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NLIGHT, INC. - Quarter Report: 2022 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________
FORM 10-Q
________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
 
Commission File Number 001-38462
________________________________________________________
NLIGHT, INC.
(Exact name of Registrant as specified in its charter)
________________________________________________________
Delaware91-2066376
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
4637 NW 18th Avenue
Camas, Washington 98607
(Address of principal executive office, including zip code)
(360) 566-4460
(Registrant's telephone number, including area code)
__________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Exchange on which Registered
Common Stock, par value
$0.0001 per share
LASRThe Nasdaq Stock Market LLC

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 the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).                     Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.    
Large Accelerated FilerAccelerated FilerNon-Accelerated FilerSmaller 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 revised financial accounting standards 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 Exchange Act).     Yes ☐    No ☒

As of October 31, 2022, the Registrant had 45,307,101 shares of common stock outstanding.



TABLE OF CONTENTS
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Table of Contents
PART I


ITEM 1. FINANCIAL STATEMENTS


nLIGHT, Inc.
Consolidated Balance Sheets
(In thousands)
(Unaudited)

As of
September 30, 2022December 31, 2021
Assets
Current assets:
    Cash and cash equivalents$62,184 $146,534 
    Marketable securities50,190 — 
Accounts receivable, net of allowances of $287 and $303
43,803 41,574 
    Inventory80,660 73,746 
    Prepaid expenses and other current assets14,138 15,350 
          Total current assets250,975 277,204 
Restricted cash251 250 
Lease right-of-use assets14,472 17,048 
Property, plant and equipment, net 63,232 56,101 
Intangible assets, net 4,676 6,698 
Goodwill12,313 12,420 
Other assets, net2,634 3,897 
          Total assets$348,553 $373,618 
Liabilities and Stockholders’ Equity
Current liabilities:
     Accounts payable$19,755 $26,347 
     Accrued liabilities14,548 14,730 
     Deferred revenues1,736 1,629 
     Current portion of lease liabilities2,697 3,066 
          Total current liabilities38,736 45,772 
Non-current income taxes payable6,527 7,149 
Long-term lease liabilities13,515 14,612 
Other long-term liabilities3,937 3,952 
          Total liabilities62,715 71,485 
Stockholders' equity:
  Common stock - $0.0001 par value; 190,000 shares authorized, 45,303 and 44,248 shares issued and outstanding at September 30, 2022, and December 31, 2021, respectively
16 15 
     Additional paid-in capital489,867 470,760 
     Accumulated other comprehensive loss(4,070)(587)
     Accumulated deficit(199,975)(168,055)
          Total stockholders’ equity285,838 302,133 
          Total liabilities and stockholders’ equity$348,553 $373,618 

See accompanying notes to consolidated financial statements.
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nLIGHT, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Revenue:
Products$48,042 $54,393 $147,283 $155,289 
Development12,051 17,842 38,096 47,404 
Total revenue60,093 72,235 185,379 202,693 
Cost of revenue:
Products35,350 34,193 104,801 98,828 
Development11,267 16,647 35,540 44,500 
Total cost of revenue46,617 50,840 140,341 143,328 
Gross profit13,476 21,395 45,038 59,365 
Operating expenses:
Research and development12,716 14,838 40,215 40,830 
Sales, general, and administrative13,741 13,316 36,430 40,087 
Total operating expenses26,457 28,154 76,645 80,917 
Loss from operations(12,981)(6,759)(31,607)(21,552)
Other income (expense):
Interest income (expense), net167 (20)238 (126)
Other income (loss), net(31)102 (108)246 
Loss before income taxes(12,845)(6,677)(31,477)(21,432)
Income tax expense (benefit)110 203 443 (513)
Net loss$(12,955)$(6,880)$(31,920)$(20,919)
Net loss per share, basic and diluted$(0.29)$(0.16)$(0.72)$(0.50)
Shares used in per share calculations, basic and diluted44,786 42,884 44,289 41,759 

See accompanying notes to consolidated financial statements.

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nLIGHT, Inc.
Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)


Three Months Ended September 30,Nine Months Ended
September 30,
2022202120222021
Net loss$(12,955)$(6,880)$(31,920)$(20,919)
Other comprehensive loss:
Foreign currency translation adjustments, net of tax(1,709)(378)(3,673)(543)
Unrealized gains on available-for-sale securities190 — 190 — 
Comprehensive loss$(14,474)$(7,258)$(35,403)$(21,462)

See accompanying notes to consolidated financial statements.

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nLIGHT, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
(Unaudited)
Three Months Ended September 30, 2022
 Common stockAdditional paid-in capitalAccumulated other comprehensive lossAccumulated deficitTotal stockholders' equity
SharesAmount
Balance, June 30, 202245,074 $15 $483,410 $(2,551)$(187,020)$293,854 
Net loss— — — — (12,955)(12,955)
Issuance of common stock pursuant to exercise of stock options86 383 — — 384 
Issuance of common stock pursuant to vesting of restricted stock awards and units, net of stock withheld for tax153 — (1,421)— — (1,421)
Restricted stock awards modified in connection with performance achievement(10)— — — — — 
Stock-based compensation— — 7,495 — — 7,495 
Unrealized gains on available-for-sale securities— — — 190 — 190 
Cumulative translation adjustment, net of tax— — — (1,709)— (1,709)
Balance, September 30, 202245,303 $16 $489,867 $(4,070)$(199,975)$285,838 
Nine Months Ended September 30, 2022
Common stockAdditional paid-in capitalAccumulated other comprehensive lossAccumulated deficitTotal stockholders' equity
SharesAmount
Balance, December 31, 202144,248 $15 $470,760 $(587)$(168,055)$302,133 
Net loss— — — — (31,920)(31,920)
Issuance of common stock pursuant to exercise of stock options557 1,145 — — 1,146 
Issuance of common stock pursuant to vesting of restricted stock awards and units, net of stock withheld for tax530 — (3,967)— — (3,967)
Restricted stock awards forfeited in connection with transition agreement(140)— — — — — 
Restricted stock awards modified in connection with performance achievement(10)— — — — — 
Issuance of common stock under the Employee Stock Purchase Plan118 — 1,201 — — 1,201 
Stock-based compensation— — 20,728 — — 20,728 
Unrealized gains on available-for-sale securities— — — 190 — 190 
Cumulative translation adjustment, net of tax— — — (3,673)— (3,673)
Balance, September 30, 202245,303 $16 $489,867 $(4,070)$(199,975)$285,838 

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nLIGHT, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
(Unaudited)
Three Months Ended September 30, 2021
 Common stockAdditional paid-in capitalAccumulated other comprehensive lossAccumulated deficitTotal stockholders' equity
SharesAmount
Balance, June 30, 202143,181 $15 $457,480 $(424)$(152,425)$304,646 
Net loss— — — — (6,880)(6,880)
Issuance of common stock pursuant to exercise of stock options193 — 205 — — 205 
Issuance of common stock pursuant to vesting of restricted stock awards and units, net of stock withheld for tax502 — (3,667)— — (3,667)
Stock-based compensation— — 10,072 — — 10,072 
Cumulative translation adjustment, net of tax— — — (378)— (378)
Balance, September 30, 202143,876 $15 $464,090 $(802)$(159,305)$303,998 
Nine Months Ended September 30, 2021
Common stockAdditional paid-in capitalAccumulated other comprehensive lossAccumulated deficitTotal stockholders' equity
SharesAmount
Balance, December 31, 202039,793 $15 $358,544 $(259)$(138,386)$219,914 
Net loss— — — — (20,919)(20,919)
Proceeds from follow-on offering, net of offering costs2,537 — 82,354 — — 82,354 
Issuance of common stock pursuant to exercise of stock options746 — 975 — — 975 
Issuance of common stock pursuant to vesting of restricted stock awards and units, net of stock withheld for tax767 — (8,265)— — (8,265)
Issuance of common stock under the Employee Stock Purchase Plan33 — 750 — — 750 
Stock-based compensation— — 29,732 — — 29,732 
Cumulative translation adjustment, net of tax— — — (543)— (543)
Balance, September 30, 202143,876 $15 $464,090 $(802)$(159,305)$303,998 
See accompanying notes to consolidated financial statements.
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nLIGHT, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended September 30,
20222021
Cash flows from operating activities:
Net loss$(31,920)$(20,919)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation8,135 6,670 
Amortization3,492 4,641 
Reduction in carrying amount of right-of-use assets2,369 2,435 
Provision for (recoveries of) losses on accounts receivable(70)
Stock-based compensation20,728 29,732 
Deferred income taxes(1)(11)
Loss on disposal of assets— 
Unrealized gain on available-for-sale securities(190)— 
Changes in operating assets and liabilities:
Accounts receivable, net(3,431)(4,580)
Inventory(8,761)(16,169)
Prepaid expenses and other current assets1,091 (5,542)
Other assets, net(308)(437)
Accounts payable(5,792)9,699 
Accrued and other long-term liabilities1,219 907 
Deferred revenues142 (925)
Lease liabilities(1,241)(2,156)
Non-current income taxes payable(86)(591)
Net cash provided by (used in) operating activities(14,552)2,687 
Cash flows from investing activities:
Acquisition of business, net of cash acquired(664)(291)
Purchases of property, plant and equipment(16,442)(13,636)
Acquisition of intangible assets and capitalization of patents(359)(303)
Purchase of marketable securities(50,000)— 
Net cash used in investing activities(67,465)(14,230)
Cash flows from financing activities:
Proceeds from public offerings, net of offering costs— 82,354 
Principal payments on term loan, debt and financing leases— (428)
Payment of contingent consideration related to acquisition— (326)
Proceeds from employee stock plan purchases1,201 750 
Proceeds from stock option exercises1,146 975 
Tax payments related to stock award issuances(3,967)(8,265)
Net cash provided by (used in) financing activities(1,620)75,060 
Effect of exchange rate changes on cash(712)(256)
Net increase (decrease) in cash, cash equivalents, and restricted cash(84,349)63,261 
Cash, cash equivalents, and restricted cash, beginning of period146,784 102,573 
Cash, cash equivalents, and restricted cash, end of period$62,435 $165,834 
Supplemental disclosures:
Cash paid for interest, net$— $116 
Cash paid for income taxes250 434 
Operating cash outflows from operating leases2,828 2,555 
Right-of-use assets obtained in exchange for lease liabilities2,242 7,348 
Accrued purchases of property, equipment and patents2,468 2,287 

See accompanying notes to consolidated financial statements.
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nLIGHT, Inc.
Notes to Consolidated Financial Statements
Note 1 - Basis of Presentation and New Accounting Pronouncements
Basis of Presentation
The accompanying unaudited consolidated financial statements of nLIGHT, Inc. and our wholly-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The unaudited financial information reflects, in the opinion of management, all adjustments necessary for a fair presentation of financial position, results of operations, stockholders’ equity, and cash flows for the interim periods presented. The results reported for the interim period presented are not necessarily indicative of results that may be expected for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Critical Accounting Policies
Our critical accounting policies have not materially changed during the nine months ended September 30, 2022, from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

New Accounting Pronouncements
None.

Note 2 - Acquisition
On July 30, 2020, we acquired the outstanding shares of OPI Photonics S.r.l. (OPI), an Italian limited liability company, for cash consideration of $1.6 million, $0.2 million of which was paid at closing with the remaining $1.4 million to be paid over 24 months. The final payment to OPI of $0.7 million was made during the third quarter of 2022.

Note 3 - Revenue

We recognize revenue upon transferring control of products and services and the amounts recognized reflect the consideration we expect to be entitled to receive in exchange for these products and services. We consider customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. As part of our consideration of the contract, we evaluate certain factors, including the customer's ability to pay (or credit risk). For each contract, we consider the promise to transfer products, each of which is distinct, as the identified performance obligations.

We allocate the transaction price to each distinct product based on its relative standalone selling price. Master sales agreements or purchase orders from customers could include a single product or multiple products. Regardless, the contracted price with the customer is agreed to at the individual product level outlined in the customer contract or purchase order. We do not bundle prices; however, we do negotiate with customers on pricing for the same products based on a variety of factors (e.g., level of contractual volume). We have concluded that the prices negotiated with each individual customer are representative of the stand-alone selling price of the product.

We often receive orders with multiple delivery dates that may extend across several reporting periods. We allocate the transaction price of the contract to each delivery based on the product standalone selling price and invoice for each scheduled delivery upon shipment or delivery and recognize revenues for such delivery at that point, assuming transfer of control has occurred. Rights of return generally are not included in customer contracts. Accordingly, product revenue is recognized upon shipment or delivery, as applicable, and transfer of control. Rights of return are evaluated as they occur.

Revenues recognized at a point in time consist of sales of semiconductor lasers, fiber lasers and other related products. Revenues recognized over time generally consist of development arrangements that are structured based on our costs incurred. Because control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer. Billing under these arrangements generally occurs within one month after the work is completed.
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The following tables represent a disaggregation of revenue from contracts with customers for the periods presented (in thousands):
    
Sales by End Market
Three Months Ended September 30,Nine Months Ended
September 30,
 2022202120222021
Industrial$22,217 $26,737 $68,112 $73,044 
Microfabrication17,682 17,695 51,416 53,184 
Aerospace and Defense20,194 27,803 65,851 76,465 
$60,093 $72,235 $185,379 $202,693 

Sales by Geography

Three Months Ended September 30,Nine Months Ended
September 30,
 2022202120222021
North America$32,793 $37,430 $103,619 $101,659 
China5,230 13,709 17,041 48,045 
Rest of World22,070 21,096 64,719 52,989 
$60,093 $72,235 $185,379 $202,693 

Sales by Timing of Revenue

Three Months Ended September 30,Nine Months Ended
September 30,
 2022202120222021
Point in time$45,268 $53,070 $138,931 $150,187 
Over time14,825 19,165 46,448 52,506 
$60,093 $72,235 $185,379 $202,693 

Our contract assets and liabilities are as follows (in thousands):
Balance Sheet ClassificationAs of
 September 30, 2022December 31, 2021
Contract assetsPrepaid expenses and
other current assets
$7,481 $9,657 
Contract liabilitiesDeferred revenues and other long-term liabilities2,758 2,358 


During the three and nine months ended September 30, 2022, we recognized revenue of $0.1 million and $1.6 million, respectively, that was included in the deferred revenue balances at the beginning of the period as the performance obligations under the associated agreements were satisfied.

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Note 4 - Concentrations of Credit and Other Risks
The following customers accounted for 10% or more of our revenues for the periods presented:
Three Months Ended September 30,Nine Months Ended
September 30,
2022202120222021
U.S. Government16%23%16%21%
Marubun Corporation11%
(1)
(1)
(1)
(1)Represents less than 10% of total revenues.

Financial instruments that potentially expose us to concentrations of credit risk consist principally of accounts receivable. As of September 30, 2022, and December 31, 2021, one customer accounted for approximately 16% and two customers accounted for approximately 33%, respectively, of net accounts receivable. No other customers accounted for 10% or more of net accounts receivable at either date. 

Note 5 - Marketable Securities

Marketable securities consist primarily of highly liquid investments with maturities of greater than 90 days when purchased. Our marketable securities are considered available-for-sale as they represent investments of cash and are available for current operations. As such, they are included as current assets on our Consolidated Balance Sheets at fair value with unrealized gains and losses included in accumulated other comprehensive loss. Any unrealized gains and losses that are considered to be other-than-temporary are recorded in other income (loss), net on our Consolidated Statements of Operations. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method and recorded in other income (loss), net on our Consolidated Statements of Operations.

Unrealized gains were $0.2 million in both the three and nine months ended September 30, 2022. These unrealized gains are considered temporary and are reflected in the Statements of Comprehensive Loss.

See Note 6 for additional information.

Note 6 - Fair Value of Financial Instruments

The carrying amounts of certain of our financial instruments, including cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities are shown at cost which approximates fair value due to the short-term nature of these instruments. The fair value of our term and revolving loans approximates the carrying value due to the variable market rate used to calculate interest payments.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
Level 1 Inputs: Observable inputs, such as quoted prices (unadjusted) in active markets for identical assets or liabilities at the measurement date.
Level 2 Inputs: Observable inputs, other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Inputs: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
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Our financial instruments that are carried at fair value consist of Level 1 assets which include highly liquid investments and bank drafts classified as cash equivalents and marketable securities. Our fair value hierarchy for our financial instruments was as follows (in thousands):
September 30, 2022
Level 1Level 2Level 3Total
Cash Equivalents:
  Money market securities $39,139 $— $— $39,139 
  Commercial paper55 — — 55 
39,194 — — 39,194 
Marketable Securities:
  U.S. treasuries50,190 — — 50,190 
Total$89,384 $— $— $89,384 
December 31, 2021
Level 1Level 2Level 3Total
Cash Equivalents:
  Money market securities$126,900 $— $— $126,900 
  Commercial paper236 — — 236 
Total$127,136 $— $— $127,136 

Cash Equivalents
The fair value of cash equivalents is determined based on quoted market prices for similar or identical securities.

Marketable Securities
We classify our marketable securities as available-for-sale and value them utilizing a market approach that uses observable inputs without applying significant judgment.

Note 7 - Inventory
Inventory is stated at the lower of average cost (principally standard cost, which approximates actual cost on a first-in, first-out basis) and net realizable value. Inventory includes raw materials and components that may be specialized in nature and subject to obsolescence. On a quarterly basis, we review inventory quantities on hand in comparison to our past consumption, recent purchases, and other factors to determine what inventory quantities, if any, may not be sellable. Based on this analysis, we write down the affected inventory value for estimated excess and obsolescence charges. At the point of loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Inventory consisted of the following (in thousands):
As of
September 30, 2022December 31, 2021
Raw materials$38,404 $32,185 
Work in process and semi-finished goods24,213 24,642 
Finished goods18,043 16,919 
$80,660 $73,746 

Note 8 - Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
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As of
 Useful life (years)September 30, 2022December 31, 2021
Automobile3$109 $114 
Computer hardware and software
3 - 5
8,371 6,594 
Manufacturing and lab equipment
2 - 7
88,972 81,130 
Office equipment and furniture
5 - 7
2,324 2,361 
Leasehold and building improvements
2 - 12
30,868 28,125 
Buildings309,392 9,392 
LandN/A3,399 3,399 
143,435 131,115 
Accumulated depreciation (80,203)(75,014)
$63,232 $56,101 

Note 9 - Intangible Assets and Goodwill
Intangible Assets
The details of definite lived intangible assets were as follows (in thousands):
Estimated useful life
(in years)
As of
 September 30, 2022December 31, 2021
Patents
3 - 5
$6,288 $5,986 
Development programs
2 - 4
7,200 7,200 
Developed technology52,736 3,038 
16,224 16,224 
Accumulated amortization (11,548)(9,526)
$4,676 $6,698 

Amortization related to intangible assets was as follows (in thousands):
Three Months Ended September 30,Nine Months Ended
September 30,
 2022202120222021
Amortization expense$660 $1,026 $2,147 $3,068 

Estimated amortization expense for future years is as follows (in thousands):
Remainder of 2022$737 
20232,209 
2024900 
2025511 
2026319 
$4,676 
Goodwill
The carrying amount of goodwill by segment was as follows (in thousands):
Laser ProductsAdvanced DevelopmentTotals
Balance, December 31, 20212,172 10,248 12,420 
Currency exchange rate adjustment(107)— (107)
Balance, September 30, 2022$2,065 $10,248 $12,313 
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Note 10 - Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
As of
September 30, 2022December 31, 2021
Accrued payroll and benefits$10,492 $10,915 
Product warranty, current2,491 2,286 
Other accrued expenses1,565 1,529 
$14,548 $14,730 

Note 11 - Product Warranties
We provide warranties on certain products and record a liability for the estimated future costs associated with warranty claims at the time revenue is recognized. The warranty liability is based on historical experience, any specifically identified failures, and our estimate of future costs. The current portion of our product warranty liability is included in the accrued liabilities and the long-term portion is included in other long-term liabilities in our Consolidated Balance Sheets.

Product warranty liability activity was as follows for the periods presented (in thousands):
Nine Months Ended September 30,
 20222021
Product warranty liability, beginning$5,371 $4,711 
Warranty charges incurred, net(1,023)(1,699)
Provision for warranty charges, net of adjustments971 2,431 
Product warranty liability, ending5,319 5,443 
Less: current portion of product warranty liability(2,491)(2,251)
Non-current portion of product warranty liability$2,828 $3,192 

Note 12 - Commitments and Contingencies

Leases
See Note 13.

Legal Matters
On March 25, 2022, Lumentum Operations LLC filed a complaint against nLIGHT, Inc. and certain of its employees in the U.S. District Court for the Western District of Washington. The complaint alleges that Lumentum is the partial or full owner of certain of our patents and requests corresponding relief from the court. We are vigorously defending against Lumentum’s allegations.

From time to time, we may be subject to various other legal proceedings and claims in the ordinary course of business. We do not believe the ultimate resolution of these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

Note 13 - Leases

We lease real estate space under non-cancelable operating lease agreements for commercial and industrial space. Facilities-related operating leases have remaining terms of 0.1 to 12.7 years, and some leases include options to extend up to 15 years. Other leases for automobiles, manufacturing and office and computer equipment have remaining lease terms of 0.3 to 4.8 years. These leases are primarily operating leases; financing leases are not material. We did not include any renewal options in our lease terms for calculating the lease liabilities as we are not reasonably certain we will exercise the options at this time. The weighted-average remaining lease term for the lease obligations was 8 years as of  September 30, 2022, and the weighted-average discount rate was 3.6%.

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The components of lease expense related to operating leases were as follows (in thousands):
Three Months Ended September 30,Nine Months Ended
September 30,
2022202120222021
Lease expense:
Operating lease expense$911 $968 $2,907 $2,933 
Short-term lease expense185 172 437 456 
Variable and other lease expense224 192 659 549 
$1,320 $1,332 $4,003 $3,938 

Future minimum payments under our non-cancelable lease obligations were as follows as of September 30, 2022 (in thousands):
Remainder of 2022$972 
20233,247 
20242,854 
20252,039 
20261,655 
Thereafter8,461 
Total minimum lease payments19,228 
Less: interest(3,016)
Present value of net minimum lease payments16,212 
Less: current portion of lease liabilities(2,697)
Total long-term lease liabilities$13,515 

Note 14 - Stockholders' Equity and Stock-Based Compensation

Restricted Stock Awards and Units
Restricted stock award (RSA) and restricted stock unit (RSU) activity under our equity incentive plan was as follows (in thousands, except weighted-average grant date fair values):
Number of Restricted Stock AwardsWeighted-Average Grant Date Fair Value
RSAs at December 31, 2021753 $25.63 
Awards vested(271)22.77 
Awards forfeited(140)25.21 
Awards modified(10)22.54 
RSAs at September 30, 2022332 28.24 
RSAs forfeited were in connection with our former chief financial officer's transition agreement dated January 18, 2022.

Number of Restricted Stock UnitsWeighted-Average Grant Date Fair Value
RSUs at December 31, 20212,799 $24.41 
Awards granted1,328 11.67 
Awards vested(839)23.93 
Awards forfeited(167)25.28 
RSUs at September 30, 20223,122 19.09 

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The total fair value of RSAs and RSUs vested during the nine months ended September 30, 2022, was $6.2 million and $20.1 million, respectively. Awards outstanding as of September 30, 2022 include 740,199 performance-based awards that will vest upon meeting certain performance criteria.

Stock Options
The following table summarizes our stock option activity during the nine months ended September 30, 2022 (in thousands, except weighted-average exercise prices):
 Number of OptionsWeighted-Average Exercise PriceWeighted-Average Remaining Contractual Term (Years)Aggregate Intrinsic Value
Outstanding, December 31, 20212,454 $1.614.4$54,815
Options exercised(557)$2.06
Options canceled(42)$9.27
Outstanding, September 30, 20221,855 $1.313.7$15,116
Options exercisable at September 30, 20221,849 $1.283.6$15,111
Options vested as of September 30, 2022, and expected to vest after September 30, 20221,855 $1.313.7$15,116

Total intrinsic value of options exercised for the nine months ended September 30, 2022 and 2021, was $7.5 million and $23.3 million, respectively. We received proceeds of $1.1 million and $1.0 million from the exercise of options for the nine months ended September 30, 2022 and 2021, respectively.

Employee Stock Purchase Plan
Information related to activity under our Employee Stock Purchase Plan was as follows (shares in thousands):

Nine Months Ended September 30, 2022
Shares issued118 
Weighted-average per share purchase price$10.15 
Weighted-average per share discount from the fair value of our common stock on date of issuance$1.79 

Stock-Based Compensation
Total stock-based compensation expense was included in our consolidated statements of operations as follows (in thousands):
Three Months Ended September 30,Nine Months Ended
September 30,
2022202120222021
Cost of revenues$712 $740 $2,105 $1,780 
Research and development3,169 3,782 9,408 10,408 
Sales, general and administrative3,614 5,550 9,215 17,544 
$7,495 $10,072 $20,728 $29,732 

Unrecognized Compensation Costs
As of September 30, 2022, total unrecognized stock-based compensation was $51.6 million, which will be recognized over an average expected recognition period of 2.3 years.

Common Stock Repurchase Plan
On November 14, 2019, our Board of Directors authorized the repurchase of up to $10.0 million of our outstanding shares of common stock. The authorization does not have an expiration date. As of September 30, 2022, no repurchases had been executed under the program.
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Note 15 - Segment Information

We operate in two reportable segments consisting of the Laser Products segment and the Advanced Development segment. The following table summarizes the operating results by reportable segment for the periods presented (dollars in thousands):
Three Months Ended September 30, 2022
Laser ProductsAdvanced DevelopmentCorporate and OtherTotals
Revenue$48,042 $12,051 $— $60,093 
Gross profit$13,404 $784 $(712)$13,476 
Gross margin27.9 %6.5 %NM*22.4 %
Nine Months Ended September 30, 2022
Laser ProductsAdvanced DevelopmentCorporate and OtherTotals
Revenue$147,283 $38,096 $— $185,379 
Gross profit$44,587 $2,556 $(2,105)$45,038 
Gross margin30.3 %6.7 %NM*24.3 %
Three Months Ended September 30, 2021
Laser ProductsAdvanced DevelopmentCorporate and OtherTotals
Revenue$54,393 $17,842 $— $72,235 
Gross profit$20,940 $1,195 $(740)$21,395 
Gross margin38.5 %6.7 %NM*29.6 %
Nine Months Ended September 30, 2021
Laser ProductsAdvanced DevelopmentCorporate and OtherTotals
Revenue$155,289 $47,404 $— $202,693 
Gross profit$58,241 $2,904 $(1,780)$59,365 
Gross margin37.5 %6.1 %NM*29.3 %
*NM = not meaningful
Corporate and Other is unallocated expenses related to stock-based compensation.

There have been no material changes to the geographic locations of our long‑lived assets, net, based on the location of the assets, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

Note 16 - Net Loss per Share

Basic and diluted net loss and the number of shares used for basic and diluted net loss calculations were the same for all periods presented because we were in a loss position.

The following potentially dilutive securities were not included in the calculation of diluted shares as the effect would have been anti‑dilutive (in thousands):
Three Months Ended September 30,Nine Months Ended
September 30,
 2022202120222021
Restricted stock units and awards701 2,195 1,046 2,547 
Common stock options1,676 2,544 2,052 2,717 
 2,377 4,739 3,098 5,264 

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Note 17 - Subsequent Event
In October 2022, we gave notice to employees at our Shanghai manufacturing facility of a reduction in force. A severance charge of approximately $0.9 million will be recorded in the fourth quarter of 2022.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by the following words: "ability," "anticipate," "attempt," "believe," "can be," "continue," "could," "depend," "enable," "estimate," "expect," "extend," "grow," "if," "intend," "likely," "may," "objective," "ongoing," "plan," "possible," "potential," "predict," "project," "propose," "rely," "should," "target," "will," "would" or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.

These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Forward-looking statements include, but are not limited to, statements about: our business model and strategic plans; the impact of the COVID-19 pandemic and the related lockdown in Shanghai on our business; our future financial performance; demand for our semiconductor and fiber laser solutions; our ability to develop innovative products; our expectations regarding product volumes and the introduction of new products; our technology and new product research and development activities; the impact of inflation; the impact of seasonality; the effect on our business of litigation to which we are or may become a party; and the sufficiency of our existing liquidity sources to meet our cash needs.

You should refer to the "Risk Factors" section of this report for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, which although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview
    
nLIGHT, Inc., is a leading provider of high‑power semiconductor and fiber lasers for industrial, microfabrication, and aerospace and defense applications. Headquartered in Camas, Washington, we design, develop, and manufacture the critical elements of our lasers, and believe our vertically integrated business model enables us to rapidly introduce innovative products, control our costs and protect our intellectual property.

We operate in two reportable segments consisting of the Laser Products segment and the Advanced Development segment. Sales of our semiconductor lasers, fiber lasers and directed energy products are included in the Laser Products segment, while revenue earned from research and development contracts are included in the Advanced Development segment.

Revenues decreased to $185.4 million in the nine months ended September 30, 2022 compared to $202.7 million in the same period of 2021 as a result of a decrease in product sales to customers in China and development
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revenue, partially offset by an increase in product sales to customers outside of China. We generated a net loss of $31.9 million for the nine months ended September 30, 2022 compared to a net loss of $20.9 million for the same period of 2021.

Factors Affecting Our Performance

Impact of the COVID-19 Pandemic

The COVID-19 pandemic and related global liquidity concerns and macro-economic volatility continues to adversely impact our end-markets, including reduced economic activity and demand for our products, and delays in new capital expenditure decisions and implementations. While our manufacturing operations generally remained open throughout the pandemic, including our manufacturing facilities in the United States, the COVID-related lockdown of Shanghai by the Chinese government forced us to halt operations in our Shanghai manufacturing facility for approximately two months during the second quarter of 2022. Our Shanghai facility manufactures products that are sold directly to end customers as well as components that are shipped to our facilities in the United States to be integrated into finished products. Although we are increasing our manufacturing capabilities in the United States, our Shanghai manufacturing facility remains an important part of our global operations. The closure of our Shanghai facility during the second quarter of 2022 has had a negative impact on our 2022 year-to-date financial results, and any additional closures, or partial closures, could have an adverse impact on future periods.

There are ongoing risks to our business that depend on the progression of the COVID-19 pandemic, including risks related to the potential return of limitations on certain government functions, business activities and person-to-person interactions. Global trade conditions may further adversely impact us and our industry. For example, pandemic-related issues exacerbated port congestion and caused intermittent supplier shutdowns and delays, resulting in additional expenses and challenges to obtaining critical parts. The full impact of the COVID-19 pandemic on our financial condition and results of operations will depend on future events and developments.

Demand for our Semiconductor and Fiber Laser Solutions

In order to continue to grow our revenues, we must continue to achieve design wins for our semiconductor and fiber lasers. We consider a design win to occur when a customer notifies us that it has selected one of our products to be incorporated into a product or system under development by such customer. For the foreseeable future, our operations will continue to depend upon capital expenditures by customers in the Industrial and Microfabrication markets, which, in turn, depend upon the demand for these customers’ products or services. In addition, in the Aerospace and Defense market, our business depends in large part on continued investment in laser technology by the U.S. government and its allies, and our ability to continue to successfully develop leading technology in this area and commercialize that technology in the future.

Demand for our products also fluctuates based on market cycles, continuously evolving industry supply chains, trade and tariff terms, as well as evolving competitive dynamics in each of our end-markets. Erosion of average selling prices, or ASPs, of established products is typical in our industry, and the ASPs of our products generally decrease as our products mature. We may also negotiate discounted selling prices from time to time with certain customers that purchase higher volumes, or to penetrate new markets or applications. Historically, we have been able to offset decreasing ASPs by introducing new and higher value products, increasing the sales of our existing products, expanding into new applications and reducing our manufacturing costs. Although we anticipate further increases in product volumes and the continued introduction of new and higher value products, ASP reduction may cause our revenues to decline or grow at a slower rate.

Technology and New Product Development

We invest heavily in the development of our semiconductor, fiber laser and directed energy technologies to provide solutions to our current and future customers. We anticipate that we will continue to invest in research and development to achieve our technology and product roadmap. Our product development is targeted to specific sectors of the market where we believe the power and performance requirements of our products can provide the most benefit. We believe our close coordination with our customers regarding their future product requirements enhances the efficiency of our research and development expenditures.


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Manufacturing Costs and Gross Margins

Our product gross profit, in absolute dollars and as a percentage of revenues, is impacted by our product sales mix, sales volumes, changes in ASPs, production volumes, the corresponding absorption of manufacturing overhead expenses, production costs and manufacturing yields. Our product sales mix can affect gross profits due to variations in profitability related to product configurations and cost profiles, customer volume pricing, availability of competitive products in various markets, and new product introductions, among other factors. Capacity utilization affects our gross margin because we have a high fixed cost base due to our vertically integrated business model. Increases in sales and production volumes drive favorable absorption of fixed costs, improved manufacturing efficiencies and lower production costs. Gross margins may fluctuate from period to period depending on product mix and the level of capacity utilization.

Our Development gross profit varies with the type and terms of contracts, contract volume, project mix, and progress on projects during the period. Most of our Development contracts are structured as cost plus fixed fee due to the technical complexity of the research and development services.

Seasonality

Our quarterly revenues can fluctuate with general economic trends, holidays in foreign countries such as Chinese New Year in the first quarter of our fiscal year, the timing of capital expenditures by our customers, and general economic trends. In addition, as is typical in our industry, we tend to recognize a larger percentage of our quarterly revenues in the last month of the quarter, which may impact our working capital trends.

Results of Operations

The following table sets forth our operating results as a percentage of revenues for the periods indicated (which may not add up due to rounding):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Revenue:
Products79.9 %75.3 %79.4 %76.6 %
Development20.1 24.7 20.6 23.4 
Total revenue100.0 100.0 100.0 100.0 
Cost of revenue:
Products58.8 47.3 56.5 48.8 
Development18.7 23.1 19.2 21.9 
Total cost of revenue77.5 70.4 75.7 70.7 
Gross profit22.5 29.6 24.3 29.3 
Operating expenses:
Research and development21.2 20.5 21.7 20.1 
Sales, general, and administrative22.9 18.4 19.7 19.8 
Total operating expenses44.1 38.9 41.4 39.9 
Loss from operations(21.6)(9.3)(17.1)(10.6)
Other income (expense):
Interest income (expense), net0.3 — 0.1 (0.1)
Other income (loss), net(0.1)0.1 (0.1)0.1 
Loss before income taxes(21.4)(9.2)(17.1)(10.6)
Income tax expense (benefit)0.2 0.3 0.2 (0.3)
Net loss(21.6)%(9.5)%(17.3)%(10.3)%

Revenues by End Market

Our revenues by end market were as follows for the periods presented (dollars in thousands):
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Three Months Ended September 30,Change
2022% of Revenue2021% of Revenue$%
Industrial$22,217 37.0 %$26,737 37.0 %$(4,520)(16.9)%
Microfabrication17,682 29.4 17,695 24.5 (13)(0.1)
Aerospace and Defense20,194 33.6 27,803 38.5 (7,609)(27.4)
$60,093 100.0 %$72,235 100.0 %$(12,142)(16.8)%
Nine Months Ended September 30,Change
2022% of Revenue2021% of RevenueAmount%
Industrial$68,112 36.7 %$73,044 36.0 %$(4,932)(6.8)%
Microfabrication51,416 27.7 53,184 26.2 (1,768)(3.3)
Aerospace and Defense65,851 35.5 76,465 37.8 (10,614)(13.9)
$185,379 100.0 %$202,693 100.0 %$(17,314)(8.5)%

The decreases in revenue from the Industrial and Microfabrication markets for the three and nine months ended September 30, 2022, compared to the same periods of 2021, were driven by decreases in unit sales in China, partially offset by increases in unit sales outside of China. The closure of our Shanghai facility for approximately two months during the second quarter of 2022 due to the COVID-19 pandemic had a negative impact on year-to-date sales in China. The decreases in revenue from the Aerospace and Defense market for the three and nine months ended September 30, 2022, compared to the same periods of 2021, were due to decreased activity on research and development contracts, and a decrease in unit sales for the third quarter of 2022 compared to the same period of 2021 due primarily to supply chain disruptions.

Revenues by Segment

Our revenues by segment were as follows for the periods presented (dollars in thousands):
Three Months Ended September 30,Change
2022% of Revenue2021% of Revenue$%
Laser Products$48,042 79.9 %$54,393 75.3 %$(6,351)(11.7)%
Advanced Development12,051 20.1 17,842 24.7 (5,791)(32.5)
$60,093 100.0 %$72,235 100.0 %$(12,142)(16.8)%
Nine Months Ended September 30,Change
2022% of Revenue2021% of RevenueAmount%
Laser Products$147,283 79.4 %$155,289 76.6 %$(8,006)(5.2)%
Advanced Development38,096 20.6 47,404 23.4 (9,308)(19.6)
$185,379 100.0 %$202,693 100.0 %$(17,314)(8.5)%

The decreases in Laser Products revenue for the three and nine months ended September 30, 2022, compared to the same periods of 2021, were driven by decreased units sales across each end market as discussed above. The decreases in Advanced Development revenue for the three and nine months ended September 30, 2022, compared to the same periods of 2021, were primarily due to decreased activity on research and development contracts. Most of our Advanced Development revenue is generated from cost plus fixed fee research and development contracts, and all Advanced Development revenue is included in the Aerospace and Defense market.

Revenues by Geographic Region

Our revenues by geographic region were as follows for the periods presented (dollars in thousands):
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Three Months Ended September 30,Change
2022% of Revenue2021% of Revenue$%
North America$32,793 54.6 %$37,430 51.8 %$(4,637)(12.4)%
China5,230 8.7 13,709 19.0 (8,479)(61.8)
Rest of World22,070 36.6 21,096 29.2 974 4.6 
$60,093 100.0 %$72,235 100.0 %$(12,142)(16.8)%
Nine Months Ended September 30,Change
2022% of Revenue2021% of RevenueAmount%
North America$103,619 55.9 %$101,659 50.2 %$6,597 10.3 %
China17,041 9.2 48,045 23.7 (22,525)(65.6)
Rest of World64,719 34.9 52,989 26.1 10,756 33.7 
$185,379 100.0 %$202,693 100.0 %$(5,172)(4.0)%

Geographic revenue information is based on the location to which we ship our products. The decrease in North America revenue for the three months ended September 30, 2022, compared to the same period of 2021, is a result of decreased revenue from the Aerospace and Defense market, partially offset by increased revenue from the Industrial and Microfabrication markets. The increase in North America revenue for the nine months ended September 30, 2022, compared to the same period of 2021, was the result of increased revenue from the Industrial and Microfabrication markets, partially offset by decreased revenue from the Aerospace and Defense market.

The increase in Rest of World revenue for the three months ended September 30, 2022, compared to the same period of 2021, was due to increased revenue from the Microfabrication market, partially offset by decreased revenue from the Industrial market. The increase in Rest of World revenue for the nine months ended September 30, 2022, compared to the same period of 2021, was due to increased revenue from the Microfabrication and Industrial markets.

The decreases in China revenue for the three and nine months ended September 30, 2022, compared to the same periods of 2021, was the result of decreased sales in the Industrial and Microfabrication markets, primarily as a result of deteriorating market conditions. The closure of our Shanghai facility for approximately two months during the second quarter of 2022 due to the COVID-19 pandemic also had a negative impact on year-to-date sales in China.

Cost of Revenues and Gross Margin

Cost of Laser Products revenue consists primarily of manufacturing materials, labor, shipping and handling costs, tariffs and manufacturing-related overhead. We order materials and supplies based on backlog and forecasted demand from our customers. We expense all warranty costs and inventory provisions as cost of revenues.

Cost of Advanced Development revenue consists of materials, labor, subcontracting costs, and an allocation of indirect costs including overhead and general and administrative.

Our gross profit and gross margin were as follows for the periods presented (dollars in thousands):
Three Months Ended September 30, 2022
Laser ProductsAdvanced DevelopmentCorporate and OtherTotal
Gross profit$13,404 $784 $(712)$13,476 
Gross margin27.9 %6.5 %NM*22.4 %
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Nine Months Ended September 30, 2022
Laser ProductsAdvanced DevelopmentCorporate and OtherTotal
Gross profit$44,587 $2,556 $(2,105)$45,038 
Gross margin30.3 %6.7 %NM*24.3 %

Three Months Ended September 30, 2021
Laser ProductsAdvanced DevelopmentCorporate and OtherTotal
Gross profit$20,940 $1,195 $(740)$21,395 
Gross margin38.5 %6.7 %NM*29.6 %
Nine Months Ended September 30, 2021
Laser ProductsAdvanced DevelopmentCorporate and OtherTotal
Gross profit$58,241 $2,904 $(1,780)$59,365 
Gross margin37.5 %6.1 %NM*29.3 %
*NM = not meaningful

The decreases in Laser Products gross margin for the three and nine months ended September 30, 2022, compared to the same periods of 2021, were driven by sales mix and decreased factory utilization, increased investments in U.S. based manufacturing, and increased production and freight costs, partially offset by an increase in duty reclaim. The changes in Advanced Development gross margin for the three and nine months ended September 30, 2022, compared to the same periods of 2021, are not material and primarily the result of changes in the composition of research and development contracts.

Operating Expenses

Our operating expenses were as follows for the periods presented (dollars in thousands):

Research and Development
Three Months Ended September 30,Change
20222021$%
Research and development$12,716 $14,838 $(2,122)(14.3)%
Nine Months Ended September 30,Change
20222021Amount%
Research and development$40,215 $40,830 $(615)(1.5)%

The decrease in research and development expense for the three months ended September 30, 2022, compared to the same period in 2021, was driven by a decrease in project-related expenses, a decrease in stock-based compensation of $0.6 million, and a decrease in purchased intangible amortization of $0.4 million. The decrease in research and development expense for the nine months ended September 30, 2022, compared to the same period in 2021, was primarily due to a decrease in stock-based compensation of $1.0 million and a decrease in purchased intangible amortization of $0.8 million, partially offset by an increase in salary costs and project-related expenses.

Sales, General and Administrative
Three Months Ended September 30,Change
20222021$%
Sales, general, and administrative$13,741 $13,316 $425 3.2 %
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Nine Months Ended September 30,Change
20222021Amount%
Sales, general, and administrative$36,430 $40,087 $(3,657)(9.1)%

The increase in sales, general and administrative expense for the three months ended September 30, 2022, compared to the same period in 2021 was primarily due to increases in salary costs, professional service fees, facility expenses and decreases in administrative cost allocated to development projects, partially offset by a decrease in stock-based compensation of $1.9 million. The decrease in sales, general and administrative expense for the nine months ended September 30, 2022, compared to the same period in 2021 were driven by a decrease in stock-based compensation of $8.3 million, partially offset by increases in salary costs, professional service fees, facility expenses and decreases in administrative cost allocated to development projects. The decreases in stock-based compensation for the three and nine months ended September 30, 2022, compared to the same periods of 2021, were the result of forfeitures and decreases in expected achievement related to performance-based stock awards.

Interest Income (Expense), net
Three Months Ended September 30,Change
20222021$%
Interest income (expense), net$167 $(20)$187 935.0%
Nine Months Ended September 30,Change
20222021Amount%
Interest income (expense), net$238 $(126)$364 288.9 %

The increase in interest income, net, for the three and nine months ended September 30, 2022, compared to the same periods in 2021 was driven by increases in interest rates and the investment in marketable securities during the second quarter of 2022, as well as the payoff of our long-term debt in the third quarter of 2021.

Other Income (Loss), net
Three Months Ended September 30,Change
20222021$%
Other income (loss), net$(31)$102 $(133)(130.4)%
Nine Months Ended September 30,Change
20222021Amount%
Other income (loss), net$(108)$246 $(354)(143.9)%

Changes in other income (loss), net, are primarily attributable to changes in net realized and unrealized foreign exchange transactions resulting from currency rate fluctuations.

Income Tax Expense (Benefit)
Three Months Ended September 30,Change
20222021$%
Income tax expense (benefit)$110 $203 $(93)(45.8)%
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Nine Months Ended September 30,Change
20222021Amount%
Income tax expense (benefit)$443 $(513)$956 186.4 %

We record income tax expense for taxes in our foreign jurisdictions including Finland, Italy, and Korea. While our tax expense is largely dependent on the geographic mix of earnings related to our foreign operations, we also record tax expense for uncertain tax positions taken and associated penalties and interest. We consider all available evidence, both positive and negative, in assessing the extent to which a valuation allowance should be applied against our deferred tax assets. Due to the uncertainty with respect to their ultimate realizability in the United States, Austria, and China, we continue to maintain a full valuation allowance in these jurisdictions as of September 30, 2022.

The decrease in income tax expense for the three months ended September 30, 2022 compared to the same period of 2021 was driven by lower profitability in foreign jurisdictions, while the increase in income tax expense for the nine months ended September 30, 2022, compared to the same period in 2021, was driven by a discrete tax benefit related to return to provision true ups and expiring statutes of limitations of unrecognized tax positions recorded in the second quarter of 2021.

Liquidity and Capital Resources

We had cash and cash equivalents of $62.2 million and $146.5 million as of September 30, 2022 and December 31, 2021, respectively. In addition, we had marketable securities of $50.2 million at September 30, 2022. Prior to the second quarter of 2022, we had no marketable securities.

For the nine months ended September 30, 2022, our principal uses of liquidity were to fund our working capital needs and purchase property, plant and equipment. We believe our existing sources of liquidity will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements may vary materially from period to period and will depend on many factors, including the timing and extent of spending on research and development efforts, the expansion of sales and marketing activities, the continuing market acceptance of our products and ongoing investments to support the growth of our business. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, technologies and intellectual property rights. From time to time, we may explore additional financing sources which could include equity, equity‑linked and debt financing arrangements.

The following table summarizes our cash flows for the periods presented (in thousands):
Nine Months Ended September 30,
20222021
Net cash provided by (used in) operating activities$(14,552)$2,687 
Net cash used in investing activities(67,465)(14,230)
Net cash provided by (used in) financing activities(1,620)75,060 
Effect of exchange rate changes on cash(712)(256)
Net increase (decrease) in cash, cash equivalents and restricted cash$(84,349)$63,261 
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Net Cash Provided by (Used in) Operating Activities

During the nine months ended September 30, 2022, net cash used in operating activities was $14.6 million, which was the result of a $31.9 million net loss and use of cash for working capital of $17.2 million, partially offset by non‑cash expenses totaling $34.7 million related primarily to depreciation, amortization, and stock-based compensation. Changes in working capital were driven by a $3.4 million increase in accounts receivable, net, a $8.8 million increase in inventory, and a $5.8 million decrease in accounts payable. The increase in accounts receivable, net was primarily due to the timing of shipments and collections in the third quarter of 2022 compared to the fourth quarter of 2021. The increase in inventory was due to an expected increase in future sales and an increase in safety stock during 2022 to mitigate supply chain risks, lower demand primarily from China, and anticipated demand for recently introduced products. The decrease in accounts payable was due to a decrease in inventory purchasing in the third quarter of 2022 compared to the fourth quarter of 2021, and the timing of vendor payments.
During the nine months ended September 30, 2021, net cash provided by operating activities was $2.7 million, which was primarily driven by non‑cash expenses totaling $43.4 million related to depreciation and amortization, stock-based compensation, and other items, a $9.7 million increase in accounts payable and a $0.9 million increase in accrued and other long-term liabilities. These items were partially offset by our net loss of $20.9 million and increases of $16.2 million in inventory and $4.6 million in accounts receivable. The increase in inventory was driven primarily by an expected increase in future period sales. The increase in accounts receivable was attributable to the increase in revenue and timing of shipments during the quarter. The increase in accounts payable was attributable to the increase in inventory and the timing of vendor payments.
Net Cash Used in Investing Activities

During the nine months ended September 30, 2022, net cash used in investing activities was $67.5 million, primarily resulting from the purchase of $50.0 million of marketable securities and $16.4 million of capital expenditures related to investments in directed energy, manufacturing equipment and facilities.

During the nine months ended September 30, 2021, net cash used in investing activities was $14.2 million, primarily
resulting from $13.6 million of capital expenditures related to investments in manufacturing equipment and improvements to our corporate facility.

Net Cash Provided by (Used in) Financing Activities

During the nine months ended September 30, 2022, net cash used in financing activities was $1.6 million, which was primarily driven by $4.0 million of withholding tax payments related to the vesting of stock awards, partially offset by $2.3 million of proceeds from stock options exercises and employee stock plan purchases.

During the nine months ended September 30, 2021, net cash provided by financing activities was $75.1 million, which was primarily driven by our follow-on public offering of $82.4 million, net of offering costs, and $1.7 million of proceeds from stock options exercises and employee stock program purchases, partially offset by $8.3 million of withholding tax payments related to the vesting of stock awards.

Credit Facilities

We have a $40.0 million revolving line of credit, or LOC, with Pacific Western Bank dated September 24, 2018, which is secured by our assets and matures September 24, 2024.

The LOC agreement contains restrictive and financial covenants and bears an unused credit fee of 0.20% on an annualized basis. The interest rate on the LOC is based on the Prime Rate, minus a margin based on our liquidity levels. No amounts were outstanding under the LOC at September 30, 2022 and we were in compliance with all covenants.

Contractual Obligations

For the nine months ended September 30, 2022, our operating lease obligations decreased by approximately $1.5 million. There have been no other material changes to our contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

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Inflation

While we do not believe that inflation had a material effect on our business, financial condition or results of operations through September 30, 2022, we have experienced higher than expected increases in wages and other compensation costs, materials, and shipping costs during 2022. We expect these increases will continue to impact our cost structure. If our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could materially adversely affect our business, financial condition and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in Part II of our Annual Report on Form 10-K for the year ended December 31, 2021. Other than the addition of marketable securities consisting of U.S. Treasuries to our investment portfolio, our exposure to market risk has not changed materially since December 31, 2021.

ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and our chief financial officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and our chief financial officer have concluded that, as of such date, our disclosure controls and procedures were, in design and operation, effective.

Changes in Internal Control over Financial Reporting

Our chief executive officer and our chief financial officer did not identify any changes in our internal control over financial reporting in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act during the three months ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Internal Control

Control systems, including ours, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any control systems must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.










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PART II

ITEM 1. LEGAL PROCEEDINGS

For a description of our material pending legal proceedings, see Note 12, Commitments and Contingencies, to our consolidated financial statements included elsewhere in this report.

ITEM 1A. RISK FACTORS

For risk factors related to our business, reference is made to Item 1A, "Risk Factors," contained in Part I of our Annual Report on Form 10-K for the year ended December 31, 2021 and Item 1A, "Risk Factors," contained in Part II of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022. There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022. , except as described below.

We are subject to governmental export and import controls that could subject us to liability, impair our ability to compete and otherwise adversely affect our business, financial condition, results of operations and growth prospects.

The United States and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of certain products, technologies, and software. For example, the U.S. government recently announced new controls restricting the ability to send certain products and technology related to semiconductors, semiconductor manufacturing and supercomputing to China without an export license. These new controls including the licensing requirement also apply to certain hardware containing these specified integrated circuits, or ICs. In many cases, these licenses are subject to a policy of denial and will not be issued. The U.S. government also recently added additional entities in China to restricted party lists impacting the ability of U.S. companies to provide products and technology to these entities. These controls may impact our ability to export certain products and technology to China and restrict our ability to use certain ICs in our products. Additionally, these restrictions could disrupt the ability of China to produce semiconductors and other electronics and impact our ability to source components from China. It also is possible that the Chinese government will retaliate in ways that could impact our business.

We must export our products in compliance with U.S. export controls and we may not always be successful in obtaining necessary export licenses. Denials of export licenses or limitations imposed on our ability to export or sell our products imposed by these laws, may harm our international and domestic revenues. Furthermore, noncompliance with these laws could have negative consequences, including government investigations, penalties and reputational harm. Any failure to adequately comply with these laws could result in civil fines or suspension or loss of our export privileges, as well as substantial expense and diversion of management resources and attention, any of which could materially adversely affect our business, financial condition, results of operations and growth prospects.


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ITEM 6. EXHIBITS

(a) Exhibits
Exhibit
Number
Incorporated by ReferenceFiled
Herewith
DescriptionFormFile No.ExhibitFiling Date
3.110-Q001-384623.1May 25, 2018
3.28-K001-384623.1April 21, 2020
4.1S-1/A333-2240554.1April 16, 2018
10.18-K001-3846210.1July 8, 2022
31.1X
31.2X
32.1*X
101.INSInline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)X
101.SCHInline XBRL Taxonomy Extension Schema DocumentX
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.X
101.DEFInline XBRL Taxonomy Extension Definition Linkbase DocumentX
101.LABInline XBRL Taxonomy Extension Label Linkbase DocumentX
101.PREInline XBRL Taxonomy Extension Presentation Linkbase DocumentX
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)X
+Indicates a management contract or compensatory plan or arrangement.
*
The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NLIGHT, INC.
(Registrant)
November 4, 2022By:/s/ SCOTT KEENEY
DateScott Keeney
President and Chief Executive Officer
(Principal Executive Officer)
November 4, 2022By:/s/ JOSEPH CORSO
DateJoseph Corso
Chief Financial Officer
(Principal Financial Officer)
November 4, 2022By:/s/ JAMES NIAS
DateJames Nias
Chief Accounting Officer
(Principal Accounting Officer)

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