and U.S. GAAP income, R&D tax credit carry forwards and state net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our consolidated financial statements become deductible for income tax purposes, when net operating loss carry forwards could be applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards.

At December 31, 2021, we had $5.2 million of deferred tax assets, of which $1.5 million were subject to valuation allowances. Our valuation allowances at December 31, 2021 and December 31, 2020 mainly relate to state R&D tax credits and net operating loss carry forwards. Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with credit and loss carry forwards not expiring unused and tax planning alternatives. In analyzing the need for valuation allowances, we first considered our history of cumulative operating results for income tax purposes over the past three years in each of the tax jurisdictions in which we operate, our financial performance in recent quarters, statutory carry forward periods and tax planning alternatives. In addition, we considered both our near-term and long-term financial outlook. After considering all available evidence (both positive and negative), we concluded that recognition of valuation allowances for substantially all of our U.S. and Singapore based deferred tax assets was not required at December 31, 2021 or December 31, 2020. However, our conclusion could change in the future, if our actual results or assumptions about future economic conditions, revenue growth or profitability deteriorate. Any resulting valuation allowance could have a material negative effect on our financial position and results of operations in the future. For example, if we were to experience losses over a period of several years, we could be required to record valuation allowances for most of our remaining net deferred tax assets, which totaled $3.7 million at December 31, 2021.

We file income tax returns in the United States and various state and foreign jurisdictions. Our federal income tax returns for years after 2017 are still subject to examination by the Internal Revenue Service. We are no longer subject to state and local income tax examinations for years prior to 2017. The Inland Revenue Authority of Singapore has initiated a routine compliance review of our 2018 income tax return. We presently anticipate that the outcome of this audit will not have a significant impact on our financial position or results of operations.