What changed in this filing

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Item 1A. Risk Factors

2022-02-22 compared with 2021-02-22 · 85 added, 71 removed, 379 unchanged (29% of the section changed)

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The COVID-19 pandemic, including private and public sector responses, could materially adversely affect our business, financial condition, results of operations and/or cash flows.

As a result of the ongoing COVID-19 pandemic, governmental authorities where we produce and sell our products implemented and are continuing to implement numerous and evolving measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and guidance and business shutdowns.

As a result of the ongoing COVID-19 pandemic, governmental authorities where we produce and sell our products have implemented numerous and evolving measures to contain the virus, which have been complicated by viral variants and uneven access to, and acceptance and effectiveness of, vaccines globally.

Such measures include travel bans and restrictions, quarantines, shelter-in-place orders and guidance, and business shutdowns.

Although certain restrictions related to the COVID-19 pandemic have eased, uncertainty continues to exist regarding such measures and potential future measures, particularly in response to increases in infection rates.

We have significant manufacturing operations in the U.S., Europe and Russia, and a material portion of our sales are in China, the U.S.

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While our main production facilities currently remain operational, these measures have impacted and may further impact our workforce and operations, as well as those of our customers, vendors and suppliers.

There is considerable uncertainty regarding such measures and potential future measures.

In addition to reduced productivity, the constraints and limits implemented in our operations in response to COVID-19 may slow or diminish our research and development activities and qualification activities with our customers.

Restrictive governmental measures had specific expiration dates and some of those measures have been extended in response to increases in infection rates.

As a result, there is considerable uncertainty regarding the duration of such measures and potential future measures.

Restrictions on our manufacturing, support operations or workforce, or similar limitations for our vendors and suppliers could limit our ability to meet customer demand, testing, installation and acceptance of our equipment or delays for orders, deliveries and payments, and could have a material adverse effect on our financial condition, cash flows and results of operations.

In addition, restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, could limit our ability to manufacture, deliver or install products and generate sales, or could result in higher costs and could have a material adverse effect on our financial condition, cash flows and results of operations.

or could result in higher costs and could have a material adverse effect on our financial condition, cash flows and results of operations.

In response to these developments, we and our suppliers and customers modified business practices, including restricting employee travel, modifying employee work locations, implementing social distancing and enhanced sanitary measures, and cancelling attendance at events and conferences.

We experienced and may experience increased absenteeism and reduced levels

of productivity and efficiency, even with the rollout of vaccination programs.

We experienced and may experience increased absenteeism and reduced levels of productivity and efficiency and we face an increasingly competitive labor market due to sustained labor shortage and increased turnover related to the COVID-19 pandemic .

The COVID-19 pandemic has also disrupted our internal operations, including by exposing us to cyber and other data security risks associated with the increased number of our employees working remotely, as well as increased dependence on internet and telecommunications access and capabilities.

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The resumption of normal business operations after such interruptions may be delayed or constrained by lingering effects of COVID-19 on our suppliers, third-party service providers, and/or customers.

The impact of COVID-19, including changes in customer demand, pandemic fears and market downturns, and restrictions on business and individual activities has created significant economic and demand uncertainty.

The continued impact of COVID-19, including changes in customer demand, supply chain constraints experienced by us, our suppliers and our customers, pandemic fears and market downturns, and restrictions on business and individual activities has created significant economic and demand uncertainty.

We have experienced and expect to continue to experience unpredictable volatility in demand in several of our end-markets.

In addition to the economic slowdown caused by the COVID-19 pandemic, we anticipate that it could cause regional recessions and/or a global recession.

Economic indicators continue to show improvement from the severe contraction experienced following the outset of the COVID-19 pandemic, which has led to an improvement in the recent demand environment in certain regions.

The sustainability of the economic recovery observed in 2021 remains unclear.

The COVID-19 pandemic also may exacerbate other risks disclosed herein, including but not limited to downturns in our markets, uncertainty and adverse changes in general economic conditions, highly competitive markets and declining average selling prices, price decreases, and international operations and customers.

The degree to which COVID-19 impacts our financial condition, cash flows and results of operations depends upon future developments, which are highly uncertain and cannot be predicted, including but not limited to the duration, location and spread of the outbreak, its severity, governmental and business measures to contain the virus and address its impact, and how quickly and to what extent normal economic and operating conditions can resume.

We cannot at this time predict the many potential impacts of the COVID-19 pandemic, but it could have a material adverse effect on our business, prospects, financial condition, cash flows and results of operations.

The degree to which the COVID-19 pandemic impacts our financial condition, cash flows and results of operations depends upon future developments, which are highly uncertain and cannot be predicted, including but not limited to the duration, location and spread of the outbreak, the emergence, contagiousness, and threat of new and different strains of virus, the availability, acceptance, and effectiveness of vaccines, governmental and business measures to contain the virus and address its impact, and how quickly and to what extent normal economic and operating conditions can resume.

These factors, and others that are currently unknown or considered immaterial, could have a material adverse effect on our business, prospects, financial condition, cash flows and results of operations.

Furthermore, the COVID-19 pandemic makes it more difficult for us to forecast demand and provide guidance for 2022.

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Because all components of our budgeting and forecasting are dependent upon estimates of growth or contraction in the markets and applications we serve and demand for our products, the prevailing economic uncertainties render estimates of future income and expenditures very difficult to make.

A significant portion of our sales are to customers in China, which accounted for 42%, 37% and 43% in 2020, 2019 and 2018, respectively.

A significant portion of our sales are to customers in China, which accounted for 38%, 42% and 37% of net sales in 2021, 2020 and 2019, respectively.

Slowing economic growth or recession, tariff-trade wars or other adverse economic developments or uncertainty in any of our key markets, including in China, may result in a decrease in our sales.

Adverse changes have occurred and may occur in the future as a result of declining or flat global or regional economic conditions, fluctuations in currency and commodity prices, wavering confidence, capital expenditure reductions, unemployment, declines in stock markets, contraction of credit availability, declines in real estate values, or other factors affecting economic conditions generally.

These changes may negatively affect the sales of our products, increase exposure to losses from bad debts, increase the cost and decrease the availability of financing, increase the risk of loss on investments, or increase costs associated with manufacturing and distributing products.

distributing products.

An economic downturn could have a material adverse effect on our business, financial condition and results of operations.

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Approximately 91% of our revenues in 2021 were from customers in the materials processing market.

applications in this market are broad, sales for these applications are cyclical and have historically experienced sudden and severe downturns and periods of oversupply, resulting in significantly reduced demand for capital equipment, including the products that we manufacture and market.

For example, our sales decreased by 25% in the materials processing market in 2009 as a result of the global economic recession, our material processing sales declined 10% in the second half of 2018 and 11% in the 2019 fiscal year, in part due to decreased capital equipment demand stemming from adverse changes to U.S.-China relations, including rounds of tariff increases and retaliations and 12% in the 2020 fiscal year, in part due to decreased capital equipment demand attributed to the COVID-19 pandemic.

Although applications in this market are broad, sales for these applications are cyclical and have historically experienced sudden and severe downturns and periods of oversupply, resulting in significantly reduced demand for capital equipment, including the products that we manufacture and market.

For example, our sales decreased by 25% in the materials processing market in 2009 as a result of the global economic recession, our material processing sales declined 10% in the second half of 2018 and 11% in the 2019 fiscal year, in part due to decreased capital equipment demand stemming from adverse changes to U.S.-China relations, including rounds of tariff increases and retaliations and declined 12% in the 2020 fiscal year, in part due to decreased capital equipment demand attributed to the COVID-19 pandemic.

For the foreseeable future, our operations will continue to depend upon capital expenditures by customers in these industries or markets, which, in turn, depend upon the demand, as well as forecasted demand, for their products or services.

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Risks Relating to Industry Dynamics and Competition

The markets for our products are highly competitive and increased competition could result in reduced sales, reduced gross margins or the loss of market share.

The markets for our products are highly competitive and currently subject to significant price and technological competition, and if we are unable to compete successfully, it could result in reduced sales, reduced gross margins or the loss of market share.

The industries in which we operate are characterized by significant price and technological competition.

We compete with makers of fiber lasers, solid-state lasers, direct diode lasers, high power CO 2, YAG and disc lasers.

These include public and private companies such as Coherent, Inc., Laserline GmbH, Lumentum Holdings Inc., Maxphotonics Co., Ltd., nLight, Inc., Trumpf GmbH + Co.

These include public and private companies such as Coherent, Inc., Laserline GmbH, Lumentum Holdings Inc., Maxphotonics Co., Ltd., MKS Instruments, Inc., nLight, Inc., Trumpf GmbH + Co.

KG, and Wuhan Raycus Fiber Laser Technologies Co.

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The laser and amplifier industries are experiencing declining average selling prices, which could cause our gross margins to decline and harm our operating results.

Our products are experiencing and may in the future continue to experience a significant decline in average selling prices ("ASPs") as a result of new product and technology introductions, increased competition and price pressures from significant customers.

Our products are experiencing and may in the future continue to experience a significant decline in average selling prices ("ASPs") as a result of increased competition, pressure to reduce prices from significant customers and new product and technology introductions.

Newer market participants, particularly in China, have reduced and may continue to reduce, prices of competing products to gain market share.

If the ASPs of our products decline further and we are unable to increase our unit volumes, introduce new or enhanced products with higher margins or reduce manufacturing costs to offset anticipated decreases in the prices of our existing products, our operating results may be adversely affected.

in the prices of our existing products, our operating results may be adversely affected.

In addition, because of our significant fixed costs, we are limited in our ability to reduce total costs quickly in response to any revenue shortfalls.

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Our ability to maintain or increase sales depends upon our ability to develop new products, penetrate new applications and end markets for fiber lasers and maintain or increase our market share in existing applications.

Our level of sales will depend on our ability to generate sales of fiber lasers in new and developing markets and applications for lasers where they have not been used previously and in applications in which other lasers, such as CO 2 and YAG lasers, have been used.

To date, a significant portion of our revenue growth has been derived from sales of fiber lasers

primarily for applications where CO 2 and YAG lasers historically have been used.

Our level of sales will depend on our ability to generate sales of fiber lasers in new and developing markets including applications for lasers where they have not been used previously and in applications in which other lasers, such as CO 2 and YAG lasers, have been used.

To date, a significant portion of our revenue growth has been derived from sales of fiber lasers primarily for applications where CO 2 and YAG lasers historically have been used.

We have made significant sales into the cutting, welding and marking and engraving applications, large applications where the use of other laser technologies was well established.

As fiber lasers reach higher levels of penetration in core materials processing applications and there is higher levels of competition in these core material processing application, the development of new applications, end markets and products outside our core applications becomes more important to our ability to generate sales.

As fiber lasers increase penetration in core materials processing applications and there is more competition in these core material processing applications, the development of new applications, end markets and products outside our core applications becomes more important to our ability to generate sales.

In order to maintain or increase market demand for our products, we will need to devote substantial resources to:

• demonstrate the effectiveness of fiber lasers in new applications for materials processing, medical, communications or other applications such as cinema and projection;

• successfully develop new product lines, such as UV, visible and ultrafast fiber lasers, with competitive features that extend our product line;

• demonstrate the effectiveness of fiber lasers in new applications for materials processing, medical, communications and advanced applications;

• successfully develop new product lines, such as the handheld welder, UV, visible and ultrafast fiber lasers with competitive features that extend our product line;

• increase our direct and indirect sales efforts;

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Potential customers may have substantial investments and know-how related to their existing laser and non-laser technologies.

They may perceive risks relating to the reliability, quality, usefulness and profitability of integrating of fiber lasers in their systems when compared to other laser or non-laser technologies available in the market or that they manufacture themselves.

They may perceive risks relating to the reliability, quality, usefulness and profitability of integrating fiber lasers in their systems when compared to other laser or non-laser technologies available in the market or that they manufacture themselves.

Despite fiber lasers having better performance and prices compared to other lasers or tools, OEM customers may be reluctant to switch incumbent suppliers or we may miss the design cycles of our customers.

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If our capacity and production levels are not properly sized in relation to expected demand, we may need to record write-downs for excess or obsolete inventory.

Because we are vertically integrated,

the rate at which we turn inventory has historically been low when compared to our cost of sales.

Because we are vertically integrated, the rate at which we turn inventory has historically been low when compared to our cost of sales.

We do not expect this to change significantly in the future and believe that we will have to maintain a relatively high level of inventory compared to our cost of sales.

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In the aggregate, our top five customers accounted for 19%, 24% and 21% of our consolidated net sales in 2021, 2020 and 2019, respectively.

Our largest customer is located in China and accounted for 8%, 9% and 12% of sales in 2020, 2019 and 2018, respectively.

A few of our larger customers, including our largest customer, are making fiber lasers or announced plans to develop fiber lasers.

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In addition, due to the absence of long-term volume purchase agreements, we forecast our revenues and plan our production and inventory levels based upon the demand forecasts of our OEM customers, end users and distributors, which are highly unpredictable and can fluctuate substantially.

This could lead to increased inventory levels and increased carrying costs and risk of excess or obsolete inventory due to unanticipated reductions in purchases by our customers.

This could lead to increased inventory levels and increased carrying costs and risk of excess or obsolete inventory due to

unanticipated reductions in purchases by our customers.

In addition, provisions have been recorded as a result of changes in market prices of certain components, the value of those inventories that was realizable through finished product sales due to declines in certain end market demand and uncertainties related to the recoverability of the value of inventories due to technological and product changes, and excess quantities.

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If we do not achieve planned yields, our product costs could increase resulting in lower gross margins, and key component availability would decrease.

We are highly dependent on the significant experience and specialized expertise of our CEO, COO and other senior management and scientific staff.

We are highly dependent on the significant experience and specialized expertise of our CEO and other senior management and scientific staff.

The unavailability or loss of one or more of these key employees or our failure to attract other highly skilled personnel necessary to compete successfully could harm our business and results of operations.

Our future success is substantially dependent on the continued service and performance of our executive officers, particularly our founder and chief executive officer, Dr.

Gapontsev, age 81, and our chief operating officer, Dr.

Our future success is substantially dependent on the continued service and performance of our executive officers, particularly our chief executive officer, Dr.

Eugene Scherbakov, age 74.

They play key roles setting our strategic direction, directing the development of new technologies and maintaining our culture.

The unavailability of either key executive could have a material impact on our business.

Although the board engages in executive succession planning, our inability to effectively and immediately transition knowledge or responsibilities to their successors in the event of an unexpected absence or departure could harm our business and disrupt our operations.

He plays a key role setting our strategic direction, directing the development of new technologies and maintaining our culture.

The unavailability of Dr.

Scherbakov could have a material impact on our business.

Although the board engages in executive succession planning, our inability to effectively and immediately transition knowledge or responsibilities to his successor in the event of an unexpected absence or departure could

harm our business and disrupt our operations.

We also rely on our highly trained team of scientists, many of whom have numerous years of experience and specialized expertise in optical fibers, semiconductors and optical component technology, and other key engineering, sales, marketing, manufacturing and support personnel, any of whom may depart for a variety of reasons, which could harm our business.

The members of our scientific staff who are expected to make significant individual contributions to our business are also members of our executive management team.

Certain members of our scientific staff who are expected to make significant individual contributions to our business are also members of our executive management team.

We will need to continue to recruit and retain highly skilled scientists and engineers for certain functions.

Competition for qualified personnel in our industry is intense, particularly for physicists, software engineers and other technical staff.

If we fail to attract, integrate and retain the necessary personnel, it could

delay the development or introduction of new products, negatively impact our ability to market, sell or support our products, and significantly harm our business.

If we fail to attract, integrate and retain the necessary personnel, it could delay the development or introduction of new products, negatively impact our ability to market, sell or support our products, and significantly harm our business.

Risks Relating to Intellectual Property, Litigation, Information Systems and Regulations

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Policing unauthorized use of our trade secret technologies throughout the world and proving misappropriation of our technologies are particularly difficult, especially due to the number of our employees and operations in numerous foreign countries.

The steps that we take to acquire ownership of our employees' inventions and trade secrets in foreign countries may not have been effective under all such local laws, which could expose us to potential claims or the inability to protect intellectual property developed by our employees.

The steps that we take to acquire ownership

of our employees' inventions and trade secrets in foreign countries may not have been effective under all such local laws, which could expose us to potential claims or the inability to protect intellectual property developed by our employees.

Furthermore, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may adversely affect our ability to enforce our trade secret and intellectual property positions.

Costly and time-consuming litigation could be necessary to determine the scope of our confidential information and trade secret protection.

However, there can be no assurance that confidentiality agreements we enter into with consultants, suppliers, employees and

others will not be breached, that we will be able to effectively enforce them or that we will have adequate remedies for any breach.

However, there can be no assurance that confidentiality agreements we enter into with consultants, suppliers, employees and others will not be breached, that we will be able to effectively enforce them or that we will have adequate remedies for any breach.

Given our reliance on trade secret laws, others may independently develop similar or alternative technologies or duplicate our technologies and commercialize discoveries that we have made.

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We may face particular privacy, data security and data protection risks due to laws and regulations regulating the protection or security of personal and other sensitive data, including in particular several laws and regulations that have recently been enacted or adopted or are likely to be enacted or adopted in the future.

For instance, effective May 25, 2018, the European General Data Protection Regulation (“GDPR”) imposed additional obligations and risk upon our business and substantially increased the penalties to which we could be subject in the event of any non-compliance.

GDPR requires companies to satisfy

new requirements regarding the handling of personal data (generally, of EU residents), including its use, protection and the rights of affected persons regarding their data.

For instance, in 2018, the European General Data Protection Regulation (“GDPR”) imposed additional obligations and risk upon our business and substantially increased the penalties to which we could be subject in the event of any non-compliance.

GDPR requires companies to satisfy requirements regarding the handling of personal data (generally, of EU residents), including its use, protection and the rights of affected persons regarding their data.

Failure to comply with GDPR requirements could result in penalties of up to 4% of worldwide revenue.

In addition, several other jurisdictions around the world have recently enacted privacy laws or regulations similar to GDPR.

For instance, California enacted the California Consumer Privacy Act (“CCPA”), which became effective January 1, 2020, and which gives consumers many of the same rights as those available under GDPR.

For instance, in 2020, California enacted the California Consumer Privacy Act (“CCPA”), giving consumers many of the same rights as those available under GDPR.

Several laws similar to the CCPA have been proposed in the United States at both the federal and state level.

GDPR and other similar laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business.

We are evaluating its processes and taking measures to ensure compliance with all applicable privacy and data protection-related laws and regulations.

We are evaluating these requirements and taking measures to ensure compliance with all applicable privacy and data protection-related laws and regulations.

Due to the lack of experience with the interpretation and enforcement of many of these laws and regulations, some measures initially might not satisfy standard or best practices that will be established in the coming years.

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manufactured goods.

Such changes by the United States and other countries have the potential to adversely impact U.S.

Such changes by the United States

and other countries have the potential to adversely impact U.S.

and worldwide economic conditions, our industry and the global demand for our products, and as a result, could negatively affect our business, financial condition and results of operations.

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Licenses may also include conditions that limit the use, resale, transfer, re-export, modification, disassembly, or transfer of a product, software or technology after it is exported without first obtaining permission from the relevant government agency.

Failure to comply with these laws and regulations could result in government sanctions, including substantial monetary penalties, denial of export privileges, debarment from government contracts and a loss of revenues.

Delays in obtaining or failure to obtain required export licenses may require us to defer shipments for substantial periods or cancel orders.

Any of these circumstances could adversely affect our operations and, as a result, our financial results could suffer.

We have a large manufacturing facility and research and development operations in Russia which supplies components to our U.S.

Although we have implemented compliance measures designed to prevent transactions prohibited by current or future Trade Controls, we have previously identified, and may continue to identify, instances in which we exported products without obtaining the required export authorizations and/or submitting the required requests.

As a result, we have submitted a limited number of voluntary self-disclosures regarding compliance with export control laws and regulations with the U.S.

Department of Commerce’s Bureau of Industry and Security (“BIS”).

In October 2021, the U.S.

Department of Justice (“DOJ”) advised us it is conducting an investigation into certain shipments of equipment.

While we are cooperating fully with the DOJ’s review, we are unable to estimate its ultimate impact on the Company.

Our failure to comply with these laws and regulations could result in costly government investigations, government sanctions, including substantial monetary penalties, civil or criminal penalties, denial of export privileges, debarment from government contracts, and a loss of revenues and reputational harm.

We have a large manufacturing facility and research and development operations in Russia which manufactures and supplies components to our U.S.

and German manufacturing facilities.

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Also, all three such facilities provide finished products to China, our largest market.

Should there be any disruption of our supplies from or to our Russian operations, should the United States, the European Union or Russia implement new or broad-based Trade Controls, including those directed at China, our production and/or deliveries as well as results of operations would be affected.

Although we have implemented compliance measures designed to prevent transactions prohibited by current or future Trade Controls, our failure to successfully comply with applicable Trade Controls may expose us to negative legal and business consequences, including civil or criminal penalties, government investigations, and reputational harm.

Should there be any disruption of our supplies from or to our Russian operations, should the United States, the European Union or Russia implement new or broad-based Trade Controls directed at each other or China, our production and/or deliveries as well as results of operations and/or financial condition could be affected.

In addition, Trade Controls and their implementation are fluid and may change due to diplomatic and political considerations outside of our control.

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Risks Relating to Our Common Stock

Gapontsev, our Chairman and Chief Executive Officer, and three trusts he created collectively control approximately 31% of our voting power and have a significant influence on the outcome of director elections and other matters requiring stockholder approval, including a change in corporate control.

Gapontsev, our Chairman and Chief Executive Officer, and IP Fibre Devices (UK) Ltd., of which Dr.

Gapontsev is the managing director, together with three trusts he created beneficially own approximately 31% of our common stock.

Certain trusts and a company created by the late founder of the Company collectively control approximately 30% of our voting power and have a significant influence on the outcome of director elections and other matters requiring stockholder approval, including a change in corporate control.

IP Fibre Devices (UK) Ltd.

("IPFD"), together with trusts created by the late founder of the Company, Dr.

Gapontsev, beneficially own approximately 33% of our common stock.

Scherbakov, our CEO, is the sole managing director of IPFD.

Trustees of the trusts are officers or employees of the Company.

Gapontsev and the trusts have a significant influence on the outcome of matters requiring stockholder approval, including election of our directors, stockholder proposals and approval of significant corporate transactions.

Gapontsev and the trusts may vote their shares of our common stock in ways that other stockholders may consider would be adverse to the interests of the other stockholders.

Trustees of the trusts and Dr.

Scherbakov, as managing director of IPFD, have significant influence on the outcome of matters requiring stockholder approval, including election of our directors, stockholder proposals and approval of significant corporate transactions.

IPFD and the trusts may vote their shares of our common stock in ways that other stockholders may consider would be adverse to the interests of the other stockholders.

These significant ownership interests could delay, prevent or cause a change in control of the Company and might affect the market price of our common stock.

Provisions in our charter documents and Delaware law, and our severance arrangements, could prevent or delay a change in control of our company, even if a change in control would be beneficial to our stockholders.

Provisions of our certificate of incorporation and by-laws, including certain provisions that will take effect when Dr.

Provisions of our certificate of incorporation and by-laws, including certain provisions that will take effect when founder of the Company, the late Dr.

Gapontsev, together with his affiliates and associates, ceases to beneficially own an aggregate of 25% or more of our outstanding voting securities, may discourage, delay or prevent a merger, acquisition or change of control, even if it would be beneficial to our stockholders.

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• lack of cumulative voting for director elections.

Section 203 of the Delaware General Corporation Law, which will apply to the Company following such time as Dr.

Section 203 of the Delaware General Corporation Law, which will apply to the Company following such time as the late Dr.

Gapontsev, together with his affiliates and associates, ceases to beneficially own 25% or more of the total voting power of our outstanding shares, may prohibit business combinations with stockholders owning 15% or more of our outstanding voting stock.

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Political, economic and monetary instability and changes in governmental regulations or policies, including trade tariffs and protectionism, could adversely affect both our ability to effectively operate our foreign sales offices and the ability of our foreign suppliers to supply us with required materials or services.

Any interruption or delay in the supply of our required components, products, materials or services, or our inability to obtain these components, materials, products or services from

alternate sources at acceptable prices and within a reasonable amount of time, could impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders.

We are subject to risks of doing business in Russia through our subsidiary, NTO IRE-Polus, which provides components and test equipment to us and sells finished fiber devices to customers in Russia and neighboring countries as well as finished lasers to China.

Further, approximately 42% of our sales in 2020 were to customers in China.

We have also invested in manufacturing facilities in Belarus.

The results of our operations, business prospects and facilities in these three countries are subject to the economic and political environment in Russia, China and Belarus.

Any interruption or delay in the supply of our required components, products, materials or services, or our inability to obtain these components, materials, products or services from alternate sources at acceptable prices and within a reasonable amount of time, could impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders.

We are subject to risks of doing business in Russia through our subsidiary, NTO IRE-Polus, which provides critical components and test equipment to our U.S.

and German operations, sells finished lasers to customers in Russia and supplies our Chinese subsidiary with a portion of the finished lasers they sell to customers in China.

Further, our Russian operations are dependent upon the supply of certain critical components from our U.S.

and German operations for the production of finished lasers.

We are also subject to risks of doing business in China, as approximately 38% of our sales in 2021 were to Chinese customers.

The results of our operations, business prospects and facilities in Russia, China and Belarus (where we manufacture certain mechanical components) are subject to the economic and political environment there and global geopolitical conditions.

In recent years, these countries have undergone substantial political, economic and social change.

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The future economic direction of these emerging market countries remains largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the government, together with tax, legal, regulatory and political developments.

As a result of escalating tensions along the Russia-Ukraine border, the U.S.

and certain allies in Europe imposed sanctions on Russia and could impose further sanctions against it.

Russia could respond in kind.

Sanctions imposed by any of these countries could disrupt our supply of critical components among our manufacturing facilities in the U.S., Germany, Russia or Belarus, and cause us to shift all or portions of work occurring in Russia or Belarus to other countries.

In addition, if sanctions or retaliatory sanctions targeting the banking sector are imposed, we may not be able to transfer cash to and from Russia to fund operations or repatriate surplus liquidity.

Such disruptions could negatively affect our ability to provide critical components to affiliates or produce finished goods for customers, which could increase our costs, require capital expenditures and harm our results of operations and financial condition.

Our failure to manage the risks associated with our operations in Russia, China and Belarus and our other existing and potential future international business operations could have a material adverse effect upon our results of operations.

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Although we have pursued relatively small acquisitions in the past, we may pursue larger transactions in the future.

Acquisitions present a number of potential risks and challenges that could, if not met, disrupt our business operations, increase our operating costs, reduce consolidated margins, cause us to incur impairment charges and reduce the value of the acquired company, asset or technology to us.

Acquisitions present a

number of potential risks and challenges that could, if not met, disrupt our business operations, increase our operating costs, reduce consolidated margins, cause us to incur impairment charges and reduce the value of the acquired company, asset or technology to us.

We may not be able to effectively integrate acquired businesses, business cultures, products, patents or technologies into our existing business and products, or retain key employees.

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Negative industry or economic trends, including reduced estimates of future cash flows, disruptions to our business, slower growth rates, lack of growth in our relevant business units or differences in the estimated product acceptance rates could lead to impairment charges against our long-lived assets, including goodwill and other intangible assets.

For example, we recorded a non-cash impairment charge of $44.6 million in 2020.

Our valuation methodology for assessing impairment requires management to make significant judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance at many points

during the analysis.

Also, the process of evaluating the potential impairment of goodwill is subjective.

We operate in a highly competitive environment and projections of future operating results and cash flows may vary significantly from actual results.

Additionally, if our analysis indicates potential impairment to goodwill in one or more of our business units, we may be required to record additional charges to earnings in our financial statements, which could negatively affect our results of operations.

Additionally, if our analysis indicates potential impairment to goodwill in one or more of our reporting units, we may be required to record additional charges to earnings in our financial statements, which could negatively affect our results of operations.

We are exposed to credit risk and fluctuations in the market values of our cash, cash equivalents and marketable securities.

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Uncertainty or disruptions in financial markets may negatively impact our ability to access additional financing or to refinance our existing credit facilities or existing debt arrangements on favorable terms or at all, which could negatively affect our ability to fund current and future expansion as well as future acquisitions and development.

These disruptions may include turmoil in the financial services industry, unprecedented volatility in the markets where our outstanding securities trade, changes in reference rates for interest such as the scheduled discontinuation of LIBOR in 2021 and general economic downturns in the areas where we do business.

These disruptions may include turmoil in the financial services industry, unprecedented volatility in the markets where our outstanding securities trade, changes in reference rates for interest such as the discontinuation of LIBOR in 2023 and general economic downturns in the areas where we do business.

If we are unable to access funds at competitive rates, or if our short-term or long-term borrowing costs increase, our ability to finance our operations, meet our short-term obligations and implement our operating strategy could be adversely affected.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors