(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
5408 NE 88th Street, Building E
Vancouver, Washington98665
(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 November 2, 2020, the Registrant had 39,365,991 shares of common stock outstanding.
Accounts receivable, net of allowances of $335 and $269
23,452
27,126
Inventory
53,432
46,131
Prepaid expenses and other current assets
12,996
8,084
Total current assets
200,032
198,593
Restricted cash
291
41
Lease right-of-use assets
11,428
—
Property, plant and equipment, net of accumulated depreciation of $63,513 and $58,633
42,365
27,747
Intangible assets, net of accumulated amortization of $5,972 and $3,150
9,088
10,006
Goodwill
12,503
9,872
Other assets, net
4,681
3,707
Total assets
$
280,388
$
249,966
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$
24,403
$
12,700
Accrued liabilities
14,663
11,605
Deferred revenues
2,124
679
Lease liabilities
2,347
—
Current portion of long-term debt
142
51
Total current liabilities
43,679
25,035
Non-current income taxes payable
7,219
6,429
Long-term lease liabilities
9,397
—
Long-term debt
205
—
Other long-term liabilities
3,796
1,894
Total liabilities
64,296
33,358
Stockholders' equity:
Common stock - $0.0001 par value; 190,000 shares authorized, 39,335 shares issued and outstanding at September 30, 2020, and 38,084 shares issued and outstanding at December 31, 2019
15
15
Additional paid-in capital
351,703
336,732
Accumulated other comprehensive loss
(1,757)
(2,685)
Accumulated deficit
(133,869)
(117,454)
Total stockholders’ equity
216,092
216,608
Total liabilities and stockholders’ equity
$
280,388
$
249,966
See accompanying notes to consolidated financial statements.
Note 1 - Basis of Presentation and New Accounting Pronouncements
Basis of Presentation
The accompanying consolidated financial statements of nLIGHT, Inc. and its wholly owned subsidiaries (Company) 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 2019 Annual Report on Form 10-K.
Reclassifications
Certain immaterial reclassifications were made to the prior period financial statements to conform to the current period presentation.
Critical Accounting Policies
Other than the adoption of new lease accounting standards as described in Note 13, our critical accounting policies have not materially changed during the nine months ended September 30, 2020 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
New Accounting Pronouncements
ASU 2016-02, ASU 2018-10, ASU 2018-11 and ASU 2019-01
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), in February 2016. ASU 2016-02 requires the recognition of right-of-use (ROU) assets and lease liabilities on the balance sheet for virtually all leases, other than leases that meet the definition of short-term. ASU 2016-02 was amended in July 2018, March 2019 and February 2020. The Company adopted ASU 2016-02, as amended, on January 1, 2020 using the modified transition approach, resulting in the recognition of operating lease ROU assets and lease liabilities of $7.6 million and $7.9 million, respectively. Refer to Note 13 for additional information.
The FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in June 2016. ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For assets measured at amortized cost, the new standard requires that the income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 was amended in November 2018, April 2019 and March 2020. ASU 2016-13, as amended, is effective for annual reporting periods of emerging growth companies beginning after December 15, 2020. An entity will apply the new standard, as amended, using a modified-retrospective approach and record a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the impact on its consolidated financial statements and cannot reasonably estimate the impact on its financial statements at this time.
ASU 2020-04
FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, in March 2020. ASU 2020-04 provides optional practical expedients and exceptions for applying U.S. GAAP to contracts and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective for all entities for the period March 12, 2020 through December 31, 2022, and will not apply to contract modifications made after December 31, 2022. If elected, the optional expedients for contract modifications must be applied consistently for all eligible contracts or eligible transactions. Adoption of the ASU as of its effective date had no material impact on the Company's financial position, results of operations and cash flows.
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 approximately $1.6 million, including contingent consideration of up to $0.3 million. Approximately $0.2 million was paid at closing with the remaining $1.4 million to be paid over the next 24 months. Located in Turin, Italy, OPI develops high power multi-emitter laser diode sources and innovative devices for kilowatt fiber laser beam management, including beam collimation, coupling and switching.
The allocation of the purchase price for the OPI acquisition was as follows (in thousands):
Valuation at
July 30, 2020
Cash
$
58
Accounts receivable
73
Inventory
307
Other assets
186
Tangible assets acquired
624
Accounts payable
(193)
Deferred taxes
(299)
Debt
(402)
Other liabilities
(164)
Liabilities assumed
(1,058)
Total tangible assets and liabilities assumed
(434)
Intangible assets
1,179
Goodwill
869
Net assets acquired
$
1,614
The intangible assets as of the July 30, 2020 acquisition date were as follows (in thousands):
Amount
Weighted-Average Useful Life (in years)
Developed technology
$
1,179
5.0
The acquisition price was allocated to the tangible and identified intangible assets acquired and liabilities assumed as of the acquisition date based upon their respective fair values. The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the amount of goodwill resulting from the acquisition. The fair values assigned to assets acquired and liabilities assumed were based on management’s best estimates and assumptions as of the reporting date and are considered preliminary. Changes to amounts recorded as assets or liabilities may result in corresponding adjustments to goodwill.
The goodwill and operating results of OPI are allocated to the Company's Laser Products segment. Revenue and earnings since the date of acquisition are not material. Transaction costs of $0.1 million were expensed as incurred as a component of Sales, general, and administrative expenses.
Pro forma financial information has not been provided for the purchase as it was not material to the Company’s overall financial position.
Nutronics
On November 14, 2019, the Company acquired Nutronics, Inc. (Nutronics), a private company, pursuant to the Stock Purchase Agreement between nLIGHT, Inc. and selling stockholders of Nutronics, Inc. and sellers as of that date. The total acquisition consideration consisted of $17.4 million in cash. Based in Longmont, Colorado, Nutronics is a leading developer of coherently combined lasers and beam control systems (BCS) for high-energy laser (HEL) systems serving the defense market.
The acquisition price was allocated to the tangible and identified intangible assets acquired and liabilities assumed as of the closing date of the acquisition based upon their respective fair values. The fair values assigned to assets acquired and liabilities assumed were based on management’s best estimates and assumptions, including future tax elections, as of the reporting date and are considered preliminary. During the nine months ended September 30, 2020, updated information primarily related to a 2020 tax election resulted in an increase to deferred taxes and other liabilities acquired of $1.8 million and a corresponding adjustment to goodwill. The table below summarizes the assets acquired and liabilities assumed (in thousands):
Valuation as of
Balances as of
November 14, 2019
Adjustments
September 30, 2020
Cash
$
33
$
—
$
33
Accounts receivable
635
—
635
Contract assets
456
—
456
Inventory
255
—
255
Other current assets
201
—
201
Property, plant and equipment
1,019
—
1,019
Security deposits
46
—
46
Tangible assets acquired
2,645
—
2,645
Accounts payable
(278)
—
(278)
Other liabilities
(477)
(100)
(577)
Deferred revenue
(141)
—
(141)
Deferred taxes
—
(1,667)
(1,667)
Liabilities assumed
(896)
(1,767)
(2,663)
Total tangible assets acquired and liabilities assumed
1,749
(1,767)
(18)
Intangible assets
7,200
7,200
Goodwill
8,484
1,767
10,251
Net assets acquired
$
17,433
$
—
$
17,433
The intangible assets as of the November 14, 2019 acquisition date were as follows (in thousands):
Amount
Weighted-Average Useful Life (in years)
Development programs
$
7,200
3.1
Pro forma financial information has not been provided for the purchase as it was not material to the Company’s overall financial position.
Note 3 - Revenue
The following tables represent a disaggregation of revenue from contracts with customers for the periods presented (in thousands):
The Company's contract assets and liabilities are as follows (in thousands):
Balance Sheet Classification
As of
September 30, 2020
December 31, 2019
Contract assets
Prepaid expenses and other current assets
$
5,178
$
2,449
Contract liabilities
Deferred revenue and Other long-term liabilities
2,524
881
During the three and nine months ended September 30, 2020, the Company recognized revenue of $0.8 million and $1.6 million, respectively, that was included in the deferred revenue balances at the beginning of the periods as the performance obligations under the associated agreements were satisfied.
Note 4 - Concentrations of Credit and Other Risks
The following customers accounted for 10% or more of the Company's revenues for the periods presented:
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
Quick Laser Technology Co., Ltd.
13%
12%
13%
*
U.S. Government
16%
*
13%
*
Raytheon Technologies
12%
15%
13%
12%
*Represents less than 10% of total revenues
Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of accounts receivable. As of September 30, 2020 and December 31, 2019, two customers accounted for approximately 44% and 48%, respectively, of net accounts receivable. No other customers accounted for 10% or more of net accounts receivable in either of these periods.
Note 5 - Fair Value of Financial Instruments
The carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable, restricted cash, and accounts payable are shown at cost which approximates fair value due to the short-term nature of these instruments. The fair value of the Company’s term and revolving loans with Pacific Western Bank, also described in Note 12, approximates the carrying value due to the variable market rate used to calculate interest payments.
The Company does not have any other significant financial assets or liabilities that are measured at fair value.
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.
The Company’s 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. The Company's fair value hierarchy for its financial instruments consists of cash equivalents as follows (in thousands):
September 30, 2020
Level 1
Level 2
Level 3
Total
Money market securities
$
74,084
$
—
$
—
$
74,084
Commercial paper
4,585
—
—
4,585
Total
$
78,669
$
—
$
—
$
78,669
December 31, 2019
Level 1
Level 2
Level 3
Total
Money market securities
$
94,260
$
—
$
—
$
94,260
Commercial paper
2,401
—
—
2,401
Total
$
96,661
$
—
$
—
$
96,661
Note 6 - Inventory
Inventory is stated at the lower of average cost and net realizable value.Inventory consisted of the following (in thousands):
Property, plant and equipment consist of the following (in thousands):
As of
Useful life (years)
September 30, 2020
December 31, 2019
Computer hardware and software
3-5
$
4,625
$
4,764
Manufacturing and lab equipment
2-7
65,893
59,395
Office equipment and furniture
5-7
1,410
1,462
Leasehold and building improvements
2-12
21,470
20,759
Buildings
30
9,081
—
Land
N/A
3,399
—
105,878
86,380
Accumulated depreciation
(63,513)
(58,633)
$
42,365
$
27,747
On March 31, 2020, the Company purchased a commercial property in Camas, Washington that consists of approximately 21 acres of land and two buildings with approximately 165,000 square feet of office space, clean rooms and manufacturing space. The property was purchased "as is", and the Company intends to use the property as its new headquarters following the completion of certain renovations and modifications.
Note 8 - Intangible Assets and Goodwill
Intangibles
The details of amortizing intangible assets are as follows (in thousands, except for estimated useful lives):
Estimated useful life (in years)
As of
September 30, 2020
December 31, 2019
Patents
3 - 5
$
6,689
$
5,956
Development programs
2 - 4
7,200
7,200
Developed technology
5
1,171
—
15,060
13,156
Accumulated amortization
(5,972)
(3,150)
$
9,088
$
10,006
Goodwill
The carrying amount of goodwill by segment was as follows (in thousands):
Laser Products
Advanced Development
Totals
Balance, December 31, 2019
$
1,388
$
8,484
$
9,872
Business acquisition
869
—
869
Purchase accounting adjustment
—
1,767
1,767
Currency exchange rate adjustment
(5)
—
(5)
Balance, September 30, 2020
$
2,252
$
10,251
$
12,503
See Note 2 for details related to goodwill for the Nutronics and OPI acquisitions.
Other assets consisted of the following (in thousands):
As of
September 30, 2020
December 31, 2019
Demonstration assets, net
$
1,965
$
1,824
Deferred tax assets, net
72
72
Other
2,644
1,811
$
4,681
$
3,707
Demonstration (demo) assets are equipment that is used for demonstration and other purposes with existing and prospective customers. Demo assets are recorded at cost and amortized over an estimated useful life of approximately two years. Amortization expense was as follows for the periods presented (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
Amortization expense
$
478
$
454
$
1,500
$
1,355
Note 10 - Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
As of
September 30, 2020
December 31, 2019
Accrued payroll and benefits
$
10,759
$
8,208
Product warranty, current
1,982
1,683
Income tax payable
—
155
Other accrued expenses
1,922
1,559
$
14,663
$
11,605
Note 11 - Product Warranties
The Company provides warranties on certain products and records 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 its estimate of future costs.
Product warranty liability activity for the nine months ended September 30, 2020 and 2019 was as follows (in thousands):
Nine Months Ended September 30,
2020
2019
Product warranty liability, beginning
$
2,984
$
4,555
Warranty charges incurred, net
(2,259)
(1,971)
Provision for warranty charges, net of adjustments
3,425
456
Acquired warranty
100
—
Product warranty liability, ending
$
4,250
$
3,040
Less: current portion of product warranty liability
The Company has a $40.0 million revolving line of credit (LOC) with Pacific Western Bank which is secured by its assets and expires in September 2021. Interest on the LOC is based primarily on the London Interbank Offered Rate (LIBOR), or an alternative rate such as the Prime rate, plus or minus, respectively, a margin based on certain liquidity levels. The loan agreement contains restrictive and financial covenants and bears an unused credit fee of 0.20% on an annualized basis. As of September 30, 2020, no amounts were outstanding under the LOC, and the Company was in compliance with all covenants under the loan agreement.
Contractual Commitments and Purchase Obligations
The Company's purchase obligations and other contractual obligations have increased as of September 30, 2020 by approximately $11.7 million for operating leases as discussed in Note 13, and approximately $1.4 million for the earn-out and hold-back amounts related to the acquisition of OPI (see Note 2). There have been no other material changes to the Company's purchase obligations and other contractual obligations from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2019.
Legal Matters
From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. As of September 30, 2020, and as of the filing of this Quarterly Report on Form 10-Q, the Company was not involved in any material legal proceedings.
Note 13 - Leases
Adoption of ASC 842
The Company adopted ASU 2016-02, Leases (Topic 842) and related amendments, using the modified transition approach with an effective date of January 1, 2020. The modified transition approach permits a company to use its effective date as the date of initial application to apply the standard to its leases, and, therefore, not restate comparative prior period financial information. Consequently, prior period financial information is not updated, and the disclosures required under the new standard will not be provided for dates and periods prior to January 1, 2020. The adoption of the lease standard did not have any effect on our previously reported consolidated financial statements and did not result in a cumulative catch-up adjustment to opening equity.
Transition Practical Expedients and Elections
The standard provides several optional practical expedients in transition. The Company elected the ‘package of practical expedients,’ which permits it to not reassess, under the new standard, the Company's prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to it. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption; for those leases that qualify, the Company will not recognize a right-of-use asset or lease liability, and this includes not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient to not separate lease and non-lease components for all its leases.
Lease Accounting
We lease real estate space under non-cancelable operating lease agreements for commercial and industrial space, as well as our corporate headquarters located in Vancouver, Washington. Our facilities-related operating leases have remaining terms of 0.3 to 14.7 years, and some leases include options to extend up to 15 years. We also have leases for automobiles, manufacturing and office and computer equipment with remaining lease terms of 0.2 to 5.7 years. These leases are primarily operating leases; financing leases are not material. We did not include any of our renewal options in our lease terms for calculating our lease liability as we are not reasonably certain we will exercise the options at this time. The weighted-average remaining lease term for our lease obligations was 9.0 years at September 30, 2020, and the weighted-average discount rate was 3.5%.
The components of lease expense related to operating leases were as follows (in thousands):
Undiscounted future minimum payments under our non-cancelable lease obligations were as follows as of September 30, 2020 (in thousands):
Remainder of 2020
$
785
2021
2,463
2022
1,873
2023
1,401
2024
1,347
Thereafter
5,976
$
13,845
Note 14 - Income Taxes
Income Tax Provision
To calculate the interim tax provision, at the end of each interim period the Company estimates the annual effective tax rate and applies that to its ordinary quarterly earnings. The effect of changes in the enacted tax laws or rates is recognized in the interim period in which the change occurs. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and judgments including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent differences between book and tax amounts, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained, or the tax environment changes.
The Company’s effective tax rate for the three and nine months ended September 30, 2020 and 2019 differs from the U.S. statutory rate due to the U.S. and China valuation allowance, foreign income taxed at local statutory rates, and accrued withholding taxes. In addition, the three and nine months ended September 30, 2020 included a $1.7 million prior year tax benefit true-up related to purchase accounting for Nutronics. For the nine months ended September 30, 2020, the Company reported U.S. pre-tax loss and China pre-tax income. The Company has not yet been able to establish a sustained level of profitability in the U.S. and China, or other sufficient significant positive evidence, to conclude that its U.S. and China deferred tax assets are more likely than not to be realized. Therefore, the Company continues to maintain a valuation allowance against its U.S. and China deferred tax assets.
Note 15 - 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):
The total fair value of RSAs and RSUs vested during the nine months ended September 30, 2020 was $1.5 million and $7.0 million, respectively. Awards outstanding as of September 30, 2020 include 0.7 million performance-based awards that will vest upon meeting certain performance criteria.
Stock Options
The following table summarizes the Company’s stock option activity during the nine months ended September 30, 2020 (in thousands, except weighted average exercise prices):
Number of Options
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term (Years)
Aggregate Intrinsic Value
Outstanding, December 31, 2019
4,239
$1.54
6.1
$79,443
Options exercised
(633)
$1.77
Options canceled
(13)
$1.56
Outstanding, September 30, 2020
3,593
$1.50
5.5
$78,962
Options exercisable at September 30, 2020
2,869
$1.06
5.2
$64,337
Options vested as of September 30, 2020 and expected to vest after September 30, 2020
3,593
$1.50
5.5
$78,962
Total intrinsic value of options exercised for the nine months ended September 30, 2020 and 2019 was $11.2 million and $11.5 million, respectively. The Company received proceeds of $1.1 million and $1.0 million from the exercise of options for the nine months ended September 30, 2020 and 2019, respectively.
Employee Stock Purchase Plan
Information related to activity under our Employee Stock Purchase Plan (ESPP) was as follows (in thousands, except weighted- average per share prices):
Nine Months Ended September 30, 2020
Shares issued
39
Weighted-average per share purchase price
$
17.53
Weighted-average per share discount from the fair value of the Company's common stock on date of issuance
$
3.85
Stock-Based Compensation
Total stock-based compensation expense was included in our consolidated statements of operations as follows (in thousands):
As of September 30, 2020, total unrecognized stock-based compensation related to unvested stock awards was $64.9 million, which will be recognized over the next five years as follows (in thousands):
Remainder of 2020
$
6,594
2021
24,256
2022
19,231
2023
12,154
2024
2,646
$
64,881
Total unrecognized stock-based compensation includes approximately 0.6 million awards that do not have a measurement date and have been valued as of September 30, 2020.
Common Stock Repurchase Plan
On November 14, 2019, the Company's Board of Directors authorized the repurchase of up to $10.0 million of its outstanding shares of common stock. This program is intended to offset the potentially dilutive effects of restricted stock grants awarded in connection with the acquisition of Nutronics. (See Note 2 for additional information.) As of September 30, 2020, no repurchases had been executed under the program.
Note 16 - Segment Information
The Company operates 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 period presented (dollars in thousands):
Three Months Ended September 30, 2020
Laser Products
Advanced Development
Corporate and Other
Totals
Revenue
$
51,117
$
10,615
$
—
$
61,732
Gross profit
$
16,977
$
688
$
(505)
$
17,160
Gross margin
33.2
%
6.5
%
NM
27.8
%
Nine Months Ended September 30, 2020
Laser Products
Advanced Development
Corporate and Other
Totals
Revenue
$
133,151
$
23,934
$
—
$
157,085
Gross profit
$
39,198
$
1,708
$
(1,189)
$
39,717
Gross margin
29.4
%
7.1
%
NM
25.3
%
Corporate and Other is unallocated expenses related to stock-based compensation. Since the Company operated only in the Laser Products segment prior to the acquisition of Nutronics in November 2019, no comparative information is presented for 2019.
Except as described in Note 7, there have been no material changes to the geographic locations of the Company’s 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, 2019.
Note 17 - Net Loss per Share
The following table sets forth the calculation of basic and diluted net loss per share for the periods presented (in thousands, except per share amounts):
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
Numerator:
Net loss
$
(2,110)
$
(778)
$
(16,415)
$
(2,168)
Denominator:
Weighted-average shares, basic
38,558
37,262
38,195
37,005
Weighted-average shares, diluted
38,558
37,262
38,195
37,005
Net loss per share:
Basic
$
(0.05)
$
(0.02)
$
(0.43)
$
(0.06)
Diluted
$
(0.05)
$
(0.02)
$
(0.43)
$
(0.06)
The following potentially dilutive shares of restricted stock awards and units, employee stock purchase plan, and stock options were not included in the calculation of diluted shares above as the effect would have been anti‑dilutive (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
Restricted stock units and awards
3,498
1,912
2,129
1,912
Employee stock purchase plan
39
33
—
77
Common stock options
3,593
4,529
3,593
4,529
7,130
6,474
5,722
6,518
Note 18 - Subsequent Event
On November 3, 2020, the Company entered into a lease amendment related to its Longmont, Colorado facilities. The agreement included lease modifications that extended the lease term on the Company's existing premises and added a new right-of-use asset consisting of additional expansion premises. The lease, as modified, includes a minimum lease term of 90 months. The lease modifications together resulted in increases to the Company's balance sheet of approximately $1.1 million each in right-of-use assets and lease liabilities as of the lease modification date.
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 size of our market opportunity; our ability to develop new technology, designs and applications for our lasers; the implementation of our business model and strategic plans, including estimates regarding future sales, revenues, expenses, acquisitions, investments, capital requirements and stock performance; our future financial performance; fluctuations in our quarterly results of operations and other operating measures, particularly as a result of seasonality; the Chinese regulatory regime for our products and services; the adoption of our products or lasers generally and the growth of the laser market broadly and within specific industries; our utilization of vertical integration; our ability to adequately protect our intellectual property rights; the impact on our sales and operations of public health crises in China, the United States or internationally, including the current COVID-19 pandemic and our response to it; the effect on our business of litigation to which we are or may become a party; our ability to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud; future macroeconomic conditions and the effect of trade restrictions and new or increased tariffs on our products; the sufficiency of our existing liquidity sources to meet our cash needs; and our ability to sustain and manage growth in our business.
You should refer to the "Risk Factors" section of this report and those risk factors discussed in our other Securities and Exchange Commission filings 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., headquartered in Vancouver, Washington, is a leading provider of high‑power semiconductor and fiber lasers. Revolutionizing laser technology, we are making the impossible possible. We design, develop and manufacture the critical elements of our lasers, and we believe our vertically integrated business model enables us to rapidly introduce innovative products, control our costs and protect our intellectual property.
In July 2020, we acquired OPI Photonics S.r.l. (OPI), an Italian limited liability company. Located in Turin, Italy, OPI develops high power multi-emitter laser diode sources and innovative devices for kilowatt fiber laser beam management, including beam collimation, coupling and switching. In November 2019, we acquired Nutronics, Inc. (Nutronics), based in Longmont, Colorado, a leading developer of coherently combined lasers and beam control systems (BCS) for high-energy laser (HEL) systems serving the defense market. Our consolidated financial results for the three and nine months ended September 30, 2020 include the results of OPI and Nutronics, and therefore may not be directly comparable to the corresponding period of 2019, which does not include the results of OPI and Nutronics.
Since the acquisition of Nutronics, 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 optical fibers are included in the Laser Products segment, while revenue earned from research and development contracts are included in the Advanced Development segment.
Revenues increased to $157.1 million in the nine months ended September 30, 2020 compared to $133.7 million in the same period of 2019 as a result of higher revenue from the Aerospace and Defense market, including the acquisition of Nutronics, offset partially by lower revenues from the Microfabrication market. We generated a net loss of $16.4 million for the nine months ended September 30, 2020 as compared to a net loss of $2.2 million for the same period of 2019. The higher net loss in 2020 was driven by an increase in stock-based compensation, amortization of intangible assets from the Nutronics acquisition, and a decrease in gross margins on product sales, offset partially by higher revenue.
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. COVID-19 continues to spread throughout the United States and the world, including in geographies in which we and our customers operate. Our first priority is the health and safety of our employees and our communities. As of the date of this report, all our U.S. operating locations have been deemed essential and all of our global manufacturing facilities are fully operational. Our Shanghai manufacturing facility was closed for an additional week following the Chinese New Year, due to COVID-19, but has since remained open. All of our facilities have implemented a variety of policies and procedures, including additional cleaning, social distancing, wearing masks, staggered shifts and prohibiting or significantly restricting on-site visitors, to minimize the risk to our employees.
The impact from the rapidly changing U.S. and global market and economic conditions due to the COVID-19 pandemic is uncertain, with disruptions to the business of our customers and suppliers, which may materially adversely impact our business, operations, demand for our products and coincidentally our consolidated results of operations and financial condition in the future. In response to the global pandemic, many of our non-manufacturing personnel outside of China have been primarily working from home since March 2020. While we have not incurred significant disruptions to our manufacturing or to our supply chain thus far from the COVID-19 pandemic, we may experience decreased demand from certain customers. We are unable to accurately predict the impact COVID-19 will have due to numerous uncertainties, including the severity of the disease, the duration of the pandemic, potential resurgence of outbreaks in locations where outbreaks have previously been contained, actions that may be taken by governmental authorities, the impact to our customers’ and suppliers’ businesses and other factors identified in the “Risk Factors” section of this report. We are continuing to evaluate closely the nature and extent of the impact to our business, consolidated results of operations, and financial condition.
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.
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. However, recent ASP pressure has been more pronounced, and as a result, we have only been able to partially offset the impact of the lower selling prices. Certain of our competitors have continued to reduce the price of their fiber lasers sold in the China Industrial market. Although we anticipate further increases in product volumes and the continued introduction of new and higher value products, we expect further ASP reduction that 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 and fiber laser 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
Our 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.
Given the fixed nature of our facilities and equipment costs, we expect gross margin to increase as revenues and volumes increase. Historically, gross margins have fluctuated from period to period depending on product mix and the level of capacity utilization. However, over the last 18 - 24 months, gross margins have been negatively affected by increased tariff costs as a result of the trade war between the United States and China. So long as such increased tariff costs remain in place or increase further, our gross margins may continue to decline unless we can sufficiently increase our prices to offset those costs.
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:
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
Revenue:
Products
82.8
%
100.0
%
84.8
%
100.0
%
Development
17.2
—
15.2
—
Total revenue
100.0
100.0
100.0
100.0
Cost of revenue:
Products
56.1
70.4
60.6
68.3
Development
16.1
—
14.1
—
Total cost of revenue
72.2
70.4
74.7
68.3
Gross profit
27.8
29.6
25.3
31.7
Operating expenses:
Research and development
18.0
14.6
18.6
14.5
Sales, general, and administrative
16.2
16.6
17.4
17.9
Total operating expenses
34.2
31.2
36.0
32.4
Loss from operations
(6.4)
(1.6)
(10.7)
(0.7)
Other income (expense):
Interest income (expense), net
(0.2)
1.5
0.1
1.6
Other income, net
0.8
0.2
—
—
Income (loss) before income taxes
(5.8)
0.1
(10.6)
0.9
Income tax expense (benefit)
(2.4)
1.9
(0.2)
2.5
Net loss
(3.4)
%
(1.8)
%
(10.4)
%
(1.6)
%
Revenues by Segment
Our revenues by segment were as follows for the periods presented (dollars in thousands):
The increase in Laser Products revenue for the three months ended September 30, 2020, compared to the same period of 2019, was driven by higher revenue from the Aerospace and Defense market and the Industrial market. The decrease in Laser Product revenue for the nine months ended September 30, 2020, compared to the same period of 2019, was not significant, as decreased revenue from the Microfabrication market was partially offset by increased revenue from the Aerospace and Defense market. Prior to the acquisition of Nutronics in November 2019, we operated only in the Laser Products segment. The Laser Products segment for the three and nine months ended September 30, 2019 includes approximately $1.4 million and $3.8 million, respectively, of revenue earned from non-Nutronics research and development contracts.
Revenues by End Market
Our revenues by end market were as follows for the periods presented (dollars in thousands):
Three Months Ended September 30,
Change
2020
% of Revenue
2019
% of Revenue
$
%
Industrial
$
21,880
35.4
%
$
18,977
43.3
%
$
2,903
15.3
%
Microfabrication
14,052
22.8
$
13,280
30.3
772
5.8
Aerospace and Defense
25,800
41.8
$
11,557
26.4
14,243
123.2
$
61,732
100.0
%
$
43,814
100.0
%
$
17,918
40.9
%
Nine Months Ended September 30,
Change
2020
% of Revenue
2019
% of Revenue
$
%
Industrial
$
60,500
38.5
%
$
58,021
43.4
%
$
2,479
4.3
%
Microfabrication
38,771
24.7
45,907
34.3
(7,136)
(15.5)
Aerospace and Defense
57,814
36.8
29,795
22.3
28,019
94.0
$
157,085
100.0
%
$
133,723
100.0
%
$
23,362
17.5
%
The increase in revenue from the Industrial market for the three and nine months ended September 30, 2020, compared to the same periods of 2019, was driven by an increase in unit sales and change in sales mix toward high-power fiber lasers. The increase in revenue from the Microfabrication market for the three months ended September 30, 2020, compared to the same period of 2019, was driven by a net increase in unit sales, while the decrease in Microfabrication revenue for the nine months ended September 30, 2020, compared to the same period of 2019, was due to lower unit sales to customers for consumer electronics and semiconductors. The increase in revenue from the Aerospace and Defense market for the three and nine months ended September 30, 2020, compared to the same periods of 2019, was primarily attributable to the acquisition of Nutronics, and an increase in unit sales to new and existing customers for defense applications.
Our revenues by geographic region were as follows for the periods presented (dollars in thousands):
Three Months Ended September 30,
Change
2020
% of Revenue
2019
% of Revenue
$
%
North America
$
31,384
50.8
%
$
16,382
37.4
%
$
15,002
91.6
%
China
19,186
31.1
17,397
39.7
1,789
10.3
Rest of World
11,162
18.1
10,035
22.9
1,127
11.2
$
61,732
100.0
%
43,814
100.0
%
$
17,918
40.9
%
Nine Months Ended September 30,
Change
2020
% of Revenue
2019
% of Revenue
$
%
North America
$
72,924
46.4
%
$
50,294
37.6
%
$
22,630
45.0
%
China
52,723
33.6
49,251
36.8
3,472
7.0
Rest of World
31,438
20.0
34,178
25.6
(2,740)
(8.0)
$
157,085
100.0
%
$
133,723
100.0
%
$
23,362
17.5
%
Geographic revenue information is based on the location to which we ship our products. The increase in North America revenue for the three and nine months ended September 30, 2020 compared to the same periods of 2019 was primarily driven by the acquisition of Nutronics and increased sales in the Aerospace and Defense market, partially offset by decreased sales in the Microfabrication market on a year-to-date basis. The increase in China revenue for the three and nine months ended September 30, 2020 compared to the same periods of 2019 was primarily due to increased sales in the Industrial market. The increase in Rest of World revenue for the three months ended September 30, 2020, compared to the same period of 2019, was due to increased sales in the Microfabrication market, while the decrease in Rest of World revenue for the nine months ended September 30, 2020, compared to the same period of 2019, was driven by lower sales in all markets.
Cost of Revenues and Gross Margin
Cost of revenues consists primarily of manufacturing materials, payroll, shipping and handling costs, tariffs and manufacturing-related overhead. We order materials and supplies based on backlog and forecasted customer orders. We expense all warranty costs and inventory provisions as cost of revenues.
Our gross profit and gross margin were as follows for the periods presented (dollars in thousands):
Three Months Ended September 30,
Change
Laser Products
Advanced Development
Corporate and Other
2020
2019
$
%
Gross profit
$
16,977
$
688
$
(505)
$
17,160
$
12,962
$
4,198
32.4
%
Gross margin
33.2
%
6.5
%
NM
27.8
%
29.6
%
—
(1.8)
%
Nine Months Ended September 30,
Change
Laser Products
Advanced Development
Corporate and Other
2020
2019
$
%
Gross profit
$
39,198
$
1,708
$
(1,189)
$
39,717
$
42,347
$
(2,630)
(6.2)
%
Gross margin
29.4
%
7.1
%
NM
25.3
%
31.7
%
—
(6.4)
%
The increase in Laser Products gross margin for the three months ended September 30, 2020, compared to the same period of 2019, was driven primarily by product cost improvements, higher production volume and factory utilization, and changes in sales mix. The decrease in Laser Products gross margin for the nine months ended September 30, 2020, compared to the same period of 2019, was primarily due to overall price reductions in the Industrial market and increased reserve charges, offset partially by product cost improvements and changes in sales mix. Since we operated only in the Laser Products segment prior to the acquisition of Nutronics in 2019, no segment breakout is presented for the comparative periods in 2019.
Our operating expenses were as follows for the periods presented (dollars in thousands):
Research and Development
Three Months Ended September 30,
Change
2020
2019
$
%
Research and development
$
11,126
$
6,402
$
4,724
73.8
%
Nine Months Ended September 30,
Change
2020
2019
$
%
Research and development
$
29,136
$
19,318
$
9,818
50.8
%
The increase in research and development expense for the three and nine months ended September 30, 2020, compared to the same periods in 2019, was primarily due to increases in stock-based compensation of $2.1 million and $4.9 million, respectively; increases in purchased intangible amortization from the Nutronics acquisition of $0.7 million and $2.0 million, respectively; and increased project-related costs to support our development efforts.
Sales, General and Administrative
Three Months Ended September 30,
Change
2020
2019
$
%
Sales, general, and administrative
$
10,010
$
7,256
$
2,754
38.0
%
Nine Months Ended September 30,
Change
2020
2019
$
%
Sales, general, and administrative
$
27,343
$
23,972
$
3,371
14.1
%
The increase in sales, general and administrative expense for the three and nine months ended September 30, 2020, compared to the same periods in 2019 was primarily due to increases in stock-based compensation of $3.3 million and $5.8 million, respectively, offset partially by decreases in marketing costs, travel and entertainment, and professional service fees.
Interest Income (Expense), net
Three Months Ended September 30,
Change
2020
2019
$
%
Interest income (expense), net
$
(96)
$
665
$
(761)
(114.4)%
Nine Months Ended September 30,
Change
2020
2019
$
%
Interest income (expense), net
$
122
$
2,155
$
(2,033)
(94.3)%
The decrease in interest income (expense), net, for the three and nine months ended September 30, 2020, compared to the same periods in 2019 was primarily attributable to lower balances in our money market funds coupled with a decrease in the market rates on those funds.
The changes in other income, net for the three and nine months ended September 30, 2020, compared to the same periods in 2019 was primarily attributable to changes in net realized and unrealized foreign exchange transactions resulting from currency rate fluctuations.
Income Tax Expense
Three Months Ended September 30,
Change
2020
2019
$
%
Income tax expense (benefit)
$
(1,485)
$
837
$
(2,322)
(277.4)
%
Nine Months Ended September 30,
Change
2020
2019
$
%
Income tax expense (benefit)
$
(162)
$
3,383
$
(3,545)
(104.8)
%
We record income tax expense for taxes in our foreign jurisdictions including Finland and Korea. We also record tax expense for uncertain tax positions taken and associated penalties and taxes. 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 U.S. and China, we continue to maintain a full valuation allowance in both jurisdictions as of September 30, 2020.
The decrease in income tax expense for the three and nine months ended September 30, 2020, compared to the same periods in 2019 was driven by a decrease in income from our Finland operations and a $1.7 million prior year tax benefit true-up related to purchase accounting for Nutronics. Our tax expense is dependent on the geographic mix of earnings and primarily related to our foreign operations.
Liquidity and Capital Resources
We had cash and cash equivalents of $110.2 million and $117.3 million as of September 30, 2020 and December 31, 2019, respectively.
For the nine months ended September 30, 2020, our principal uses of liquidity were to acquire a commercial property in Camas, Washington, and fund our working capital needs. Our principal sources of liquidity for the nine months ended September 30, 2020 included cash flows from operations. In addition, $15 million of proceeds was drawn from our revolving line of credit in the first quarter of 2020 and repaid in full during the third quarter of 2020.
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. However, we may need to raise additional capital to expand the commercialization of our products, fund our operations and further our research and development activities. 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,
2020
2019
Net cash provided by (used in) operating activities
$
14,694
$
(1,894)
Net cash used in investing activities
(20,280)
(9,988)
Net cash provided by (used in) financing activities
(1,638)
1,238
Effect of exchange rate changes on cash
373
29
Net decrease in cash
$
(6,851)
$
(10,615)
Net Cash Provided by (Used in) Operating Activities
During the nine months ended September 30, 2020, net cash provided by operating activities was $14.7 million, which was primarily driven by $16.4 million of net loss reported for the period, and non‑cash adjustments of $28.7 million related to depreciation and amortization, stock-based compensation, and other items. These items were partially offset by increases of $6.4 million in inventory and $10.6 million in accounts payable. The increase in inventory supported new product introductions, decreased customer lead times and increased safety stock. The increase in accounts payable was primarily driven by timing of vendor payments.
During the nine months ended September 30, 2019, net cash used in operating activities was $1.9 million, which was driven by $2.2 million of net loss reported in the period, and non-cash adjustments of $12.2 million related to depreciation and amortization, stock-based compensation, and other items. These items were offset by increases of $2.8 million in accounts receivable, $11.1 million in inventory, and $3.3 million in accounts payable. The reasons for the increases were as follows: in accounts receivable, due to the timing of sales and customer collections; in inventory, primarily to support new product introductions; and in accounts payable, due to timing of vendor payments.
Net Cash Used in Investing Activities
During the nine months ended September 30, 2020, net cash used in investing activities was $20.3 million, primarily resulting from $19.4 million of capital expenditures related to the acquisition of commercial property and other investments in manufacturing equipment for our worldwide operations.
During the nine months ended September 30, 2019, net cash used in investing activities was $10.0 million, which was primarily due to capital expenditures related to investments in manufacturing equipment in our worldwide operations.
Net Cash Provided by (Used in) Financing Activities
During the nine months ended September 30, 2020, net cash used in financing activities was $1.6 million, which was primarily driven by $3.3 million of withholding tax payments related to vesting of restricted stock awards, offset by $1.8 million of proceeds from stock option exercises and employee stock program purchases. In addition, the $15.0 million in proceeds from our revolving line of credit drawn in the first quarter of 2020 was paid in full during the third quarter of 2020.
During the nine months ended September 30, 2019, net cash provided by financing activities was $1.2 million, which was primarily driven by $1.8 million of proceeds from stock option exercises and employee stock plan purchases, partially offset by $0.5 million of withholding tax payments related to vesting of restricted stock awards.
Credit Facilities
We have a $40.0 million revolving line of credit with Pacific Western Bank which is secured by our assets and expires in September 2021. Interest on the line of credit is based primarily on the London Interbank Offered Rate (LIBOR), or an alternative rate such as the Prime rate, plus or minus, respectively, a margin based on certain liquidity levels. The loan agreement contains restrictive and financial covenants and bears an unused credit fee of 0.20% on an annualized basis. As of September 30, 2020, no amounts were outstanding under the line of credit, and we were in compliance with all covenants under the loan agreement.
For the nine months ended September 30, 2020, our contractual obligations increased by approximately $11.7 million for operating leases and approximately $1.4 million for the earn-out and hold-back amounts related to the acquisition of OPI. There have been no other material changes to our significant contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
Off-Balance Sheet Arrangements
Since inception, we have not had any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for another contractually narrow or limited purpose.
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to 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.
Recent Accounting Pronouncements
See Note 1 to Consolidated Financial Statements.
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, 2019. Our exposure to market risk has not changed materially since December 31, 2019.
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, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We acquired OPI Photonics S.r.l. (OPI) on July 30, 2020 and Nutronics, Inc. (Nutronics) on November 14, 2019, and have not yet completed the process of integrating the acquired businesses' internal controls over financial reporting into our overall internal controls over financial reporting processes.
Inherent Limitation on the Effectiveness of Internal Control
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their
costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 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.
PART II
ITEM 1. LEGAL PROCEEDINGS
We may, from time to time, be party to litigation and subject to claims incident to the ordinary course of business. As our company matures, we may become party to an increasing number of litigation matters and claims. The outcome of litigation and claims cannot be predicted with certainty, and the resolution of these matters could materially adversely affect our business, financial condition, results of operations and growth prospects.
There have been no material changes to the legal proceedings disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
ITEM 1A. RISK FACTORS
You should carefully consider the following risk factors, in addition to the other information contained in this report, including the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. This report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.
With the exception of the risk factors identified below, 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, 2019.
Risks Related to our Business and Industry
Our operations are vulnerable to the impact of COVID-19 and other public health crises, which have disrupted and likely will continue to disrupt our manufacturing and supply chain and adversely affect our business and operating results.
We are vulnerable to the impact of COVID-19 and other public health crises. The impact of COVID-19, including disruptions to our business, impact on end-market demand, restrictions on individual and business activities, and global liquidity concerns, has created significant volatility in the macro-economic environment and led to reduced economic activity. There have been material actions taken by global government authorities to contain and slow the spread of COVID-19, including travel bans, quarantines, and stay-at-home orders to restrict activities for individuals and businesses. The duration of many stay-at-home orders, and the conditions and timing under which many restrictions will be lifted or reinstated, are unknown.
In response to the global pandemic, many of our non-manufacturing personnel outside of China have been working from home since March 2020. Our global manufacturing operations, including our U.S. facilities located in Vancouver and Camas, Washington, Hillsboro, Oregon, and Longmont, Colorado have been designated as essential businesses and therefore continue to operate. Our facility in Lohja, Finland also continues to operate. Our Shanghai manufacturing facility was closed for an additional one week following the Chinese New Year, due to COVID-19, but has since remained open. In the best interest of our employees and regions in which our teams operate, we have implemented significant preventative measures to ensure the health and safety of our employees and the communities in which we operate.
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, impacts on our suppliers and customers, the demand for our products, and whether the pandemic leads to recessionary conditions in any of our key markets. Additionally, our supply and distribution chains may be disrupted or their operations discontinued permanently. As such, the ultimate impact on our financial condition and results of operations cannot be determined at this time. As long as the COVID-19 pandemic continues, our business, financial condition and results of operations may be adversely affected.
The COVID-19 pandemic may also intensify the risks described in the other risk factors disclosed in this report and our other Securities and Exchange Commission filings.
We have substantial sales and business operations in China, which exposes us to risks inherent in doing business there.
Our business operations in China and our sales to Chinese customers are critical to our success. As of September 30, 2020, we had approximately 580 full-time employees at our Shanghai facility where we have high-volume manufacturing, fiber laser assembly and sales operations. Moreover, approximately 34% and 37% of our revenues were derived from China for the nine months ended September 30, 2020 and 2019, respectively. As a result, downturns in the Chinese economy could materially adversely affect our results of operations. The Chinese economy differs from the economies of other developed countries in many respects, including the level of government involvement, level of development, growth rate and control of foreign exchange and allocation of resources. The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Despite reforms, the government continues to exercise significant control over China's economic growth by way of the allocation of resources, control over foreign currency-denominated obligations and monetary policy and provision of preferential treatment to particular industries or companies. We cannot predict the future economic policies of the Chinese government or their effect on the regional or global economy and we cannot predict other governments' economic policies toward China. For example, the United States and China have imposed a number of tariffs and other restrictions on items imported or exported between the United States and China, and could impose additional tariffs or other trade restrictions. These or other events may lead to a significant reduction in demand for our products, which could materially adversely affect our results of operations.
The political, legal and regulatory climate in China, both nationally and regionally, is fluid and unpredictable, and operating in China exposes us to political and legal risks. Our ability to operate in China may be materially adversely affected by changes in Chinese laws and regulations such as those related to, among other things, taxation, import and export tariffs or other trade restrictions, environmental regulations, land use rights, intellectual property, currency controls, network security, privacy, employee benefits and overtime policies and other matters. Our operations in China are subject to numerous laws, regulations, rules and specifications relating to human health and safety and the environment. Applicable laws, rules and regulations often lack clarity and it is difficult to predict how any of these laws, rules and regulations will be enforced. If we or our employees or agents violate, or are alleged to have violated, any of these laws, rules and regulations, we or our employees could be subject to civil or criminal penalties, damages or fines, or our employees or agents could be detained, imprisoned or prevented from entering China, any of which could materially adversely affect our results of operations.
In addition, our business in China is subject to audit and financial risks as a result of varying accounting, auditing and financial reporting standards, accountability and protections, including risks related to the lack of access by the Public Company Accounting Oversight Board (United States) (PCAOB) to inspect PCAOB-registered accounting firms.
A breach of our information technology and security systems could materially adversely affect our business.
We use information technology and security systems to maintain our facility's physical security and to protect proprietary and confidential information, including that of our customers, suppliers and employees. Accidental or willful security breaches or other unauthorized access to our facilities or information systems, or viruses, loggers, or other malfeasant code in our data or software, could compromise this information. The consequences of such loss and possible misuse of our proprietary and confidential information could include, among other things, unfavorable publicity, damage to our reputation, difficulty marketing our products, customer allegations of breach-of-contract, litigation by affected parties and possible financial liabilities for damages, any of which could materially adversely affect our business, financial condition, reputation and relationships with customers and partners. We also rely on a number of third-party "cloud-based" providers of corporate infrastructure services relating to, among other things, human resources, electronic communication services and some financial functions, and we are therefore dependent on the security systems of these providers. Any security breaches or other unauthorized access to our service-providers' systems or viruses, loggers or other malfeasant code in their data or software could expose us to information loss and misappropriation of confidential information. Because the techniques used to obtain unauthorized access to or sabotage security systems change frequently and are often not recognized until after an attack, we may be unable to anticipate the techniques or implement adequate preventative measures, thereby exposing us to material adverse effects on our business, financial condition, results of operations and growth prospects. Moreover, the increase in remote working during the COVID-19 pandemic may also result in heightened privacy, data security and fraud risks, and our understanding of applicable legal and regulatory requirements, as well as the latest guidance from regulatory authorities in connection with the COVID-19 pandemic, may be subject to legal or regulatory challenge, particularly as regulatory guidance evolves in response to future developments.
We are subject to regulatory compliance requirements, including Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to maintain an effective system of internal controls we may not be able to accurately report our consolidated financial results or prevent fraud.
We are subject to the SEC's rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal controls over financial reporting. However, our independent registered public accounting firm will not be required to report on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until our annual report on Form 10-K for the fiscal year ending December 31, 2020. Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud.
Our testing of key controls over financial reporting, or the subsequent testing by our independent registered public accounting firm required under the Sarbanes-Oxley Act for the fiscal year ending December 31, 2020, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock would likely decline and we could be subject to lawsuits, sanctions or investigations by regulatory authorities, which would require additional financial and management resources.
In addition, the Sarbanes-Oxley Act requirements may be modified, supplemented or amended from time to time. Implementing the changes may take significant time and may require additional employee compliance training. We or our independent registered public accounting firm may discover internal controls that need improvement. A discovery of a material weakness, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price. Any inability to provide reliable financial reports or prevent fraud could harm our business. We cannot assure you that we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management or our independent registered public accounting firm will conclude that our internal controls are effective in future periods. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated operating results and harm our reputation.
In addition, we are subject to the reporting requirements of the Exchange Act, the listing requirements of the Nasdaq Stock Market, and other applicable securities rules and regulations. As a consequence, and particularly after we cease to be an "emerging growth company" at the end of the fiscal year ending December 31, 2020, we expect to continue to incur legal, accounting and other expenses. We also anticipate that we will continue to incur costs associated with corporate governance requirements, including requirements of the SEC and the Nasdaq Stock Market. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board of Directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
Our growth is dependent, in part, on the successful integration of acquired businesses. Future acquisitions could result in operating difficulties and may materially adversely affect our business, financial condition, results of operations and growth prospects.
On November 14, 2019, we acquired Nutronics, Inc. (Nutronics), and on July 30, 2020, we acquired OPI Photonics S.r.l. (OPI). The successful integration of Nutronics and OPI depends on the realization of anticipated efficiencies and synergies. If we are unable to successfully integrate Nutronics and OPI, or realize growth, synergies and efficiencies that were expected when determining the respective transaction consideration, then goodwill and other intangible assets acquired may be considered impaired and result in an adverse impact on our business, financial condition, results of operations and growth prospects.
We have evaluated, and expect to continue evaluating, other potential strategic transactions, and we may pursue one or more transactions, including acquisitions. We have limited experience executing acquisitions. Integrating an acquired company, business or technology may create unforeseen operating difficulties and expenditures. If we fail to successfully integrate our acquisitions, or the people or technologies associated with those acquisitions, into our company, the results of operations of the combined company could be adversely affected. Any integration process will require significant time and resources, require significant attention from management, and disrupt the ordinary functioning of our business, and we may not be able to manage the process successfully, which could adversely affect our business, results of operations, and financial condition.
We may have to pay cash, incur debt, or issue equity securities to pay for any such acquisition, each of which could affect our financial condition or the value of our capital stock. The sale of equity to finance any such acquisitions could result in dilution to our stockholders. If we incur more debt, it would result in increased fixed obligations and could also subject us to covenants or other restrictions that would impede our ability to flexibly operate our business.
We are an "emerging growth company," and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups, or JOBS, Act enacted in April 2012, and, until we are no longer an "emerging growth company" at the end of the fiscal year ending December 31, 2020, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to "emerging growth companies" For example, as an "emerging growth company" we have not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002, or Section 404, have been subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Until we are no longer an "emerging growth company," if some investors find our common stock less attractive as a result of any choices to reduce disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.
As an "emerging growth company," the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors.
Delaware and Washington law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our common stock.
Anti-takeover provisions in our charter documents and under Delaware and Washington law could make an acquisition of us difficult, limit attempts by our stockholders to replace or remove our current management or Board of Directors and adversely affect our stock price.
Provisions of our amended and restated certificate of incorporation and amended and restated bylaws may delay or discourage transactions involving an actual or potential change in our control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect the price of our stock. Among other things, our amended and restated certificate of incorporation and amended and restated bylaws:
•permit the Board of Directors to issue up to 5 million shares of preferred stock, with any rights, preferences and privileges as they may designate;
•provide that the authorized number of directors may be changed only by resolution of the Board of Directors;
•provide that all vacancies on our Board of Directors may only be filled by our Board of Directors and not by stockholders;
•divide the Board of Directors into three classes;
•provide that a director may only be removed from the Board of Directors by the stockholders for cause;
•require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be taken by written consent;
•provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner and meet specific requirements as to the form and content of a stockholder's notice;
•prevent cumulative voting rights (therefore allowing the holders of a plurality of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose);
•provide that special meetings of our stockholders may be called only by the chairman of the board, our chief executive officer (or president, in the absence of a chief executive officer) or by the Board of Directors; and
•provide that stockholders will be permitted to amend our amended and restated certificate of incorporation, and until December 31, 2020, our amended and restated bylaws only upon receiving at least two-thirds of the total votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any "interested" stockholder for a period of three years following the date on which the stockholder became an "interested" stockholder. Likewise, because our principal executive offices are located in Washington, the anti-takeover provisions of the Washington Business Corporation Act may apply to us under certain circumstances now or in the future. These provisions prohibit a "target corporation" from engaging in any of a broad range of business combinations with any stockholder constituting an "acquiring person" for a period of five years following the date on which the stockholder became an "acquiring person."
Our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees to us or our stockholders, (iii) any action arising pursuant to any provision of the Delaware General Corporation Law, or our amended and restated certificate of incorporation or our amended and restated bylaws or (iv) any other action asserting a claim that is governed by the internal affairs doctrine shall be a state or federal court located within the State of Delaware, in all cases subject to the court having jurisdiction over indispensable parties named as defendants.
Our amended and restated bylaws also provide that the federal district courts of the United States of America are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. On December 19, 2018, the Delaware Court of Chancery issued a decision in Matthew Sciabacucchi v. Matthew B. Salzberg et al., C.A. No. 2017-0931-JTL (Del. Ch.), finding that provisions such as the federal forum provision are not valid under Delaware law. In light of this decision of the Delaware Court of Chancery, we previously disclosed that we do not intend to enforce the federal forum provision in our amended and restated bylaws unless and until such time there is a final determination by the Delaware Supreme Court regarding the validity of such provisions. On March 18, 2020, the Delaware Supreme Court issued its decision in Salzburg et al. v. Matthew Sciabacucchi, No. 346, 2019 (Del.), which reversed the Delaware Court of Chancery’s decision. The Delaware Supreme Court found that provisions such as the federal forum provision are facially valid under Delaware law. In light of this decision finally resolving the facial validity of such provisions, we intend to enforce the federal forum provision in our bylaws.
Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to this provision. These exclusive-forum provisions may limit a stockholder's ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find either exclusive-forum provision in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our results of operations.
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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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.
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 6, 2020
By:
/s/ SCOTT KEENEY
Date
Scott Keeney
President and Chief Executive Officer (Principal Executive Officer)
November 6, 2020
By:
/s/ RAN BAREKET
Date
Ran Bareket
Chief Financial Officer (Principal Accounting and Financial Officer)
