CyberOptics
Annual Report 2017

Plain-text annual report

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-Kx ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of the Securities ExchangeAct of 1934 for the Year Ended December 31, 2017. o TRANSITION PURSUANT TO SECTION 13 or 15(d) of the Securities ExchangeAct of 1934 for the transition period from ______ to ______. COMMISSION FILE NO. (0-16577) CYBEROPTICS CORPORATION(Exact name of registrant as specified in its charter) Minnesota41-1472057(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)5900 Golden Hills DriveMINNEAPOLIS, MINNESOTA55416(Address of principal executive offices)(Zip Code) (763) 542-5000(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Exchange Act: Title of each class: Common Stock, no par valueName of Exchange: NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Exchange Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90days. Yes ☑ No ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes ☑ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ☑ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerginggrowth company. See the definitions of “large accelerated filer”, “accelerated filer”, "smaller reporting company", and "emerging growth company" in Rule 12b-2 ofthe Exchange Act. Large Accelerated Filer ☐Accelerated filer ☑Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller Reporting Company ☐ Emerging Growth Company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisedfinancial accounting standard provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑ State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equitywas last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscalquarter: $140,462,271. As of February 28, 2018, there were 6,984,686 shares of the registrant’s Common Stock, no par value, issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE: The responses to Part III items 10, 11, 12, 13 and 14 herein are incorporated by reference to certain information in the Company’s definitive Proxy Statement forits Annual Meeting of Shareholders to be held May 10, 2018.1CYBEROPTICS CORPORATIONFORM 10-KFor the Fiscal Year Ended December 31, 2017TABLE OF CONTENTS PART I. 3ITEM 1.DESCRIPTION OF BUSINESS3ITEM 1A.RISK FACTORS14ITEM 1B.UNRESOLVED STAFF COMMENTS 19ITEM 2.PROPERTIES19ITEM 3.LEGAL PROCEEDINGS19ITEM 4.MINE SAFETY DISCLOSURES19PART II.20ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES20ITEM 6.SELECTED FINANCIAL DATA22ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS23ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK31ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA32ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE62ITEM 9A.CONTROLS AND PROCEDURES62ITEM 9B.OTHER INFORMATION62PART III.63ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE63ITEM 11.EXECUTIVE COMPENSATION63ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS63ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE63ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES63PART IV.64ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES64SIGNATURES66 2Table of Contents PART I. ITEM 1. DESCRIPTION OF BUSINESS GENERALBackground CyberOptics Corporation was founded in 1984 and is a leading global developer and manufacturer of high precision sensing technologysolutions. Our headquarters are located at 5900 Golden Hills Drive in Golden Valley, Minnesota. Our website address is www.cyberoptics.com.You can access, free of charge, our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, ourquarterly reports on Form 10-Q, current reports on Form 8-K and any other amendments to those reports, at our website, or at the Commission’swebsite at www.sec.gov. Proxy materials for our upcoming 2018 annual shareholders meeting to be held on May 10, 2018 will be availableelectronically via the internet at the following address: http://www.idelivercommunications.com/proxy/cybe/. As a leading global developer and manufacturer of high precision 3D sensors, our strategy is to leverage our 3D sensor technologies in our keyvertical markets that consist of the surface mount technology (SMT), semiconductor and metrology markets. We also intend to capitalize onsignificant growth opportunities in the emerging advanced packaging market. A key element of our strategy is to deliver profitable growththrough the continued sale and development of new high precision 3D sensors 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 thepotential to significantly expand our markets. Our products are used in the SMT, semiconductor and metrology markets to significantly improve our customers' manufacturing yields andproductivity, and to assist our customers in meeting their rigorous demands for manufacturing quality. Our products use a variety of proprietarytechnologies such as lasers, optics and machine vision, combined with software, electronics and mechanical design. Our products helpmanufacturers solve their most complex manufacturing challenges by providing them with key metrics related to their manufacturing processes,thereby allowing them to improve production volumes, yields and product quality. The majority of our revenues (63% in 2017) is derived from products we develop and sell for use in SMT electronic circuit board assembly orwith equipment used in SMT electronic circuit board assembly. We sell products in these markets both as sensor components that areincorporated into products manufactured by other companies for sale to circuit board assembly companies, and as complete stand-aloneinspection systems that are sold directly to circuit board assembly companies. We manufacture 3D and 2D optical sensors for use in our own proprietary inspection system products and for sale to original equipmentmanufacturers (OEMs), system integrators and end customers in the SMT, semiconductor and metrology markets. We sell high-precision 3Dsensors to KLA-Tencor for use in systems that inspect back-end semiconductor packaging. We also sell high-precision 3D sensors toNordson-YESTECH for use in systems that inspect circuit boards. Our SMT electronic assembly alignment sensor products are sold tomanufacturers of pick-and-place machines to align electronic surface mount components during placement on the circuit board and to a solderpaste screen printer company to align stencils with circuit boards. We also sell sensors to OEMs for solder paste inspection (SPI) systems usedin the SMT market. Our inspection system products are primarily sold to manufacturers of SMT electronic circuit boards to control quality as in-line systems.These products are used by manufacturers to measure screen printed solder paste, to inspect circuit boards and components after componentplacement, to confirm proper placement after full assembly of circuit boards and to inspect solder joints on printed circuit boards.Manufacturers of DRAM and Flash Memory use our inspection system products to inspect assembly of their memory modules. Increasingly,our inspection system products are being used for inspection and metrology in the areas of advanced packaging, complex mobile device andautomotive applications. Our semiconductor products, primarily our WaferSense® family of products, assist with yield improvement and tool uptime in thesemiconductor wafer fabrication process and flat panel display manufacturing by providing highly accurate measurements of critical processfactors. These measurements are impossible or very difficult to obtain without powering down the process equipment. Customers which useour products have better yields, through-put and tool up-time. Our products are more accurate when compared to the various manualtechniques historically used by semiconductor manufacturers to obtain critical wafer fabrication process measurements.We have continued to invest in our WaferSense® family of products. In response to ongoing input from semiconductor and flat panel displaymanufacturers, we are developing additional products that can be used in semiconductor fabs and flat panel display factories. Strong futuresales growth is anticipated for the WaferSense® family of products.3Table of Contents Manufacturers in a wide variety of industries can use our inspection system products as in-line or off-line metrology tools to capture surfacedata to help solve their most complex manufacturing and product quality challenges. Our 3D scanning and metrology services scan, model andinspect objects of all sizes and complexity for customers who do not have their own metrology equipment.Our ability to implement our strategy effectively is subject to numerous uncertainties and risks, including the risks identified in Item 1A of thisAnnual Report on Form 10-K. There can be no assurance that our strategy will be successful. Multi-Reflection Suppression Technology A key element in our strategy is the development of new high precision 3D sensors based on our proprietary MRS technology. Our recent andplanned product introductions are designed to strengthen our competitive position in our current markets and expand into adjacent markets.We believe 3D inspection and metrology represent a high-growth segment for both the SMT and semiconductor capital equipment markets. Wealso see significant growth opportunities for 3D measurement and inspection in the emerging market for advanced packaging applications. Webelieve that MRS is a break-through optical technology for high-end inspection and metrology. Unlike competing technologies, our MRStechnology has the ability to inhibit reflections and provide microscopic quality images at production line speeds.Challenges with shrinking transistor dimensions is shifting the burden to 3D stacking of chips. As a result, advanced semiconductor packagingis expected to grow rapidly in the next 5 to 10 years. Micro electromechanical systems devices (MEMS) are now being used for many advancedapplications. Yield challenges with these products are driving the need for inspection and metrology. We are seeing a growing number ofopportunities in the markets for our SMT and semiconductor products because our 3D MRS technology platform is well suited for many ofthese applications, particularly advanced packaging and complex mobile devices. We are introducing new products based on our MRStechnology that we believe will allow us to capitalize on these opportunities and significantly increase our revenues in the future. We have significantly advanced our MRS-enabled 3D sensor technology as part of a research initiative aimed at applying our 3D MRStechnology to mid-end and front-end semiconductor inspection and the emerging advanced semiconductor packaging market. Our MRStechnology is now able to inspect cracks and other defects as small as 30 microns in wafer dies, which is suitable for many mid-endsemiconductor and advanced packaging inspection and metrology applications. We are currently demonstrating this technology tosemiconductor manufacturers, and we believe that initial sales of products based on MRS-enabled technology with the ability to conduct mid-end semiconductor inspections are possible before the end of 2018. We have entered into a mutually exclusive agreement to supply KLA-Tencor with high-precision 3D sensor subsystems for its back-endsemiconductor packaging inspection systems. We also have entered into an agreement to supply Nordson-YESTECH with high precision 3Dsensor subsystems for its inspection systems serving the SMT market. The sensor subsystems are based on the MRS technology that we havebeen developing for the past several years. We intend to expand sales of products based on our MRS technology in the SMT, semiconductorand metrology markets, including inspection and metrology for advanced packaging applications, through new OEM partners, systemintegrators and direct sales to end-user customers. Our 3D MRS technology has also been deployed in our 3D automated optical inspection (AOI) system, the SQ3000, which is designed toexpand our presence in markets requiring high precision inspection. In these markets, identifying defects has become highly challenging andcritical due to smaller electronics packaging and increasing component density on circuit boards. We believe the combination of our proprietaryMRS technology, sophisticated 3D fusing algorithms and precision optics allows us to offer microscopic image quality at production speeds.We recognized our initial revenues from sales of the SQ3000 in the second quarter of 2015. We believe our MRS technology provides significantcompetitive advantages over conventional technologies used in the semiconductor and circuit board inspection and metrology markets. We have recently introduced two new metrology products that incorporate our 3D MRS sensor technology, CyberGage360®, which waslaunched in the second half of 2016, and SQ3000™ 3D CMM, which was launched in the second half of 2017. We believe that both of theseproducts will be able to address many inspection and metrology applications in the SMT, semiconductor and general industrial markets. Oursales of CyberGage360® and SQ3000™ 3D CMM to date have been minimal. However, we believe future sales of these products could besignificant, based upon positive feedback from customer product evaluations. Notwithstanding the positive feedback from prospectivecustomers, there can be no assurance that these products will ever achieve widespread market acceptance in any of our served markets. OPERATIONS AND PRODUCTS We develop, manufacture and sell intelligent, non-contact sensors and systems for process control, inspection and metrology. Our productofferings are sold to OEMs, system integrators and end-user customers in the SMT circuit board assembly, semiconductor and generalindustrial metrology markets. Our OEMs and system integrators incorporate our sensor offerings into capital equipment serving theseindustries. We also sell sensors and stand-alone inspection systems directly to end-users. We provide services for 3D scanning and metrologyfor those customers who cannot justify the purchase of their own 3D scanning and metrology equipment, or need services for special projects. 4Table of Contents Our principal products are used by manufacturers to increase operating efficiencies and yields, and to assist them in meeting rigorous demandsfor product quality. In addition to proprietary hardware designs that combine precision optics, various light sources and multiple detectors, ourproducts incorporate software that controls the hardware and filters and converts raw data into application specific information. Our 3Dscanning and metrology services help manufacturers quickly solve their most complex 3D inspection, analysis and product engineeringchallenges, allowing them to improve product yields and quality. High Precision 3D and 2D Optical Sensors We manufacture high precision sensors for use in the SMT, semiconductor and metrology markets. We sell our sensors to OEMs, systemintegrators and end customers and for use in our own stand-alone inspection system and metrology products. Although most of our revenuefrom sensor sales has historically come from our alignment sensors, we recently began selling 3D MRS subsystems to OEM's for integrationinto their own proprietary stand-alone products serving the SMT and semiconductor markets. We also have integrated our 3D MRS sensortechnology into our own stand-alone products for 3D inspection and metrology. In February 2015, we entered into a mutually exclusive agreement to supply KLA-Tencor with high-precision 3D MRS sensor subsystems for itsback-end semiconductor packaging inspection systems. We have an agreement to supply Nordson-YESTECH with high-precision 3D MRSsensor subsystems for the SMT market. We intend to negotiate agreements for sale of these sensors to other OEMs, system integrators andend-users, and to deploy them in our next generation inspection system and metrology products. We also have developed a strobe inspectionmodule (SIM) that features extremely fast image acquisition and low false call rates in 2D applications. We use the SIM in our 2D AOI products,including our QX family of products and the MX600 product that is used for post-singulation inspection of memory modules. We believe that a strategy of developing and selling complete inspection systems and metrology products to end-users provides us withvaluable customer input in the markets we currently serve, and allows us to refine the sensors and sensor subsystems for these markets andadjacent markets. At the same time, sales to OEMs allow us to capitalize on our strengths in optical physics, sensor design and softwarealgorithm development. We believe that the resulting sensor products and subsystems are unique and add significant value to the products ofour OEM customers. 3D MRS Sensors Our 3D MRS sensors are used in our stand-alone inspection system and metrology products serving the SMT, semiconductor and metrologymarkets. We also sell our 3D MRS sensors to OEM customers serving the SMT and semiconductor markets. Our 3D MRS sensors also havepotential applications for inspection and metrology in the semiconductor mid-end and advanced packaging markets. Our high precision 3D sensors are based on commercially available cameras, digital light projectors and other hardware components, combinedwith our proprietary MRS technology, 3D fusing algorithms and precision optics. We believe the combination of these elements allows oursensor to capture microscopic quality images at production speeds. Revenue from shipments of high precision 3D MRS sensor subsystems toOEM's accounted for 8% of our revenues in 2017, 6% of our revenues in 2016 and 4% of our revenues in 2015. Strobe Inspection Modules (SIM) We also design and manufacture 2D sensors based on our strobe inspection module (SIM) technology and proprietary Autonomous ImageInterpretation (Ai2) software for automated optical inspection. These sensors are based on a proprietary hardware design utilizing a strobedbased lighting concept for extremely fast image acquisition. We deploy these sensors in our family of 2D AOI inspection systems which, webelieve, offer an industry leading level of low false call performance at fast in-line production speeds. We also utilize this technology inour MX600 system for post-singulation inspection of memory modules. To date our use of the SIM technology has been limited to our own 2DAOI offerings for SMT. Our SIM technology can be used for a variety of inspection tasks outside of traditional SMT applications, includinginspecting for completeness and accuracy at the end of line final assembly. SMT Electronic Assembly Alignment Sensors Our SMT electronic assembly alignment sensor products are a family of alignment sensors that are customized and incorporated into theequipment manufactured by our customers for use in SMT circuit board assembly. We work closely with our OEM customers to integratesensors into their equipment.LaserAlign®. Our LaserAlign sensor family has accounted for the majority of our sales in the SMT electronic assembly alignment sensorsproduct line. These sensors are primarily sold for incorporation into pick-and-place machines manufactured and sold by a number of differentOEM customers for use in SMT production lines. 5Table of Contents The LaserAlign family of products aligns both large and extremely small surface mount and through-hole components, known as chipcapacitors and resistors, during transport on a pick-and-place machine prior to placement. LaserAlign sensors are incorporated into theplacement heads of pick-and-place machines to ensure accurate component placement at high production speeds. Various high-speed pick-and-place machines use between one and twenty LaserAlign sensors per machine. LaserAlign integrates an intelligent sensor, composed of a laser,optics and detectors with a microprocessor and software for making specific measurements. LaserAlign enables quick and accurate alignment ofeach component as it is being transported by the pick-and-place arm for surface mount or through-hole assembly. Using non-contacttechnology, LaserAlign facilitates orientation and placement of components at higher speeds than can be achieved using conventionalmechanical or machine vision component centering systems. The LaserAlign sensor is offered in several different configurations to satisfy the requirements of the machines on which it is used. Revenuefrom product shipments of LaserAlign sensors has been a principal contributor to our revenue during the past five years and accounted for15% of our revenue in 2017, 12% of our revenue in 2016 and 14% of our revenue in 2015. InPrinter Inspection Camera. The InPrinter Inspection Camera, which is mounted directly in DEK brand screen printers manufactured by ASMPacific Technology Ltd., is used to identify fiducial markings on a circuit board to ensure accurate board registration prior to placement ofsolder paste, as well as to provide an upgraded capability for 2D solder paste and stencil inspection. Revenue from shipments of the InPrinterInspection Camera accounted for 4% of our revenue in 2017, 3% of our revenue in 2016 and 5% of our revenue in 2015. 3D Solder Paste Inspection (SPI) Sensors We manufacture custom designed 3D SPI sensors for use in our own family of SPI systems. We also sell our 3D SPI sensors to Viscom GmbHfor use in their SPI platforms. Sales of 3D SPI sensors to Viscom accounted for minimal revenues in each of 2017, 2016 and 2015. Inspection System Products Our inspection system products are primarily used in the semiconductor and SMT electronic assembly industries for process control,inspection and metrology. These systems are sold to end-user manufacturing customers that use them in a production line or alongside aproduction line to maintain process and quality control. Our products incorporate our proprietary 3D and 2D optical sensors, off the shelf,translation or robotics hardware and conveyors and complete computer systems or processors with internally developed software. Automated Optical Inspection (AOI) Products We have been selling AOI products for well over a decade and have continued to develop and improve our AOI offerings since inception.These products are typically used to inspect circuit boards after component placement to determine whether all components have been placedcorrectly, and to measure the quality of solder joints after reflow. These products can also be used for inspection and metrology in theadvanced packaging market, and for certain industrial metrology applications. Revenue from shipments of our AOI products accounted for23% of our revenues in 2017, 32% of our revenues in 2016 and 20% of our revenues in 2015. SQ3000. Our first 3D AOI system, the SQ3000, is designed to expand our presence in markets requiring high precision inspection. Identifyingdefects on circuit boards has become highly challenging and critical due to smaller electronics packaging and increasing component density,combined with smaller and more complex solder joints. We believe there are a growing number of opportunities for the sales of SQ3000 in thesemiconductor inspection and metrology markets, particularly for advanced packaging, MEMS and complex mobile device applications. Webelieve our 3D MRS sensor technology is uniquely suited for many of these applications because of its ability to offer microscopic imagequality and superior measurement performance at production line speeds. The SQ3000 is also available in versions that can accommodate dualproduction lanes and larger circuit board sizes. We recognized our initial revenues from sales of the SQ3000 in the second quarter of 2015. Salesof the SQ3000 accounted for 18% of our revenues in 2017, 12% of our revenues in 2016 and 8% of our revenues in 2015. QX600 and QX150i. Our next generation 2D QX600 and QX150i AOI systems feature our SIM sensor technology and advanced Ai2 softwarewhich, we believe, offer an industry leading level of low false call performance. We have invested in significant software enhancements for all ofour AOI products that improve set-up and programming time and ease of use for the customer. The QX600 is available in versions that canaccommodate dual production lanes and larger circuit board sizes. QX100i. We market our 2D QX100i AOI system for production lines requiring extremely fast inspection speeds. These products also feature ourSIM sensor technology and advanced Ai2 software. The QX100i does not offer the resolution capability of the QX600 or QX150i, but insteadwas designed to provide the fastest AOI inspection times currently available in the market and also an industry-leading level of low false callperformance.QX250i. Our new 2D QX250i AOI system features our SIM sensor technology and advanced Ai2 software. The QX250i features two sensorsthat allows for both top and bottom side inspection of a circuit board.6Table of Contents MX600. Our MX600 system utilizes our SIM sensor technology and Ai2 software and is used for post-singulation inspection of memorymodules. In 2016, we recognized $5.7 million of revenue from sales of this product to one of the world’s top four memory manufacturers. Werecognized no revenue from sales of this product in 2017, and a small amount of revenue in 2015. We believe that additional MX600 orderscould be received in future periods. Solder Paste Inspection (SPI) Products We have been selling in-line 3D solder paste measurement machines for over a decade and have continued to develop and improve our SPIfamily of products since their introduction. Revenue from shipments of our SPI products accounted for 11% of our revenues in 2017, 9% of ourrevenues in 2016 and 8% of our revenues in 2015. SE3000. The recently introduced SE3000 is an in-line system solder paste inspection system based on our 3D MRS sensor technology. TheSE3000 measures in 3D the amount of solder paste applied to a circuit board after the first step of the SMT circuit board assembly process.Because of the small size of the components that must be placed on each pad of solder paste and the density of components placed on thecircuit board, a significant amount of SMT assembly problems are related to the quality of solder paste deposition. Misplaced solder paste orexcess or inadequate amounts of paste can lead to improper connections or bridges between leads causing an entire circuit board tomalfunction. The SE3000 inspects the height, area and volume of solder paste placed on an entire circuit board at production line speeds andwith resolution that allows the SE3000 to measure the smallest chip scale packages and micro ball array component sites. The SE3000 can beintegrated into most SMT production lines, providing real time quality control immediately after a printed circuit board leaves the screen printerand before component placement commences. We believe the resolution and measurement performance of the SE3000 is superior to other solderpaste inspection products currently available in the market. SE600. The SE600 is an in-line solder paste inspection system incorporating a dual-illumination sensor that measures in 3D the height, area andvolume of solder paste placed on an entire circuit board at production line speeds. The SE600 can be integrated into most SMT productionlines. SE500ULTRA. The SE500ULTRA is an in-line solder paste inspection system incorporating the same proprietary 3D inspection technology asthe SE600, but with a single illumination sensor. The SE500ULTRA inspects at faster speeds than the SE600 and is intended for use in high-volume production environments. Because the SE500ULTRA performs inspections at very high speed, it does not provide the same level ofresolution and measurement performance as the SE600. Metrology Products and Services We have recently introduced two new metrology products that incorporate our 3D MRS sensor technology, CyberGage®360, which waslaunched in the second half of 2016, and SQ3000™ 3D CMM, which was launched in the second half of 2017. Manufacturers in a variety ofindustries, including the SMT, semiconductor and consumer electronic industries, can use these products as in-line or off-line metrology toolsto capture surface data to help solve their most complex manufacturing and product quality challenges. Our sales of CyberGage360® andSQ3000™ 3D CMM to date have been minimal. Based upon positive feedback from customer product evaluations, we believe future sales ofthese products could be significant. However, there can be no assurance that these products will ever achieve widespread market acceptance inany of the markets we serve. We also provide services for 3D scanning and metrology for objects of all sizes and complexity for those customers who do not have theirown 3D scanning and metrology equipment, or the in-house capability to scan and measure complex parts. Revenue from sales of metrologyproducts and services accounted for 11% of our revenue in 2017, 13% of our revenue in 2016 and 17% of our revenue in 2015.Semiconductor Products Our principal semiconductor products, the WaferSense® family of products, are a series of wireless sensors that provide measurements ofcritical factors in the semiconductor fabrication process. We designed our WaferSense family of sensors to be used where wafers or reticles arelocated in semiconductor fabrication to provide measurements of critical factors that are currently impossible or extremely difficult to obtainwithout powering down the fabrication process equipment. Because the user is not required to break down semiconductor fabricationequipment when using our WaferSense products, significant time is saved and accuracy is increased, compared to the manual techniquescurrently used by many customers when checking the process parameters measured by our WaferSense products. As a result ofWaferSense technology, our customers are able to improve the up-time, through-put and process yield for their semiconductor fabricationequipment. We intend to continue to enhance and expand the WaferSense family of products in the future. We sell our semiconductor productsto both OEM and end-user customers through a network of independent sales representatives. Sales of our semiconductor products accountedfor 21% of our revenues in 2017, 15% of our revenues in 2016 and 19% of our revenues in 2015.7Table of Contents Automatic Leveling Sensor (ALS). The ALS is a wireless, vacuum-compatible sensor that can be placed in cassettes, FOUPS, on-end effectors,aligners, in-load locks and process chambers used in semiconductor fabrication to ensure that all stations are level and coplanar. Automatic Gapping Sensor (AGS). The AGS is a gapping tool that measures the gap in three places between the shower head and pedestal insemiconductor process equipment. The amount of gap between the shower head and pedestal can affect uniformity when material is depositedon semiconductor wafers. Automatic Teaching Sensor (ATS). The ATS measures X-Y-Z offset from robotic transfers of wafers to the pedestal in semiconductor processequipment. The amount of gap and offset after robotic transfer of wafers to the shower pedestal can affect film thickness and uniformity whenmaterial is deposited or etched on semiconductor wafers, impacting quality and product yields. Automatic Vibration Sensor (AVS). The AVS measures X-Y-Z acceleration for shock and vibration, which can generate wafer particles,scratches or wafer breakage, that reduce yield. WaferSense Airborne Particle Sensors. The WaferSense airborne particle sensor (APS) allows engineers to efficiently detect and classifyparticles and their exact sources in a process as wafers are transferred, slit valves are actuated and chambers are cycled, pumped down andpurged. The APS is designed to be compatible with front-ends, coater/developer tracks, and deposition and etch equipment. ReticleSense Airborne Particle Sensor allows users to quickly identify geographic particle sources in reticle environments. TheReticleSense Airborne Particle Sensor is compatible with ASML, Nikon and Canon scanners and can travel the entire reticle path to detect inreal-time when and where particles occur. The ReticleSense Airborne Particle Sensor helps our customers exceed manufacturing quality andproductivity standards in the Photo Lithography scanner environment. WaferSense Auto Multi Sensors. The WaferSense Auto Multi Sensor, an all-in-one wireless real-time device, allows engineers to quicklytake leveling, vibration and humidity measurements. Humidity measurements are becoming more important as the use of Fin Field EffectTransistor technology increases among semiconductor manufacturers. The ReticleSense Auto Multi Sensor allows users to quickly takeleveling, vibration and humidity measurements in reticle environments. Markets and Customers We sell the majority of our products into the SMT electronic circuit board assembly market and the semiconductor market. The value ofautomation is high in these markets because the products produced have high unit costs and are manufactured at speeds too high for effectivehuman involvement. Moreover, the trend toward smaller electronic devices with higher circuit densities, smaller circuit paths and extremely smallcomponents requires manufacturing and testing equipment capable of extremely accurate alignment and multidimensionalmeasurement. Challenges with shrinking transistor dimensions is shifting the burden to 3D stacking of chips. MEMS devices are now beingused for many advanced applications. Yield challenges with these products are driving the need for inspection and metrology. We are seeing agrowing number of opportunities in the markets for our SMT and semiconductor products because our 3D MRS technology platform is wellsuited for many SMT and semiconductor product applications. Trends in these markets include further efforts to reduce the cost of themanufacturing process, and to limit human involvement through automation.The vast majority of our SMT electronic assembly alignment sensors are sold on an OEM basis to Juki Corporation, Kulicke and Sofa and DEKfor integration into equipment serving the SMT circuit board assembly market. Our sales to Juki Corporation accounted for 12% of our totalrevenue in 2017. Viscom purchases our SPI sensors on an OEM basis for integration into their SPI inspection equipment. We believe ourarrangement with Viscom will allow us to sell more SPI sensors by better penetrating the European market for SMT inspection equipment. Wealso have an agreement to supply Nordson-YESTECH with 3D MRS sensor subsystems for the SMT inspection equipment market. We believeour arrangement with Nordson-YESTECH will allow us to better penetrate the SMT market with our 3D MRS sensor offerings. We sell 3D sensor subsystems on a mutually exclusive basis to KLA-Tencor for use in its semiconductor back-end packaging inspectionsystems. We have significantly advanced our 3D MRS-enabled sensor technology as part of a research initiative aimed at applying our 3D MRStechnology to mid-end and front-end semiconductor inspection and to the emerging semiconductor advanced packaging market. Our MRStechnology is now able to inspect cracks and other defects as small as 30 microns in wafer dies, which is suitable for many semiconductor mid-end and advanced packaging inspection and metrology applications. We are currently demonstrating this technology to semiconductormanufacturers, and we believe that initial sales of products based on MRS technology to conduct mid-end semiconductor inspections arepossible before the end of 2018. We estimate that the total available market for sales of our 3D MRS sensors to manufacturers of semiconductorinspection equipment will be approximately $15 million in 2018. 8Table of Contents The vast majority of our 3D and 2D optical sensors are used in our own SPI and AOI inspection equipment that we sell on a worldwide basis tomany of the leading SMT electronic assembly circuit board manufacturers, including end-user customers manufacturing their own circuitboards, original design manufacturers, electronics manufacturing service providers and outsourced semiconductor assembly and testcompanies, which manufacture cell phones, smart phones, notebook computers, server boards, and other electronic devices. We also sell ourSPI and AOI inspection equipment to semiconductor DRAM and SSD memory manufacturers. We anticipate that our AOI inspection equipmentwill be suitable for many semiconductor advanced packing inspection applications. We estimate that the total available market for sales of SPIand AOI equipment to the SMT and semiconductor advanced packaging inspection markets will be approximately $650 million in 2018. Our semiconductor products, primarily our WaferSense family of products, are used by process and equipment engineers as non-contactprecision measurement tools to optimize the process for production of semiconductor wafers and manufacturing of flat panel displays. Most ofthe world’s largest manufacturers of semiconductors and semiconductor equipment purchase our WaferSense products. We believe thepotential available market for our WaferSense products is significant, and will continue to increase in the future as new product applications areadded. The total available market for metrology equipment, which digitally captures the shape of an object, is very large, diverse and growing as thisequipment is deployed increasingly in a wide variety of industries. Our recently introduced CyberGage®360 and SQ3000™ 3D CMM productsare able to serve this market as in-line or off-line metrology tools to capture surface data for product engineering and quality assurance. Weanticipate that our future sales of these products will be concentrated in our existing markets, including the SMT, semiconductor and consumerelectronics markets. Our 3D scanning and metrology services scan, model and inspect objects of all sizes and complexity for customers who donot have their own scanning and metrology equipment. Export sales represent a large percentage of our total sales because a large portion of the global capacity for electronics assembly andsemiconductor production occurs outside the United States. In addition, a significant portion of our export sales include SMT electronicassembly alignment sensors and 3D MRS sensors sold to OEM customers located in Europe and Asia. The following table sets forth the percentage of total sales revenue represented by total export sales (sales of products into countries otherthan the United States, including sales delivered through distributors) by location during the past three years: December 31, 2017 2016 2015Asia 46% 52% 39%Europe 22% 26% 29%Other export sales (1) 3% 3% 4% (1) Includes export sales in the Americas, primarily Canada, Mexico and Latin America. See Note 13 to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K. Most of our international exportsales are negotiated, invoiced and paid in U.S. dollars. We manufacture our inspection system products in Singapore and a portion of our rawmaterial purchases are denominated in Singapore dollars. We also have R&D and sales personnel located in Singapore and sales offices locatedin other parts of the world. Although currency fluctuations do not significantly affect our revenue, they can impact our costs and influence theprice competitiveness of our products and the willingness of existing and potential customers to purchase our products.Sales and Marketing A direct sales staff located in Minnesota is responsible for sales of high precision 3D and 2D sensors to OEM customers. Our sales of AOI and SPI inspection system products occur in all global geographies. Our sales of inspection systems are more heavilyconcentrated in Asia where a significant portion of the worldwide production capacity for circuit board assembly and semiconductormanufacturing occurs. Our inspection system products are primarily sold through independent sales representatives and distributors managedby direct sales personnel located in Singapore, as well as in the United Kingdom, the United States and China. Our sales and service office inthe United Kingdom serves the European market, and we have sales and service team members based in the United States to serve theAmericas market. We have sales and service offices in China and Singapore to serve the markets for SMT and semiconductor inspectionequipment in Asia. We have agreements with 41 independent sales representatives and distributors which focus on sales and service of ourinspection system products to end-user customers. These agreements cover North and South America (13), Europe (14) and China and the restof Asia (14).9Table of Contents We sell our semiconductor products, primarily our WaferSense family of products to semiconductor fabrication facilities through a separateworldwide sales channel of independent sales representatives and distributors. We also sell our WaferSense products directly to large OEMcustomers, mainly semiconductor capital equipment manufacturers. We currently have agreements in place or in process with 14 independentsales representatives and distributors which focus on sales and service for our WaferSense products. These agreements cover the UnitedStates (4), Europe (3) and the Asia-Pacific (7). Our sales to OEM customers and our worldwide network of independent sales representative anddistributors are managed by direct sales personnel located in the United States and Asia. We also are working to establish a separate worldwide sales channel for our metrology products. We currently have agreements in place with 30independent sales representatives and distributors which focus on sales and service for our metrology products, including CyberGage®360and SQ3000™ 3D CMM. These agreements cover the Americas (13), Europe (8) and the Asia-Pacific (9). We also sell our 3D scanning andmetrology products to end-user customers through a direct sales staff located in Minnesota. Some of our global channel partners for ourinspection system and semiconductor products also market our CyberGage®360 and SQ3000™ 3D CMM products. We market our products through appearances at industry trade shows, advertising in industry journals, articles published in industry andtechnical journals and on the Internet. In addition, we have marketing arrangements with certain key customers that serve as highly visiblereferences. We support our sales efforts by utilizing internet-based search engine marketing programs to generate leads from prospects whohave expressed interest in obtaining the types of products and services that we offer. Backlog Product backlog was $11.4 million at December 31, 2017, compared to $10.2 million at December 31, 2016 and $15.0 million at December 31, 2015.Our products are typically shipped two weeks to two months after the receipt of an order. Sales of some inspection system products mayrequire customer acceptance due to performance or other acceptance criteria included in the terms of sale. For these product sales, revenue isrecognized at the time of customer acceptance. Although our business is generally not of a highly seasonal nature, sales may vary based on thecapital procurement practices in the SMT electronics assembly, general industrial manufacturing and semiconductor fabrication industries. Forexample, production capacity expansion in the SMT electronics assembly industry for anticipated holiday or back to school demands can resultin higher levels of sales in our second and third quarters. However, we are not able to quantify with any level of precision the impact of theseevents on our sales in any given quarterly period, and any seasonal cyclicality is often masked by more dramatic changes in demand caused bythe normal volatility in electronics and semiconductor markets that are associated with changes in the economy. Our scheduled backlog at anytime may vary significantly based on the timing of orders from OEM customers. Accordingly, backlog may not be an accurate indicator ofperformance in the future.Research and Development We differentiate our products primarily on the basis of customer benefits afforded by the use of innovative and proprietary technology and onour ability to combine several different technological disciplines to address industry and customer needs. In addition, we actively seek ongoingstrategic customer relationships with leading product innovators in both our existing and new markets. We actively investigate the needs of,and seek input from, these customers to facilitate the adoption of current innovative technologies and to identify opportunities to improvemanufacturing processes.We commit substantial resources to the development of important next-generation technologies that, we believe, will position us to be a globaltechnology leader in high precision 3D sensors and capture additional market share in our key vertical markets of SMT, semiconductor and 3Dscanning and metrology. We maintain our commitment to research and development and product development even during periods whenstrong demand in the markets for our products does not exist. During the past three years, research and development efforts have been focusedon a number of activities that are critical to our future growth and success, including the following: •We have developed new high precision 3D sensors based on our proprietary MRS technology. MRS is a high speed metrologygrade 3D measurement technology using commercially available components, combined with proprietary algorithms and precisionoptics. MRS technology solves many of the reflecting issues impacting all triangulation sensor technologies. In addition todeveloping 3D MRS sensors for our own stand-alone inspections system products, we also have developed 3D MRS based sensorsfor use in semiconductor back-end packaging inspection systems manufactured by KLA-Tencor. • We have significantly advanced our MRS-enabled 3D sensor technology as part of a research initiative aimed at applying our 3D MRStechnology to mid-end and front-end semiconductor inspection and the emerging semiconductor advanced packaging market. OurMRS technology is now able to inspect cracks and other defects as small as 30 microns in wafer dies, which makes our 3D MRStechnology suitable for many mid-end semiconductor and advanced packaging inspection and metrology applications. The ability ofour MRS technology to conduct mid-end semiconductor inspections is an important milestone in our effort to make MRS-enabled 3Dsensor technology applicable to front-end semiconductor inspection in the next two to four years.10Table of Contents •We have continued development of our first 3D AOI system, the SQ3000. This system is designed to expand our presence in marketsrequiring high precision measurement and inspection. Identifying defects on circuit boards has become highly challenging and criticaldue to smaller electronics packaging and increasing component density, combined with smaller and more complex solder joints. TheSQ3000 is suitable for many advanced packing inspection applications. We believe our MRS technology provides us with significantcompetitive advantages due to its ability to offer microscopic image quality at production line speed. •We have continued development of our system for post-singulation inspection of memory modules, the MX600. This system is basedon our 2D SIM sensor technology and Ai2 image recognition software. The inspection requirements for this system are similar to AOIrequirements for circuit board production. In 2016, we recognized $5.7 million of revenue from sales of this product to one of theworld’s top four memory manufacturers. In 2017, we did not recognize any revenues from sales of the MX600. However, because webelieve the MX600 system offers superior speed, inspection performance and a low level of false calls, we expect to sell MX600systems in future years. •We have incorporated our MRS technology into two new metrology products, CyberGage®360, which was launched in the secondhalf of 2016, and SQ3000™ 3D CMM, which was launched in the second half of 2017. Manufacturers in a variety of industries,including SMT, semiconductor and consumer electronics, can use these products as in-line or off-line metrology tools to help solvecomplex manufacturing and product quality challenges. We have not sold a significant number of CyberGage®360 and SQ3000™ 3DCMM products to date. However, based upon positive feedback from customer product evaluations, we believe future sales of theseproducts could be significant. •We have continued development of our WaferSense line of products. We have developed new offerings for advanced particlemeasurement, and have developed a line of multi-purpose sensors that measure leveling, vibration and humidity in an all-in-onewireless real-time device. We also have started to develop new products for use in flat panel display manufacturing. Research and development expenses were $8.0 million or 15% of revenue in 2017, $8.0 million or 12% of revenue in 2016 and $7.6 million or 18%of revenue in 2015. Research and development expenses consist primarily of salaries, project materials, contract labor and other costsassociated with ongoing product development and enhancement efforts. Research and development resource utilization is centrally managedbased on market opportunities and the status of individual projects. Manufacturing All of our 3D and 2D optical sensors, SMT alignment sensors, WaferSense semiconductor sensor products and CyberGage®360 3D scanningsystems are assembled at our Minneapolis, Minnesota headquarters facility. Our inspection systems and SQ3000™ 3D CMM products areassembled in Singapore. Much of our product manufacturing, which is primarily circuit board manufacturing, lens manufacturing and metalparts production, is performed by outside contractors. Our production personnel inspect incoming parts, perform final assembly, calibrate andperform final quality control testing of finished products. Our products are not well suited for the large production runs that would justify thecapital investment necessary for complete internal manufacturing. A variety of components used in our products are available only from single sources and involve relatively long order cycles, in some cases upto six months. We believe we have identified alternative assembly contractors for most of our sub-assemblies. Use of those alternativecontractors could require substantial rework of the product designs, resulting in periods during which we could not satisfy customer orders. Anactual change in such contractors would likely require a period of training and testing. Accordingly, an interruption in a supply relationship or reduced production capacity experienced by one or more of such contractors couldresult in the inability to deliver one or more of our products for a period of several months. To help prevent delays in the shipment of ourproducts, we maintain in inventory, or on scheduled delivery from suppliers, components that we believe will be sufficient to meet forecasteddemand, often times for a minimum of six months.Competition We face competition from a number of companies in the machine vision, image processing and inspection systems markets, many of which arelarger and have greater financial resources than we do. However, we believe our current and planned products offer advantages from competingproducts in terms of price and suitability for specific applications.11Table of ContentsOur 3D and 2D optical sensors and SMT electronic assembly alignment sensors primarily compete with the sensors and vision systemsdeveloped by OEMs using their own design staff for incorporation into their products. We believe our high precision 3D sensors based on ourMRS technology are unique in the marketplace based on the ability to offer microscopic quality images at fast production line speeds. Our 2DSIM sensors and SMT electronic assembly alignment sensor products also compete with vision (camera and software based) systems andcomponent libraries available from Cognex Corporation and others. Although advances in vision systems have reduced some of theadvantages of our SMT electronic assembly alignment sensor products in some configurations, we continue to believe that our sensorscompete favorably based on our ability to custom design products with stringent physical form requirements, speed, flexibility, low cost andease of use.The primary competition for sales of our SPI and AOI inspection system products has been from Korean based companies, includingKoh Young Technology, MirTec Ltd., and Parmi. We also compete with Taiwanese based Test Research, Inc. and German based Viscom, amongothers. Sales of AOI systems account for roughly two-thirds of the approximately $600 million total SPI and AOI SMT inspection systemsmarket, with 3D AOI representing the fastest growing segment of this market. In the $50 million market for semiconductor advanced packaginginspection equipment, our competitors include suppliers of mid-end and back-end semiconductor inspection equipment, including RudolphTechnologies, Inc. and Camtek, Inc. We believe our 3D MRS sensor technology and the Ai2 software used in our SQ family of productsdifferentiates our products from competing products and that our products compete effectively in the AOI market based on cost, ease of use atrapid production line speeds and the low rate of false calls. We believe that our SQ3000 3D AOI product, enabled by our proprietary MRStechnology, 3D fusing algorithms and precision optics, offers advantages over competing products and will allow us to gain market share basedon our ability to offer microscopic quality images at fast production line speeds. The multi-billion dollar market for 3D scanning and metrology products is highly fragmented. The primary competition for our CyberGage®360and SQ3000™ 3D CMM metrology products include coordinate-measuring machine based products sold by Hexagon, Zeiss and others, andassorted other 3D measurement technology products offering varying combinations of speed and accuracy. The market for 3D scanning andmetrology services is dominated by small regional market participants. Our sales of CyberGage360® and SQ3000™ 3D CMM to date have beenminimal. However, we believe that the unique performance characteristics of our MRS technology, which inhibit reflections and enable veryaccurate measurements at fast speeds, combined with ease of use, will give these products a competitive advantage in the marketplace for 3Dscanning and metrology. We believe our WaferSense products are unique to the marketplace and primarily face competition from the manual techniques currently usedby most customers to monitor their semiconductor fabrication or flat panel display manufacturing equipment. We believe that ourWaferSense products provide more reliable and accurate measurements than these manual techniques. In a semiconductor fabricationenvironment, we believe that our WaferSense products save significant time because the user is not required to break down process equipment,or pressurize a vacuum chamber, thereby improving tool up-time, through-put and process yield. Employees As of December 31, 2017, we had 177 full-time employees worldwide, including 44 in sales, marketing and customer support, 63 inmanufacturing, purchasing and production operations, 54 in engineering, research and development, and 16 in finance, administration andinformation services. Of these employees, 101 are located at our corporate headquarters in Minneapolis, Minnesota, 18 are located at our facilityin Bloomington, Minnesota and 58 are located in other offices (5 in the United Kingdom, 1 in Oregon, 1 in California, 41 in Singapore, 6 inChina, 2 in Taiwan, 1 in Japan and 1 in Korea). Although we have been successful in attracting and retaining qualified technical personnel, thereis an ongoing need for more employees with advanced degrees and training in mathematics, optical physics and other key disciplines. Therecan be no assurance that we will be able to successfully retain or recruit qualified technical personnel in the future. None of our employees arecovered by collective bargaining agreements or are members of a union.Proprietary Protection We rely on the technical expertise and know-how of our personnel and trade secret protection, as well as on patents, to maintain ourcompetitive position. We attempt to protect intellectual property by restricting access to proprietary methods by a combination of technical andinternal security measures. In addition, we make use of non-disclosure agreements with customers, consultants, suppliers and employees.Nevertheless, there can be no assurance that any of the above measures will be adequate to protect our proprietary technology and it ispossible that any of our products could be duplicated by other companies in the same markets in which we participate. 12Table of ContentsWe hold 43 patents (25 U.S. and 18 foreign) on a number of technologies, including the technologies used in our 3D optical sensors, MRStechnology, LaserAlign products, SIM sensor technology, inspection systems, WaferSense products, CyberGage®360 3D and SQ3000™ 3DCMM products, and other products. In addition, we have 14 pending patents (4 U.S. and 10 foreign). We protect the proprietary nature of oursoftware primarily through copyright and license agreements, but also through close integration with our hardware offerings. Weutilize 34 registered trademarks (14 U.S. and 20 foreign) and have 1 U.S. trademark registration pending. We also have 14 domain names andseveral common law trademarks. It is our policy to protect the proprietary nature of our new product developments whenever they are likely tobecome significant sources of revenue. No guarantee can be given that we will be able to obtain patent or other protection for other products. As the number of our products increases and the functionality of those products expands, we may become increasingly subject to attempts toduplicate our proprietary technology. We periodically receive communications from third parties asserting that our products infringe, or mayinfringe, the proprietary rights of these third parties or others. These claims of infringement may lead to protracted and costly litigation, whichcould require us to pay substantial damages or have the sale of our products stopped by an injunction. Infringement lawsuits or claims couldalso cause product delays, require us to redesign our products, hinder our ability to sell our products, or make the sale of these products moreexpensive. In addition, although we do not believe that any of our products infringe the rights of others, there can be no assurance that thirdparties will not assert infringement claims in the future or that any such assertion will not require us to enter into a royalty arrangement or resultin litigation. Government Regulation Many of our products contain lasers. Products containing lasers are classified as either Class I, Class II or Class IIIb Laser Products underapplicable rules and regulations of the Center for Devices and Radiological Health (CDRH) of the Food and Drug Administration. Suchregulations generally require a self-certification procedure pursuant to which a manufacturer must file with the CDRH with respect to eachproduct incorporating a laser device, periodic reporting of sales and purchases and compliance with product labeling standards. Our lasers aregenerally not harmful to human tissue, but could result in injury if directed into the eyes of an individual or otherwise misused. We are notaware of any incident involving injury or a claim of injury from our laser devices and believe that our sensors and sensor systems comply withall applicable laws for the manufacture of laser devices. 13Table of Contents 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 lookingstatements 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 and improvement inprofits, 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 thesefactors include the following: •We have recently introduced or are in the process of introducing a number of products based upon our 3D MRS technology and thefailure of this technology to perform up to our expectations would materially adversely affect our anticipated operating results. Webelieve our MRS technology is unique in the marketplace based upon its ability to inhibit reflections and offer microscopic qualityimages at production line speeds, and we have high expectations about the prospect for longer-term sales of products based on thistechnology. We have incorporated the MRS technology into various products, including our 3D AOI offering, the SQ3000, two newmetrology products, CyberGage®360 and SQ3000™ 3D CMM, and products for OEM customers, including KLA-Tencor, Nordson-YESTECH, and others. We also expect to use this technology in other new products, including next generation inspection systems forthe SMT and semiconductor markets, and in products for new applications. If the performance of the MRS technology does not meetour expectations, if the products we have introduced or are about to introduce based upon the MRS technology do not operate up tospecifications, if the market otherwise does not find this technology attractive, or if we are unable to efficiently identify new customersand new applications for this technology given our current sales channels, our operating results for 2018, and our expectations forlonger term growth in revenue, would be materially adversely affected. •Our business has been and will continue to be significantly impacted by the global economy and uncertainty in the outlook for theglobal economy makes it more likely that our actual results will differ materially from expectations. Economic uncertainties affectbusinesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities, andnegatively 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 existingand future orders with us. In addition, financial difficulties experienced by our suppliers, distributors or customers could result inproduct delays, increased accounts receivable defaults and inventory challenges. The OEMs and semiconductor manufacturers thatpurchase our sensors and the manufacturers that purchase our inspection system products are largely dependent on continueddemand for consumer and commercial electronics, including smartphones, tablets and computers. Demand for electronics is a functionof the health of the economies in the United States and around the world. Sales of our metrology products and services are alsodependent upon the health of the global economy. Our results would be adversely affected in the future if these economies were toexperience recessions. •World events beyond our control may affect our operations. Our operations and markets could be negatively affected by world eventsthat effect economies and commerce in the specific countries, such as China, Singapore and Japan, in which we do business. Naturaldisasters have affected travel patterns and accessibility in these countries in the past and other natural occurrences could affect thebusiness we do in these countries in the future. Terrorist activity or other armed conflicts that could occur in countries in which we dobusiness, labor disputes that impact complex international shipping arrangements, or other unanticipated actions by local populationscould affect our ability to do business in specific geographies. Many of the countries in which we do business can be affected byeconomic forces that are different from the forces that affect the United States and change the amount of business we conduct. •Our operating results have varied, and will likely continue to vary significantly, from quarter to quarter. Our quarterly operatingresults have varied in the past and will likely continue to vary significantly from quarter to quarter. Some of the factors that mayinfluence our operating results include the following: changes in customer demand for our sensors, inspection systems and metrologyproducts, which is influenced by economic conditions in our markets and the overall health of the global economy; demand forproducts that use circuit boards and semiconductors; market acceptance of our products and those developed by our OEMcustomers; competition; seasonal variations in customer demand; the timing, cancellation or delay of customer orders, particularly our3D MRS-enabled AOI systems; the timing of product shipments and related customer acceptances; and product development andother costs, including increased research, development, engineering and marketing expenses associated with our introduction of newproducts and product enhancements, and ongoing sales and marketing activities. 14Table of Contents •The markets for capital equipment in the electronics assembly and semiconductor industries in which we operate are cyclical, andwe cannot predict with precision when market downturns will occur. We operate in cyclical markets – the electronics assembly andsemiconductor capital equipment markets – that periodically adjust independent of global economic conditions. We will not be able topredict with accuracy the timing or magnitude of periodic downturns in this market. In the past, these downturns have severelyaffected our operations and generated several years of unprofitable operations. Ultimately, we have difficulty determining the durationor severity of any market downturns, the strength of any subsequent recoveries, and the long-term impact that economic conditionsmay have on our business. •Sales of sensors to five OEM customers constituted 30% of our revenue in 2017, and the loss of any of these customers could have amaterially adverse impact on our results of operations. Although we anticipate that our future revenue and operations will be lessdependent on any particular customer, given recent success with new products based on our high precision 3D MRS sensortechnology, and the anticipated future revenue potential of our other products, including those products we anticipate introducing inthe future, 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 operationscould be adversely affected. •We generate over 70% of our revenue from export sales that are subject to risks of international operations. Our export sales aresubject 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 ourproducts 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, disease, or other events that may affect local economies and our access to markets outside the United States. •Our development and assembly operations in Singapore, and our sales operations in Asia, are subject to unique risks because of theremote nature of the operations. Our Singapore development and manufacturing operations, and our Asian sales operations, present anumber of risks. These risks relate to the retention of personnel, management of product development and operations, managementand access to customer and distributor interactions, control over administrative and business processes, regulatory and legalissues and other matters relating to foreign operations. Our financial performance, ability to serve our customers and ability tomanufacture and sell products in Asia could be negatively impacted if we are unable to retain our Asian based employees, if it costsmore than expected to retain these employees or hire other experienced employees in a timely manner, if we are unable to manage theseemployees appropriately, or if we are unable to locate suitable sources of components for our products manufactured in Asia. 15Table of Contents •Exchange rate fluctuations may have a significant negative impact on our revenue and results of operations. Most of our internationalexport sales are negotiated, invoiced and paid in U.S. dollars. Significant fluctuations in the value of the U.S. dollar relative to othercurrencies could have a negative impact on the price competitiveness of our products relative to foreign competitors and thewillingness of customers to purchase our products. A significant portion of our cost of revenues, research and development and salesand marketing costs are denominated in the Singapore dollar. In addition, other sales and marketing costs are denominated in BritishPounds Sterling 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 currenciesof other geographies could have a significant negative impact on our future revenue, costs and results of operations •Our products could become obsolete. Our current products, as well as the products we have under development, are designed tooperate with the technology that we believe currently exists or may exist for electronic components, printed circuit boards, memorymodules and semiconductor manufacturing markets, including general purpose metrology. The products we develop to meet customerneeds and requirements are subject to rapid technological change and, because it takes considerable time to develop new products, wemust anticipate industry trends, as well as technological developments, in order to effectively compete. Further, because we do nothave unlimited development resources, we might choose to forgo the pursuit of what becomes a leading technology or market anddevote our resources to technologies and markets that are less successful. If we incorrectly anticipate technology developments ormarket trends, or have inadequate resources to develop our products to deal with changes in technology and markets, our productscould become obsolete, and our future revenue and operating results would be negatively impacted. •The market for most surface mount capital equipment has become more mature and price competitive, negatively impacting ourmargins. The electronics capital equipment market for surface mount technologies is becoming more mature, resulting in increasedprice pressure on suppliers of this type of equipment. Consequently, our SMT electronic assembly inspection systems and alignmentsensor products have become subject to increased levels of price competition and competition from other suppliers which may or maynot utilize different technology, including lower cost Asian based suppliers. •Because of the high cost of changing equipment, customers in our markets are sometimes resistant to purchasing our productseven if they are superior. We believe that, because of the high cost of installation and integration of new inspection equipment intoproduction 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 orcost advantages that outweigh the expense of installing and integrating new systems, it may be difficult for us to achieve significantsales to a customer that currently uses a competitor’s equipment. •Our ability to compete in the markets for our products is dependent upon our ability to recruit new capable channel partners anddirect sales employees and the sales skills of our channel partners and employees. In order to generate significant incrementalrevenue in the future, we need to expand the capability of our sales channels by recruiting new, high quality channel partners andsales employees. Our efforts to increase the size and capability of our direct sales team and channel partners will increase our coststructure. If we are unable to successfully improve the size and capability of our sales channel, our future sales will be negativelyimpacted, and we will not obtain an adequate return on the increase in our cost structure. To the extent our competitors haverelationships with stronger channel partners, it may be difficult for us to achieve significant incremental revenue, even if our productsare technologically superior. • Competitors in Asia may be able to compete favorably with us based on lower production and employee costs. We compete with largemultinational companies when selling our inspection system products. These competitors are able to take advantage of greaterfinancial resources and larger sales distribution networks. We also compete with new Asian based suppliers, many of which may havelower 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 systems and metrologyproducts. We sell our products through key OEM customers, and usually have significant credit exposure with respect to thesecustomers. In addition, we sell our inspection system and metrology products through a network of international distributors. Thesedistributors tend to be small and have limited financial resources and access to capital. Although these distributors do not hold ourproducts in inventory for re-sale, we are exposed to credit risk and would incur losses if they are unable to pay for the products theyhave purchased from us. •We are dependent upon outside suppliers for components of our products, and delays in or unavailability of those components wouldadversely affect our results. We use outside contractors to manufacture the components used in many of our products and some ofthe components we order require significant lead times that could affect our ability to sell our products if the components are notavailable. In addition, if these components do not meet stringent quality requirements or become obsolete, there could be delays in theavailability of our products, and we could be required to make significant investments in designing replacement components. 16Table of Contents •Breaches of our network security could expose us to losses. We manage and store on our network systems various proprietaryinformation and sensitive or confidential data relating to our operations. There has been an increasing incidence of unauthorizedaccess to the computer networks of various technology companies, and we are not immune to attempted unauthorized access.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 anddeploy viruses, worms, and other malicious software programs that disrupt our operations and create security vulnerabilities. Attackson our network systems could result in significant losses, compromise our competitive advantages and damage our reputation withcustomers. •Our efforts to protect our intellectual property may be less effective in certain foreign countries, where intellectual property rightsare not as well protected as in the United States. The laws of some foreign countries do not protect our proprietary rights to as greatan extent as do the laws of the U.S., and many U.S. companies have encountered substantial problems in protecting their proprietaryrights against infringement abroad. Consequently, there is a risk that we may be unable to adequately protect our proprietary rights incertain foreign countries. If this occurs, it would be easier for our competitors to develop and sell competing products in thesecountries. •We may fail to adequately protect our intellectual property and therefore lose our competitive advantage. Our future success andcompetitive 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 adequatelyprotect our intellectual property, our competitors may be able to duplicate and enhance the products we have developed. We own orhave licensed a number of patents, and have filed applications for additional patents. Any of our pending patent applications may berejected, and we may be unable to develop additional proprietary technology that is patentable in the future. In addition, the patentsthat we do own or that have been issued or licensed to us may not provide us with competitive advantages and may be challenged bythird parties. Further, third parties may also design around these patents. In addition to patent protection, we rely upon trade secretprotection for our confidential and proprietary information and technology. We routinely enter into confidentiality agreements with ouremployees and other third parties. Even though these agreements are in place, there can be no assurance that trade secrets andproprietary information will not be disclosed, that others will not independently develop technology substantially equivalent to ourproprietary technology or otherwise gain access to our trade secrets, or that we can fully protect our trade secrets and proprietaryinformation. Violations by others of our confidentiality agreements and the loss of employees who have specialized knowledge andexpertise could harm our competitive position and cause our sales and operating results to decline as a result of increased competition.Costly and time-consuming litigation might be necessary to enforce and determine the scope of our proprietary rights, and failure toobtain or maintain trade secret protection might adversely affect our ability to continue our research or bring products to market. •Protection of our intellectual property rights, or the efforts of third parties to enforce their own intellectual property rights againstus, may result in costly and time-consuming litigation, substantial damages, lost product sales and/or the loss of importantintellectual property rights. We may be required to initiate litigation in order to enforce any patents issued to or licensed by us, or todetermine the scope or validity of a third party’s patent or other proprietary rights. Any litigation, regardless of outcome, could beexpensive and time consuming, and could subject us to significant liabilities or require us to re-engineer our products or obtainexpensive 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, ourcommercial success depends in part on our ability to avoid infringing or misappropriating patents or other proprietary rights owned bythird parties. We periodically receive communications from third parties asserting that our products infringe, or may infringe, theproprietary rights of these third parties or others. These claims of infringement may lead to protracted and costly litigation, whichcould require us to pay substantial damages or have the sale of our products stopped by an injunction. Infringement lawsuits or claimscould also cause product delays or require us to redesign our products and these delays could result in the loss of substantialrevenues. We may also be required to obtain a license from the third party or cease activities utilizing the third party’s proprietaryrights. 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 theseproducts more expensive. •We have significant deferred tax assets recorded on our balance sheet based on the income tax laws and income tax rates at whichthey are expected to be utilized in the future. Our ability to utilize these deferred tax assets is dependent on our ability to generatesufficient profits in future periods. A change in income tax laws or a further reduction in income tax rates in the future could require usto write-down the value of our deferred tax assets. The amount of any write-down could be large and may result in a significant chargeagainst future earnings. Our ability to utilize our deferred tax assets and realize their value is dependent upon our ability to generatesufficient levels of profitability and taxable income in future periods. If we do not generate sufficient profits and taxable income infuture periods, we most likely would be required to record a valuation allowance against our deferred tax assets, resulting in asignificant charge against earnings. 17Table of Contents •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 industry 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 technologysolutions 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 selllarger blocks, the attractiveness of our stock to institutional shareholders, and the market value of our common stock. There were6,979,686 shares of our common stock outstanding as of December 31, 2017. Although our common stock is traded in the NASDAQGlobal Market, in part because of the number of shares we have outstanding and available for trading, the daily trading volume in ourstock is low, averaging less than 100,000 shares per day. Shareholders wishing to purchase or sell larger blocks of stock may not beable to do so quickly, and disposal by any shareholder of a significant block of stock could adversely affect the sale price in themarketplace. Further, institutional investors often have policies against investment in stock that is illiquid, and many institutionalinvestors may elect not to purchase or hold our stock because of the inability to dispose of it. Lack of institutional interest in ourcommon stock can negatively impact its market price and liquidity. • In order to be successful, we must attract, engage, retain and integrate key research and development employees. Failure to do socould have an adverse effect on our ability to profitably grow our business. Identifying, hiring, developing, training and retaininghighly-skilled research and development employees is critical to our future, and competition for these types of employees can beintense. Failure to successfully hire key research and development employees or the loss of key research and development employeescould 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. •We are dependent on our President and Chief Executive Officer, Dr. Subodh Kulkarni, for new product innovation and much of thesales, marketing and business development activities related to our markets, particularly our MRS sensors. Dr. Kulkarni performs acritical role at CyberOptics with respect to product strategy and new product development and innovation. Also, he has beeninstrumental in development and expansion of our relationships with key OEM customers, including KLA-Tencor and Nordson-YESTECH. In addition, Dr. Kulkarni has significant responsibility for identifying potential new applications and developing newcustomers for our MRS sensor technology. If Dr. Kulkarni's employment with CyberOptics were to end for any reason, our ability todevelop innovative products and achieve sustained long-term revenue growth may be negatively impacted in a significant way. 18Table of Contents ITEM 1B. UNRESOLVED STAFF COMMENTS Not applicable. ITEM 2. PROPERTIES We lease a 50,724 square foot mixed office and warehouse facility built to our specifications in Golden Valley, Minnesota, which functions as ourcorporate headquarters and primary manufacturing facility for our sensor products, including those used in our inspection system products.Our lease for the Golden Valley facility expires December 31, 2018. It contains an escalation clause and two renewal options of three years each. We lease a 10,165 square foot mixed office and warehouse facility in Bloomington, Minnesota that serves as a sales, service and integrationfacility for our metrology products and services. Our lease for the Bloomington, Minnesota facility expires on December 31, 2018. We lease a 19,805 square foot mixed office and warehouse facility in Singapore that serves as a sales, development and final assembly andintegration facility for our inspection system products. Our lease for the Singapore facility expires on July 24, 2020 and contains an escalationclause and one three year renewal option. As of December 31, 2017, we also have operating leases in the United Kingdom and China, which expire in June 2018 and November 2018,respectively. We anticipate entering into a new lease before the end of 2018 that will combine our current Golden Valley and Bloomington, Minnesotaoperations into a single facility. We believe that there are facilities available for lease in the Minneapolis, Minnesota area that will meet ouranticipated needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS We are not currently subject to any material pending or threatened legal proceedings. ITEM 4. MINE SAFETY DISCLOSURES None. 19Table of Contents PART II. ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on the Nasdaq Global Market. The following table sets forth, for the fiscal periods indicated, the high and low salesprices for our common stock as reported by the Nasdaq Global Market. These prices do not reflect adjustments for retail markups, markdownsor commissions. 2017 2016 2015Quarter High Low High Low High LowFirst $41.18 $23.90 $10.00 $7.27 $11.75 $9.01 Second $26.25 $19.80 $18.44 $9.30 $11.24 $9.77 Third $25.69 $13.75 $25.41 $15.15 $10.46 $4.80 Fourth $18.00 $11.35 $30.50 $22.40 $8.48 $5.86 As of February 28, 2018, there were approximately 200 holders of record of our common stock and approximately 3,000 beneficial holders. Wehave never paid a dividend on our common stock. Dividends are payable at the discretion of the Board of Directors out of funds legallyavailable. Our Board has no current intention of paying dividends. In October 2017, our Board adopted a program authorizing the repurchase of up to $3.0 million of shares of our common stock. The commonstock will be acquired from time to time in open market transactions, block purchases and other transactions complying with Rule 10b-18 of theSecurities and Exchange Commission (the "SEC"). We also withhold common shares to cover employee tax withholding obligations upon thevesting of restricted stock units and stock option exercises. In the three and twelve months ended December 31, 2017, we withheld 7,366 sharesto satisfy employee tax withholding requirements of $35,424. Company Repurchase of Equity Securities Period(a)Total Numberof SharesPurchased(b)Average PricePaid perShare (c)Total Numberof SharesPurchased asPart ofPubliclyAnnounced Program (d)ApproximateValue ofShares thatMay Yet BePurchasedUnder the Program (1) October 1, 2017 to October 31, 2017 — $— — $3,000,000November 1, 2017 to November 30, 2017 15,000 $15.98 15,000 $2,760,243 December 1, 2017 to December 31, 2017 — $ — — $2,760,243Total 15,000 $15.98 15,000 $2,760,243 (1)Amount reflected in column (d) represents the approximate dollar value of shares that remain to be repurchased under the program. 20Table of Contents The following graph compares the cumulative total shareholder return on our common stock from January 1, 2013 to December 31, 2017 with thecumulative total return on a broad market index (the Nasdaq US Index) and a peer group index (the RDG Semiconductor Composite Index). Ineach case, we have calculated the cumulative return assuming an investment of $100 on December 31, 2012, and reinvestment of all dividends. 201220132014201520162017CyberOptics Corporation100.0086.12129.51103.10351.75202.16NASDAQ Composite100.00141.63162.09173.33187.19242.29RDG Semiconductor Composite100.00135.28172.65159.13212.14291.70 21Table of Contents ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with our Consolidated Financial Statements and the related Notes theretoand the "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Annual Reporton Form 10-K. The balance sheet data as of December 31, 2017 and 2016 and the statement of operations data for the years ended December 31,2017, 2016 and 2015 set forth below were derived from our audited consolidated financial statements included elsewhere in this Annual Reporton Form 10-K. The balance sheet data as of December 31, 2015, 2014 and 2013, and the statement of operations data for the years endedDecember 31, 2014 and 2013 were derived from our audited consolidated financial statements not included herein. Year Ended December 3120172016201520142013 Statement of Operations Data:Revenues $53,333 $66,240 $41,130 $46,483 $33,308 Income (loss) from operations$1,015$6,153$(2,163)$(1,477)$(6,166)Net income (loss) $1,312 $11,562 $(2,089)$(1,487) $(6,168) Net income (loss) per share:Basic $0.19 $1.69 $(0.31) $(0.23)$(0.91) Diluted$0.19$1.64$(0.31)$(0.23)$(0.91)Balance Sheet Data:Cash and cash equivalents $6,944 $10,640 $4,274 $5,171 $3,101 Marketable securities$15,743$15,221$13,333$15,174$20,144Working capital $33,400 $30,793 $23,910 $22,938 $26,154 Total assets$59,501$59,580$44,739$46,412$44,575Stockholders’ equity $52,282 $48,898 $36,058 $37,438 $38,479 22Table of Contents ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Overview Our recent and planned product introductions are designed to strengthen our competitive position in our current markets and expand intoadjacent markets. We believe 3D inspection and metrology represents a high-growth segment for both the SMT and semiconductor capitalequipment markets. We also see significant growth opportunities for 3D measurement and inspection in the emerging market for advancedpackaging applications. For these reasons, we are working to strengthen our position as a leading global developer and manufacturer of high-precision 3D sensors. A key element in our strategy is the continued sale and development of new high precision 3D sensors based on ourproprietary MRS technology. We believe that MRS is a break-through optical technology for high precision inspection and metrology, with the potential to expand ourmarkets in the future. Manufacturing yield challenges as products become more complex are driving the need for inspection and metrology. Wesee a growing number of opportunities in the markets for SMT and semiconductor inspection, because our 3D MRS technology platform is wellsuited for many of these applications, particularly advanced packaging and complex mobile devices. We are taking advantage of these marketstrends by deploying our 3D MRS sensor technology in the following products: •The SQ3000, our 3D AOI system, which is designed to expand our presence in SMT and semiconductor markets requiring highprecision measurement and inspection. In these markets, identifying defects has become highly challenging and critical due to smallerand more complex electronics packaging and increasing component density on circuit boards. •High-precision 3D sensor subsystems. We have entered into a mutually exclusive agreement to supply KLA-Tencor with thesesubsystems for its back-end semiconductor packaging inspection systems. We also have entered into an agreement tosupply Nordson-YESTECH with high precision 3D sensor subsystems for its inspection systems serving the SMT market. •Two new metrology products, CyberGage®360, which was launched in the second half of 2016, and SQ3000™ 3D CMM, which waslaunched in the second half of 2017. Manufacturers in a variety of industries, including SMT, semiconductor and consumerelectronics, can use these products as in-line or off-line metrology tools to help solve complex manufacturing and product qualitychallenges. We have not sold a significant number of CyberGage360 and SQ3000 3D CMM products to date. However, based uponpositive feedback from customer product evaluations, we believe future sales of these products could be significant. Revenue from MRS based products increased to $14.3 million in 2017, up from $12.3 million in 2016 and $4.8 million in 2015. We believe we willbe able to increase sales of products based on our MRS technology in the SMT, semiconductor and metrology markets, including the marketthat requires inspection and metrology for advanced packaging applications. We intend to increase sales of these products by utilizingnew OEM partners and system integrators and by expanding direct sales to end-user customers. We have significantly advanced our MRS-enabled 3D sensor technology as part of a research initiative aimed at applying our 3D MRStechnology to mid-end and front-end semiconductor inspection and the emerging semiconductor advanced packaging market. Our MRStechnology is now able to inspect cracks and other defects as small as 30 microns in wafer dies, which makes our MRS technology suitable formany mid-end semiconductor and advanced packaging inspection and metrology applications. We are currently demonstrating thistechnology to semiconductor manufacturers, and we believe that initial sales of products based on MRS-enabled technology for mid-endsemiconductor inspections are possible before the end of 2018. We have continued to invest in our WaferSense® family of products. In response to ongoing input from semiconductor and flat panel displaymanufacturers, we are developing additional product offerings that can be used in semiconductor fabs and flat panel display factories. Strongfuture sales growth is anticipated for the WaferSense® family of products. Our backlog was $11.4 million at December 31, 2017, an increase from $11.2 million at September 30, 2017 and $10.2 million at December 31, 2016.Over the longer term, we believe that anticipated sales growth of our 3D MRS-enabled products and WaferSense products should increase ourrevenues and net income. We believe that we have the resources required to attain our growth objectives, given our available cash andmarketable securities balances totaling $22.7 million at December 31, 2017. Our ability to implement our strategy effectively is subject to numerous uncertainties and risks, including the risks identified in Item 1A of thisAnnual Report on Form 10-K. 23Table of Contents Revenues Our revenues decreased by 19% to $53.3 million in 2017, from $66.2 million in 2016, and increased by 61% in 2016, from $41.1 million in 2015. Thefollowing table sets forth, for the years indicated, revenues by product line (in thousands): (In thousands) 2017 2016 2015High precision 3D and 2D sensors $17,079 $18,797 $13,022 Semiconductor sensors 11,059 10,061 7,677 Inspection systems 19,468 28,680 13,578 Metrology products and services 5,727 8,702 6,853 Total $53,333 $66,240 $41,130 Revenues from sales of high precision 3D and 2D sensors decreased by $1.7 million or 9% to $17.1 million in 2017, and increased by $5.8 millionor 44% to $18.8 million in 2016, from $13.0 million in 2015. Revenue from sales of legacy 2D LaserAlign sensors declined in 2017 following a largeincrease in 2016, when a longstanding OEM customer experienced a significant increase in sales of its products that incorporate our sensors.Sales of high precision 3D MRS sensors increased to $4.4 million in 2017, from $4.0 million in 2016 and $1.6 million in 2015. We believe sales ofhigh precision 3D MRS sensors will continue to grow in the future. In addition, we project a growing number of opportunities in the markets forSMT and semiconductor inspection products, because our high precision 3D MRS sensors are well suited for many of these applications,particularly applications relating to advanced packaging and complex mobile devices. Sales of high precision 3D and 2D sensors are dependenton the success of our OEM partners selling products that incorporate our sensors. Quarterly sales of high precision 3D and 2D MRS sensorsare prone to significant fluctuations, both sequentially and on a year-over-year basis. Revenues from sales of semiconductor sensors, principally our WaferSense® line of products, increased by $1.0 million or 10% to $11.1 millionin 2017, and increased by $2.4 million or 31% to $10.1 million in 2016, from $7.7 million in 2015. The sales increases in 2017 and 2016 were due tofavorable conditions in the semiconductor capital equipment market, and improved customer awareness of our WaferSense® products at majorsemiconductor manufacturers and capital equipment suppliers. Revenue increases in 2016 were also due in part to the successful launch of anew Auto-Multi Sensor that combined leveling, vibration and humidity measurements into an all-in-one wireless, real-time device. We anticipatethat the benefits from growing market awareness of our WaferSense® products and new introductions of WaferSense® products will lead toadditional WaferSense® product sales in future periods. Specifically, we also are launching new products aimed at increasing our sales ofWaferSense® products to flat panel display manufacturers, as these customers have determined that our WaferSense® products are able tosignificantly improve their manufacturing processes and yields. Revenues from sales of inspection systems decreased by $9.2 million or 32% to $19.5 million in 2017, and increased by $15.1 million or 111% to$28.7 million in 2016, from $13.6 million in 2015. Revenues from sales of inspection systems declined in 2017 because higher sales of SQ3000 3DAOI products were unable to offset lower sales of legacy inspection systems and the lack of sales of MX600 memory module inspectionssystems. Revenue from sales of inspection systems in 2016 resulted from strong demand for our entire portfolio of inspection system products,including SQ3000 3D MRS-enabled AOI systems and recognition of $5.7 million in revenue from sales of MX600 memory module inspectionsystems. Strong sales growth from SQ3000 systems in 2016 was due in part to follow-on orders totaling approximately $4.7 million from a keycustomer that manufactures a next-generation consumer electronics product. We believe a growing number of companies are transitioning from 2D AOI to 3D AOI systems to meet the increasingly demanding inspectionrequirements of the electronics, semiconductor and industrial markets. We believe sales of our new 3D MRS enabled AOI products willrepresent an increasing percentage of our total AOI and SPI product sales in the future. We expect that the competitive advantages of ourunique 3D MRS technology will provide us with an opportunity to capture a greater market share of the 3D AOI systems market.Revenues from sales of metrology products and services decreased by $3.0 million or 34% to $5.7 million in 2017, and increased by $1.8 millionor 27% to $8.7 million in 2016, from $6.9 million in 2015. Revenue in 2017 and 2016 was significantly impacted by fluctuations in the level of salesincreases of x-ray scanning systems, mainly to a single customer. There were no sales of x-ray scanning systems in 2017. Revenue from sales ofx-ray scanning systems totaled $3.3 million in 2016. We believe that our future revenue growth from sales of metrology products and serviceswill be determined in large part by market acceptance of our new 3D MRS-based CyberGage®360 and SQ3000™ 3D CMM products. Export revenues totaled $38.0 million or 71% of our revenues in 2017, compared to $53.5 million or 81% of total revenues in 2016, and $29.7million or 72% of total revenues in 2015. Export revenue as a percentage of total revenue was lower in 2017 when compared to 2016, becausemost of the large transactions that drove our strong revenue growth in 2016 were export sales. The increase in export revenues as a percentageof total revenues in 2016 was due to the large increase in sales of SMT inspection systems, a higher proportion of which are generally soldoutside the United States as compared to our other products. 24Table of ContentsCost of Revenues and Gross Margin Cost of revenues decreased by $8.6 million or 23% to $28.6 million in 2017, and increased by $14.2 million or 62% to $37.2 million in 2016, from$23 million in 2015. Fluctuations in cost of revenues were primarily due to the corresponding fluctuations in revenue levels. Total revenuedecreased by 19% in 2017 and increased by 61% in 2016. Items included in cost of revenues that fluctuate with the level of sales include rawmaterials, direct labor and factory overhead costs. Total gross margin as a percentage of revenue was 46% in 2017, 44% in 2016 and 44% in 2015. The fluctuations in gross margin percentage weremainly due to a change in the mix of products sold. Sales of higher margin MRS and WaferSense® products constituted a larger percentage ofour total revenue in 2017, compared to 2016 and 2015. Our markets are highly price competitive, particularly the electronic assembly market, resulting in continual pressure on our gross margins. Wecompensate for pricing pressure by introducing new products with more features and improved performance and through manufacturing costreduction programs. Sales of many products that we have recently introduced or are about to introduce, including our CyberGage®360and SQ3000™ 3D CMM products, SQ3000 3D AOI products, 3D MRS sensors and WaferSense products have, or are expected to have, morefavorable gross margins than many of our existing products. Operating Expenses Research and development expenses were $8.0 million or 15% of revenue in 2017, $8.0 million or 12% of revenue in 2016, and $7.6 million or 18%of revenue in 2015. In 2017, lower bonus accruals for employees working in research and development were offset by costs related to payincreases and employee additions. Research and development expenses were higher in 2016 when compared to 2015 mainly due tobonus accruals resulting from our improved financial performance. Current research and development expenditures are primarily focused oncontinued development of our MRS technology and related products, including 3D sensor subsystems, enhancements to the SQ3000 3D AOIand SQ3000™ 3D CMM products and commercialization of a sensor for mid-end semiconductor inspection. Selling, general and administrative expenses were $15.7 million or 29% of revenue in 2017, $14.8 million or 22% of revenue in 2016 and $12.6million or 31% of revenue in 2015. The increase in selling, general and administrative expenses in 2017 was due to additional investment inmarketing programs and additional sales and marketing personnel to better penetrate our targeted markets. The cost increases in 2017 wereoffset in part by lower incentive compensation expenses due to reduced levels of revenue and profitability. The increase in selling, general andadministrative expenses in 2016 compared to 2015 was due to higher sales commissions and the accrual of incentive compensation resultingfrom our significantly improved financial performance. Interest Income and Other Interest income and other includes interest earned on investments and gains and losses associated with foreign currency transactions,including intercompany financing transactions associated with our subsidiaries in the United Kingdom, Singapore and China. Because wemaintain our investments in instruments designed to avoid risk of loss of principal, we have generated very little interest income in the currentinterest rate environment. Our gains and losses from foreign currency transactions primarily result from intercompany financing transactions.Due to weakness in the U.S. dollar relative to foreign currencies in 2017, we recognized losses from foreign currency transactions of $177,000 in2017. Due to the strength of the U.S. dollar in 2016 and 2015, we recognized gains from foreign currency transactions of $207,000 in 2016 and$103,000 in 2015. Provision for Income Taxes We recorded income tax benefits of $404,000 in 2017 and $5.2 million in 2016, and income tax expense of $28,000 in 2015. The non-cash incometax benefit recorded in 2017 was primarily due to a significant change in income tax law, contained in the Tax Cuts and Jobs Act, passed by theU.S. Congress in December 2017. Prior to passage of the new tax law, we had recorded a $2.7 million deferred tax liability for the outside basisdifference related to the undistributed earnings of our Singapore subsidiary. Under the new tax law, the prior system of taxing U.S. corporationson the foreign earnings of their non-U.S. subsidiaries when such earnings were repatriated was replaced with a partial territorial system thatprovides a 100% dividends-received-deduction for foreign-source dividends received from 10%-or-more owned foreign corporations. Thebenefit from eliminating the deferred tax liability for the undistributed earnings of our Singapore subsidiary was offset in part by the write-downof our deferred tax assets to reflect the 21% corporate income tax rate in the new tax law. Our income tax benefit in 2017 also includes excess taxbenefits from employee share-based payments. The non-cash income tax benefit recorded in 2016 reflects a $9.6 million reduction in thevaluation allowances recorded against our deferred tax assets from utilization of available net operating loss carry forwards and ourdetermination that significant valuation allowances were no longer needed for our U.S. and Singapore based deferred tax assets. Income taxexpense in 2015 includes minimal state income tax expense and foreign income tax expense incurred by our subsidiaries in the United Kingdomand China.25Table of ContentsEffective January 1, 2017, we adopted Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based PaymentAccounting, which requires recognition of excess tax benefits or tax deficiencies from employee-share based payments in income tax expense orbenefit as a discrete item in the reporting period in which they occur. In 2017, we recognized $227,000 of excess tax benefits from employee-sharebased payments. We have significant deferred tax assets as a result of temporary differences between the taxable income reflected on our tax returns and ourincome determined in accordance with accounting principles generally accepted in the United States (GAAP), research and development taxcredit carry forwards and federal, state and foreign net operating loss carry forwards. A deferred tax asset generally represents future taxbenefits to be received when temporary differences previously reported in our consolidated financial statements become deductible for incometax purposes, when net operating loss carry forwards are applied against future taxable income, or when tax credit carry forwards are utilized onour tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided incurrent financial accounting standards. Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances arerequired considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of futureprofitability, the duration of statutory carry forward periods, our experience with loss carry forwards not expiring unused and tax planningalternatives. In analyzing the need for valuation allowances, we first considered our history of cumulative operating results for income taxpurposes over the past three years in each of the tax jurisdictions in which we operate, our financial performance in recent quarters, statutorycarry forward periods and tax planning alternatives. Finally, we considered both our near and long-term financial outlook. After considering allavailable evidence both positive and negative, we concluded that recognition of valuation allowances for substantially all of our U.S. andSingapore deferred tax assets was not required at December 31, 2017 or December 31, 2016. Our conclusions regarding the realizability of ourdeferred tax assets caused us to substantially reduce the valuation allowances recorded against our U.S. and Singapore based deferred taxassets in the fourth quarter of 2016, resulting in recognition of a significant non-cash income tax benefit. We file income tax returns in the United States and various state and foreign jurisdictions. Our federal income tax returns for years after 2012 arestill subject to examination by the Internal Revenue Service. We are no longer subject to state and local income tax examinations for years priorto 2013. The Inland Revenue Authority of Singapore recently initiated a review of our 2016 and 2015 income tax returns. We do not presentlyanticipate that the outcome of this audit will have a significant impact on our financial position or results of operations. Liquidity and Capital Resources Our cash and cash equivalents decreased by $3.7 million in 2017. Proceeds of $6.9 million from maturities of marketable securities, and proceedsof $636,000 from stock option exercises and share purchases under our employee stock purchase plan added to our cash and cash equivalents.These sources of cash were more than offset by cash used to fund operating activities totaling $2.4 million, by purchases of marketablesecurities totaling $7.5 million, purchases of fixed assets and payment of capitalized patent costs totaling $1.3 million and common stockrepurchases totaling $240,000. Our cash and cash equivalents fluctuate in part because of sales and maturities of marketable securities andinvestment of cash balances in marketable securities, and from other sources of cash. Accordingly, we believe the combined balances of cashand marketable securities provide a more reliable indication of our available liquidity than cash balances alone. Combined balances of cash andmarketable securities decreased by $3.2 million to $22.7 million as of December 31, 2017, from $25.9 million as of December 31, 2016. Operating activities used $2.4 million of cash in 2017. Cash used in operations included net income of $1.3 million, which included non-cashexpenses totaling $3.0 million for depreciation and amortization, recovery of doubtful accounts, deferred taxes, non-cash losses from foreigncurrency transactions and equity-based compensation costs. Changes in operating assets and liabilities using cash included an increase ininventories of $3.2 million, a decrease in accounts payable of $2.1 million and a decrease in accrued expenses of $1.6 million. Changes inoperating assets and liabilities providing cash included a decrease in accounts receivable of $171,000. Inventories increased because materialswere purchased to support higher sales of our new products that were originally anticipated in the second half of 2017. Actual sales of theseproducts were lower than anticipated. The use of cash for accounts payable resulted from the timing of the additional inventory purchases andcorresponding payments to suppliers. Accrued expenses decreased due to payment in 2017 of incentive compensation and bonuses accrued in2016. The accounts receivable decrease was due to lower sales levels in the fourth quarter of 2017, when compared to the fourth quarterof 2016. 26Table of ContentsOperating activities provided $9.1 million of cash in 2016. Cash provided by operations included net income of $11.6 million, including a $5.3million deferred income tax benefit and non-cash expenses totaling $2.6 million for depreciation and amortization, provision for doubtfulaccounts, non-cash gains from foreign currency transactions and equity-based compensation costs. Changes in operating assets and liabilitiesproviding cash included a decrease in inventories of $1.0 million, an increase in accounts payable of $550,000 and an increase in accruedexpenses of $1.9 million. Changes in operating assets and liabilities using cash included an increase in accounts receivable of $2.8 million, anincrease in other assets of $346,000 and a decrease in advance customer payments of $153,000. Inventories decreased due to customeracceptance of our remaining MX600 backlog, offset in part by new purchases of inventory needed to manufacture products for future salesrequirements. The accounts payable increase resulted from the timing of new inventory purchases and payments to suppliers. Accruedexpenses in 2016 were higher, mainly due to incentive compensation and warranty accruals resulting from our improved financial performanceand higher sales levels. Accounts receivable increased because sales were $2.1 million higher in the fourth quarter of 2016, when compared tothe fourth quarter of 2015. Other assets increased due to payments for income tax deposits and recoverable goods and services taxes. The smalldecrease in advance customer payments resulted from the timing of cash collections and recognition of revenue for transactions that werepreviously deferred. Operating activities used $2.4 million of cash in 2015. Cash used in operations reflected our net loss of $2.1 million, which included non-cashexpenses totaling $2.2 million for depreciation and amortization, provision for doubtful accounts, deferred taxes, non-cash gains from foreigncurrency transactions and stock compensation expenses. Changes in operating assets and liabilities used $2.5 million of cash in 2015, mainlydue to increased inventory purchases needed for higher customer demand and payment of calendar year 2014 incentive compensation accrualsand stay bonuses to employees of our wholly-owned subsidiary, Laser Design, Inc., in 2015. Investing activities used $1.9 million of cash in 2017 and $3.4 million of cash in 2016, and provided $954,000 of cash in 2015. Changes in the levelof investment in marketable securities, resulting from the purchases, sales and maturities of those securities used $544,000 of cash in 2017, $1.9million of cash in 2016, and provided $1.8 million of cash in 2015. We used $1.3 million of cash in 2017, $1.4 million of cash in the 2016 and$797,000 of cash in 2015 for the purchase of fixed assets and capitalized patent costs. Financing activities from stock option exercises and share purchases under our employee stock purchase plan provided $636,000 of cash in2017, $655,000 of cash in 2016 and $636,000 of cash in 2015. Financing activities used $240,000 of cash in 2017 for repurchases of our commonstock. Payments for employee tax withholding obligations for shares withheld upon the vesting of restricted stock units and exercises of stockoption used $35,000 of cash in 2017 and $9,000 of cash in 2016. At December 31, 2017, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referredto 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. Except for obligations under facility leases and purchase contracts, we had no material commitments for expenditures as of December 31, 2017.Purchase commitments for inventory can vary based on the volume of revenue and resulting inventory requirements. The following summarizes our contractual obligations at December 31, 2017, and the effect such obligations are expected to have on ourliquidity and cash in future periods.December 31, 2017 (in thousands) Total Less Than 1 Year 1 – 4 Years After 4 Years Contractual Obligations: Non-cancelable operating lease obligations $ 2,137 $ 1,433 $ 704 $ — Purchase obligations 8,194 8,194 — — Reserve for income taxes 159 — 159 — Total contractual cash obligations $ 10,490 $ 9,627 $ 863 $ — Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding. Included in thepurchase obligations category in the table above are orders for inventory purchases under our standard terms and conditions and undernegotiated agreements with vendors and utilities. We expect to receive consideration (i.e., products or services) in exchange for these purchaseobligations. The purchase obligation amounts do not represent all anticipated future purchases, but instead represent only those items forwhich we are contractually obligated. The majority of our products and services are purchased as needed, with no contractual commitment.Consequently, the amounts in the purchase obligations category of the table above do not provide a reliable indicator of our expected futurecash outflows.27Table of ContentsWe lease a 50,724 square foot mixed office and warehouse facility built to our specifications in Golden Valley, Minnesota, which functions as ourcorporate headquarters and primary manufacturing facility. The lease for this space will expire in December 2018. We lease a 19,805 square footmixed office and warehouse facility in Singapore. The lease for our Singapore facility expires in July 2020. We anticipate entering into a newlease before the end of 2018 that will combine our current Golden Valley and Bloomington, Minnesota operations into a single facility.Our Board of Directors has adopted a program authorizing the purchase of up to $3.0 million of shares of our common stock. The common stockmay be acquired from time to time in open market transactions, block purchases and other transactions complying with Rule 10b-18 of theSEC. The share repurchase program will expire on September 30, 2018. As of December 31, 2017, we have spent $240,000 to repurchase 15,000shares of our common stock under this program. Our cash, cash equivalents and marketable securities totaled $22.7 million at December 31, 2017. We believe that on-hand cash, cash equivalentsand marketable securities, coupled with anticipated future cash flow from operations, will be adequate to fund our cash flow needs for theforeseeable future, including the contractual obligations reflected in the table 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 relativestrength or weakness of the worldwide electronics assembly and semiconductor fabrication capital equipment markets. We believe that inflationhas not had a significant effect on our operations. Most of our international export sales are negotiated, invoiced and paid in U.S. dollars. We manufacture our inspection system products inSingapore and a portion of our raw material purchases are denominated in Singapore dollars. We also have R&D and sales personnel located inSingapore and sales offices located in other parts of the world. Although currency fluctuations do not significantly affect our revenue, they canimpact our costs and influence the price competitiveness of our products and the willingness of existing and potential customers to purchaseour 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 havebeen prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets andliabilities. On an on-going basis, we evaluate these estimates, including estimates related to revenue recognition, bad debts, warrantyobligations, inventory valuation, intangible assets, derivatives and hedging and income taxes. We base these estimates on historical experienceand on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ fromthese estimates under different assumptions or conditions. The estimates and judgments that we believe have the most effect on our reportedfinancial position and results of operations are as follows: Revenue Recognition. Revenue from all customers, including distributors, is recognized when all significant contractual obligations have been satisfied and collectionof the resulting receivable is reasonably assured. Generally, product revenues are recognized upon shipment under Ex-works terms, and includeshipping and handling costs. Revenue from services is recognized as work is performed. Taxes collected from customers and remitted togovernmental authorities are excluded from revenue on the net basis of accounting. Estimated returns and warranty costs are recorded at thetime of sale. Sales of some inspection system products may require customer acceptance due to performance or other acceptance criteriaincluded in the terms of sale. For these inspection system product sales, revenue is recognized at the time of customer acceptance. Our multipledeliverable arrangements typically include the sale of an inspection system or metrology product, related installation and training and, in somecases, an extended warranty. Revenue from installation and training are recognized as the services are provided. Revenue from extendedwarranties is recognized ratably over the warranty period. When a sale involves multiple elements, revenue is allocated to each respective element at inception of an arrangement using the relative sellingprice method. The selling price is determined based on a selling price hierarchy, consisting of vendor specific objective evidence (VSOE), thirdparty evidence or estimated selling price. Management’s best estimate of the selling price of inspection system and metrology products isbased on the cost of the product and a reasonable margin based on geographic location and competitive market conditions. We use VSOE toestablish fair value for extended warranty, installation and training services. If VSOE is not available to establish fair value for extended warrantyand installation and training services, we estimate a selling price based on the cost-build-up for the particular service and a reasonable grossmargin. Costs related to products delivered are recognized in the period revenue is recognized. Cost of revenues consists primarily of directlabor, manufacturing overhead, materials and components and excludes amortization of intangible assets. 28Table of ContentsOn January 1, 2018, we adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. Under the new standard,revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to whichthe entity expects to be entitled in exchange for those goods or services. We performed a review of the requirements of the new standard andidentified which of our revenue streams are within the scope of ASU 2014-09. We adopted the new standard using the modified retrospectivemethod, with the cumulative effect of initially applying the guidance recognized at the date of initial application. Our adoption of the newstandard on January 1, 2018 did not have a material impact on our consolidated financial statements. Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Inmaking the determination of the appropriate allowance for doubtful accounts, we consider specific accounts, historical write-offs, changes incustomer relationships and credit worthiness and concentrations of credit risk. Specific accounts receivable are written-off once a determinationis made that the account is uncollectible. If the financial condition of our customers were to deteriorate, resulting in an impairment of their abilityto make payments, additional allowances may be required. The allowance for doubtful accounts was $473,000 at December 31, 2017 and $547,000at December 31, 2016. 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 qualityprograms and processes, including actively monitoring and evaluating the quality of component suppliers, warranty obligations are affected byproduct failure rates, material usage and service delivery costs incurred in correcting a product failure. If actual product failure rates, materialusage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. The allowance forwarranties was $767,000 at December 31, 2017 and $790,000 at December 31, 2016. Inventory Write Downs. We write down inventory for estimated obsolescence or lack of marketability equal to the difference between the cost of inventory and theestimated market value based upon assumptions about future demand and market conditions. We formulate our assumptions regarding futuredemand and market conditions based on order trends and input from customers regarding their future requirements. If actual market conditionsare less favorable than those projected, or if in the future we decide to discontinue sales and marketing of any of our products, additionalinventory write-downs may be required. Excess and obsolete inventories were written down by $748,000 at December 31, 2017 and $1.2 million atDecember 31, 2016. Valuation of Intangible and Long-Lived Assets. We assess the impairment of identifiable intangible assets, long lived assets and related goodwill whenever events or changes in circumstancesindicate the carrying value may not be recoverable. In addition, we perform an annual goodwill impairment assessment. Factors we considerimportant, which could trigger an impairment review and that we consider when performing our annual goodwill impairment assessment, includethe 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 netbook value. •For intangible and long-lived assets, if the carrying value exceeds the un-discounted cash flows from such asset. •For goodwill, if the carrying value of our net assets (net book value) exceeds fair value. When we determine that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon theexistence of one or more of the above indicators of impairment, we measure any potential impairment based on a projected discounted cash flowmethod using a discount rate that we believe is commensurate with the risk inherent in our current business model. We utilize the incomeapproach to estimate our fair value. The income approach is a valuation technique under which we estimate future cash flows using financialforecasts. Future estimated cash flows are discounted to their present value to calculate fair value. When determining fair value, we also giveconsideration to the control premium in excess of our current market capitalization that might be obtained from a third party acquirer. Theseassumptions require significant judgment and actual results may differ from assumed or estimated amounts. 29Table of Contents At December 31, 2017 we had goodwill of $1.4 million. Our recent analysis performed as of December 31, 2017 indicates that our goodwill is notimpaired. However, our conclusion could change in the future, if our assumptions about future economic conditions, revenue growth orprofitability change. Any resulting impairment charge could have a material effect on our financial position and results of operations in thefuture. Income Taxes. Significant judgment is required in determining worldwide income tax expense based upon tax laws in the various jurisdictions in which weoperate. We have established reserves for uncertain tax positions by applying the “more likely than not” threshold (i.e., a likelihood ofoccurrence greater than fifty percent). The recognition threshold is met when an entity concludes that a tax position, based solely on itstechnical merits, is more likely than not to be sustained upon examination by the relevant taxing authority. Those tax positions failing to qualifyfor initial recognition are recognized in the first interim period in which they meet the more likely than not standard, or are resolved throughnegotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. De-recognition of a tax position that waspreviously recognized occurs when an entity subsequently determines that a tax position no longer meets the more likely than not threshold ofbeing sustained. All tax positions are analyzed periodically and adjustments are made as events warrant modification, such as the completion ofaudits 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 thejurisdictions in which we operate. This process involves estimating the current tax liability, as well as assessing temporary differences arisingfrom 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 taxable income on our tax returns and our GAAP income,research and development tax credit carry forwards and federal, state and foreign net operating loss carry forwards. A deferred tax assetgenerally represents future tax benefits to be received when temporary differences previously reported in our consolidated financial statementsbecome deductible for income tax purposes, when net operating loss carry forwards are applied against future taxable income, or when tax creditcarry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance basedon the guidance provided in current financial accounting standards. Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances arerequired takes into account, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of futureprofitability, the duration of statutory carry forward periods, our experience with loss carry forwards not expiring unused and tax planningalternatives. In analyzing the need for valuation allowances, we first considered our history of cumulative operating results for income taxpurposes over the past three years in each of the tax jurisdictions in which we operate, our financial performance in recent quarters, statutorycarry forward periods and tax planning alternatives. Finally, we considered both our near and long-term financial outlook. After considering allavailable evidence both positive and negative, we concluded that recognition of valuation allowances for substantially all of our U.S. andSingapore deferred tax assets was not required at December 31, 2017 or December 31, 2016. Our conclusions regarding the realizability of ourdeferred tax assets caused us to substantially reduce the valuation allowances recorded against our U.S. and Singapore-based deferred taxassets in the fourth quarter of 2016, resulting in recognition of a significant non-cash income tax benefit. Derivatives and Hedging. We may enter into foreign exchange forward contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated inforeign currencies associated with our subsidiary in Singapore. These transactions are designated as cash flow hedges and are recorded in theaccompanying consolidated balance sheet at fair value. The effective portion of the gain or loss on the derivative is reported as a component ofother comprehensive income (loss) and reclassified into earnings in the same period during which the hedged transaction affects earnings.Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment ofeffectiveness are recognized in current earnings. The maximum length of time over which we hedge our exposure to the variability in future cashflows is 12 months. There were no foreign exchange forward contracts designated as cash flow hedges in 2017. At December 31, 2016, therewere no open foreign exchange forward contracts. At December 31, 2015, all of our open foreign exchange forward contracts had maturities ofone year or less. The dollar equivalent gross notional amount of our foreign exchange forward contracts designated as cash flow hedges wasapproximately $1.8 million at December 31, 2015. We estimate any hedge ineffectiveness on a quarterly basis by considering the difference between the prices of a hypothetical forward contractmaturing on the last day of a given month, to the prices of a series of hypothetically perfect daily forward contracts. Hedge ineffectiveness andthe amounts excluded from effectiveness testing recognized in earnings on cash flow hedges were not material in 2016 or 2015. The fair value for our foreign exchange forward contracts was based on foreign currency spot and forward rates obtained from reputablefinancial institutions with resulting valuations periodically validated by obtaining foreign currency spot rates and forward quotes from otherindustry standard sources or third party or counterparty quotes. 30Table of Contents ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Exchange Risk Most of our international export sales are negotiated, invoiced and paid in U.S. dollars. We manufacture our inspection system products inSingapore and a portion of our raw material purchases are denominated in Singapore dollars. We also have research and development and salespersonnel located in Singapore and sales offices located in other parts of the world. Although currency fluctuations do not significantly affectour revenue, they can impact our costs and influence the price competitiveness of our products and the willingness of existing and potentialcustomers to purchase these products. A hypothetical 5% appreciation or depreciation in the U.S. dollar relative to the reporting currencies ofour foreign subsidiaries in 2017 would have affected the foreign-currency denominated operating expenses of these subsidiaries byapproximately $500,000. We cannot accurately predict future exchange rates or the overall impact of future exchange rate fluctuations on ourbusiness, results of operations and financial condition. As of December 31, 2017, we did not have any open foreign exchange forward contracts to hedge our exposure to fluctuations in foreigncurrency exchange rates. We recognized a loss from foreign currency transactions, primarily intercompany financing transactions, of $177,000 in2017. The loss from foreign currency transactions was primarily caused by a weaker U.S. dollar in relation to the Singapore dollar and the Britishpound sterling. Balance sheet related foreign currency translation adjustments are recorded in accumulated other comprehensive loss, acomponent of shareholders’ equity. Accordingly, these adjustments do not impact our net income. Interest Rate Risk We invest excess funds not required for current operations in marketable securities. Our investments in marketable securities consist of U.S.Government or U.S. Government agency securities, various tax exempt securities or certain approved corporate instruments with maturities offive years or less. The average maturity of securities in our investment portfolio does not exceed 18 months. We also hold an investment in acertain specified marketable equity security issued by a public company. As of December 31, 2017, our portfolio of marketable securities had anapproximate weighted average effective maturity of 1.2 years. All marketable securities are classified as available-for-sale and carried at fairvalue. We estimate that a hypothetical 1% increase in market interest rates would result in an approximate $180,000 decrease in the market valueof our portfolio of marketable securities. If such a rate increase occurred, our net income would only be impacted if securities were sold prior tomaturity. 31Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS CYBEROPTICS CORPORATION December 31, December 31,(In thousands, except share information) 2017 2016ASSETS Cash and cash equivalents $6,944 $10,640 Marketable securities 6,670 6,493 Accounts receivable, less allowance for doubtful accounts of $473 at December 31, 2017 and$547 at December 31, 2016 10,772 10,895 Inventories 14,393 11,531 Other current assets 1,593 1,535 Total current assets 40,372 41,094 Marketable securities, long-term 9,073 8,728 Equipment and leasehold improvements, net 2,307 2,438 Intangibles, net 380 438 Goodwill 1,366 1,366 Other assets 261 193 Deferred tax assets 5,742 5,323 Total assets $59,501 $59,580 LIABILITIES AND STOCKHOLDERS’ EQUITY Accounts payable $4,294 $6,217 Advance customer payments 393 328 Accrued expenses 2,285 3,756 Total current liabilities 6,972 10,301 Other liabilities 88 250 Reserve for income taxes 159 131 Total liabilities 7,219 10,682 Commitments and contingencies Stockholders’ equity: Preferred stock, no par value, 5,000,000 shares authorized, none outstanding — — Common stock, no par value, 25,000,000 shares authorized, 6,979,686 shares issued andoutstanding at December 31, 2017 and 6,901,887 shares issued and outstanding at December 31,2016 34,080 32,801 Accumulated other comprehensive loss (1,409) (1,940)Retained earnings 19,611 18,037 Total stockholders’ equity 52,282 48,898 Total liabilities and stockholders’ equity $59,501 $59,580 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 32Table of Contents CONSOLIDATED STATEMENTS OF OPERATIONSCYBEROPTICS CORPORATION Year Ended December 31,(In thousands, except per share amounts) 2017 2016 2015Revenues $53,333 $66,240 $41,130 Cost of revenues 28,573 37,185 22,989 Gross margin 24,760 29,055 18,141 Research and development expenses 8,022 8,040 7,602 Selling, general and administrative expenses 15,657 14,796 12,635 Amortization of intangibles 66 66 67 Income (loss) from operations 1,015 6,153 (2,163) Interest income and other (107) 238 102 Income (loss) before income taxes 908 6,391 (2,061) Income tax provision (benefit) (404) (5,171) 28 Net income (loss) $1,312 $11,562 $(2,089) Net income (loss) per share – Basic $0.19 $1.69 $(0.31)Net income (loss) per share – Diluted $0.19 $1.64 $(0.31) Weighted average shares outstanding – Basic 6,946 6,832 6,706 Weighted average shares outstanding – Diluted 7,075 7,049 6,706 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 33Table of Contents CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)CYBEROPTICS CORPORATION Year Ended December 31,(In thousands) 2017 2016 2015Net income (loss) $ 1,312 $11,562 $(2,089) Other comprehensive income (loss), before tax: Foreign currency translation adjustments 738 (383) (625) Unrealized losses on available-for-sale securities: Unrealized losses (3) (8) (78)Total unrealized losses on available-for-sale securities (3) (8) (78) Unrealized gains (losses) on foreign exchange forward contracts: Unrealized gains (losses) — 53 (298)Reclassification adjustment for losses included in net income (loss) — 36 563 Total unrealized gains on foreign exchange forward contracts — 89 265 Other comprehensive income (loss), before tax 735 (302) (438)Income tax provision (benefit) related to items of other comprehensiveincome (loss) 204 (71) — Other comprehensive income (loss), net of tax 531 (231) (438)Total comprehensive income (loss) $ 1,843 $11,331 $(2,527) THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 34Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWSCYBEROPTICS CORPORATION Year Ended December 31,(In thousands) 20172016 2015CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $1,312 $11,562 $(2,089)Adjustments to reconcile net income (loss) to net cash provided by (used in)operating activities: Depreciation and amortization 2,285 2,086 1,968 Provision for (recovery of) doubtful accounts (48) 24 (44)Deferred taxes (297) (5,269) 38 Foreign currency transaction losses (gains) 115(341) (225)Stock-based compensation 895 863 511 Changes in operating assets and liabilities: Accounts receivable 171 (2,769) (161)Inventories (3,163) 1,029 (2,489)Other assets (31) (346) (24)Accounts payable (2,100) 550 1,146 Advance customer payments 62 (153) (9)Accrued expenses (1,627) 1,888 (1,011)Net cash provided by (used in) operating activities (2,426) 9,124 (2,389) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of available-for-sale marketable securities 6,931 4,690 5,167 Proceeds from sales of available-for-sale marketable securities — 1,502 1,518 Purchases of available-for-sale marketable securities (7,475) (8,127) (4,934)Additions to equipment and leasehold improvements (1,226) (1,363) (691)Additions to patents (120) (71) (106)Net cash provided by (used in) investing activities (1,890) (3,369) 954 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 378 474 458 Tax payments related to shares withheld for share-based compensation plans (35) (9) — Common stock repurchases (240) — — Proceeds from issuance of common stock under employee stock purchase plan 258 181 178 Net cash provided by financing activities 361 646 636 Effects of exchange rate changes on cash and cash equivalents 259 (35) (98) Net increase (decrease) in cash and cash equivalents (3,696) 6,366 (897) Cash and cash equivalents – beginning of period 10,640 4,274 5,171 Cash and cash equivalents – end of period $6,944 $10,640 $4,274 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.35Table of Contents CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYCYBEROPTICS CORPORATION Common Stock Accumulated OtherComprehensive Loss RetainedEarnings TotalStockholders’ Equity(In thousands) Shares Amount BALANCE, DECEMBER 31, 2014 6,644 $30,145 $(1,271) $8,564 $37,438 Exercise of stock options, vesting of restrictedstock units, net of shares exchanged as payment 88 458 — — 458 Share issuances for compensation purposes 4 41 — — 41 Stock-based compensation — 470 — — 470 Issuance of common stock under Employee StockPurchase Plan 36 178 — — 178 Other comprehensive loss, net of tax — — (438) — (438)Net loss — — — (2,089) (2,089)BALANCE, DECEMBER 31, 2015 6,772 31,292 (1,709) 6,475 36,058 Exercise of stock options, vesting of restrictedstock units, net of shares exchanged as payment 86 474 — — 474 Tax payments related to shares withheld for share-based compensation plans — (9) — — (9) Share issuances for compensation purposes 8 136 — — 136 Stock-based compensation — 727 — — 727 Issuance of common stock under Employee StockPurchase Plan 36 181 — — 181 Other comprehensive loss, net of tax — — (231) — (231)Net income — — — 11,562 11,562 BALANCE, DECEMBER 31, 2016 6,902 32,801 (1,940) 18,037 48,898 Increase related to adoption of ASU 2016-09 — 23 — 262 285 Exercise of stock options, vesting of restrictedstock units and issuance of restricted shares, netof shares exchanged as payment 73 378 — — 378 Tax payments related to shares withheld for share-based compensation plans (7) (35) — — (35) Share issuances for compensation purposes 8 — — — — Stock-based compensation — 895 — — 895 Issuance of common stock under Employee StockPurchase Plan 19 258 — — 258 Repurchase of common stock (15) (240) — — (240)Other comprehensive income, net of tax — — 531 — 531Net income — — — 1,312 1,312 BALANCE, DECEMBER 31, 20176,980$34,080$(1,409)$19,611$52,282 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 36Table of Contents NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSCYBEROPTICS CORPORATION NOTE 1 – BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIESDescription of BusinessWe are a leading global developer and manufacturer of high precision sensing technology solutions. Our products are used in surface mounttechnology (SMT), semiconductor and metrology markets to significantly improve yields and productivity.Principles of ConsolidationThe consolidated financial statements include the accounts of CyberOptics Corporation and its wholly-owned subsidiaries. In these notes tothe consolidated financial statements, these companies are collectively referred to as “CyberOptics,” “we,” “us,” or “our.” All significant inter-company accounts and transactions have been eliminated in consolidation.Segment ReportingWe operate in a single reportable segment that includes the design, development and manufacture of high precision sensing technologysolutions.Use of EstimatesThe preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at thedate of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual resultscould differ significantly from those estimates.Cash and Cash EquivalentsWe consider all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. Cash and cashequivalents consist of funds maintained in demand deposit accounts, money market accounts, corporate debt instruments and U.S. governmentbacked obligations. Cash and cash equivalent balances, at times, may exceed federally insured limits.Marketable SecuritiesAll marketable securities are classified as available-for-sale and consist of U.S. government and agency backed obligations, certificates ofdeposit, corporate debt instruments, asset backed securities or equity securities. Marketable securities are classified as short-term or long-termin the consolidated balance sheet based on their maturity date and expectations regarding sales.Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders’ equityuntil realized. These fair values are primarily determined using quoted market prices. The carrying amounts of securities, for purposes ofcomputing unrealized gains and losses, are determined by specific identification. The cost of securities sold is also determined by specificidentification.We monitor the carrying value of our investments compared to their fair value to determine whether an other-than-temporary impairment hasoccurred. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value hasbeen less than the cost basis, credit quality and our ability and intent to hold the investment for a period of time sufficient to allow for anyanticipated recovery in market value. If a decline in fair value is determined to be other-than-temporary, an impairment charge related to thatspecific investment is recorded in current operations.Cash and marketable securities held by foreign subsidiaries totaled $187,000 at December 31, 2017 and $614,000 at December 31, 2016.InventoriesInventories are stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out (FIFO) method. Appropriateconsideration is given to deterioration, obsolescence, and other factors in evaluating net realizable value. Demonstration inventories are statedat cost less accumulated amortization, generally based on a 36 month useful life. Accumulated amortization for demonstration inventories totaled $1.5 million at December 31, 2017 and $1.1 million at December 31, 2016.37Table of Contents Accounts Receivable and Allowance for Doubtful AccountsWe extend unsecured credit to our customers in the normal course of business. Allowances for doubtful accounts are maintained for estimatedlosses resulting from the inability of our customers to make required payments. In making the determination of the appropriate allowance fordoubtful accounts, we consider specific accounts, historical write-offs, changes in customer relationships and credit worthiness andconcentrations of credit risk. Specific accounts receivable are written-off once a determination is made that the account is uncollectible.Equipment and Leasehold ImprovementsEquipment and leasehold improvements are stated at cost. Significant additions or improvements extending asset lives are capitalized, whilerepairs and maintenance are charged to expense as incurred. In-progress costs are capitalized with depreciation beginning when assets areplaced in service. Depreciation is recorded using the straight-line method over the estimated useful lives of the equipment, ranging from one toseven years. Leasehold improvements are amortized using the straight-line method over the shorter of the asset useful life or the underlyinglease term, ranging from one to eight years. Gains or losses on dispositions are included in current operations.GoodwillGoodwill represents the excess of purchase price over the fair value of net assets acquired in a business combination. We have determined thatwe have one reporting unit. We evaluate the carrying value of goodwill annually on December 31st and more frequently if management believesindicators of impairment exist. Such indicators could include, but are not limited to (1) a significant adverse change in legal factors or inbusiness climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. We first assess qualitative factors todetermine whether it is more likely than not that our fair value is greater than carrying value (i.e. net book value). If we conclude that it is morelikely than not that our fair value is greater than carrying value, no further testing is required. If we conclude that it is more likely than not thatour fair value is less than carrying value, we conduct a two-step quantitative goodwill impairment test. The first step of the impairment testinvolves comparing our fair value to carrying value. We estimate our fair value using the income approach. The income approach is a valuationtechnique under which we estimate future cash flows using financial forecasts. Future estimated cash flows are discounted to their presentvalue to calculate fair value. When considering fair value, we also give consideration to the control premium in excess of our current marketcapitalization that might be obtained from a third party acquirer. If we determine that our carrying value exceeds fair value, the amount ofimpairment loss must be measured. The second step of the goodwill impairment test involves comparing the implied fair value of our goodwillwith the carrying value of that goodwill. The amount, by which the carrying value of the goodwill exceeds its implied value, if any, is recognizedas an impairment loss. On December 31, 2017 and 2016, we performed a qualitative assessment to determine if there was any indication that our goodwill might beimpaired. After considering all available evidence, including our financial performance, financial outlook and current market capitalization, weconcluded that it is more likely than not that our fair value is greater than carrying value. As a result, no further testing was deemed necessary,and we determined that our goodwill was not impaired. No amounts were recorded for goodwill impairment in 2017, 2016 or 2015.PatentsPatents consist of legal and patent registration costs for protection of our proprietary technology. We amortize patent costs on a straight-linebasis, based upon their estimated life.Long Lived AssetsIntangible assets subject to amortization and other long lived assets are reviewed for impairment when events or changes in circumstancesindicate that the carrying amount of the assets may not be recoverable. An impairment loss would be recognized when future undiscountedcash flows expected to result from use of the asset and eventual disposition are less than the carrying amount. Revenue RecognitionRevenue from all customers, including distributors, is recognized when all significant contractual obligations have been satisfied, pricing isfixed and determinable and collection of the resulting receivable is reasonably assured. Generally, product revenues are recognized uponshipment under Ex-works terms, and include shipping and handling costs. Revenue from services is recognized as work is performed. Taxescollected from customers and remitted to governmental authorities are excluded from revenue on the net basis of accounting. Estimated returnsand warranty costs are recorded at the time of sale. Sales of some inspection system products may require customer acceptance due toperformance or other acceptance criteria included in the terms of sale. For these inspection system product sales, revenue is recognized at thetime of customer acceptance. Our multiple deliverable arrangements typically include the sale of an inspection system or metrology product,related installation and training and, in some cases, an extended warranty. Revenue from installation and training are recognized as the servicesare provided. Revenue from extended warranties is recognized ratably over the warranty period.38Table of ContentsWhen a sale involves multiple elements, revenue is allocated to each respective element at inception of an arrangement using the relative sellingprice method. Selling price is determined based on a selling price hierarchy, consisting of vendor specific objective evidence (VSOE), third partyevidence or estimated selling price. Management’s best estimate of the selling price of an inspection system and metrology products is basedon the cost of the product and a reasonable margin based on geographic location and competitive market conditions. We use VSOE to establishfair value for extended warranty, installation and training services. If VSOE is not available to establish fair value for extended warranty,installation and training services, we estimate a selling price based on the cost-build-up for the particular service and a reasonable gross margin.Costs related to products delivered are recognized in the period revenue is recognized. Cost of revenues consists primarily of direct labor,manufacturing overhead, materials and components and excludes amortization of intangible assets.Foreign Currency TranslationFinancial position and results of operations of our international subsidiaries are measured using local currency as their functional currency.Assets and liabilities of these operations are translated at the exchange rates in effect at each fiscal year-end. Statements of operationsaccounts are translated at the average rates of exchange prevailing during the year. Translation adjustments arising from the use of differingexchange rates from period to period are included as a cumulative translation adjustment in stockholders’ equity.Foreign Currency TransactionsForeign currency transaction gains and losses are included in interest income and other in the statement of operations. We recognized a foreigncurrency transaction loss of $177,000 in 2017 and a foreign currency transaction gain of $207,000 in 2016 and $103,000 in 2015.Research and DevelopmentResearch and development (R&D) costs, including software development, are expensed when incurred. Software development costs arerequired to be expensed until the point that technological feasibility and proven marketability of the product are established; costs otherwisecapitalizable after such point also are expensed because they are insignificant. All other R&D costs are expensed as incurred. R&D expensesconsist primarily of salaries, project materials, contract labor and other costs associated with ongoing product development and enhancementefforts.Derivatives and HedgingWe may enter into foreign exchange forward contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated inforeign currencies associated with our subsidiary in Singapore. These transactions are designated as cash flow hedges and are recorded in theaccompanying consolidated balance sheet at fair value. The effective portion of the gain or loss on the derivative is reported as a component ofother comprehensive income (loss) and reclassified into earnings in the same period during which the hedged transaction affects earnings.Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment ofeffectiveness are recognized in current earnings. Cash flows from derivative instruments are classified in the consolidated statement of cashflows in the same category as the cash flows from the items subject to designated hedge relationships.Advertising CostsWe expense all advertising costs as incurred. Advertising expense incurred was $400,000 in 2017, $356,000 in 2016 and $410,000 in 2015. Warranty CostsWe provide for the estimated cost of product warranties which cover products for periods ranging from one to three years at the time revenue isrecognized.Income TaxesWe evaluate uncertain tax positions using the “more likely than not” threshold (i.e., a likelihood of occurrence greater than fifty percent). Therecognition threshold is met when an entity concludes that a tax position, based solely on its technical merits, is more likely than not to besustained upon examination by the relevant taxing authority. Those tax positions failing to qualify for initial recognition are classified as a grossunrecognized tax benefit until the first interim period in which they meet the more likely than not standard, or are resolved through negotiationor litigation with the taxing authority, or upon expiration of the statute of limitations. De-recognition of a tax position that was previouslyrecognized occurs when an entity subsequently determines that a tax position no longer meets the more likely than not threshold of beingsustained. 39Table of Contents Only the portion of the unrecognized tax benefit that is expected to be paid within one year is classified as a current liability. As a result,liabilities expected to be resolved without the payment of cash (e.g., resolution due to the expiration of the statute of limitations) or are notexpected to be paid within one year are not classified as current. It is our policy to record estimated interest and penalties as income tax expenseand tax credits as a reduction in income tax expense.Deferred income taxes are recorded to reflect the tax consequences in future years of differences between the financial reporting and tax basesof assets and liabilities. Income tax expense is the sum of the tax currently payable and the change in the deferred tax assets and liabilitiesduring the period, excluding changes in deferred tax assets recorded to equity and goodwill. Valuation allowances are established when, in theopinion of management, there is uncertainty that some portion or all of the deferred tax assets will not be realized. We assess the realizability ofour deferred tax assets and the need for a valuation allowance based on all positive and negative evidence.Net Income (Loss) Per ShareBasic net income (loss) per basic share is computed by dividing net income (loss) by the weighted average number of common sharesoutstanding during the period. Net income per diluted share is computed by dividing net income by the weighted average number of commonand common equivalent shares outstanding during the period. Common equivalent shares consist of common shares to be issued upon exerciseof stock options, vesting of restricted stock units, vesting of restricted shares and from purchases of shares under our employee stockpurchase plan, as calculated using the treasury stock method. All common equivalent shares are excluded from the calculation of net loss perdiluted share due to their anti-dilutive effect.Fair Value of Financial InstrumentsThe carrying amounts of financial instruments such as cash equivalents, accounts receivable, other assets, accounts payable, accruedexpenses and other liabilities approximate their related fair values due to the short-term maturities of these instruments.Stock-Based CompensationAll equity-based payments to employees, including grants of stock options, are required to be recognized as an expense in our consolidatedstatements of operations based on the grant date fair value of the award. We utilize the straight-line method of expense recognition over theaward’s service period for our graded vesting options. The fair value of stock options has been determined using the Black-Scholes model. Weaccount for the impact of forfeitures related to share-based payment arrangements when the forfeitures occur. We have classified equity basedcompensation within our consolidated statement of operations in the same manner as our cash based employee compensation costs. Weelected to use the alternative transition guidance known as the “short-cut method” to determine our pool of windfall tax benefits at January 1,2006.See Note 7 to the consolidated financial statements for additional information related to stock-based compensation. See Note 2 for additionalinformation related to our adoption of Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based PaymentAccounting.Related Party TransactionsOne of our board members serves as the President and Chief Executive Officer of Key Tronic Corporation. Our sales to Key Tronic Corporationtotaled $133,000 in 2017, $556,000 in 2016 and $82,000 in 2015. Recent Accounting DevelopmentsIn January 2017, the Financial Accounting Standards Board (FASB) issued guidance on simplifying the test for goodwill impairment(Accounting Standards Update (ASU) No. 2017-04, Simplifying the Test for Goodwill Impairment). Under the new standard, goodwillimpairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying valueof goodwill. The new guidance eliminates the requirement to determine goodwill impairment by calculating the implied fair value of goodwill byhypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in abusiness combination. The new guidance is to be applied prospectively to impairment tests beginning January 1, 2020, with early adoptionpermitted. We are currently evaluating when we will adopt this new guidance and do not expect the adoption to have a material impact on ourconsolidated financial statements.40Table of ContentsIn February 2016, the FASB issued new lease accounting guidance (ASU No. 2016-02, Leases). Under the new guidance, at the commencementdate, lessees will be required (a) to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease,measured on a discounted basis, and (b) to record a right-of-use asset, which is an asset that represents the lessee’s right to use, or control theuse of, a specified asset for the lease term. The new guidance is not applicable for leases with a term of 12 months or less. Lessor accounting islargely unchanged. U.S. public companies are required to apply the amendments in ASU 2016-02 for fiscal years beginning after December 15,2018, including interim periods within those fiscal years. Early application is permitted. Lessees (for capital and operating leases) and lessors(for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or enteredinto after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would notrequire any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply afull retrospective transition approach. We intend to adopt this guidance on January 1, 2019 and are currently evaluating the impact of the newguidance on our consolidated financial statements. In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers (ASU No. 2014-09, Revenue fromContracts with Customers). Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflectsthe consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosuresregarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permitstwo methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initiallyapplying the guidance recognized at the date of initial application. We have performed a review of the requirements of the new guidance andhave identified which of our revenue streams will be within the scope of ASU 2014-09. We have applied the five-step model of the new standardto a selection of contracts within each of our revenue streams, and have compared the results to our current account practices. We also haveperformed detailed contract reviews to complete necessary adjustments to our existing accounting policies, and have implemented changes toour processes and internal controls to capture new data and address changes in financial reporting. We will expand our consolidated financialstatement disclosures to comply with the requirements of ASU No. 2014-09. We adopted the new standard using the modified retrospectivemethod, with the cumulative effect of initially applying the guidance recognized at the date of initial application. Our adoption of the newstandard on January 1, 2018 did not have a material impact on our consolidated financial statements. In July 2015, the FASB issued guidance on simplifying the measurement of inventory (ASU No. 2015-11, Simplifying the Measurement ofInventory). The guidance requires an entity to measure inventory at the lower of cost or net realizable value, which consists of estimated sellingprices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. The new guidanceeliminated unnecessary complexity that existed under previous "lower of cost or market" guidance. The updated guidance was appliedprospectively beginning January 1, 2017. Our implementation of this standard did not have a material impact on our consolidated financialstatements.In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, whichrevises the accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certainfair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fairvalue of financial instruments. The new guidance requires the fair value measurement of investments in equity securities and other ownershipinterests in an entity that do not result in consolidation and are not accounted for under the equity method. Entities will need to measure theseinvestments and recognize changes in fair value in net income. Entities will no longer be able to recognize unrealized holding gains and losseson equity securities they classify under current guidance as available-for-sale in other comprehensive income. This standard is effectivebeginning January 1, 2018 via a cumulative-effect adjustment to beginning retained earnings, except for guidance relative to equity securitieswithout readily determinable fair values which is applied prospectively. Our adoption of the new standard on January 1, 2018 did not have amaterial impact on our consolidated financial statements. NOTE 2 – ADOPTION OF ASU NO. 2016-09, IMPROVEMENTS TO EMPLOYEE SHARE-BASED PAYMENT ACCOUNTINGOn January 1, 2017, we adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU No. 2016-09). Theguidance impacted the accounting for share-based payment transactions, including the income tax consequences, classification of awards aseither equity or liabilities, and classification in the consolidated statement of cash flows. At January 1, 2017, we had excess tax benefits from employee share-based payments that were not recognized because current taxes payablehad not been reduced. Under the new guidance, we are required to recognize the excess tax benefits regardless of whether or not they reduceincome taxes payable in the current period. The new guidance also requires all excess tax benefits and tax deficiencies to be recognized asincome tax expense or benefit in our statement of operations. Prior to our adoption of ASU No. 2016-09, stock compensation expense was basedon the number of awards that were expected to vest in the future. Under the new guidance, we are allowed to account for the impact offorfeitures related to share-based payment arrangements when the forfeitures occur. 41Table of ContentsRecognition of the deferred tax assets for previously unrecognized excess tax benefits and the impact of additional stock compensation expenseresulting from the change in the accounting for stock option forfeitures were required to be applied using a modified retrospective approach. AtJanuary 1, 2017, we recorded a $278,000 credit to retained earnings and a corresponding debit to deferred tax assets for previously unrecognizedexcess tax benefits. We also recorded a $23,000 credit to common stock, a $16,000 debit to retained earnings and a $7,000 debit to deferred taxassets for additional stock compensation expense related to the change in accounting for stock option forfeitures. Our income tax provision in 2017 includes a $227,000 excess tax benefit from employee share-based payments. The impact of the change inaccounting for stock option forfeitures on stock compensation expense in 2017 was inconsequential.ASU 2016-09 includes an amendment specifying that excess tax benefits are to be classified as an operating activity in the statement of cashflows on either a prospective or retrospective basis. This amendment had no impact on our consolidated statements of cash flows for anyperiod presented because excess tax benefits have not been used to reduce current tax payments.ASU 2016-09 also includes an amendment specifying that payments of employee withholding taxes resulting from stock option exercises, bywithholding shares acquired by an option holder, are to be classified as a financing activity in the consolidated statements of cash flows on aretrospective basis. The change impacted the presentation of financing activities in the consolidated statements of cash flows.NOTE 3 – MARKETABLE SECURITIESOur investments in marketable securities are classified as available-for-sale and consist of the following: December 31, 2017(In thousands) Cost UnrealizedGains UnrealizedLosses Fair ValueShort-Term U.S. government and agency obligations $4,381 $— $(13) $4,368 Corporate debt securities and certificates of deposit 1,792 — (4) 1,788 Asset backed securities 515 — (1) 514 Marketable securities – short-term $6,688 $— $(18) $6,670 Long-Term U.S. government and agency obligations $4,801 $— $(33) $4,768 Corporate debt securities and certificates of deposit 1,189 — (10) 1,179 Asset backed securities 3,045 — (16) 3,029 Equity security 42 55 — 97 Marketable securities – long-term $9,077 $55 $(59) $9,073 December 31, 2016(In thousands) Cost UnrealizedGains UnrealizedLosses Fair ValueShort-Term U.S. government and agency obligations $5,005 $4 $(1) $5,008 Corporate debt securities and certificates of deposit 1,476 1 (1) 1,476 Asset backed securities 9 — — 9 Marketable securities – short-term $6,490 $5 $(2) $6,493 Long-Term U.S. government and agency obligations $4,815 $1 $(12) $4,804 Corporate debt securities and certificates of deposit 2,161 — (17) 2,144 Asset backed securities 1,732 — (5) 1,727 Equity security 42 11 — 53 Marketable securities – long-term $8,750 $12 $(34) $8,728 42Table of Contents In Unrealized Loss Position ForLess Than 12 Months In Unrealized Loss Position ForGreater Than 12 Months(In thousands) Fair Value GrossUnrealizedLosses Fair Value GrossUnrealizedLossesDecember 31, 2017 U.S. government and agency obligations $5,593 $(29) $3,543 $(17)Corporate debt securities and certificates of deposit 478 (2) 1,991 (12)Asset backed securities 2,312 (9) 1,232 (8)Marketable securities – short-term $8,383 $(40) $6,766 $(37)December 31, 2016 U.S. government and agency obligations $4,481 $(13) $— $—Corporate debt securities and certificates of deposit 2,795 (18) — —Asset backed securities 1,471 (5) — —Marketable securities – long-term $8,747 $(36) $— $— Our investments in marketable debt securities all have maturities of less than years. Net pre-tax unrealized losses for marketable securities of$22,000 at December 31, 2017 and $19,000 at December 31, 2016 have been recorded as a component of accumulated other comprehensive loss instockholders’ equity. We have determined that the net pre-tax unrealized losses for marketable debt securities at December 31, 2017 andDecember 31, 2016 were caused by fluctuations in interest rates and are temporary in nature. We review our marketable securities to identify andevaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is other-than-temporaryinclude the length of time and extent to which fair value has been less than the cost basis, credit quality and our ability and intent to hold theinvestment for a period of time sufficient to allow for any anticipated recovery in market value. No marketable securities were sold in 2017. Wereceived proceeds from the sale of marketable securities of $1.5 million in 2016 and $1.5 million in 2015. No gain or loss was recognized on any ofthese sales. See Note 6 for additional information regarding the fair value of our investments in marketable securities. Investments in marketable securities classified as cash equivalents of $1.6 million at December 31, 2017 and $5.2 million at December 31, 2016,consist of corporate debt securities and certificates of deposit. There were no unrealized gains or losses associated with any of these securitiesat December 31, 2017 or December 31, 2016. NOTE 4 – DERIVATIVESWe may enter into foreign exchange forward contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated inforeign currencies associated with our subsidiary in Singapore. These transactions are designated as cash flow hedges and are recorded in theaccompanying consolidated balance sheet at fair value. The effective portion of the gain or loss on the derivative is reported as a component ofother comprehensive income (loss) and reclassified into earnings in the same period during which the hedged transaction affects earnings.Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment ofeffectiveness are recognized in current earnings. There were no foreign exchange forward contracts designated as cash flow hedges in 2017.Hedge ineffectiveness and the amounts excluded from effectiveness testing recognized in earnings on cash flow hedges were not material in2016 or 2015. The maximum length of time over which we hedge our exposure to the variability in future cash flows is 12 months. At December 31, 2016, therewere no open foreign exchange forward contracts. At December 31, 2015, all of our open foreign exchange forward contracts had maturities ofone year or less. The dollar equivalent gross notional amount of our foreign exchange forward contracts designated as cash flow hedges atDecember 31, 2015 was approximately $1.8 million.435Table of Contents Reclassifications of amounts from accumulated other comprehensive loss into earnings include accumulated gains (losses) at the time earningsare impacted by the forecasted transaction. The location in the consolidated statements of operations and consolidated statements ofcomprehensive income (loss) and the amounts of gains and losses related to derivative instruments designated as cash flow hedges are asfollows: Year Ended December 31, 2016(In thousands) Pretax Gain Recognizedin Other ComprehensiveIncome (Loss) on EffectivePortion of Derivative Pretax Loss Recognizedin Earnings on EffectivePortion of Derivative as aResult of Reclassificationfrom Accumulated OtherComprehensive LossCost of revenues $32 $(27)Research and development 14 (6)Selling, general and administrative 7 (3)Total $53 $(36) Year Ended December 31, 2015(In thousands) Pretax Loss Recognizedin Other ComprehensiveIncome(Loss) on EffectivePortion of Derivative Pretax Loss Recognizedin Earnings on EffectivePortion of Derivative as aResult of Reclassificationfrom Accumulated OtherComprehensive LossCost of revenues $(185) $(352)Research and development (71) (118)Selling, general and administrative (42) (93)Total $(298) $(563)At December 31, 2017 and December 31, 2016, there were no amounts recorded in accumulated other comprehensive loss for cash flow hedginginstruments. The $147,000 after tax net unrealized loss recorded in accumulated other comprehensive loss at December 31, 2015 for cash flowhedging instruments was reclassified to earnings during 2016. Additional information with respect to the impact of derivative instruments on other comprehensive income (loss) is included in Note 5. Our foreign exchange forward contracts contain credit risk to the extent that our bank counter-parties may be unable to meet the terms of theagreements. We minimize such risk by limiting our counter-parties to major financial institutions. We do not expect material losses as a result ofdefaults by other parties.44Table of ContentsNOTE 5 – COMPREHENSIVE INCOME (LOSS)Reclassification adjustments are made to avoid double counting for items included in comprehensive income (loss) that are also recorded aspart of net income (loss). Reclassifications to earnings related to cash flow hedging instruments are discussed in Note 4. Reclassifications and taxes related to items of other comprehensive income (loss) are as follows: Year Ended December 31, 2017 Year Ended December 31, 2016 Year Ended December 31, 2015(In thousands) BeforeTax TaxEffect Net of TaxAmount BeforeTax TaxEffect Net of TaxAmount BeforeTax TaxEffect Net of TaxAmountForeign currency translationadjustments $738 $(204) $534 $(383) $— $(383) $(625) $— $(625)Net changes related to available-for-sale securities: Unrealized gains (losses) (3) — (3) (8) 7 (1) (78) — (78)Reclassification adjustments forlosses included in interestincome and other — — — — 6 6 — — — Total net changes related toavailable-for-sale securities (3) — (3) (8) 13 5 (78) — (78)Net changes related to foreignexchange forward contracts: Unrealized gains (losses) — — — 53 — 53 (298) — (298)Reclassification adjustments forlosses included in net income(loss) Cost of revenues — — — 27 41 68 352 — 352 Research and developmentexpenses — — — 6 10 16 118 — 118 Selling, general andadministrative expenses — — — 3 7 10 93 — 93 Total net changes related to foreignexchange forward contracts — — — 89 58 147 265 — 265 Other comprehensive income (loss) $735 $(204) $531 $(302) $71 $(231) $(438) $— $(438)45Table of ContentsAt December 31, 2017, December 31, 2016 and December 31, 2015 components of accumulated other comprehensive loss is as follows: (In thousands) ForeignCurrencyTranslationAdjustments Available-for-SaleSecurities ForeignExchangeForwardContracts AccumulatedOtherComprehensiveLossBalances at December 31, 2014 $(920) $61 $(412) $(1,271)Other comprehensive loss before reclassifications (625) (78) (298) (1,001)Reclassifications from accumulated other comprehensive loss — — 563 563 Net current period other comprehensive income (loss) (625) (78) 265 (438)Balances at December 31, 2015 $(1,545) $(17) $(147) $(1,709)Other comprehensive income (loss) before reclassifications (383) (1) 53 (331)Reclassifications from accumulated other comprehensive loss — 6 94 100 Net current period other comprehensive income (loss) (383) 5 147 (231)Balances at December 31, 2016 $(1,928) $(12) $— $(1,940) Other comprehensive income (loss) before reclassifications 534 (3) — 531 Reclassifications from accumulated other comprehensive loss — — — —Net current period other comprehensive income (loss) 534 (3) — 531 Balances at December 31, 2017 $(1,394) $(15) $— $(1,409) NOTE 6 – FAIR VALUE MEASUREMENTSWe determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer aliability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participantson the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use ofunobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the lastunobservable, to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets orliabilities (Level 1). The next highest priority is based on quoted prices for similar assets or liabilities in active markets or quoted prices foridentical or similar assets or liabilities in non-active markets or other observable inputs (Level 2). The lowest priority is given to unobservableinputs (Level 3). The following provides information regarding fair value measurements for our marketable securities as of December 31, 2017and December 31, 2016 according to the three-level fair value hierarchy. Fair Value Measurements at December 31, 2017 Using(In thousands) BalanceDecember 31,2017 Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3)Marketable securities: U.S. government and agency obligations $9,136 $— $9,136 $— Corporate debt securities and certificates of deposit 2,967 — 2,967 — Asset backed securities 3,543 — 3,543 — Equity security 97 97 — — Total marketable securities $15,743 $97 $15,646 $— 46Table of Contents Fair Value Measurements atDecember 31, 2016 Using(In thousands) BalanceDecember 31,2016 Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3)Marketable securities: U.S. government and agency obligations $9,812 $— $9,812 $— Corporate debt securities and certificates of deposit 3,620 — 3,620 — Asset backed securities 1,736 — 1,736 — Equity security 53 53 — — Total marketable securities $15,221 $53 $15,168 $— During the years ended December 31, 2017 and 2016, there were no transfers within the three level hierarchy. A significant transfer is recognizedwhen the inputs used to value a security have been changed which merit a transfer between the disclosed levels of the valuation hierarchy.The fair value for our U.S. government and agency obligations, corporate debt securities and certificates of deposit and asset backed securitiesare determined based on valuations provided by external investment managers who obtain them from a variety of industry standard dataproviders. The fair value for our equity security is based on a quoted market price obtained from an active market. The carrying amounts of financial instruments such as cash equivalents, accounts receivable, other assets, accounts payable, accruedexpenses and other liabilities approximate their related fair values due to the short-term maturities of these instruments. Non-financial assetssuch as equipment and leasehold improvements, goodwill and intangible assets are subject to non-recurring fair value measurements if they aredeemed impaired. We had no re-measurements of non-financial assets to fair value in 2017 or 2016. NOTE 7 – STOCK-BASED COMPENSATIONWe have three stock-based compensation plans that are administered by the Compensation Committee of the Board of Directors. We have anEmployee Stock Incentive Plan for officers, other employees, consultants and independent contractors under which we have granted optionsand restricted stock units to officers and other employees, an Employee Stock Purchase Plan under which shares of our common stock may beacquired by employees at discounted prices, and a Non-Employee Director Stock Plan that provides for automatic grants of shares of ourcommon stock to non-employee directors. New shares of our common stock are issued upon stock option exercises, vesting of restricted stockunits, issuances of shares to board members and issuances of shares under our the Employee Stock Purchase Plan.Employee Stock Incentive PlanAs of December 31, 2017, there are 327,839 shares of common stock reserved in the aggregate for issuance pursuant to future awards under ourEmployee Stock Incentive Plan and 602,737 shares of common stock reserved in the aggregate for issuance pursuant to outstanding awardsunder our Employee Stock Incentive Plan. Although our Compensation Committee has authority to issue options, restricted stock, restrictedstock units, share grants and other share based benefits under our Employee Stock Incentive Plan, to date only restricted stock units and stockoptions have been granted under the plan. Options have been granted at an option price per share equal to the market value of our commonstock on the date of grant, vest over a four year period and expire seven years after the date of grant. Restricted stock units vest over a fouryear period and entitle the holders to one share of our common stock for each restricted stock unit. Reserved shares underlying outstandingawards, including options and restricted shares, that are forfeited are available under the Employee Stock Incentive Plan for future grant.Non-Employee Director Stock PlanAs of December 31, 2017, there were 68,000 shares of common stock reserved in the aggregate for issuance pursuant to future awards under ourNon-Employee Director Stock Plan and 16,000 shares of common stock reserved in the aggregate for issuance pursuant to outstanding stockoption awards under our Non-Employee Director Stock Plan. Under the terms of the plan, each non-employee director will be automatically begranted 2,000 shares of our common stock on the date of each annual meeting at which such director is elected to serve on the board(beginning with our May 2016 annual meeting). At our May 11, 2017 annual meeting, our shareholders, upon recommendation of the Board ofDirectors, approved amendments to the Non-Employee Director Stock Plan that eliminated annual stock option grants for non-employeedirectors and retained share grants under the Non-Employee Director Stock Plan which will now vest in four equal quarterly installments duringthe year after the grant date provided the non-employee director is still serving as a director on the applicable vesting date. 47Table of ContentsPursuant to the plan, on the date of our 2017 annual meeting, we issued a total of 8,000 shares of our common stock to our non-employeedirectors. The shares had an aggregate fair market value on the date of grant equal to $167,000 (grant date fair value of $20.90 per share). Pursuant to the original plan, on the date of our 2016 annual meeting, we issued a total of 8,000 shares of our common stock and stock optionsto acquire 16,000 shares of our common stock to our non-employee directors. Both the shares and the options were fully vested on the date ofgrant. The shares had an aggregate fair market value on the date of grant equal to $136,000 (grant date fair value of $16.97 per share) and theoptions had an aggregate fair market value on the date of grant using the Black-Scholes model equal to $139,000 (grant date fair value of$8.71 per option to acquire one share of our common stock).Stock Option ActivityThe following is a summary of activity in stock options for 2017: Options Outstanding Weighted AverageExercisePrice Per ShareOutstanding, December 31, 2016 547,625 $9.39 Granted 77,900 15.40 Exercised (57,000) 9.18 Expired — — Forfeited — — Outstanding, December 31, 2017 568,525 $10.24 Exercisable, December 31, 2017 308,063 $8.66 The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds the option's exercise price. For optionsoutstanding at December 31, 2017, the weighted average remaining contractual term of all outstanding options was 4.4 years and their aggregateintrinsic value was $3.2 million. At December 31, 2017, the weighted average remaining contractual term of options that were exercisable was 3.8years and their aggregate intrinsic value was $2.1 million. The aggregate intrinsic value of stock options exercised was $782,000 in 2017,$720,000 in 2016 and $182,000 in 2015. We received proceeds from stock option exercises of $378,000 in 2017, $474,000 in 2016 and $458,000 in2015. The aggregate fair value of options that vested was $443,000 in 2017, $495,000 in 2016 and $264,000 in 2015.The fair value of stock options granted to our employees and non-employee directors was estimated on the date of grant using the Black-Scholes model. The Black-Scholes valuation model incorporates ranges of assumptions that are disclosed in the table below. The risk-freeinterest rate is based on the United States Treasury yield curve at the time of grant with a remaining term equal to the expected life of theawards. We used historical experience to estimate the expected term, representing the length of time in years, that the options are expected to beoutstanding. Expected volatility was computed based on historical fluctuations in the daily price of our common stock.For stock options granted in the three year period ended December 31, 2017, we utilized the fair value of our common stock on the date of grantand employed the following key assumptions in computing fair value using the Black-Scholes option-pricing model: 2017 2016 2015Risk-free interest rates2.14%- 2.15% 1.24% - 1.89% 1.56%Expected life in years5.00 - 5.29 5.09 - 7.50 5.01 - 5.11Expected volatility 52.30% - 52.86% 42.22% - 46.67% 40.82% Dividend yield0.00% 0.00% 0.00% Weighted average fair value on grant date$7.36 $9.88 $2.7348Table of ContentsRestricted Shares and Restricted Stock UnitsRestricted shares are granted under our Non-Employee Director Stock Plan. Restricted stock units are granted under our Employee StockIncentive Plan. There were 32,200 restricted shares and restricted stock units granted in 2017 (weighted average grant date fair value of $16.77each), 10,700 restricted stock units granted in 2016 (weighted average grant date fair value of $26.40 each) and 18,250 restricted stock unitsgranted in 2015 (weighted average grant date fair value of $7.18 each). The aggregate fair value of outstanding restricted shares and restrictedstock units based on the closing share price of our common stock as of December 31, 2017 was $813,000. The aggregate fair value of restrictedshares and stock units that vested, based on the closing share price of our common stock on the vesting date, was $453,000 in 2017, $394,000 in2016 and $129,000 in 2015.The following is a summary of activity in restricted shares and restricted stock units for 2017: Non-vested restricted stock units Shares Weighted AverageGrant DateFair ValueNon-vested at December 31, 2016 45,549 $11.93 Granted 32,200 16.77 Vested (23,537) 11.79 Forfeited — — Non-vested at December 31, 2017 54,212 $14.86 Employee Stock Purchase PlanWe have an Employee Stock Purchase Plan available to eligible U.S. employees. Under terms of the plan, eligible employees may designate from1% to 10% of their compensation to be withheld through payroll deductions, up to a maximum of $6,500 in each plan year, for the purchase ofcommon stock at 85% of the lower of the market price on the first or last day of the offering period. Purchases under this plan were 18,404shares in 2017, 36,481 shares in 2016 and 35,845 shares in 2015. As of December 31, 2017, 40,872 shares remain available for future issuanceunder this plan.Stock Grant Plan for Non-Employee DirectorsPreviously, we had a stock grant plan for non-employee directors that provided for automatic grants of 1,000 shares of our common stock toeach of our non-employee directors upon their re-election to the Board of Directors. This plan was terminated and our non-employee directorsdid not receive any share grants under this plan on the date of our 2016 annual meeting at which our shareholders approved the Non-EmployeeDirector Stock Plan. There were 4,000 shares issued under this plan in 2015 with a fair market value on the date of grant equal to $41,000(weighted average grant date fair value of $10.36).Stock Based Compensation InformationPre-tax stock-based compensation expense for 2017 includes $667,000 for stock options and restricted stock units, $121,000 for our employeestock purchase plan, and $107,000 for 8,000 restricted shares issued to board members for compensation purposes. Pre-tax stock-basedcompensation expense for 2016 includes $648,000 for stock options and restricted stock units, $79,000 for our employee stock purchase plan,and $136,000 for shares issued to board members for compensation purposes. (In thousands) 2017 2016 2015Pre-tax stock-based compensation expense $895 $863 $511 Income tax benefits related to stock-based compensation $310 $428 $— At December 31, 2017, the total unrecognized compensation cost related to non-vested stock-based compensation arrangements was $2.0million and the related weighted average period over which such cost is expected to be recognized is 1.56 years. In 2017, we recognized a $421,000 income tax benefit from the exercise of stock options and vesting of share based payments, including $227,000of excess tax benefits. In 2016 and 2015, no tax benefits were realized from the exercise of stock options or vesting of share-based payments andno amounts were credited to additional paid-in capital. See Note 2 for additional information related to our adoption of Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting. 49Table of ContentsNOTE 8 – NET INCOME (LOSS) PER SHAREBasic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstandingduring the period. Net income per diluted share is computed by dividing net income by the weighted average number of common and commonequivalent shares outstanding during the period. Common equivalent shares consist of common shares to be issued upon exercise of stockoptions, vesting of restricted stock units, vesting of restricted shares and from purchases of shares under our employee stock purchase plan, ascalculated using the treasury stock method. All common equivalent shares were excluded from the calculation of net loss per diluted share in2015 due to their anti-dilutive effect. The components of net income (loss) per basic and diluted share are as follows: (In thousands except per share amounts) Net Income Weighted AverageShares Outstanding Per Share AmountYear Ended 12/31/2017: Basic $1,312 6,946 $0.19Dilutive effect of common equivalent shares — 129 —Dilutive $1,312 7,075 $0.19 (In thousands except per share amounts) Net Income Weighted AverageShares Outstanding Per Share AmountYear Ended 12/31/2016: Basic $11,562 6,832 $1.69 Dilutive effect of common equivalent shares — 217 (0.05)Dilutive $11,562 7,049 $1.64 (In thousands except per share amounts) Net Loss Weighted AverageShares Outstanding Per Share AmountYear Ended 12/31/2015: Basic $(2,089) 6,706 $(0.31)Dilutive effect of common equivalent shares — — — Dilutive $(2,089) 6,706 $(0.31)Potentially dilutive shares excluded from the calculation of diluted net income (loss) per common share because their effect was anti-dilutivetotaled 356,000 shares in 2017, 108,000 shares in 2016 and 587,000 shares in 2015. NOTE 9 – OTHER FINANCIAL STATEMENT DATAInventories consist of the following: December 31,(In thousands) 2017 2016Raw materials and purchased parts $7,383 $6,475 Work in process 1,666 826 Finished goods 5,344 4,230 Total inventories $14,393 $11,531 50Table of ContentsEquipment and leasehold improvements consist of the following: December 31,(In thousands) 2017 2016Equipment $14,088 $13,624 Leasehold improvements 1,688 1,628 15,776 15,252 Accumulated depreciation and amortization (13,469) (12,814) $2,307 $2,438 Depreciation and amortization expense related to equipment and leasehold improvements was $1.3 million in 2017, $1.3 million in 2016 and $1.2million in 2015. Intangible assets consist of the following: December 31, 2017 December 31, 2016(In thousands) Gross CarryingAmount AccumulatedAmortization Net GrossCarryingAmount AccumulatedAmortization NetPatents $2,687 $(2,463) $224 $2,567 $(2,351) $216 Software 206 (111) 95 206 (82) 124 Marketing assets and customerrelationships 101 (45) 56 101 (33) 68 Non-compete agreements 101 (96) 5 101 (71) 30 $3,095 $(2,715) $380 $2,975 $(2,537) $438 Amortization expense in 2017, 2016 and 2015 was as follows: Year Ended December 31, Weighted Avg. Remaining Life-Years at December 31, 2017(In thousands) 2017 2016 2015 Patents $112 $98 $110 2.0Software 29 29 29 3.2Marketing assets and customer relationships 12 12 12 4.8Non-compete agreements 25 26 25 0.2 $178 $165 $176 Amortization of patents has been classified as research and development expense in the accompanying consolidated statement of operations.Estimated aggregate amortization expense based on current intangible assets for the next five years is expected to be as follows: $147,000 in2018, $114,000 in 2019, $80,000 in 2020, $20,000 in 2021 and $9,000 in 2022.Accrued expenses consist of the following: December 31,(In thousands) 2017 2016Wages and benefits $1,328 $2,673 Warranty liability 713 717 Other 244 366 $2,285 $3,756 51Table of ContentsOther liabilities consist of the following: December 31,(In thousands) 2017 2016Deferred rent $— $111 Warranty liability 54 73 Deferred warranty revenue 34 66 $88 $250 Warranty costs:We provide for the estimated cost of product warranties, which cover products for periods ranging from one to three years, at the time revenueis recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the qualityof component suppliers, warranty obligations are affected by product failure rates, material usage and service delivery costs incurred incorrecting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions tothe estimated warranty liability would be required and could be material. Our warranty liability is included as a component of accrued expenses.At the end of each reporting period we revise our estimated warranty liability based on these factors. A reconciliation of the changes in our estimated warranty liability is as follows: Year Ended December 31, (In thousands) 2017 2016 2015Balance at beginning of period $790 $645 $839 Accrual for warranties 582 688 441 Warranty revision7 (53) (19)Settlements made during the period (612) (490) (616) Balance at end of period 767 790 645 Current portion of estimated warranty liability (713) (717) (584)Long-term estimated warranty liability $54 $73 $61 Deferred warranty revenue:The current portion of our deferred warranty revenue is included as a component of advance customer payments. A reconciliation of thechanges in our deferred warranty revenue is as follows: Year Ended December 31, (In thousands) 2017 2016 2015 Balance at beginning of period $346 $199 $ 475 Revenue deferrals 357 581 353 Amortization of deferred revenue (444) (434) (629) Total deferred warranty revenue 259 346 199 Current portion of deferred warranty revenue (225) (280) (196)Long-term deferred warranty revenue $34 $66 $ 3 52Table of ContentsNOTE 10 – INCOME TAXES Income (loss) before income taxes consists of the following: Year Ended December 31,(In thousands) 2017 2016 2015Sources of income (loss) before income taxes: United States $(120) $5,135 $(2,994)Foreign 1,028 1,256 933 Total income (loss) before income taxes $ 908 $6,391 $(2,061) The provision (benefit) for income taxes consists of the following: Year Ended December 31,(In thousands) 2017 2016 2015Current: Federal $(164) $76 $(14)State 30 10 4 Foreign 27 12 — Total current $ (107) $98 $(10)Deferred: Federal $(744) $(4,799) $(4)State 1 — 1 Foreign 446 (470) 41 Total deferred $(297) $(5,269) $38 Total provision (benefit) for income taxes $(404) $(5,171) $28 A reconciliation of the statutory rate to the effective income tax rate is as follows: Year Ended December 31, 2017 2016 2015Federal statutory rate 34.0%34.0% 34.0%State income taxes, net of federal benefit 2.3 0.1 (0.2)U.S. Subpart F income 1.6 3.2 (1.0)Earnings and dividends of foreign affiliate — 32.2 (28.9)Stock based compensation (19.8) 0.5 (1.4)Research and experimentation credit (13.9) (2.2) 4.6 Foreign rate difference 13.6 (7.1) 17.8 Changes to U.S. federal income tax law (93.8) — — Valuation allowance 26.1 (141.9) (26.1)Other, net 5.4 0.3 (0.1)Effective tax rate (44.5)%(80.9)% (1.3)%53Table of ContentsOur effective tax rate for 2017 was favorably impacted by 93.8% due to a significant change in income tax law contained in the Tax Cuts andJobs Act (the Tax Reform Act) passed by the U.S. Congress in December 2017. Under the new tax law, the prior system of taxing U.S.corporations on the foreign earnings of their non-U.S. affiliates when such earnings were repatriated was replaced with a partial territorialsystem that provides a 100% dividends-received-deduction for foreign-source dividends received from 10%-or-more owned foreigncorporations. The benefit from eliminating the previously recorded $2.7 million deferred tax liability for the undistributed earnings of ourSingapore subsidiary was offset in part by the write-down of our deferred tax assets to reflect the 21% corporate income tax rate in the new taxlaw. Our effective tax rate for 2016 was favorably impacted by 141.9% due to a substantial reduction in the valuation allowances for our deferred taxassets. Recognition of the deferred tax liability for the undistributed earnings of our subsidiary in Singapore impacted our effective tax rate by anegative 32.2% in 2016. Receipt of a dividend from our subsidiary in Singapore impacted our income tax rate by a negative 28.9% in 2015. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (“UTB”) is as follows: Year Ended December 31,(In thousands) 2017 2016 2015Gross UTB balance at beginning of year $1,757 $1,887 $1,508 Additions based on tax positions related to the current year 139 178 186 Additions for tax positions of prior years 603 — 289 Reductions for tax positions of prior years (38) (96) (78)Reductions due to lapse of applicable statute of limitations — (212) (18)Gross UTB balance at end of year $2,461 $1,757 $1,887 Net UTB balance at end of year $ 159 $131 $126 The ending net UTB results from adjusting the gross balance for items such as federal, state, and non-U.S. deferred items, interest andpenalties, and deductible taxes. The net UTB is a long-term income tax reserve within our consolidated balance sheets. We recognize interestand penalties related to unrecognized tax benefits in tax expense. Accrued interest and penalties on a gross basis are inconsequential. Werecorded additional income tax expense for the increase in our liability for uncertain tax positions of $28,000 in 2017 and $5,000 in 2016. Werecorded an income tax benefit for the decrease in our liability for uncertain tax positions of $14,000 in 2015. Estimated gross interest andpenalties included in the above amounts for all years were inconsequential.We file income tax returns in the United States and various state and foreign jurisdictions. Our federal income tax returns for years after 2013 arestill subject to examination by the Internal Revenue Service. We are no longer subject to state and local income tax examinations for years priorto 2013. The Inland Revenue Authority of Singapore recently initiated a review of our 2016 and 2015 income tax returns, causing us to increaseour gross and net UTB. The increase in the UTB did not have a significant impact on our overall effective income tax rate in 2017. We do notpresently anticipate that the outcome of these audits will have a significant impact on our financial position or results of operations.54Table of Contents Deferred tax assets and liabilities consist of the following: December 31, 2017 December 31, 2016(In thousands) Assets Liabilities Assets LiabilitiesEquipment, leaseholds and intangible amortization, net $217 $387 $352 $395 Inventory allowances 563 — 783 21 Accrued expenses 139 — 221 — Warranty accrual 165 — 272 — Deferred revenue 155 — 181 — Accounts receivable allowance 102 — 188 — Federal and state tax credits 3,818 — 3,624 — Federal and state net operating loss carry forwards 2,237 — 2,801 — Foreign net operating loss carry forwards — — 463 — Stock based compensation 289 — 381 — Earnings of foreign subsidiary———2,520Other, net 50 — 79 — Subtotal 7,735 387 9,345 2,936 Valuation allowance (1,606) — (1,086) — Total deferred tax assets and liabilities $6,129 $387 $8,259 $2,936 We have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income,research and development tax credit carry forwards and federal, state and foreign net operating loss carry forwards. A deferred tax assetgenerally represents future tax benefits to be received when temporary differences previously reported in our consolidated financial statementsbecome deductible for income tax purposes, when net operating loss carry forwards are applied against future taxable income, or when tax creditcarry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance basedon the guidance provided in current financial accounting standards.Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances arerequired considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of futureprofitability, the duration of statutory carry forward periods, our experience with loss carry forwards not expiring unused and tax planningalternatives. In analyzing the need for valuation allowances, we first considered our history of cumulative operating results for income taxpurposes over the past three years in each of the tax jurisdictions in which we operate, our financial performance in recent quarters, statutorycarry forward periods and tax planning alternatives. Finally, we considered both our near and long-term financial outlook. After considering allavailable evidence both positive and negative, we concluded that recognition of valuation allowances for substantially all of our U.S. andSingapore deferred tax assets was not required. Our conclusions regarding the realizability of our deferred tax assets caused us to substantiallyreduce the valuation allowances recorded against our U.S. and Singapore based deferred tax assets in the fourth quarter of 2016, resulting inrecognition of a significant non-cash income tax benefit. The remaining valuation allowances recorded against our deferred tax assets increased by $520,000 in 2017 for federal and state R&D tax creditcarry forwards and state net operating loss carry forwards that we do expect to use. Valuation allowances recorded against our deferred taxassets decreased by $9.6 million in 2016 from utilization of available net operating loss carry forwards and our determination that significantvaluation allowances were no longer needed for substantially all of our U.S. and Singapore based deferred tax assets, due to the improvement inour operating results and financial outlook. At December 31, 2017, we have federal R&D tax credit carry forwards of $3.9 million that will beginto expire in 2019 and a federal net operating loss carry forward of $8.9 million that will begin to expire in 2022, if unused. During 2016, we concluded that it was no longer our intent to permanently reinvest the undistributed earnings of our Singapore subsidiary, andwe recognized the corresponding U.S. deferred tax liability for the related outside basis difference. Under the Tax Reform Act passed by the U.S.Congress in December 2017, the prior system of taxing U.S. corporations on the foreign earnings of their non-U.S. affiliates when such earningswere repatriated was replaced with a partial territorial system that provides a 100% dividends-received-deduction for foreign-source dividendsreceived from 10%-or-more owned foreign corporations. Accordingly, the previously recorded deferred tax liability for the outside basisdifference related to our Singapore subsidiary was reversed. 55Table of ContentsSee Note 2 for additional information related to our adoption of Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting.Cash payments for income taxes, net of refunds received, were $40,000 in 2017, $144,000 in 2016 and $16,000 in 2015.NOTE 11 – OPERATING LEASESWe lease a 50,724 square foot mixed office and warehouse facility in Golden Valley, Minnesota. The lease has a term of 90 months and expires onDecember 31, 2018. The lease contains an escalation clause and two renewal options of three years each. Rental expense, including the effectsof lease incentives, is recognized on a straight-line basis over the term of the lease. We are also required to pay insurance, property taxes andother operating expenses related to the leased facility.We lease a 10,165 square foot mixed office and warehouse facility in Bloomington, Minnesota. The lease expires on December 31, 2018. Rentalexpense, including the effects of lease incentives, is recognized on a straight-line basis over the term of the lease. We are also required to payinsurance, property taxes and other operating expenses related to the leased facility. We lease a 19,805 square foot mixed office and warehouse facility in Singapore. The lease expires in July 2020, contains an escalation clauseand one three year renewal option. In addition, we lease facilities for the operations of our other subsidiaries under operating leases that expireat various times through November 2018. Rent expense was $1.3 million in 2017, $1.3 million in 2016, and $1.2 million in 2015. At December 31, 2017, the future minimum lease paymentsrequired under non-cancelable operating lease agreements are as follows: Year ending December 31,(In thousands)2018$1,433 2019445 2020259 2021— Total$2,137 NOTE 12 – 401(K) AND OTHER DEFINED CONTRIBUTION PLANSWe have a retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code (the Code), whereby eligible employees maycontribute a portion of their earnings, not to exceed annual amounts allowed under the Code. In addition, we may also make contributions at thediscretion of the Board of Directors. We provided matching contributions to employees totaling $304,000 in 2017, $261,000 in 2016 and $300,000in 2015.We also contribute to defined contribution retirement savings plans on behalf of our employees in the United Kingdom. We made contributionsto these plans totaling $30,000 in 2017, $30,000 in 2016 and $33,000 in 2015. NOTE 13 – REVENUE CONCENTRATIONS, SIGNIFICANT CUSTOMERS, AND GEOGRAPHIC AREASThe following summarizes our revenue by product line: (In thousands) 2017 2016 2015High precision 3D and 2D sensors $17,079 $18,797 $13,022 Semiconductor sensors 11,059 10,061 7,677 Inspection systems 19,468 28,680 13,578 Metrology products and services 5,727 8,702 6,853 Total $53,333 $66,240 $41,130 56Table of ContentsThe following summarizes certain significant customer information: (In thousands) SignificantCustomer Percentage ofRevenuesYear ended December 31, 2017 A 12%Year ended December 31, 2016 B 12% C 11%Year ended December 31, 2015 A 10% B 11%Export sales as a percentage of total sales was 71% in 2017, 81% in 2016 and 72% in 2015. Export sales are attributed to the country where theproduct is shipped. Substantially all of our export sales are negotiated, invoiced and paid in U.S. dollars.As of December 31, 2017, accounts receivable from significant customer A were $814,000. Revenue by geographic area is summarized as follows: Year Ended December 31,(In thousands) 2017 2016 2015United States $15,361 $12,754 $11,452 Netherlands 2,786 8,033 4,533 Other Europe 8,948 9,183 7,462 China 6,899 14,626 4,060 Singapore 4,424 2,767 1,010 South Korea 2,643 7,634 3,462 Japan 7,177 4,505 4,802 Other Asia 3,685 5,106 2,580 Other 1,410 1,632 1,769 Total revenues $53,333 $66,240 $41,130 Long-lived assets include equipment and leasehold improvements and intangible and other assets attributable to each geographic area’soperations. Long-lived assets at December 31, 2017 and 2016 are as follows: (In thousands) 2017 2016Long-lived assets: United States $2,348 $2,721 Europe 4 7 Asia and other 335 148 Total long-lived assets $2,687 $2,876 57Table of Contents NOTE 14 – SHARE REPURCHASEIn October 2017, our Board of Directors adopted a program authorizing the purchase of up to $3.0 million of shares of our common stock. Thecommon stock will be acquired from time to time in open market transactions, block purchases and other transactions complying with Rule 10b-18 of the Securities and Exchange Commission. The share repurchase program will terminate on September 30, 2018. In 2017, we spent $240,000to repurchase 15,000 shares of our common stock. NOTE 15 – CONTINGENCIESWe are periodically a defendant in miscellaneous lawsuits, claims and disputes in the ordinary course of business. While the outcome of thesematters cannot be predicted with certainty, management presently believes the disposition of these matters will not have a material effect on ourfinancial position, results of operations or cash flows.In the normal course of business to facilitate sales of our products and services, we at times indemnify other parties, including customers, withrespect to certain matters. In these instances, we have agreed to hold the other parties harmless against losses arising out of intellectualproperty infringement or other types of claims. These agreements may limit the time within which an indemnification claim can be made, andalmost always limit the amount of the claim. It is not possible to determine the maximum potential amount under these indemnificationagreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particularagreement. Historically, payments made, if any, under these agreements have not had a material impact on our operating results, financialposition or cash flows. NOTE 16 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)(In thousands, except per share amounts) 2017 March 31 June 30 September 30 December 31, TotalRevenues $11,920 $16,409 $11,828 $13,176 53,333 Gross margin 5,398 7,733 5,592 6,037 24,760 Income (loss) from operations (539) 1,662 (163) 55 1,015 Net income (loss) (214) 1,095 (72) 503 1,312 Net income (loss) per share - Basic (1) (0.03) 0.16 (0.01) 0.07 0.19 Net income (loss) per share - Diluted (1) (0.03) 0.15 (0.01) 0.07 0.19 2016 March 31 June 30 September 30 December 31, TotalRevenues $19,114 $18,631 $15,040 $13,455 66,240 Gross margin 7,944 8,145 6,641 6,325 29,055 Income from operations 2,391 1,987 1,137 638 6,153 Net income 2,263 2,041 1,172 6,086 11,562 Net income per share - Basic (1) 0.33 0.30 0.17 0.88 1.69 Net income per share - Diluted (1) 0.33 0.29 0.16 0.85 1.64 (1)The summation of quarterly per share amounts may not equal the calculation for the full year, as each quarterly calculation is performeddiscretely. 58Table of Contents CYBEROPTICS CORPORATIONSCHEDULE OF VALUATION AND QUALIFYING ACCOUNTSDescriptionBalance at Charged to Other Balance Beginning of Costs and Increases at end ofPeriod Expenses (Decreases) Period Allowance for doubtful accounts: Year ended December 31, 2017 $547,000 $(48,000) $(26,000) $473,000 Year ended December 31, 2016$521,000 $24,000 $2,000 $547,000 Year ended December 31, 2015$561,000 $(44,000) $4,000 $521,000 DescriptionBalance at Charged to Other Balance Beginning of Costs and Increases at end ofPeriod Expenses (Decreases) Period Allowance for obsolete inventory: Year ended December 31, 2017 $1,230,000 $349,000 $(831,000) $748,000 Year ended December 31, 2016$950,000 $408,000 $(128,000) $1,230,000 Year ended December 31, 2015 $914,000 $187,000 $(151,000) $950,000 DescriptionBalance at Charged to Other Balance Beginning of Costs and Increases at end ofPeriod Expenses (Decreases) Period Allowance for deferred taxes: Year ended December 31, 2017 $1,086,000 $216,000 $304,000 $1,606,000 Year ended December 31, 2016$10,644,000 $(9,589,000) $31,000 $1,086,000 Year ended December 31, 2015 $10,500,000 $538,000 $(394,000) $10,644,000 59Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and ShareholdersCyberOptics CorporationOpinion on internal control over financial reportingWe have audited the internal control over financial reporting of CyberOptics Corporation (a Minnesota corporation) and subsidiaries (the“Company”) as of December 31, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), theconsolidated financial statements of the Company as of and for the year ended December 31, 2017, and our report dated March 9, 2018expressed an unqualified opinion on those financial statements.Basis for opinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control overFinancial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance withthe U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and limitations of internal control over financial reportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, orthat the degree of compliance with the policies or procedures may deteriorate./s/ GRANT THORNTON LLPMinneapolis, Minnesota March 9, 2018 60Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and ShareholdersCyberOptics CorporationOpinion on the financial statementsWe have audited the accompanying consolidated balance sheets of CyberOptics Corporation (a Minnesota corporation) and subsidiaries (the“Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), changes instockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and schedules(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financialposition of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in theperiod ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), theCompany’s internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report datedMarch 9, 2018 expressed an unqualified opinion.Basis for opinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sfinancial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities andExchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our auditsincluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis forour opinion./s/ GRANT THORNTON LLPWe have served as the Company’s auditor since 2009. Minneapolis, MinnesotaMarch 9, 2018 61Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURENONE.ITEM 9A. CONTROLS AND PROCEDURESDisclosure Controls and ProceduresUnder the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, weevaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring thatinformation required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated tomanagement, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding requireddisclosure.During the quarter ended December 31, 2017, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control overfinancial reporting.Management's Report on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f)under the Exchange Act, for CyberOptics Corporation and its subsidiaries (collectively, the Company). Our internal control over financialreporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP).Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts andexpenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that couldhave a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, and even when determinedto be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures may deteriorate.Management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financialreporting as of December 31, 2017. In making this evaluation, our management used the criteria for effective internal control over financialreporting described in the 2013 “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as ofDecember 31, 2017.Our internal control over financial reporting as of December 31, 2017 has been audited by Grant Thornton LLP, as stated in their report includedelsewhere herein.ITEM 9B. OTHER INFORMATIONNONE. 62Table of Contents PART III. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information contained under the headings “Proposal I–Election of Directors,” “Information About our Board of Directors and itsCommittees and Other Corporate Governance Matters,” “Section 16(a) Beneficial Ownership Reporting Compliance” and "ExecutiveCompensation-Executive Officers" of the Company’s definitive proxy statement for its annual meeting of shareholders to be held May 10, 2018(the Proxy Statement), is hereby incorporated by reference.ITEM 11. EXECUTIVE COMPENSATIONThe information under the headings “Information About our Board of Directors and its Committees and Other Corporate Governance Matters–Compensation of Independent Directors,” and “Executive Compensation” of the Proxy Statement is hereby incorporated by reference.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERSThe information contained under the headings “Beneficial Ownership” and "Equity Compensation Plan Information" of the Proxy Statement ishereby incorporated by reference.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCEThe information under the headings “Information About our Board of Directors and its Committees and Other Corporate Governance Matters–Committees of Our Board–Audit Committee” and "Related Person Transactions" of the Proxy Statement is hereby incorporated by reference.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information under the heading “Independent Accountants and Payment of Fees” and “Information About our Board of Directors and itsCommittees and Other Corporate Governance Matters–Committees of Our Board–Audit Committee” of the Proxy Statement is herebyincorporated by reference. 63Table of Contents PART IV.ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a)(1) Financial Statements: The Consolidated Financial Statements included in Item 8 to this Form 10-K consist of the following: Consolidated Balance Sheets as of December 31, 2017 and 2016. Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015. Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015. Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015. Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015. Notes to the Consolidated Financial Statements. Schedule of Valuation and Qualifying Accounts 64Table of Contents (b) LIST OF EXHIBITSExhibitNumber Description 2.0 Asset purchase agreement by and among LDI Acquisition Corp., Laser Design Inc., GKS Services Corp., Innovative Design Group,Inc. 3D Scanning Technologies, Ltd., and certain shareholders of Laser Design, Inc. dated as of January 14, 2014 (incorporated byreference to Exhibit 2.0 to the Company's annual report on Form 10-K for the year ended December 31, 2013). 3.1 Articles of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1997). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K dated September 8, 2008). *4.1 CyberOptics Corporation Stock Option Plan for Non-Employee Directors, as amended (incorporated by reference to Exhibit 4.2 of theCompany’s Registration Statement on Form S-8 filed August 10, 2006 (file no 333-136500)). *4.2 CyberOptics Corporation 1998 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the current report onForm 8-K dated May 20, 2016) *4.3 CyberOptics Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 of the Company’s RegistrationStatement on Form S-8 filed August 10, 2011 (file no 333-176196)). *4.4 CyberOptics Corporation Stock Grant Plan for Non-Employee Directors (incorporated by reference to the Company's RegistrationStatement on Form S-8 filed August 13, 2014 (file no 333-198100) and Exhibit 4.1 of the Company’s Registration Statement on Form S-8 filed August 14, 2008 (file no 333-153015)). *4.5 CyberOptics Corporation Non-Employee Director Stock Plan (incorporated by reference to Exhibit 10.2 to the current report on Form8-K dated May 20, 2016) *4.6 CyberOptics Corporation Amended Non-Employee Director Stock Plan (incorporated by reference to Exhibit 4.1 to the Company'squarterly report on Form 10-Q for the quarter ended June 30, 2017) 10.1 Lease Agreement between FirstCal Industrial 2 Acquisitions LLC and the Company dated March 27, 2006 (incorporated by referenceto Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2006). 10.2 First Amendment to Lease effective as of March 14, 2011, by and between Hines REIT Minneapolis Industrial, LLC and CyberOpticsCorporation (incorporated by reference to Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended March31, 2011). *10.3 Severance Pay Agreement with Jeffrey A. Bertelsen (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K datedMay 19, 2008). *10.4 Amendment to Severance Pay Agreement with Jeffrey A. Bertelsen (incorporated by reference to Exhibit 10.1 to the current report onForm 8-K dated May 18, 2009). *10.5 Clarification to Severance Pay Agreement with Jeffrey A. Bertelsen (incorporated by reference to Exhibit 10.9 to the Company’sannual report on Form 10-K for the year ended December 31, 2011). *10.6 Employment agreement with Subodh Kulkarni dated January 13, 2014 (incorporated by reference to Exhibit 10.12 to the Company'sannual report on Form 10-K for the year ended December 31, 2013) 10.8 Tenancy agreement between RBC Investor Services Trust Singapore Limited and CyberOptics Singapore Private Limited datedDecember 8, 2016 (incorporated by reference to Exhibit 10.9 to the Company’s annual report on Form 10-K for the year endedDecember 31, 2016). *10.10 Form of stock option agreement used for option grants to employees (incorporated by reference to Exhibit 10.9 to the Company'sannual report on Form 10-K for the year ended December 31, 2014). *10.11 Form of restricted stock award agreement used for awards to employees (incorporated by reference to Exhibit 10.10 to the Company'sannual report on Form 10-K for the year ended December 31, 2014). 21.0 Subsidiaries of the Company. 23.1 Consent of Independent Registered Public Accounting Firm. 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.0 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.0 Financial statements formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the ConsolidatedStatement of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements ofCash Flows, (v) the Consolidated Statements of Stockholders' Equity, and (vi) the Notes to the Consolidated Financial Statements. * Management Contract or Compensatory Plan or Arrangement 65Table of Contents SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized. CYBEROPTICS CORPORATION /s/ SUBODH KULKARNI By Subodh Kulkarni, President and CEOPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated. Name Title Date /s/ SUBODH KULKARNI President and CEO March 9, 2018Subodh Kulkarni (Principal Executive Officer) /s/ ALEX B. CIMOCHOWSKI Director March 9, 2018Alex B. Cimochowski /s/ MICHAEL M. SELZER JR. Chairman, Director March 9, 2018Michael M. Selzer, Jr. /s/ IRENE M. QUALTERS Director March 9, 2018Irene M. Qualters /s/ CRAIG D. GATES Director March 9, 2018Craig D. Gates /s/ JEFFREY A. BERTELSEN Vice President, CFO, and COO March 9, 2018Jeffrey A. Bertelsen (Principal Financial Officer and Principal Accounting Officer) 66Exhibit 21.0SUBSIDIARIESName Jurisdiction of Formation CyberOptics Ltd. United Kingdom CyberOptics Holdings Ltd. United Kingdom CyberOptics (Singapore) Pte. Ltd Singapore Laser Design, Inc. Minnesota CyberOptics (China) Co., Ltd. People’s Republic of ChinaExhibit 23.1Consent of Independent Registered Public Accounting Firm We have issued our reports dated March 9, 2018, with respect to the consolidated financial statements and internal control over financialreporting included in the Annual Report of CyberOptics Corporation on Form 10-K for the year ended December 31, 2017. We consent to theincorporation by reference of said reports in the Registration Statements of CyberOptics Corporation on Forms S-8 (File No. 333-211553, File No.333-183296, File No. 333-176196, and File No. 333-103310). /s/GRANT THORNTON LLP Minneapolis, Minnesota March 9, 2018Exhibit 31.1I, Subodh Kulkarni, certify that:1.I have reviewed this Annual Report on Form 10-K of CyberOptics Corporation. 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to theperiod covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.Date: March 9, 2018 /s/ Subodh Kulkarni Signature Name: Subodh Kulkarni Title: President and CEOExhibit 31.2I, Jeffrey A. Bertelsen, certify that:1.I have reviewed this Annual Report on Form 10-K of CyberOptics Corporation. 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to theperiod covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. Date: March 9, 2018 /s/ Jeffrey A. Bertelsen Signature Name: Jeffrey A. Bertelsen Title: Vice President, CFO and COOExhibit 32CERTIFICATION PURSUANT TO18 U.S.C. §1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of CyberOptics Corporation (the “Company”) on Form 10-K for the year ended December 31, 2017 as filedwith the Securities and Exchange Commission on or about the date hereof (the “Report”), the undersigned, Subodh Kulkarni, Chief ExecutiveOfficer, and Jeffrey A. Bertelsen, Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. §1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002, that: 1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. /s/ Subodh Kulkarni Subodh Kulkarni President and CEO March 9, 2018 /s/ Jeffrey A. Bertelsen Jeffrey A. Bertelsen Vice President, CFO and COO March 9, 2018END OF FILING

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