nLIGHT(LASR) - 2019 Q2 - Quarterly Report

Part I. Financial Information Item 1. Unaudited Interim Financial Statements Unaudited interim financials for Q2 2019 indicate a revenue decline, a shift to net loss, and an immaterial impact from ASC 606 adoption Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $142,661 | $149,478 | | Inventory | $42,285 | $35,329 | | Total current assets | $219,805 | $218,621 | | Total assets | $255,589 | $250,130 | | Liabilities & Equity | | | | Total current liabilities | $24,713 | $23,587 | | Total liabilities | $33,652 | $32,347 | | Total stockholders' equity | $221,937 | $217,783 | - Total assets increased to $255.6 million as of June 30, 2019, from $250.1 million at the end of 2018, primarily driven by an increase in inventory and property and equipment[9] - Cash and cash equivalents decreased by $6.8 million from December 31, 2018, to $142.7 million as of June 30, 2019[9] Consolidated Statements of Operations Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $48,048 | $51,705 | $89,909 | $94,172 | | Gross Profit | $15,871 | $17,679 | $29,385 | $32,408 | | Income (loss) from operations | $805 | $5,549 | $(247) | $9,757 | | Net income (loss) | $(155) | $4,653 | $(1,390) | $7,569 | | Net income (loss) per share, diluted | $0.00 | $0.11 | $(0.04) | $0.17 | - For the six months ended June 30, 2019, revenues decreased by 4.5% year-over-year, and the company reported a net loss of $1.4 million compared to a net income of $7.6 million in the prior-year period[11] - Operating expenses for the six months ended June 30, 2019, increased to $29.6 million from $22.7 million in the same period of 2018, primarily due to higher R&D and SG&A costs[11] Consolidated Statements of Cash Flows Consolidated Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,183) | $(2,345) | | Net cash used in investing activities | $(6,916) | $(5,781) | | Net cash provided by financing activities | $1,147 | $101,535 | | Net increase (decrease) in cash | $(6,817) | $93,038 | - Net cash used in operating activities was $1.2 million for the first six months of 2019, an improvement from a $2.3 million use in the same period of 2018[22] - Cash used in investing activities increased to $6.9 million, primarily for purchases of property and equipment[22] - Financing activities in 2018 were dominated by $101.5 million in net proceeds from the company's public offering, compared to $1.1 million provided by financing activities in 2019 from stock plan-related proceeds[22] Notes to Consolidated Financial Statements - The company adopted ASC 606 "Revenue from Contracts with Customers" on January 1, 2019, with an immaterial impact on its financial statements[48] - For the three months ended June 30, 2019, Quick Laser Technology Co., Ltd. and Raytheon Company each accounted for 10% of revenues; for the six months ended June 30, 2019, only Raytheon accounted for 10% of revenues[30] Revenue Disaggregation by End Market (Six Months Ended June 30, 2019, in thousands) | End Market | Revenue | % of Total | | :--- | :--- | :--- | | Industrial | $39,044 | 43.4% | | Microfabrication | $32,627 | 36.3% | | Aerospace and Defense | $18,238 | 20.3% | | Total | $89,909 | 100.0% | Revenue Disaggregation by Geography (Six Months Ended June 30, 2019, in thousands) | Geography | Revenue | % of Total | | :--- | :--- | :--- | | North America | $33,912 | 37.7% | | China | $31,854 | 35.4% | | Rest of World | $24,143 | 26.9% | | Total | $89,909 | 100.0% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 4.5% revenue decline to China industrial market price reductions and lower microfabrication sales, leading to gross margin contraction and a net loss, despite strong liquidity Overview - nLIGHT is a provider of high-power semiconductor and fiber lasers, operating as a single segment across three primary end markets: industrial, microfabrication, and aerospace and defense[69][70] - The company generated a net loss of $1.4 million for the first six months of 2019, a significant decrease from the $7.6 million net income in the same period of 2018, primarily due to lower revenues from the industrial market in China and increased operating expenses[70] Results of Operations Revenue by End Market (Six Months Ended June 30, in thousands) | End Market | 2019 | 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Industrial | $39,044 | $44,397 | $(5,353) | (12.1)% | | Microfabrication | $32,627 | $35,115 | $(2,488) | (7.1)% | | Aerospace and Defense | $18,238 | $14,660 | $3,578 | 24.4% | | Total | $89,909 | $94,172 | $(4,263) | (4.5)% | Revenue by Geographic Region (Six Months Ended June 30, in thousands) | Geography | 2019 | 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | North America | $33,912 | $32,552 | $1,360 | 4.2% | | China | $31,854 | $38,793 | $(6,939) | (17.9)% | | Rest of World | $24,143 | $22,827 | $1,316 | 5.8% | | Total | $89,909 | $94,172 | $(4,263) | (4.5)% | - Gross margin for the six months ended June 30, 2019, decreased to 32.7% from 34.4% in the prior-year period, driven by price declines in the industrial market and the impact of tariff costs[84] - For the six months ended June 30, 2019, R&D expenses increased 40.7% YoY to $12.9 million, and SG&A expenses increased 24.1% YoY to $16.7 million, primarily due to higher stock-based compensation and increased headcount[85][86] Liquidity and Capital Resources - As of June 30, 2019, the company had cash and cash equivalents of $142.7 million, a decrease from $149.5 million at December 31, 2018[92] - Net cash used in operating activities for the six months ended June 30, 2019, was $1.2 million, driven by a net loss of $1.4 million and a $7.0 million increase in inventory, offset by non-cash adjustments[96] - Net cash used in investing activities was $6.9 million for the first six months of 2019, primarily for capital expenditures on manufacturing equipment and facilities[98] - Management believes existing liquidity will be sufficient to meet working capital and capital expenditure needs for at least the next 12 months[94] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's exposure to market risks, including interest rate and foreign currency fluctuations, has not materially changed since December 31, 2018 - The company's exposure to financial market risks, such as interest rate and foreign currency exchange rate changes, has not materially changed since the end of the previous fiscal year[107] Item 4. Controls and Procedures Management concluded the company's disclosure controls were effective as of June 30, 2019, with internal control changes implemented for ASC 606 adoption - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[108] - Changes were made to internal controls over financial reporting due to the implementation of the new revenue recognition standard, ASC 606, beginning January 1, 2019[109] Part II. Other Information Item 1. Legal Proceedings No material changes to legal proceedings have occurred since the 2018 Annual Report on Form 10-K disclosure - There have been no material changes to the legal proceedings as disclosed in the company's 2018 Annual Report on Form 10-K[113] Item 1A. Risk Factors The company faces significant risks from cyclical markets, intense price competition in China, customer concentration, international operations, tariffs, high fixed costs, intellectual property protection, and government contract dependency - Revenue growth has slowed, with a 4.5% decrease for the six months ended June 30, 2019, compared to the same period in 2018, indicating that recent high growth rates may not be indicative of future performance[115] - The company faces intense price competition, particularly in the China market where competitors have substantially reduced fiber laser prices, which could negatively affect near-term results[123] - A significant portion of revenue comes from international customers (62% for the first half of 2019), with substantial sales and operations in China (35% of revenue), exposing the company to economic, political, and trade policy risks, including tariffs[127][132] - The company relies on a small number of customers, with the top ten accounting for 53% of revenues in the first half of 2019[138] - The aerospace and defense market, which accounted for 20% of revenues in the first half of 2019, is highly dependent on government budgets and defense spending priorities[160] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - The exhibits filed with this report include certifications from the Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[228]