NLIGHT, INC. - Quarter Report: 2022 June (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 June 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)
________________________________________________________
| Delaware | 91-2066376 | |||||||||||||
| (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 Class | Trading Symbol | Name of Exchange on which Registered | ||||||
| Common Stock, par value $0.0001 per share | LASR | The 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 Filer | ☒ | Accelerated Filer | ☐ | Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ | ||||||||||||||||
| Emerging Growth Company | ☐ | ||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or 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 August 1, 2022, the Registrant had 45,095,519 shares of common stock outstanding.
| TABLE OF CONTENTS | |||||
| Page | |||||
PART I
ITEM 1. FINANCIAL STATEMENTS
nLIGHT, Inc.
Consolidated Balance Sheets
(In thousands)
(Unaudited)
| As of | |||||||||||
| June 30, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 70,633 | $ | 146,534 | |||||||
| Marketable securities | 50,000 | — | |||||||||
Accounts receivable, net of allowances of $300 and $303 | 45,944 | 41,574 | |||||||||
| Inventory | 80,189 | 73,746 | |||||||||
| Prepaid expenses and other current assets | 14,617 | 15,350 | |||||||||
| Total current assets | 261,383 | 277,204 | |||||||||
| Restricted cash | 250 | 250 | |||||||||
| Lease right-of-use assets | 15,357 | 17,048 | |||||||||
| Property, plant and equipment, net | 62,248 | 56,101 | |||||||||
| Intangible assets, net | 5,297 | 6,698 | |||||||||
| Goodwill | 12,359 | 12,420 | |||||||||
| Other assets, net | 3,580 | 3,897 | |||||||||
| Total assets | $ | 360,474 | $ | 373,618 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 23,318 | $ | 26,347 | |||||||
| Accrued liabilities | 13,138 | 14,730 | |||||||||
| Deferred revenues | 2,034 | 1,629 | |||||||||
| Current portion of lease liabilities | 3,032 | 3,066 | |||||||||
| Total current liabilities | 41,522 | 45,772 | |||||||||
| Non-current income taxes payable | 6,991 | 7,149 | |||||||||
| Long-term lease liabilities | 14,117 | 14,612 | |||||||||
| Other long-term liabilities | 3,990 | 3,952 | |||||||||
| Total liabilities | 66,620 | 71,485 | |||||||||
| Stockholders' equity: | |||||||||||
Common stock - $0.0001 par value; 190,000 shares authorized, 45,074 and 44,248 shares issued and outstanding at June 30, 2022, and December 31, 2021, respectively | 15 | 15 | |||||||||
| Additional paid-in capital | 483,410 | 470,760 | |||||||||
| Accumulated other comprehensive loss | (2,551) | (587) | |||||||||
| Accumulated deficit | (187,020) | (168,055) | |||||||||
| Total stockholders’ equity | 293,854 | 302,133 | |||||||||
| Total liabilities and stockholders’ equity | $ | 360,474 | $ | 373,618 | |||||||
See accompanying notes to consolidated financial statements.
1
nLIGHT, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Products | $ | 48,180 | $ | 53,561 | $ | 99,241 | $ | 100,896 | |||||||||||||||
| Development | 12,647 | 15,552 | 26,045 | 29,562 | |||||||||||||||||||
| Total revenue | 60,827 | 69,113 | 125,286 | 130,458 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Products | 33,683 | 34,240 | 69,451 | 64,635 | |||||||||||||||||||
| Development | 11,759 | 14,548 | 24,273 | 27,853 | |||||||||||||||||||
| Total cost of revenue | 45,442 | 48,788 | 93,724 | 92,488 | |||||||||||||||||||
| Gross profit | 15,385 | 20,325 | 31,562 | 37,970 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 13,788 | 14,282 | 27,499 | 25,992 | |||||||||||||||||||
| Sales, general, and administrative | 11,914 | 15,057 | 22,689 | 26,771 | |||||||||||||||||||
| Total operating expenses | 25,702 | 29,339 | 50,188 | 52,763 | |||||||||||||||||||
| Loss from operations | (10,317) | (9,014) | (18,626) | (14,793) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income (expense), net | 71 | (32) | 71 | (106) | |||||||||||||||||||
| Other income (loss), net | (106) | 118 | (77) | 144 | |||||||||||||||||||
| Loss before income taxes | (10,352) | (8,928) | (18,632) | (14,755) | |||||||||||||||||||
| Income tax expense (benefit) | (10) | (1,038) | 333 | (716) | |||||||||||||||||||
| Net loss | $ | (10,342) | $ | (7,890) | $ | (18,965) | $ | (14,039) | |||||||||||||||
| Net loss per share, basic and diluted | $ | (0.23) | $ | (0.19) | $ | (0.43) | $ | (0.34) | |||||||||||||||
| Shares used in per share calculations, basic and diluted | 44,178 | 42,313 | 43,919 | 41,187 | |||||||||||||||||||
See accompanying notes to consolidated financial statements.
2
nLIGHT, Inc.
Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net loss | $ | (10,342) | $ | (7,890) | $ | (18,965) | $ | (14,039) | |||||||||||||||
| Other comprehensive loss: | |||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | (1,868) | 497 | (1,964) | (165) | |||||||||||||||||||
| Comprehensive loss | $ | (12,210) | $ | (7,393) | $ | (20,929) | $ | (14,204) | |||||||||||||||
See accompanying notes to consolidated financial statements.
3
nLIGHT, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
(Unaudited)
| Three Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||
| Common stock | Additional paid-in capital | Accumulated other comprehensive loss | Accumulated deficit | Total stockholders' equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | 44,538 | $ | 15 | $ | 477,924 | $ | (683) | $ | (176,678) | $ | 300,578 | |||||||||||||||||||||||
| Net loss | — | — | — | — | (10,342) | (10,342) | |||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options | 48 | — | 73 | — | — | 73 | |||||||||||||||||||||||||||||
| Issuance of common stock pursuant to vesting of restricted stock awards and units, net of stock withheld for tax | 370 | — | (2,468) | — | — | (2,468) | |||||||||||||||||||||||||||||
| Issuance of common stock under the Employee Stock Purchase Plan | 118 | — | 1,201 | — | — | 1,201 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 6,680 | — | — | 6,680 | |||||||||||||||||||||||||||||
| Cumulative translation adjustment, net of tax | — | — | — | (1,868) | — | (1,868) | |||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | 45,074 | $ | 15 | $ | 483,410 | $ | (2,551) | $ | (187,020) | $ | 293,854 | |||||||||||||||||||||||
| Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||
| Common stock | Additional paid-in capital | Accumulated other comprehensive loss | Accumulated deficit | Total stockholders' equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 44,248 | $ | 15 | $ | 470,760 | $ | (587) | $ | (168,055) | $ | 302,133 | ||||||||||||||||||||||||
| Net loss | — | — | — | — | (18,965) | (18,965) | |||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options | 471 | — | 762 | — | — | 762 | |||||||||||||||||||||||||||||
| Issuance of common stock pursuant to vesting of restricted stock awards and units, net of stock withheld for tax | 377 | — | (2,546) | — | — | (2,546) | |||||||||||||||||||||||||||||
| Restricted stock awards forfeited in connection with transition agreement | (140) | — | — | — | — | — | |||||||||||||||||||||||||||||
| Issuance of common stock under the Employee Stock Purchase Plan | 118 | — | 1,201 | — | — | 1,201 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 13,233 | — | — | 13,233 | |||||||||||||||||||||||||||||
| Cumulative translation adjustment, net of tax | — | — | — | (1,964) | — | (1,964) | |||||||||||||||||||||||||||||
| Balance, June 30, 2022 | 45,074 | $ | 15 | $ | 483,410 | $ | (2,551) | $ | (187,020) | $ | 293,854 | ||||||||||||||||||||||||
4
nLIGHT, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
(Unaudited)
| Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||
| Common stock | Additional paid-in capital | Accumulated other comprehensive loss | Accumulated deficit | Total stockholders' equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | 42,783 | $ | 15 | $ | 449,496 | $ | (921) | $ | (144,535) | $ | 304,055 | ||||||||||||||||||||||||
| Net loss | — | — | — | — | (7,890) | (7,890) | |||||||||||||||||||||||||||||
| Proceeds from follow-on offering, net of offering costs | — | — | (1) | — | — | (1) | |||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options | 101 | — | 196 | — | — | 196 | |||||||||||||||||||||||||||||
| Issuance of common stock pursuant to vesting of restricted stock awards and units, net of stock withheld for tax | 264 | — | (4,567) | — | — | (4,567) | |||||||||||||||||||||||||||||
| Issuance of common stock under the Employee Stock Purchase Plan | 33 | — | 750 | — | — | 750 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 11,606 | — | — | 11,606 | |||||||||||||||||||||||||||||
| Cumulative translation adjustment, net of tax | — | — | — | 497 | — | 497 | |||||||||||||||||||||||||||||
| Balance, Balance, June 30, 2021 | 43,181 | $ | 15 | $ | 457,480 | $ | (424) | $ | (152,425) | $ | 304,646 | ||||||||||||||||||||||||
| Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||
| Common stock | Additional paid-in capital | Accumulated other comprehensive loss | Accumulated deficit | Total stockholders' equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 39,793 | $ | 15 | $ | 358,544 | $ | (259) | $ | (138,386) | $ | 219,914 | ||||||||||||||||||||||||
| Net loss | — | — | — | — | (14,039) | (14,039) | |||||||||||||||||||||||||||||
| Proceeds from follow-on offering, net of offering costs | 2,537 | — | 82,354 | — | — | 82,354 | |||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options | 553 | — | 770 | — | — | 770 | |||||||||||||||||||||||||||||
| Issuance of common stock pursuant to vesting of restricted stock awards and units, net of stock withheld for tax | 265 | — | (4,598) | — | — | (4,598) | |||||||||||||||||||||||||||||
| Issuance of common stock under the Employee Stock Purchase Plan | 33 | — | 750 | — | — | 750 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 19,660 | — | — | 19,660 | |||||||||||||||||||||||||||||
| Cumulative translation adjustment, net of tax | — | — | — | (165) | — | (165) | |||||||||||||||||||||||||||||
| Balance, Balance, June 30, 2021 | 43,181 | $ | 15 | $ | 457,480 | $ | (424) | $ | (152,425) | $ | 304,646 | ||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
5
nLIGHT, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (18,965) | $ | (14,039) | |||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation | 5,214 | 4,290 | |||||||||
| Amortization | 2,329 | 3,122 | |||||||||
| Reduction in carrying amount of right-of-use assets | 1,571 | 1,632 | |||||||||
| Provision for (recoveries of) losses on accounts receivable | 6 | (72) | |||||||||
| Stock-based compensation | 13,233 | 19,660 | |||||||||
| Deferred income taxes | (1) | (11) | |||||||||
| (Gain) Loss on disposal of assets | — | 3 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | (4,975) | (4,849) | |||||||||
| Inventory | (7,383) | (8,611) | |||||||||
| Prepaid expenses and other current assets | 663 | 175 | |||||||||
| Other assets, net | (656) | (905) | |||||||||
| Accounts payable | (1,726) | 3,335 | |||||||||
| Accrued and other long-term liabilities | (1,191) | 1,347 | |||||||||
| Deferred revenues | 421 | 133 | |||||||||
| Lease liabilities | (409) | (1,404) | |||||||||
| Non-current income taxes payable | 104 | (721) | |||||||||
| Net cash provided by (used in) operating activities | (11,765) | 3,085 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisition of business, net of cash acquired | — | (291) | |||||||||
| Purchases of property, plant and equipment | (12,893) | (7,962) | |||||||||
| Acquisition of intangible assets and capitalization of patents | (228) | (216) | |||||||||
| Purchase of marketable securities | (50,000) | — | |||||||||
| Net cash used in investing activities | (63,121) | (8,469) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from public offerings, net of offering costs | — | 82,354 | |||||||||
| Principal payments on term loan, debt and financing leases | — | (399) | |||||||||
| Payment of contingent consideration related to acquisition | — | (326) | |||||||||
| Proceeds from employee stock plan purchases | 1,201 | 750 | |||||||||
| Proceeds from stock option exercises | 762 | 770 | |||||||||
| Tax payments related to stock award issuances | (2,546) | (4,598) | |||||||||
| Net cash provided by (used in) financing activities | (583) | 78,551 | |||||||||
| Effect of exchange rate changes on cash | (432) | (126) | |||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | (75,901) | 73,041 | |||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | 146,784 | 102,573 | |||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 70,883 | $ | 175,614 | |||||||
| Supplemental disclosures: | |||||||||||
| Cash paid for interest, net | $ | — | $ | 103 | |||||||
| Cash paid for income taxes | 189 | 393 | |||||||||
| Operating cash outflows from operating leases | 1,914 | 1,621 | |||||||||
| Right-of-use assets obtained in exchange for lease liabilities | 1,222 | 7,224 | |||||||||
| Accrued purchases of property, equipment and patents | 1,650 | 2,139 | |||||||||
See accompanying notes to consolidated financial statements.
6
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 six months ended June 30, 2022, from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
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 the next 24 months.
As of June 30, 2022, we owed OPI $0.7 million, which was included on our Consolidated Balance Sheets as a component of accrued liabilities.
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.
7
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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Industrial | $ | 21,899 | $ | 24,907 | $ | 45,895 | $ | 46,307 | ||||||||||||||||||
| Microfabrication | 16,415 | 20,274 | 33,734 | 35,489 | ||||||||||||||||||||||
| Aerospace and Defense | 22,513 | 23,932 | 45,657 | 48,662 | ||||||||||||||||||||||
| $ | 60,827 | $ | 69,113 | $ | 125,286 | $ | 130,458 | |||||||||||||||||||
Sales by Geography
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| North America | $ | 35,682 | $ | 33,095 | $ | 70,826 | $ | 64,229 | |||||||||||||||
| China | 4,672 | 18,759 | 11,811 | 34,336 | |||||||||||||||||||
| Rest of World | 20,473 | 17,259 | 42,649 | 31,893 | |||||||||||||||||||
| $ | 60,827 | $ | 69,113 | $ | 125,286 | $ | 130,458 | ||||||||||||||||
Sales by Timing of Revenue
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Point in time | $ | 45,448 | $ | 50,123 | $ | 93,663 | $ | 97,117 | |||||||||||||||
| Over time | 15,379 | 18,990 | 31,623 | 33,341 | |||||||||||||||||||
| $ | 60,827 | $ | 69,113 | $ | 125,286 | $ | 130,458 | ||||||||||||||||
Our contract assets and liabilities are as follows (in thousands):
| Balance Sheet Classification | As of | ||||||||||||||||
| June 30, 2022 | December 31, 2021 | ||||||||||||||||
| Contract assets | Prepaid expenses and other current assets | $ | 7,620 | $ | 9,657 | ||||||||||||
| Contract liabilities | Deferred revenues and other long-term liabilities | 3,343 | 2,358 | ||||||||||||||
During the three and six months ended June 30, 2022, we recognized revenue of $0.1 million and $1.5 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.
Note 4 - Concentrations of Credit and Other Risks
The following customer accounted for 10% or more of our revenues for the periods presented:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| U.S. Government | 16% | 20% | 16% | 20% | |||||||||||||||||||
8
Financial instruments that potentially expose us to concentrations of credit risk consist principally of accounts receivable. As of June 30, 2022, and December 31, 2021, two customers accounted for approximately 27% 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 and losses were immaterial in the three and six months ended June 30, 2022.
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.
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):
| June 30, 2022 | ||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||
| Cash Equivalents: | ||||||||||||||
| Money market securities | $ | 46,977 | $ | — | $ | — | $ | 46,977 | ||||||
| Commercial paper | 621 | — | — | 621 | ||||||||||
| 47,598 | — | — | 47,598 | |||||||||||
| Marketable Securities: | ||||||||||||||
| U.S. treasuries | 50,000 | — | — | 50,000 | ||||||||||
| Total | $ | 97,598 | $ | — | $ | — | $ | 97,598 | ||||||
9
| December 31, 2021 | ||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||
| Cash Equivalents: | ||||||||||||||
| Money market securities | $ | 126,900 | $ | — | $ | — | $ | 126,900 | ||||||
| Commercial paper | 236 | — | — | 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 | |||||||||||
| June 30, 2022 | December 31, 2021 | ||||||||||
| Raw materials | $ | 37,681 | $ | 32,185 | |||||||
| Work in process and semi-finished goods | 25,454 | 24,642 | |||||||||
| Finished goods | 17,054 | 16,919 | |||||||||
| $ | 80,189 | $ | 73,746 | ||||||||
Note 8 - Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
| As of | |||||||||||||||||
| Useful life (years) | June 30, 2022 | December 31, 2021 | |||||||||||||||
| Automobile | 3 | $ | 111 | $ | 114 | ||||||||||||
| Computer hardware and software | 3 - 5 | 8,385 | 6,594 | ||||||||||||||
| Manufacturing and lab equipment | 2 - 7 | 87,095 | 81,130 | ||||||||||||||
| Office equipment and furniture | 5 - 7 | 2,347 | 2,361 | ||||||||||||||
| Leasehold and building improvements | 2 - 12 | 30,471 | 28,125 | ||||||||||||||
| Buildings | 30 | 9,392 | 9,392 | ||||||||||||||
| Land | N/A | 3,399 | 3,399 | ||||||||||||||
| 141,200 | 131,115 | ||||||||||||||||
| Accumulated depreciation | (78,952) | (75,014) | |||||||||||||||
| $ | 62,248 | $ | 56,101 | ||||||||||||||
10
Note 9 - Intangible Assets and Goodwill
Intangibles
The details of amortizing intangible assets are as follows (in thousands):
| Estimated useful life (in years) | As of | ||||||||||||||||
| June 30, 2022 | December 31, 2021 | ||||||||||||||||
| Patents | 3 - 5 | $ | 6,185 | $ | 5,986 | ||||||||||||
| Development programs | 2 - 4 | 7,200 | 7,200 | ||||||||||||||
| Developed technology | 5 | 2,888 | 3,038 | ||||||||||||||
| 16,273 | 16,224 | ||||||||||||||||
| Accumulated amortization | (10,976) | (9,526) | |||||||||||||||
| $ | 5,297 | $ | 6,698 | ||||||||||||||
Amortization related to intangible assets was as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Amortization expense | $ | 711 | $ | 1,026 | $ | 1,487 | $ | 2,042 | ||||||||||||||||||
Estimated amortization expense for future years is as follows (in thousands):
| Remainder of 2022 | $ | 1,433 | |||
| 2023 | 2,187 | ||||
| 2024 | 879 | ||||
| 2025 | 505 | ||||
| 2026 | 293 | ||||
| $ | 5,297 | ||||
Goodwill
The carrying amount of goodwill by segment is as follows (in thousands):
| Laser Products | Advanced Development | Totals | |||||||||||||||
| Balance, December 31, 2021 | 2,172 | 10,248 | 12,420 | ||||||||||||||
| Currency exchange rate adjustment | (61) | — | (61) | ||||||||||||||
| Balance, June 30, 2022 | $ | 2,111 | $ | 10,248 | $ | 12,359 | |||||||||||
Note 10 - Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
| As of | |||||||||||
| June 30, 2022 | December 31, 2021 | ||||||||||
| Accrued payroll and benefits | $ | 9,192 | $ | 10,915 | |||||||
| Product warranty, current | 2,325 | 2,286 | |||||||||
| Other accrued expenses | 1,621 | 1,529 | |||||||||
| $ | 13,138 | $ | 14,730 | ||||||||
11
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):
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Product warranty liability, beginning | $ | 5,371 | $ | 4,711 | |||||||
| Warranty charges incurred, net | (409) | (1,132) | |||||||||
| Provision for warranty charges, net of adjustments | 198 | 1,779 | |||||||||
| Product warranty liability, ending | 5,160 | 5,358 | |||||||||
| Less: current portion of product warranty liability | (2,325) | (2,246) | |||||||||
| Non-current portion of product warranty liability | $ | 2,835 | $ | 3,112 | |||||||
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 intend to vigorously defend 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 0.3 to 12.9 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 0.6 to 3.9 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 June 30, 2022, and the weighted-average discount rate was 3.6%.
The components of lease expense related to operating leases were as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
| Lease expense: | |||||||||||||||||||||||||||||
| Operating lease expense | $ | 965 | $ | 1,092 | $ | 1,996 | $ | 1,966 | |||||||||||||||||||||
| Short-term lease expense | 131 | 210 | 252 | 283 | |||||||||||||||||||||||||
| Variable and other lease expense | 241 | 235 | 435 | 357 | |||||||||||||||||||||||||
| $ | 1,337 | $ | 1,537 | $ | 2,683 | $ | 2,606 | ||||||||||||||||||||||
Future minimum payments under our non-cancelable lease obligations were as follows as of June 30, 2022 (in thousands):
12
| Remainder of 2022 | $ | 1,956 | |||
| 2023 | 3,234 | ||||
| 2024 | 2,833 | ||||
| 2025 | 2,013 | ||||
| 2026 | 1,631 | ||||
| Thereafter | 8,451 | ||||
| Total minimum lease payments | 20,118 | ||||
| Less: interest | (2,969) | ||||
| Present value of net minimum lease payments | 17,149 | ||||
| Less: current portion of lease liabilities | (3,032) | ||||
| Total long-term lease liabilities | $ | 14,117 | |||
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 Awards | Weighted-Average Grant Date Fair Value | ||||||||||||||||
| RSAs at December 31, 2021 | 753 | $ | 25.63 | ||||||||||||||
| Awards vested | (171) | 25.10 | |||||||||||||||
| Awards forfeited | (140) | 25.21 | |||||||||||||||
| RSAs at June 30, 2022 | 442 | 25.97 | |||||||||||||||
RSAs forfeited were in connection with our former chief financial officer's transition agreement dated January 18, 2022.
| Number of Restricted Stock Units | Weighted-Average Grant Date Fair Value | ||||||||||||||||
| RSUs at December 31, 2021 | 2,799 | $ | 24.41 | ||||||||||||||
| Awards granted | 78 | 15.61 | |||||||||||||||
| Awards vested | (576) | 26.47 | |||||||||||||||
| Awards forfeited | (143) | 26.03 | |||||||||||||||
| RSUs at June 30, 2022 | 2,158 | 23.45 | |||||||||||||||
The total fair value of RSAs and RSUs vested during the six months ended June 30, 2022, was $4.3 million and $15.3 million, respectively. Awards outstanding as of June 30, 2022 include 0.7 million performance-based awards that will vest upon meeting certain performance criteria.
Stock Options
The following table summarizes our stock option activity during the six months ended June 30, 2022 (in thousands, except weighted-average exercise prices):
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| Number of Options | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Outstanding, December 31, 2021 | 2,454 | $1.61 | 4.4 | $54,815 | |||||||||||||||||||
| Options exercised | (471) | $1.62 | |||||||||||||||||||||
| Options canceled | (41) | $9.44 | |||||||||||||||||||||
| Outstanding, June 30, 2022 | 1,942 | $1.44 | 3.8 | $17,037 | |||||||||||||||||||
| Options exercisable at June 30, 2022 | 1,916 | $1.41 | 3.8 | $16,890 | |||||||||||||||||||
| Options vested as of June 30, 2022, and expected to vest after June 30, 2022 | 1,942 | $1.44 | 3.8 | $17,037 | |||||||||||||||||||
Total intrinsic value of options exercised for the six months ended June 30, 2022 and 2021, was $6.9 million and $17.8 million, respectively. We received proceeds of $0.8 million and $0.8 million from the exercise of options for the six months ended June 30, 2022 and 2021, respectively.
Employee Stock Purchase Plan
Information related to activity under our Employee Stock Purchase Plan was as follows (in thousands, except weighted average per share prices):
| Six Months Ended June 30, 2022 | |||||
| Shares issued | 118 | ||||
| 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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cost of revenues | $ | 684 | $ | 549 | $ | 1,393 | $ | 1,040 | |||||||||||||||
| Research and development | 3,117 | 3,708 | 6,239 | 6,626 | |||||||||||||||||||
| Sales, general and administrative | 2,879 | 7,349 | 5,601 | 11,994 | |||||||||||||||||||
| $ | 6,680 | $ | 11,606 | $ | 13,233 | $ | 19,660 | ||||||||||||||||
Unrecognized Compensation Costs
As of June 30, 2022, total unrecognized stock-based compensation was $46.1 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. As of June 30, 2022, no repurchases had been executed under the program.
14
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 June 30, 2022 | |||||||||||||||||||||||
| Laser Products | Advanced Development | Corporate and Other | Totals | ||||||||||||||||||||
| Revenue | $ | 48,180 | $ | 12,647 | $ | — | $ | 60,827 | |||||||||||||||
| Gross profit | $ | 15,182 | $ | 888 | $ | (685) | $ | 15,385 | |||||||||||||||
| Gross margin | 31.5 | % | 7.0 | % | NM | 25.3 | % | ||||||||||||||||
| Six Months Ended June 30, 2022 | |||||||||||||||||||||||
| Laser Products | Advanced Development | Corporate and Other | Totals | ||||||||||||||||||||
| Revenue | $ | 99,241 | $ | 26,045 | $ | — | $ | 125,286 | |||||||||||||||
| Gross profit | $ | 31,184 | $ | 1,772 | $ | (1,394) | $ | 31,562 | |||||||||||||||
| Gross margin | 31.4 | % | 6.8 | % | NM | 25.2 | % | ||||||||||||||||
| Three Months Ended June 30, 2021 | |||||||||||||||||||||||
| Laser Products | Advanced Development | Corporate and Other | Totals | ||||||||||||||||||||
| Revenue | $ | 53,561 | $ | 15,552 | $ | — | $ | 69,113 | |||||||||||||||
| Gross profit | $ | 19,871 | $ | 1,004 | $ | (550) | $ | 20,325 | |||||||||||||||
| Gross margin | 37.1 | % | 6.5 | % | NM | 29.4 | % | ||||||||||||||||
| Six Months Ended June 30, 2021 | |||||||||||||||||||||||
| Laser Products | Advanced Development | Corporate and Other | Totals | ||||||||||||||||||||
| Revenue | $ | 100,896 | $ | 29,562 | $ | — | $ | 130,458 | |||||||||||||||
| Gross profit | $ | 37,302 | $ | 1,709 | $ | (1,041) | $ | 37,970 | |||||||||||||||
| Gross margin | 37.0 | % | 5.8 | % | NM | 29.1 | % | ||||||||||||||||
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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Restricted stock units and awards | 1,158 | 2,057 | 1,241 | 2,182 | |||||||||||||||||||
| Employee stock purchase plan | — | 3 | — | 6 | |||||||||||||||||||
| Common stock options | 1,745 | 2,803 | 1,922 | 2,803 | |||||||||||||||||||
| 2,903 | 4,863 | 3,163 | 4,991 | ||||||||||||||||||||
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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: the impact on our business from the COVID-19 pandemic and the related lockdown in Shanghai; the impact of inflation; 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 $125.3 million in the six months ended June 30, 2022 compared to $130.5 million in the same period of 2021 as a result of a decrease in development revenue and product sales to customers in China, that was partially offset by an increase in product sales to customers outside of China. We generated a net loss of $19.0 million for the six months ended June 30, 2022 compared to a net loss of $14.0 million for the same period of 2021.
Factors Affecting Our Performance
Impact of the COVID-19 Pandemic
16
The COVID-19 pandemic and related global liquidity concerns and significant macro-economic volatility continues to adversely impact our end-markets, including reduced economic activity and demand for our products, delays in new capital expenditure decisions and implementations, and restrictions on individual and business activities and travel. While our manufacturing operations have generally remained open throughout the pandemic, including our manufacturing facilities in the United States, which are considered essential businesses, the recent 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 during 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 had a negative impact on our financial results for the second quarter of 2022, and any additional closures could have an adverse impact on future periods. In addition to the impact of the lockdown in Shanghai, some of our non-manufacturing personnel have been partially working from home since March 2020. In recent periods, labor issues have become more pronounced as a result of the COVID-19 pandemic and we have experienced higher than expected increases in wages and other compensation costs as well as increased competition for qualified employees.
There are ongoing related risks to our business depending on the progression of the COVID-19 pandemic, including from the potential returns to limited or closed 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 have 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, such as the duration and magnitude of the pandemic and the conditions and timing under which restrictions will be lifted or re-imposed, impacts on our supply and distribution chains as well as our customers, the demand for our products and whether the pandemic leads to recessionary conditions in any of our key markets.
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.
Manufacturing Costs and Gross Margins
17
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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Products | 79.2 | % | 77.5 | % | 79.2 | % | 77.3 | % | |||||||||||||||
| Development | 20.8 | 22.5 | 20.8 | 22.7 | |||||||||||||||||||
| Total revenue | 100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Products | 55.4 | 49.5 | 55.4 | 49.5 | |||||||||||||||||||
| Development | 19.3 | 21.1 | 19.4 | 21.4 | |||||||||||||||||||
| Total cost of revenue | 74.7 | 70.6 | 74.8 | 70.9 | |||||||||||||||||||
| Gross profit | 25.3 | 29.4 | 25.2 | 29.1 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 22.7 | 20.7 | 21.9 | 19.9 | |||||||||||||||||||
| Sales, general, and administrative | 19.6 | 21.8 | 18.1 | 20.5 | |||||||||||||||||||
| Total operating expenses | 42.3 | 42.5 | 40.0 | 40.4 | |||||||||||||||||||
| Loss from operations | (17.0) | (13.1) | (14.8) | (11.3) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income (expense), net | 0.1 | — | 0.1 | (0.1) | |||||||||||||||||||
| Other income (loss), net | (0.2) | 0.2 | (0.1) | 0.1 | |||||||||||||||||||
| Loss before income taxes | (17.1) | (12.9) | (14.8) | (11.3) | |||||||||||||||||||
| Income tax expense (benefit) | — | (1.5) | 0.3 | (0.5) | |||||||||||||||||||
| Net loss | (17.1) | % | (11.4) | % | (15.1) | % | (10.8) | % | |||||||||||||||
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 June 30, | Change | ||||||||||||||||||||||||||||
| 2022 | % of Revenue | 2021 | % of Revenue | $ | % | ||||||||||||||||||||||||
| Industrial | $ | 21,899 | 36.0 | % | $ | 24,907 | 36.1 | % | $ | (3,008) | (12.1) | % | |||||||||||||||||
| Microfabrication | 16,415 | 27.0 | 20,274 | 29.3 | (3,859) | (19.0) | |||||||||||||||||||||||
| Aerospace and Defense | 22,513 | 37.0 | 23,932 | 34.6 | (1,419) | (5.9) | |||||||||||||||||||||||
| $ | 60,827 | 100.0 | % | $ | 69,113 | 100.0 | % | $ | (8,286) | (12.0) | % | ||||||||||||||||||
| Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||
| 2022 | % of Revenue | 2021 | % of Revenue | Amount | % | ||||||||||||||||||||||||
| Industrial | $ | 45,895 | 36.6 | % | $ | 46,307 | 35.5 | % | $ | (412) | (0.9) | % | |||||||||||||||||
| Microfabrication | 33,734 | 26.9 | 35,489 | 27.2 | (1,755) | (4.9) | |||||||||||||||||||||||
| Aerospace and Defense | 45,657 | 36.5 | 48,662 | 37.3 | (3,005) | (6.2) | |||||||||||||||||||||||
| $ | 125,286 | 100.0 | % | $ | 130,458 | 100.0 | % | $ | (5,172) | (4.0) | % | ||||||||||||||||||
The decreases in revenue from the Industrial and Microfabrication markets for the three and six months ended June 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 sales in China. The decreases in revenue from the Aerospace and Defense market for the three and six months ended June 30, 2022, compared to the same periods of 2021, were primarily due to decreased activity on research and development contracts.
Revenues by Segment
Our revenues by segment were as follows for the periods presented (dollars in thousands):
| Three Months Ended June 30, | Change | ||||||||||||||||||||||||||||
| 2022 | % of Revenue | 2021 | % of Revenue | $ | % | ||||||||||||||||||||||||
| Laser Products | $ | 48,180 | 79.2 | % | $ | 53,561 | 77.5 | % | $ | (5,381) | (10.0) | % | |||||||||||||||||
| Advanced Development | 12,647 | 20.8 | 15,552 | 22.5 | (2,905) | (18.7) | |||||||||||||||||||||||
| $ | 60,827 | 100.0 | % | $ | 69,113 | 100.0 | % | $ | (8,286) | (12.0) | % | ||||||||||||||||||
| Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||
| 2022 | % of Revenue | 2021 | % of Revenue | Amount | % | ||||||||||||||||||||||||
| Laser Products | $ | 99,241 | 79.2 | % | $ | 100,896 | 77.3 | % | $ | (1,655) | (1.6) | % | |||||||||||||||||
| Advanced Development | 26,045 | 20.8 | 29,562 | 22.7 | (3,517) | (11.9) | |||||||||||||||||||||||
| $ | 125,286 | 100.0 | % | $ | 130,458 | 100.0 | % | $ | (5,172) | (4.0) | % | ||||||||||||||||||
The decreases in Laser Products revenue for the three and six months ended June 30, 2022, compared to the same periods of 2021, were driven by decreased sales to the Industrial and Microfabrication markets as discussed above. There was no significant change in Laser Product sales within the Aerospace and Defense market for the three and six months ended June 30, 2022, compared to the same periods of 2021. The decreases in Advanced Development revenue for the three and six months ended June 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 June 30, | Change | ||||||||||||||||||||||||||||
| 2022 | % of Revenue | 2021 | % of Revenue | $ | % | ||||||||||||||||||||||||
| North America | $ | 35,682 | 58.7 | % | $ | 33,095 | 47.9 | % | $ | 2,587 | 7.8 | % | |||||||||||||||||
| China | 4,672 | 7.7 | 18,759 | 27.1 | (14,087) | (75.1) | |||||||||||||||||||||||
| Rest of World | 20,473 | 33.6 | 17,259 | 25.0 | 3,214 | 18.6 | |||||||||||||||||||||||
| $ | 60,827 | 100.0 | % | $ | 69,113 | 100.0 | % | $ | (8,286) | (12.0) | % | ||||||||||||||||||
| Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||
| 2022 | % of Revenue | 2021 | % of Revenue | Amount | % | ||||||||||||||||||||||||
| North America | $ | 70,826 | 56.5 | % | $ | 64,229 | 49.2 | % | $ | 6,597 | 10.3 | % | |||||||||||||||||
| China | 11,811 | 9.4 | 34,336 | 26.3 | (22,525) | (65.6) | |||||||||||||||||||||||
| Rest of World | 42,649 | 34.1 | 31,893 | 24.4 | 10,756 | 33.7 | |||||||||||||||||||||||
| $ | 125,286 | 100.0 | % | $ | 130,458 | 100.0 | % | $ | (5,172) | (4.0) | % | ||||||||||||||||||
Geographic revenue information is based on the location to which we ship our products. The increases in both North America and Rest of World revenue for the three and six months ended June 30, 2022, compared to the same periods of 2021, were primarily driven by increased revenue from the Industrial and Microfabrication markets, partially offset by a decrease in Development revenue from the Aerospace and Defense market. The decreases in China revenue for the three and six months ended June 30, 2022, compared to the same periods of 2021, were due to decreased sales in the Industrial and Microfabrication markets, primarily as a result of deteriorating market conditions in the Industrial market. 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 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 June 30, 2022 | ||||||||||||||||||||||||||
| Laser Products | Advanced Development | Corporate and Other | Total | |||||||||||||||||||||||
| Gross profit | $ | 15,182 | $ | 888 | $ | (685) | $ | 15,385 | ||||||||||||||||||
| Gross margin | 31.5 | % | 7.0 | % | NM | 25.3 | % | |||||||||||||||||||
| Six Months Ended June 30, 2022 | |||||||||||||||||||||||
| Laser Products | Advanced Development | Corporate and Other | Total | ||||||||||||||||||||
| Gross profit | $ | 31,184 | $ | 1,772 | $ | (1,394) | $ | 31,562 | |||||||||||||||
| Gross margin | 31.4 | % | 6.8 | % | NM | 25.2 | % | ||||||||||||||||
| Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||
| Laser Products | Advanced Development | Corporate and Other | Total | |||||||||||||||||||||||
| Gross profit | $ | 19,871 | $ | 1,004 | $ | (550) | $ | 20,325 | ||||||||||||||||||
| Gross margin | 37.1 | % | 6.5 | % | NM | 29.4 | % | |||||||||||||||||||
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| Six Months Ended June 30, 2021 | |||||||||||||||||||||||
| Laser Products | Advanced Development | Corporate and Other | Total | ||||||||||||||||||||
| Gross profit | $ | 37,302 | $ | 1,709 | $ | (1,041) | $ | 37,970 | |||||||||||||||
| Gross margin | 37.0 | % | 5.8 | % | NM | 29.1 | % | ||||||||||||||||
The decreases in Laser Products gross margin for the three and six months ended June 30, 2022, compared to the same periods of 2021, were driven by sales mix, and decreased factory utilization of our Shanghai manufacturing facility due to lower sales, and the closure of our Shanghai facility for approximately two months during the second quarter of 2022 due to the COVID-19 pandemic. In addition, Laser Products gross margin was negatively impacted by increased investments in U.S. based manufacturing, and increased production and freight costs, partially offset by an increase in duty reclaim. The increases in Advanced Development gross margin for the three and six months ended June 30, 2022, compared to the same periods of 2021, were primarily due to 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 June 30, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Research and development | $ | 13,788 | $ | 14,282 | $ | (494) | (3.5) | % | |||||||||||||||
| Six Months Ended June 30, | Change | ||||||||||||||||||||||
| 2022 | 2021 | Amount | % | ||||||||||||||||||||
| Research and development | $ | 27,499 | $ | 25,992 | $ | 1,507 | 5.8 | % | |||||||||||||||
The decrease in research and development expense for the three months ended June 30, 2022, compared to the same period in 2021, was primarily due to a decrease in stock-based compensation of $0.6 million. The increase in research and development expense for the six months ended June 30, 2022, compared to the same period in 2021, was primarily due to increases in salary costs, headcount and project-related expenses to support our development efforts, partially offset by a decrease in stock-based compensation of $0.4 million, and decrease in intangible amortization.
Sales, General and Administrative
| Three Months Ended June 30, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Sales, general, and administrative | $ | 11,914 | $ | 15,057 | $ | (3,143) | (20.9) | % | |||||||||||||||
| Six Months Ended June 30, | Change | ||||||||||||||||||||||
| 2022 | 2021 | Amount | % | ||||||||||||||||||||
| Sales, general, and administrative | $ | 22,689 | $ | 26,771 | $ | (4,082) | (15.2) | % | |||||||||||||||
The decreases in sales, general and administrative expense for the three and six months ended June 30, 2022, compared to the same periods in 2021 were primarily due to decreases in stock-based compensation of $4.5 million and $6.4 million, respectively, 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 expense were driven by forfeitures and decreases in expected achievement related to performance-based stock awards.
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Interest Income (Expense), net
| Three Months Ended June 30, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Interest income (expense), net | $ | 71 | $ | (32) | $ | 103 | (321.9)% | ||||||||||||||||
| Six Months Ended June 30, | Change | ||||||||||||||||||||||
| 2022 | 2021 | Amount | % | ||||||||||||||||||||
| Interest income (expense), net | $ | 71 | $ | (106) | $ | 177 | (167.0) | % | |||||||||||||||
The increase in interest income (expense), net, for the three and six months ended June 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.
Other Income (Loss), net
| Three Months Ended June 30, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Other income (loss), net | $ | (106) | $ | 118 | $ | (224) | (189.8)% | ||||||||||||||||
| Six Months Ended June 30, | Change | ||||||||||||||||||||||
| 2022 | 2021 | Amount | % | ||||||||||||||||||||
| Other income (loss), net | $ | (77) | $ | 144 | $ | (221) | (153.5) | % | |||||||||||||||
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 June 30, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Income tax expense (benefit) | $ | (10) | $ | (1,038) | $ | 1,028 | (99.0) | % | |||||||||||||||
| Six Months Ended June 30, | Change | ||||||||||||||||||||||
| 2022 | 2021 | Amount | % | ||||||||||||||||||||
| Income tax expense (benefit) | $ | 333 | $ | (716) | $ | 1,049 | (146.5) | % | |||||||||||||||
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 June 30, 2022.
The increases in income tax expense for the three and six months ended June 30, 2022, compared to the same periods in 2021 were driven by a large discrete tax benefit related to return to provision true ups and expiring statutes of limitations of unrecognized tax positions recorded in Q2 2021.
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Liquidity and Capital Resources
We had cash and cash equivalents of $70.6 million and $146.5 million as of June 30, 2022 and December 31, 2021, respectively. In addition, we had marketable securities of $50.0 million at June 30, 2022. Prior to the second quarter of 2022 we had no marketable securities.
For the six months ended June 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):
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net cash provided by (used in) operating activities | $ | (11,765) | $ | 3,085 | |||||||
| Net cash used in investing activities | (63,121) | (8,469) | |||||||||
| Net cash provided by (used in) financing activities | (583) | 78,551 | |||||||||
| Effect of exchange rate changes on cash | (432) | (126) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | (75,901) | $ | 73,041 | |||||||
Net Cash Provided by (Used in) Operating Activities
During the six months ended June 30, 2022, net cash used in operating activities was $11.8 million, which was the result of a $19.0 million net loss and use of cash for working capital of $15.2 million, partially offset by non‑cash expenses totaling $22.4 million related primarily to depreciation, amortization, and stock-based compensation. Changes in working capital were driven by a $5.0 million increase in accounts receivable, net, a $7.4 million increase in inventory, and a $1.7 million decrease in accounts payable. The increase in accounts receivable, net was primarily due to the timing of shipments in the second quarter of 2022 compared to the fourth quarter of 2021. The increase in inventory was due to an increase in safety stock 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 timing of vendor payments.
During the six months ended June 30, 2021, net cash provided by operating activities was $3.1 million, which was primarily driven by non‑cash expenses totaling $28.6 million related to depreciation and amortization, stock-based compensation, and other items, a $3.3 million increase in accounts payable and a $1.3 million increase in accrued and other long-term liabilities. These items were partially offset by our net loss of $14.0 million and increases of $8.6 million in inventory and $4.8 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, and 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 six months ended June 30, 2022, net cash used in investing activities was $63.1 million, primarily resulting from the purchase of $50.0 million of marketable securities and $12.9 million of capital expenditures related to investments in directed energy, manufacturing equipment and facilities.
During the six months ended June 30, 2021, net cash used in investing activities was $8.5 million, primarily resulting from $8.0 million of capital expenditures related to investments in manufacturing equipment and improvements to our corporate facility.
23
Net Cash Provided by (Used in) Financing Activities
During the six months ended June 30, 2022, net cash used in financing activities was $0.6 million, which was primarily driven by $2.5 million of withholding tax payments related to the vesting of stock awards, partially offset by $2.0 million of proceeds from stock options exercises and employee stock plan purchases.
During the six months ended June 30, 2021, net cash provided by financing activities was $78.6 million, which was primarily driven by our follow-on public offering of $82.4 million, net of offering costs, and $1.5 million of proceeds from stock options exercises and employee stock program purchases, partially offset by $4.6 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 June 30, 2022 and we were in compliance with all covenants.
Contractual Obligations
For the six months ended June 30, 2022, our operating lease obligations decreased by approximately $0.5 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.
Inflation
While we do not believe that inflation had a material effect on our business, financial condition or results of operations through June 30, 2022, we have experienced higher than expected increases in wages and other compensation costs, materials, and shipping costs over the past year. 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 June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 our Quarterly Report on Form 10-Q for the quarter ended March 31, 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 March 31, 2022.
The COVID-19 pandemic has disrupted our operations, manufacturing and supply chain and likely will continue to adversely affect our business, financial condition and operating results.
The COVID-19 pandemic and related global liquidity concerns and significant macro-economic volatility continues to adversely impact our end-markets, including reduced economic activity and demand for our products, delays in new capital expenditure decisions and implementations, and restrictions on individual and business activities and travel. Government imposed restrictions may limit our ability to manufacture our products in a timely manner or at all, and some of our non-manufacturing personnel have been partially working from home since March 2020. The recent COVID-related lockdown of Shanghai by the Chinese government forced us to halt operations in our Shanghai manufacturing 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. Any additional closures, or partial closures, of our Shanghai facility in the future could have an adverse impact on future periods.
In addition, travel has been severely limited during the COVID-19 pandemic due to government restrictions and other precautionary measures. Limitations on travel, for example, have impacted our management’s ability to visit our employees and facilities, particularly in China, as well as our vendors and potential and existing customers. Such limitations have adversely impacted and could continue to adversely impact oversight of our employees and facilities, our sales and marketing efforts, and our manufacturing and supply arrangements, potentially disrupting our business operations and adversely impacting our financial condition and operating results. In recent periods, labor issues have also become more pronounced as a result of the COVID-19 pandemic and we have experienced higher than expected increases in wages and other compensation costs as well as increased competition for qualified employees.
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ITEM 6. EXHIBITS
(a) Exhibits
| Exhibit Number | Incorporated by Reference | Filed Herewith | ||||||||||||||||||
| Description | Form | File No. | Exhibit | Filing Date | ||||||||||||||||
| 3.1 | 10-Q | 001-38462 | 3.1 | May 25, 2018 | ||||||||||||||||
| 3.2 | 8-K | 001-38462 | 3.1 | April 21, 2020 | ||||||||||||||||
| 4.1 | S-1/A | 333-224055 | 4.1 | April 16, 2018 | ||||||||||||||||
| 10.1 | 8-K | 001-38462 | 10.1 | July 8, 2022 | ||||||||||||||||
| 31.1 | X | |||||||||||||||||||
| 31.2 | X | |||||||||||||||||||
| 32.1* | X | |||||||||||||||||||
| 101.INS | Inline 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.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | X | ||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||
| 104 | Cover 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) | ||||||||
| August 5, 2022 | By: | /s/ SCOTT KEENEY | ||||||
| Date | Scott Keeney | |||||||
| President and Chief Executive Officer (Principal Executive Officer) | ||||||||
| August 5, 2022 | By: | /s/ JOSEPH CORSO | ||||||
| Date | Joseph Corso | |||||||
| Chief Financial Officer (Principal Financial Officer) | ||||||||
| August 5, 2022 | By: | /s/ JAMES NIAS | ||||||
| Date | James Nias | |||||||
| Chief Accounting Officer (Principal Accounting Officer) | ||||||||
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