10-Q 1 nlightq2201910-q.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________
FORM 10-Q
________________________________________________________
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
 
Commission File Number 001-38462
________________________________________________________
NLIGHT, INC.
(Exact name of Registrant as specified in its charter)
________________________________________________________
Delaware
 
91-2066376
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
5408 NE 88th Street, Building E
Vancouver, Washington 98665
(Address of principal executive office, including zip code)
(360) 566-4460
 
(Registrant’s telephone number, including area code)
__________________________________________
 
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 x    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 x    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
o
Accelerated Filer
o
Non-Accelerated Filer
x
Smaller Reporting Company
o
 
 
 
 
 
 
Emerging Growth Company
x
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 x

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 share
LASR
The Nasdaq Stock Market LLC

As of August 2, 2019, the Registrant had 37,687,755 shares of common stock outstanding.
 



TABLE OF CONTENTS
 
Page
 
 





PART I - FINANCIAL INFORMATION

ITEM 1. UNAUDITED INTERIM FINANCIAL STATEMENTS

nLIGHT, Inc.
Consolidated Balance Sheets
(In thousands; unaudited)

 
June 30,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Current assets:
 
 
 
     Cash and cash equivalents
$
142,661

 
$
149,478

Accounts receivable, net of allowances of $329 and $303
30,752

 
26,528

     Inventory
42,285

 
35,329

     Prepaid expenses and other current assets
4,107

 
7,286

          Total current assets
219,805

 
218,621

Property and equipment, net of accumulated depreciation of $55,933
and $53,812
24,650

 
21,462

Intangible assets, net of accumulated amortization of $2,410 and $2,049
2,971

 
2,686

Goodwill
1,387

 
1,387

Other assets
6,776

 
5,974

          Total assets
$
255,589

 
$
250,130

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
     Accounts payable
$
13,360

 
$
12,068

     Accrued liabilities
10,693

 
10,708

     Deferred revenues
582

 
720

     Current portion of long-term debt
78

 
91

          Total current liabilities
24,713

 
23,587

Non-current income taxes payable
6,854

 
6,472

Long-term debt
17

 
18

Other long-term liabilities
2,068

 
2,270

          Total liabilities
33,652

 
32,347

Stockholders' equity:
 
 
 
Preferred stock - $0.0001 par value; 5,000 shares authorized, zero shares issued and outstanding at June 30, 2019 and December 31, 2018.
—

 
—

Common stock - $0.0001 par value; 190,000 shares authorized, 37,665 shares issued and outstanding at June 30, 2019 and 190,000 shares authorized, 36,705 shares issued and outstanding at December 31, 2018.
15

 
15

     Additional paid-in capital
329,982

 
324,656

     Accumulated other comprehensive loss
(2,100
)
 
(2,157
)
     Accumulated deficit
(105,960
)
 
(104,731
)
          Total stockholders’ equity
221,937

 
217,783

          Total liabilities and stockholders’ equity
$
255,589

 
$
250,130


See accompanying notes to consolidated financial statements.

1

nLIGHT, Inc.
Consolidated Statements of Operations
(In thousands, except per share data; unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
$
48,048

 
$
51,705

 
$
89,909

 
$
94,172

Cost of revenues
32,177

 
34,026

 
60,524

 
61,764

Gross profit
15,871

 
17,679

 
29,385

 
32,408

Operating expenses:
 
 
 
 
 
 
 
Research and development
6,494

 
4,898

 
12,916

 
9,181

Sales, general, and administrative
8,572

 
7,232

 
16,716

 
13,470

Total operating expenses
15,066

 
12,130

 
29,632

 
22,651

Income (loss) from operations
805

 
5,549

 
(247
)
 
9,757

Other income (expense):
 
 
 
 
 
 
 
Interest income (expense), net
740

 
(6
)
 
1,490

 
(225
)
Other income (expense), net
(907
)
 
(42
)
 
(87
)
 
34

Income before income taxes
638

 
5,501

 
1,156

 
9,566

Income tax expense
793

 
848

 
2,546

 
1,997

Net income (loss)
$
(155
)
 
$
4,653

 
$
(1,390
)
 
$
7,569

Less: Income allocated to participating securities
$
—

 
$
(1,499
)
 
$
—

 
$
(4,415
)
Net income (loss) attributable to common stockholders
$
(155
)
 
$
3,154

 
$
(1,390
)
 
$
3,154

Net income (loss) per share, basic
$
—

 
$
0.13

 
$
(0.04
)
 
$
0.23

Net income (loss) per share, diluted
$
—

 
$
0.11

 
$
(0.04
)
 
$
0.17

Shares used in per share calculations:
 
 
 
 
 
 
 
Basic
37,065

 
24,491

 
36,880

 
13,761

Diluted
37,065

 
29,756

 
36,880

 
18,797


See accompanying notes to consolidated financial statements.


2

nLIGHT, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands; unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
(155
)
 
$
4,653

 
$
(1,390
)
 
$
7,569

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax
317

 
(1,588
)
 
57

 
(638
)
Comprehensive income (loss)
$
162

 
$
3,065

 
$
(1,333
)
 
$
6,931


See accompanying notes to consolidated financial statements.


3


nLIGHT, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands; unaudited)

 
Three Months Ended June 30, 2019
 
Preferred stock
 
Common stock
 
Additional paid-in capital
 
Accumulated other comprehensive income (loss)
 
Accumulated deficit
 
Total stockholders' equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance, March 31, 2019
—

 
$
—

 
36,906

 
$
15

 
$
326,870

 
$
(2,417
)
 
$
(105,805
)
 
$
218,663

Net loss
—

 
—

 
—

 
—

 
—

 
—

 
(155
)
 
(155
)
Issuance of common stock pursuant to exercise of stock options
—

 
—

 
317

 
—

 
449

 
—

 
—

 
449

Issuance of common stock pursuant to vesting of restricted stock awards and units, net of stock withheld for tax
—

 
—

 
399

 
—

 
(480
)
 
—

 
—

 
(480
)
Issuance of common stock under the Employee Stock Purchase Plan
—

 
—

 
43

 
—

 
762

 
—

 
—

 
762

Stock-based compensation
—

 
—

 
—

 
—

 
2,381

 
—

 
—

 
2,381

Cumulative translation adjustment
—

 
—

 
—

 
—

 
—

 
317

 
—

 
317

Balance, June 30, 2019
—

 
$
—

 
37,665

 
$
15

 
$
329,982

 
$
(2,100
)
 
$
(105,960
)
 
$
221,937


 
Six Months Ended June 30, 2019
 
Preferred stock
 
Common stock
 
Additional paid-in capital
 
Accumulated other comprehensive income (loss)
 
Accumulated deficit
 
Total stockholders' equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
Balance, December 31, 2018
—

 
$
—

 
36,705

 
$
15

 
$
324,656

 
$
(2,157
)
 
$
(104,731
)
 
$
217,783

Net loss
—

 
—

 
—

 
—

 
—

 
—

 
(1,390
)
 
(1,390
)
Issuance of common stock pursuant to exercise of stock options
—

 
—

 
518

 
—

 
915

 
—

 
—

 
915

Issuance of common stock pursuant to vesting of restricted stock awards and units, net of stock withheld for tax
—

 
—

 
399

 
—

 
(480
)
 
—

 
—

 
(480
)
Issuance of common stock under the Employee Stock Purchase Plan
—

 
—

 
43

 
—

 
762

 
—

 
—

 
762

Stock-based compensation
—

 
—

 
—

 
—

 
4,129

 
—

 
161

 
4,290

Cumulative translation adjustment
—

 
—

 
—

 
—

 
—

 
57

 
—

 
57

Balance, June 30, 2019
—

 
$
—

 
37,665

 
$
15

 
$
329,982

 
$
(2,100
)
 
$
(105,960
)
 
$
221,937










4


 
Three Months Ended June 30, 2018
 
Convertible preferred stock
 
Common stock
 
Additional paid-in capital
 
Accumulated other comprehensive income (loss)
 
Accumulated deficit
 
Total stockholders' equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance, March 31, 2018
24,642

 
$
12

 
3,056

 
$
2

 
$
180,093

 
$
231

 
$
(115,753
)
 
$
64,585

Net income
—

 
—

 
—

 
—

 
—

 
—

 
4,653

 
4,653

Proceeds from initial public offering
—

 
—

 
6,900

 
1

 
110,399

 
—

 
—

 
110,400

Conversion of convertible preferred stock to common stock
(24,642
)
 
(12
)
 
24,642

 
12

 
—

 
—

 
—

 
—

Exercise of warrants for common stock
—

 
—

 
15

 
—

 
—

 
—

 
—

 
—

Exercise of stock options
—

 
—

 
179

 
—

 
62

 
—

 
—

 
62

Stock-based compensation
—

 
—

 
—

 
—

 
806

 
—

 
—

 
806

Deferred offering costs
—

 
—

 
—

 
—

 
(8,682
)
 
—

 
—

 
(8,682
)
Cumulative translation adjustment
—

 
—

 
—

 
—

 
—

 
(1,588
)
 
—

 
(1,588
)
Balance, June 30, 2018
—

 
$
—

 
34,792

 
$
15

 
$
282,678

 
$
(1,357
)
 
$
(111,100
)
 
$
170,236


 
Six Months Ended June 30, 2018
 
Convertible preferred stock
 
Common stock
 
Additional paid-in capital
 
Accumulated other comprehensive loss
 
Accumulated deficit
 
Total stockholders' equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance, December 31, 2017
24,642

 
$
12

 
2,979

 
$
2

 
$
180,657

 
$
(719
)
 
$
(118,669
)
 
$
61,283

Net income
—

 
—

 
—

 
—

 
—

 
—

 
7,569

 
7,569

Proceeds from initial public offering
—

 
—

 
6,900

 
1

 
110,399

 
—

 
—

 
110,400

Conversion of convertible preferred stock to common stock
(24,642
)
 
(12
)
 
24,642

 
12

 
—

 
—

 
—

 
—

Exercise of warrants for common stock
—

 
—

 
15

 
—

 
—

 
—

 
—

 
—

Exercise of stock options
—

 
—

 
256

 
—

 
123

 
—

 
—

 
123

Stock-based compensation
—

 
—

 
—

 
—

 
968

 
—

 
—

 
968

Deferred offering costs
—

 
—

 
—

 
—

 
(9,469
)
 
—

 
—

 
(9,469
)
Cumulative translation adjustment
—

 
—

 
—

 
—

 
—

 
(638
)
 
—

 
(638
)
Balance, June 30, 2018
—

 
$
—

 
34,792

 
$
15

 
$
282,678

 
$
(1,357
)
 
$
(111,100
)
 
$
170,236


See accompanying notes to consolidated financial statements.




5

nLIGHT, Inc.
Consolidated Statements of Cash Flows
(In thousands; unaudited)

 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(1,390
)
 
$
7,569

Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Depreciation
3,205

 
2,936

Amortization
1,276

 
1,182

Provision for losses on accounts receivable
33

 
183

Stock-based compensation
4,290

 
968

Loss on disposal of property and equipment
5

 
11

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(4,334
)
 
(8,711
)
Inventory
(6,987
)
 
(5,644
)
Prepaid expenses and other current assets
3,192

 
(3,458
)
Other assets
(1,800
)
 
(1,226
)
Accounts payable
1,111

 
3,539

Accrued and other long-term liabilities
(25
)
 
(736
)
Deferred revenues
(141
)
 
502

Non-current income taxes payable
382

 
540

Net cash used in operating activities
(1,183
)
 
(2,345
)
Cash flows from investing activities:
 
 
 
Purchases of property, equipment and patents
(6,916
)
 
(5,789
)
Proceeds from sale of property and equipment
—

 
8

Net cash used in investing activities
(6,916
)
 
(5,781
)
Cash flows from financing activities:
 
 
 
Principal payments on debt and capital leases
(50
)
 
(74
)
Proceeds from public offering, net of offering costs
—

 
101,486

Proceeds from employee stock plan purchases
762

 
—

Proceeds from stock option exercises
915

 
123

Tax payments related to stock award issuances
(480
)
 
—

Net cash provided by financing activities
1,147

 
101,535

Effect of exchange rate changes on cash
135

 
(371
)
Net increase (decrease) in cash and cash equivalents
(6,817
)
 
93,038

Cash and cash equivalents, beginning of period
149,478

 
36,687

Cash and cash equivalents, end of period
$
142,661

 
$
129,725

Supplemental disclosures:
 
 
 
Cash paid (received) for interest
$
(1,552
)
 
$
506

Cash paid for income taxes
1,393

 
2,119

Accrued purchases of property, equipment and patents
952

 
675

Accrued deferred offering costs
—

 
1,087


See accompanying notes to consolidated financial statements.


6

nLIGHT, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
 
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 (the "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 the 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 2018 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 revenue recognition guidance as described in Note 11, our critical accounting policies have not changed during the three and six months ended June 30, 2019 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

New Accounting Pronouncements

ASU 2018-07
The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (Topic 718), in June 2018. ASU 2018-07 simplifies the accounting for share-based payments made to nonemployees so the accounting for such payments is substantially the same as those made to employees. The Company adopted ASU 2018-07 on January 1, 2019 using the modified retrospective approach with fair value measurement of unsettled liability-classified nonemployee awards, and recorded a cumulative effect adjustment of $161 thousand to beginning retained earnings.

ASU 2016-02, ASU 2018-10 and ASU 2018-11    
The FASB issued 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 by both ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases (Topic 842): Targeted Improvements. As initially issued, the standard required lessees, upon adoption, to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. As amended, the standard allows an alternative transition method that permits entities to use its effective date as the date of initial application, and not restate comparative prior period financial information. ASU 2016-02, as amended, is effective for annual reporting periods of emerging growth companies beginning after December 15, 2019. The Company expects to implement the provisions of ASU 2016‑02, as amended, as of January 1, 2020 using the alternative modified retrospective transition method. The Company is currently evaluating the impact on its consolidated financial statements and cannot reasonably estimate the quantitative impact on its financial statements at this time. However, the Company expects the primary impact will be the recognition, on a discounted basis, of its minimum commitments under non-cancelable operating leases on its consolidated balance sheets, resulting in the recording of new ROU assets and lease obligations. In addition, the Company also expects this ASU, as amended, to have significant additional disclosure requirements.

The standard provides several optional practical expedients in transition. The Company expects to elect the package of practical expedients, which permits us to not reassess, under the new standard, our prior conclusions about lease identification, lease classification and initial direct costs. Additionally, the Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements, the latter not being applicable to nLIGHT. The new standard also provides practical expedients for an entity’s ongoing accounting. Further, the Company expects to elect the short-term lease recognition exemption as well as the practical expedient to not separate lease and non-lease components for all its leases.
 

7

Note 2 - Concentrations of Credit and Other Risks
The following customers accounted for 10% or more of our revenues for the periods presented:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Quick Laser Technology Co., Ltd.
10%
 
19%
 
—%
 
16%
Raytheon Company
10%
 
—%
 
10%
 
—%

Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of accounts receivable. As of June 30, 2019 and December 31, 2018, one customer accounted for 22% and 17% of gross accounts receivable, respectively. No other customers accounted for 10% or more of gross accounts receivable in either of these periods. 

Note 3 - Fair Value of Financial Instruments

The Company's fair value hierarchy for its financial instruments consists of cash equivalents as follows (in thousands):
 
June 30, 2019
 
Level 1
Level 2
Level 3
Total
Money market securities
$
124,510

$
—

$
—

$
124,510

Commercial paper
586

—

—

586

Total
$
125,096

$
—

$
—

$
125,096

 
December 31, 2018
 
Level 1
Level 2
Level 3
Total
Money market securities
$
123,121

$
—

$
—

$
123,121

Commercial paper
299

—

—

299

Total
$
123,420

$
—

$
—

$
123,420

There have been no other material changes to the financial instruments as previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Note 4 - Inventory
Inventory is stated at the lower of average cost and net realizable value. Inventory consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Raw materials
$
15,514

 
$
14,174

Work in process and semi-finished goods
15,772

 
12,807

Finished goods
10,999

 
8,348

 
$
42,285

 
$
35,329


8

Note 5 - Other Assets
Other assets consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Demonstration assets, net
$
1,752

 
$
1,982

Deferred tax assets, net
3,114

 
3,114

Other
1,910

 
878

 
$
6,776

 
$
5,974


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 for demo assets totaled $0.4 million and $0.5 million for the three months ended June 30, 2019 and 2018, respectively and $0.9 million and $0.9 million for the six months ended June 30, 2019 and 2018, respectively.

Note 6 - Accrued Liabilities
Accrued liabilities consist of the following (in thousands):

June 30, 2019
 
December 31, 2018
Accrued payroll and benefits
$
6,710

 
$
6,474

Product warranty, current
2,002

 
2,669

Income tax payable
486

 
258

Other accrued expenses
1,495

 
1,307

 
$
10,693

 
$
10,708

Note 7 - Product Warranties
We offer warranties on certain products and record a liability for the estimated future costs associated with warranty claims at the time revenue is recognized.  The warranty liability is based on historical experience, any specifically identified failures, and our estimate of future costs.

Product warranty liability activity for the six months ended June 30, 2019 and 2018 was as follows (in thousands):
 
Six Months Ended June 30,
 
2019
 
2018
Product warranty liability, beginning
$
4,555

 
$
4,186

Warranty charges incurred, net
(1,161
)
 
(1,335
)
Provision for warranty charges, net of adjustments
249

 
1,773

Product warranty liability, ending
$
3,643

 
$
4,624

Less: current portion of product warranty liability
(2,002
)
 
(3,480
)
Non-current portion of product warranty liability
$
1,641

 
$
1,144


9

Note 8 - 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 six months ended June 30, 2019 and 2018 differs from the U.S. statutory rate due to the U.S. valuation allowance, foreign income taxed at local statutory rates, and accrued withholding taxes. The increase in the effective tax rate for three and six months ended June 30, 2019 relative to 2018 is primarily due to decreased profitability within the U.S. entity as the Company maintains a full valuation allowance against the U.S. deferred tax assets.

In fiscal year to date 2019, the Company reported U.S. pre-tax losses, consistent with prior fiscal years to date within this decade, other than 2018. The Company has not yet been able to establish a sustained level of profitability in the U.S. or other sufficient significant positive evidence to conclude that its U.S. deferred tax assets are more likely than not to be realized. Therefore, the Company continues to maintain a valuation allowance against its U.S. deferred tax assets. It is reasonably possible that by the end of 2019, the Company will establish a sustained level of profitability in the U.S. As a result, it may reverse a significant portion of the valuation allowance recorded against its U.S. deferred tax assets. The reversal would result in an income tax benefit for the three months and the year ending December 31, 2019.
    
Note 9 - Stockholders' Equity and Stock-Based Compensation

Restricted Stock Awards and Units
Restricted stock award ("RSA") and restricted stock unit ("RSU") activity under our equity incentive plan was as follows (in thousands, except weighted average grant date fair values):
 
 
 
Number of Restricted Stock Awards
 
Weighted-Average Grant Date Fair Value
RSAs at December 31, 2018
 
115

 
$
37.15

 
Awards granted
 
340

 
18.69

 
Awards vested
 
(11
)
 
37.15

RSAs at June 30, 2019
 
444

 
$
23.02


 
 
 
Number of Restricted Stock Units
 
Weighted-Average Grant Date Fair Value
RSUs at December 31, 2018
 
557

 
$
30.31

 
Awards granted
 
1,003

 
18.95

 
Awards vested
 
(86
)
 
33.44

 
Awards forfeited
 
(12
)
 
33.41

RSUs at June 30, 2019
 
1,462

 
$
22.30


The total fair value of RSAs and RSUs vested during the six months ended June 30, 2019 was $0.4 million and $2.9 million, respectively. Awards outstanding as of June 30, 2019 include 0.5 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 six months ended June 30, 2019 (in thousands, except weighted average exercise prices):

10

 
Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value
Outstanding, December 31, 2018
5,171

 
$1.60
 
7.2
 
$83,700
Options exercised
(518
)
 
$1.77
 
 
 
 
Options canceled
(38
)
 
$3.06
 
 
 
 
Outstanding, June 30, 2019
4,615

 
$1.56
 
6.7
 
$81,400
Options exercisable at June 30, 2019
2,997

 
$1.01
 
6.2
 
$54,532
Options vested as of June 30, 2019 and expected to vest after June 30, 2019
4,615

 
$1.56
 
6.7
 
$81,400

Total intrinsic value of options exercised for the six months ended June 30, 2019 and 2018 was $10.4 million and $1.9 million, respectively. The Company received proceeds of $0.9 million and $0.1 million from the exercise of options for the six months ended June 30, 2019 and 2018, respectively.

Employee Stock Purchase Plan
Information related to activity under our Employee Stock Purchase Plan ("ESPP") program was as follows (in thousands, except weighted average per share prices):
 
Six Months Ended
 
June 30, 2019
Shares issued
43

Weighted average per share purchase price
$
17.91

Weighted average per share discount from the fair value of our common stock on date of issuance
$
3.16


Stock-Based Compensation
Total stock-based compensation expense was included in our consolidated statements of income as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Cost of revenues
$
267

 
$
62

 
$
476

 
$
84

Research and development
711

 
200

 
1,269

 
225

Sales, general and administrative
1,403

 
544

 
2,545

 
659

 
$
2,381

 
$
806

 
$
4,290

 
$
968


Unrecognized Compensation Costs
As of June 30, 2019, total unrecognized stock-based compensation related to outstanding, but unvested stock awards was $40.4 million, which will be recognized over the weighted average remaining vesting period of 3.3 years.


11

Note 10 - Net Income (Loss) per Share

The following table sets forth the calculation of basic and diluted net income (loss) per share attributable to common stockholders during the periods presented (in thousands, except per share amounts):    
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
(155
)
 
$
4,653

 
$
(1,390
)
 
$
7,569

Participating securities:
 
 
 
 
 
 
 
Income allocated to participating securities
—

 
(1,499
)
 
—

 
(4,415
)
Net income (loss) attributable to common stockholders
(155
)
 
3,154

 
(1,390
)
 
3,154

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted-average shares, basic
37,065

 
24,491

 
36,880

 
13,761

Dilutive effect of warrants
—

 
155

 
—

 
137

Dilutive effect of restricted stock units and awards
—

 
5

 
—

 
1

Dilutive effect of common stock options
—

 
5,105

 
—

 
4,898

Weighted-average common shares outstanding, diluted
37,065

 
29,756

 
36,880

 
18,797

Net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
—

 
$
0.13

 
$
(0.04
)
 
$
0.23

Diluted
$
—

 
$
0.11

 
$
(0.04
)
 
$
0.17


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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Restricted stock units and awards
1,906

 
541

 
1,906

 
541

Employee stock purchase plan
40

 
—

 
75

 
—

Common stock options
4,615

 
—

 
4,615

 
—

Total
6,561

 
541

 
6,596

 
541


Note 11 - Revenue

Adoption of ASC 606    
The Company adopted ASC 606 “Revenue from Contracts with Customers” using the cumulative effect method with a date of initial application of January 1, 2019. Therefore, the comparative period information has not been adjusted and continues to be reported under ASC 605 “Revenue Recognition.” The impact of adoption was immaterial, and the Company expects the impact of the adoption of the new standard to be immaterial to the consolidated financial statements on an ongoing basis. A majority of the Company's revenue continues to be recognized at a point in time when control transfers based on the terms of the underlying contract.

Revenue Recognition
Revenue is recognized when transfer of control to the customer occurs in an amount reflecting the consideration to which the Company expects to be entitled. In order to achieve this core principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.


12

The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. As part of its consideration of the contract, the Company evaluates certain factors including the customer's ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which is distinct, as the identified performance obligations. As the Company's standard payment terms are less than one year, the Company has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. Payment terms in excess of one year are evaluated as they occur.

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

Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company's performance obligation is satisfied), which typically occurs at shipment or delivery, depending on shipping terms.

The Company often receives orders with multiple delivery dates that may extend across several reporting periods. The Company allocates the transaction price of the contract to each delivery based on the product standalone selling price. The Company invoices for each scheduled delivery upon shipment or delivery and recognizes revenues for such delivery at that point, assuming transfer of control has occurred. As scheduled delivery dates are generally within one year, under the optional exemption provided by ASC 606-10-50-14 revenues allocated to future shipments of partially completed contracts are not disclosed.

Rights of return generally are not included in customer contracts. Accordingly, product revenue is recognized upon shipment or delivery, as applicable, and transfer of control. Rights of return are evaluated as they occur.

As part of its adoption of the new revenue standard, the Company has elected to account for shipping and handling as fulfillment activities and record them in cost of sales. The election of this practical expedient results in accounting treatment consistent with the Company’s historical accounting policies and therefore, this election does not impact the comparability of the financial statements.

Revenue Recognition at a Point in Time - Revenues recognized at a point in time consist of sales of semiconductor lasers, fiber lasers and other related products.

Revenue Recognition over Time - Revenues recognized over time generally consist of arrangements for goods and services that are structured based on the Company’s costs.  Revenue for these arrangements is recognized as control transfers, which occurs as the work is performed. Billing under these arrangements generally occurs within one month after the work is completed.

The following tables represent a disaggregation of revenue from contracts with customers for the periods presented (in thousands):    

Sales by End Market
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2019
Industrial
$
20,920

 
$
39,044

Microfabrication
18,094

 
32,627

Aerospace and Defense
9,034

 
18,238

 
$
48,048

 
$
89,909



13

Sales by Geography
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2019
North America
$
18,142

 
$
33,912

China
18,201

 
31,854

Rest of World
11,705

 
24,143

 
$
48,048

 
$
89,909


Contract balances - The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable is recorded at the invoiced amount, net of an allowance for doubtful accounts. A receivable is recognized in the period we deliver goods or provide services or when our right to consideration is unconditional. A contract asset is recorded when we have performed under the contract but our right to consideration is conditional on something other than the passage of time. Contract assets as of June 30, 2019 were $0.1 million and are reported on the consolidated balance sheets as a component of prepaid expenses and other current assets.  Contract liabilities include payments received in advance of performance under a contract and are satisfied as the associated revenue is recognized. Contract liabilities are reported on the consolidated balance sheets at the end of each reporting period as a component of deferred revenue. Contract liabilities as of June 30, 2019 were $0.6 million. 

During the three and six months ended June 30, 2019, the Company recognized revenue of $0.1 million and $0.7 million, respectively, that was included in the customer advances and deferred revenue balances at the beginning of the periods as the performance obligations under the associated agreements were satisfied during the three and six months ended June 30, 2019.

Note 12 - Commitments and Contingencies

Contractual Commitments and Purchase Obligations
Our purchase obligations and other contractual obligations have not materially changed as of June 30, 2019 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

Legal Matters
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. As of June 30, 2019, and as of the filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings.


14

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 compete effectively against other providers of similar products and services, as well as competing technologies; applications and processes that will use lasers, including the suitability of our products; our ability to develop new technology, designs and applications for our lasers; the reduction in cost per brilliant watt and increase in power of semiconductor lasers going forward; 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 regulatory regime for our products and services, domestically and internationally; 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; our ability to maintain and grow our relationships with our foreign customers; 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; the sufficiency of our existing liquidity sources to meet our cash needs; and our ability to sustain and manage growth in our business.

Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, including those factors discussed in Part II, Item 1A, Risk Factors and our Annual Report on Form 10-K for the year ended December 31, 2018.

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 Quarterly Report on Form 10-Q, and 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 you are cautioned not to unduly rely upon these statements.

In light of the significant uncertainties and risks inherent in these forward-looking statements, you should not regard these statements as a representation or warranty by us or anyone else that we will achieve our objectives and plans in any specified time frame, or at all, or as predictions of future events. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. 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. Our lasers are changing not only the way things are made but also the things that can be made. 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.

We function through a single operating segment in three primary end markets: industrial, microfabrication, and aerospace and defense.

We generated a net loss of $1.4 million for the first six months of fiscal 2019 as compared to net income of $7.6 million for the first six months of fiscal 2018. The decrease in net income was primarily due to lower revenues from the industrial market in China and increased operating expenses, primarily related to stock-based compensation and research and development costs.

15

Factors Affecting Our Performance
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.
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. During the second half of 2018 and the first half of 2019, certain of our competitors substantially reduced the price of their fiber lasers sold in the China market. Although we anticipate further increases in product volumes and the introduction of new and higher value products, we expect further near-term ASP reduction that may continue to cause our revenues to decline.
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, in recent periods, 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 tariff costs continue, our gross margins may continue to decline unless we can sufficiently increase our revenues to offset those costs.
Investment in Infrastructure
We have made, and intend to continue to make, substantial investments in infrastructure that will impact our cost of revenues, operating expenses and capital expenditures. We intend to continue investing to support growth at our existing facilities in order to meet the demands of our customer base. In addition, we intend to expand existing and establish new facilities in the future to accommodate our growth at various locations around the world. We expect to incur substantial costs in connection with such expansion efforts, including leasehold improvements and equipment 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.

Critical Accounting Policies and Significant Estimates

16


Management’s Discussion and Analysis and Note 2 to the consolidated financial statements in our 2018 Annual Report on Form 10-K describe the significant accounting estimates and critical accounting policies used in preparation of the consolidated financial statements. Actual results in these areas could differ from management’s estimates. During the six months ended June 30, 2019, other than the adoption of new revenue recognition guidance as described in Note 11 of this Quarterly Report, there were no significant changes in our critical accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on March 15, 2019.

Results of Operations
The following table sets forth our operating results as a percentage of revenues for the periods indicated:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenues
67.0

 
65.8

 
67.3

 
65.6

Gross profit
33.0

 
34.2

 
32.7

 
34.4

Operating expenses:
 
 
 
 
 
 
 
Research and development
13.5

 
9.5

 
14.4

 
9.7

Sales, general, and administrative
17.8

 
14.0

 
18.6

 
14.3

Total operating expenses
31.3

 
23.5

 
33.0

 
24.0

Income (loss) from operations
1.7

 
10.7

 
(0.3
)
 
10.4

Other income (expense):
 
 
 
 
 
 
 
Interest income (expense), net
1.6

 
—

 
1.7

 
(0.2
)
Other income (expense), net
(1.9
)
 
(0.1
)
 
(0.1
)
 
—

Income before income taxes
1.4

 
10.6

 
1.3

 
10.2

Income tax expense
1.7

 
1.6

 
2.8

 
2.2

Net income (loss)
(0.3
)%
 
9.0
 %
 
(1.5
)%
 
8.0
 %

Revenues by End Market

Our revenues by end market were as follows for the periods presented (dollars in thousands):
 
Three Months Ended June 30,
 
Change
 
2019
% of Revenue
 
2018
% of Revenue
 
$
 
%
Industrial
$
20,920

43.5
%
 
$
25,251

48.8
%
 
$
(4,331
)
 
(17.2
)%
Microfabrication
18,094

37.7

 
19,497

37.7

 
(1,403
)
 
(7.2
)
Aerospace and Defense
9,034

18.8

 
6,957

13.5

 
2,077

 
29.9

 
$
48,048

100.0
%
 
$
51,705

100.0
%
 
$
(3,657
)
 
(7.1
)%

 
Six Months Ended June 30,
 
Change
 
2019
% of Revenue
 
2018
% of Revenue
 
$
 
%
Industrial
$
39,044

43.4
%
 
$
44,397

47.1
%
 
$
(5,353
)
 
(12.1
)%
Microfabrication
32,627

36.3

 
35,115

37.3

 
(2,488
)
 
(7.1
)
Aerospace and Defense
18,238

20.3

 
14,660

15.6

 
3,578

 
24.4

 
$
89,909

100.0
%
 
$
94,172

100.0
%
 
$
(4,263
)
 
(4.5
)%


17

The decreases in revenue from the industrial end market for the three and six months ended June 30, 2019, compared to the same periods of 2018, were driven by price reductions in China, and changes in foreign currency exchange rates. The decreases in revenue from the microfabrication end market for the three and six months ended June 30, 2019, compared to the same periods of 2018, were driven primarily by lower unit sales to customers for consumer electronics and semiconductor markets. The increases in revenue from the aerospace and defense end market for the three and six months ended June 30, 2019, compared to the same periods of 2018, were attributable to higher volumes on our existing government contracts.

Revenues by Geographic Region

Our revenues by geographic region were as follows for the periods presented (dollars in thousands):

 
Three Months Ended June 30,
 
Change
 
2019
% of Revenue
 
2018
% of Revenue
 
$
 
%
North America
$
18,142

37.8
%
 
$
16,363

31.6
%
 
$
1,779

 
10.9
 %
China
18,201

37.9

 
23,660

45.8

 
(5,459
)
 
(23.1
)
Rest of World
11,705

24.3

 
11,682

22.6

 
23

 
0.2

 
$
48,048

100.0
%
 
$
51,705

100.0
%
 
$
(3,657
)
 
(7.1
)%
 
Six Months Ended June 30,
 
Change
 
2019
% of Revenue
 
2018
% of Revenue
 
$
 
%
North America
$
33,912

37.7
%
 
$
32,552

34.6
%
 
$
1,360

 
4.2
 %
China
31,854

35.4

 
38,793

41.2

 
(6,939
)
 
(17.9
)
Rest of World
24,143

26.9

 
22,827

24.2

 
1,316

 
5.8

 
$
89,909

100.0
%
 
$
94,172

100.0
%
 
$
(4,263
)
 
(4.5
)%

Geographic revenue information is based on the location to which we ship our products. Changes in revenue by geographic region for the three and six months ended June 30, 2019 compared to the same periods of 2018 were primarily driven by decreased revenue from the industrial market in China, partially offset by increased revenue from the aerospace and defense market in North America.

Cost of Revenues and Gross Margin

Our cost of revenues, gross profit and gross margin were as follows for the periods presented (dollars in thousands):
 
Three Months Ended
June 30,
 
Change
 
2019
 
2018
 
$
 
%
Cost of revenues
$
32,177

 
$
34,026

 
$
(1,849
)
 
(5.4
)%
Gross profit
15,871

 
17,679

 
(1,808
)
 
(10.2
)
Gross margin
33.0
%
 
34.2
%
 
—

 
(1.2
)

 
Six Months Ended
June 30,
 
Change
 
2019
 
2018
 
$
 
%
Cost of revenues
$
60,524

 
$
61,764

 
$
(1,240
)
 
(2.0
)%
Gross profit
29,385

 
32,408

 
(3,023
)
 
(9.3
)
Gross margin
32.7
%
 
34.4
%
 
—

 
(1.7
)

The decreases in gross margin for the three and six months ended June 30, 2019, compared to the same periods of 2018, were driven primarily by price declines for certain products serving the industrial market and impact of tariff costs, partially offset by product cost improvements and better product mix.

18


Operating Expenses

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

Research and Development
 
Three Months Ended
June 30,
 
Change
 
2019
 
2018
 
$
 
%
Research and development
$
6,494

 
$
4,898

 
$
1,596

 
32.6
%

 
Six Months Ended
June 30,
 
Change
 
2019
 
2018
 
$
 
%
Research and development
$
12,916

 
$
9,181

 
$
3,735

 
40.7
%

The increases in research and development expense for the three and six months ended June 30, 2019, compared to the same periods in 2018, were primarily driven by higher stock-based compensation costs, compensation related to increased headcount, and higher consulting expenses related to our continued investment in our product development initiatives. In addition, for the six months ended June 30, 2019, compared to the same period in 2018, we incurred higher materials costs to support our development efforts.

Sales, General and Administrative
 
Three Months Ended
June 30,
 
Change
 
2019
 
2018
 
$
 
%
Sales, general, and administrative
$
8,572

 
$
7,232

 
$
1,340

 
18.5
%

 
Six Months Ended
June 30,
 
Change
 
2019
 
2018
 
$
 
%
Sales, general, and administrative
$
16,716

 
$
13,470

 
$
3,246

 
24.1
%

The increases in sales, general and administrative expense for the three and six months ended June 30, 2019, compared to the same periods in 2018 were primarily driven by higher stock-based compensation costs, compensation related to increased headcount, higher consulting and professional fees, business insurance and other costs related to being a public company.

Interest Income (Expense), net
 
Three Months Ended
June 30,
 
Change
 
2019
 
2018
 
$
 
%
Interest income (expense), net
$
740

 
$
(6
)
 
$
746

 
NM

 
Six Months Ended
June 30,
 
Change
 
2019
 
2018
 
$
 
%
Interest income (expense), net
$
1,490

 
$
(225
)
 
$
1,715

 
NM


19

The increases in interest income (expense), net, for the three and six months ended June 30, 2019, compared to the same periods in 2018 were primarily attributable to interest income generated on the cash we received from our 2018 initial and follow-on public offerings, and a reduction in interest expense on our loan facilities which were paid off as of December 31, 2018.

Other Income (Expense), net
 
Three Months Ended
June 30,
 
Change
 
2019
 
2018
 
$
 
%
Other income (expense), net
$
(907
)
 
$
(42
)
 
$
(865
)
 
NM

 
Six Months Ended
June 30,
 
Change
 
2019
 
2018
 
$
 
%
Other income (expense), net
$
(87
)
 
$
34

 
$
(121
)
 
NM

The decreases in other income (expense), net for the three and six months ended June 30, 2019, compared to the same periods of 2018 were primarily attributable to higher net unrealized and realized foreign exchange losses, driven by foreign exchange rate fluctuations between the USD and the Chinese RMB.

Income Tax Expense
 
Three Months Ended
June 30,
 
Change
 
2019
 
2018
 
$
 
%
Income tax expense
$
793

 
$
848

 
$
(55
)
 
(6.5
)%

 
Six Months Ended
June 30,
 
Change
 
2019
 
2018
 
$
 
%
Income tax expense
$
2,546

 
$
1,997

 
$
549

 
27.5
%

The decrease in income tax expense for the three months ended June 30, 2019, compared to the same period in 2018 was driven by the geographic mix of earnings primarily related to operations in our China and Finland subsidiaries. We have limited tax expense associated with our operations in the U.S. as we maintain a full valuation allowance against our U.S. deferred tax assets.

The increase in income tax expense for the six months ended June 30, 2019, compared to the same period in 2018 was driven by the change in the jurisdictional mix of pre-tax earnings, which reflects increased income from our foreign subsidiaries during the current period.

Liquidity and Capital Resources

We had cash and cash equivalents of $142.7 million and $149.5 million as of June 30, 2019 and December 31, 2018, respectively.

For the six months ended June 30, 2019, our principal uses of liquidity were to fund our working capital needs and purchase new capital equipment. To date, our principal sources of liquidity have been the net proceeds we received through sales of equity securities, borrowings under our credit facilities, from our initial public offering and secondary offering, and payments received from customers for our products.

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

20

support the growth of our business. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, technologies and intellectual property rights. From time to time, we may explore additional financing sources which could include equity, equity‑linked and debt financing arrangements.

The following table summarizes our cash flows for the periods presented (in thousands):
 
Six Months Ended June 30,
 
2019
 
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

Effect of exchange rate changes on cash
135

 
(371
)
Net increase (decrease) in cash
$
(6,817
)
 
$
93,038


Net Cash Used in Operating Activities

During the six months ended June 30, 2019, net cash used in operating activities was $1.2 million which was primarily driven by $1.4 million of net loss reported for the period, non‑cash adjustments of $8.8 million related to depreciation and amortization, stock-based compensation, and other items. These items were offset by a $4.3 million increase in accounts receivable, due to the timing of sales and customer collections, and a $7.0 million increase in inventory to support new product introductions and future growth.
During the six months ended June 30, 2018, net cash used in operating activities was $2.3 million which was driven by $7.6 million of net income reported in the period, non-cash adjustments of $5.3 million related to depreciation and amortization, stock-based compensation, and other items. These items were offset by increases of $8.7 million in accounts receivable, $5.6 million in inventory, and $3.5 million in other current assets. Those uses of cash were offset by a $2.8 million net increase in accounts payable and accrued liabilities, primarily driven by the timing of vendor payments as well as accrued costs related to our initial public offering in April 2018.
Net Cash Used in Investing Activities

During the six months ended June 30, 2019, net cash used in investing activities was $6.9 million which was primarily due to capital expenditures related to investments in manufacturing equipment and facilities in our worldwide operations.

During the six months ended June 30, 2018, net cash used in investing activities was $5.8 million which was primarily due to capital expenditures during the period related to expanding our manufacturing capacity, and purchases of new manufacturing and lab equipment.

Net Cash Provided by Financing Activities

During the six months ended June 30, 2019, net cash provided by financing activities was $1.1 million which was primarily driven by $1.7 million of proceeds from stock options exercised and employee stock plan purchases, partially offset by $0.5 million of payments related to withholding taxes for restricted stock awards issued.

During the six months ended June 30, 2018, net cash provided by financing activities was primarily driven by $101.5 million of net proceeds related to our initial public offering.

Credit Facilities

The terms of our credit facilities arrangements were reported in our annual report for the year ended December 31, 2018. There have been no material changes to those arrangements during the six months ended June 30, 2019, and as of June 30, 2019 and December 31, 2018, we were in compliance with the covenants under our loan facilities.

Contractual Obligations
For the six months ended June 30, 2019, there have been no material changes to our significant contractual obligations as previously disclosed in our annual report for the year ended December 31, 2018.
 
 
 
 
 
 
 
 
 
 

21

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, 2018. Our exposure to market risk has not changed materially since December 31, 2018.

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

Beginning January 1, 2019, we implemented ASC 606, "Revenue from Contracts with Customers," which required the implementation of internal controls to ensure we adequately evaluated our contracts and properly assessed the impact on the new accounting standard. In addition, although the new revenue standard is expected to have an immaterial impact on our ongoing revenues or net income, we implemented changes to our policies and internal controls related to revenue recognition.

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.


22

PART II - OTHER INFORMATION

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, 2018.

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.

Risks Related to Our Business and Industry

Our revenue growth rate in recent periods may not be indicative of our future performance.

Between 2016 and 2018, we experienced substantial levels of revenue growth. However, our historical revenue growth rate may not be indicative of future growth, and we may not achieve similar revenue growth rates in future periods. You should not rely on our revenues for any prior quarterly or annual periods as an indication of our future revenues or revenue growth. Our results of operations may vary as a result of a number of factors, including our ability to execute on our business strategy and expand our manufacturing capacity, the general economic conditions and the legal and regulatory environment in the United States, China and globally, as well as other factors that are outside of our control. For the six months ended June 30, 2019, our revenues have decreased 4.5% compared to the same period of 2018.

Downturns in the markets we serve could materially adversely affect our revenues and profitability.

Our results of operations may vary based on the impact of changes in the industries we serve or in the global economy. A large portion of our revenue growth of our business substantially depends on demand for our products in the industrial and microfabrication markets. For our products sold to the industrial market, we believe demand is largely based on general economic conditions. Adverse changes in the global economy have occurred and may occur in the future as a result of declining or flat global or regional economic conditions, fluctuations in currency and commodity prices, trade restrictions or impositions of new tariffs, wavering confidence, unemployment, declines in stock markets, contraction of credit availability or other factors affecting economic conditions generally. We cannot predict the timing, strength or duration of any economic slowdown or recovery, whether global, regional or within specific markets.

For the microfabrication market, a portion of our revenues depends in part on the demand for our products from semiconductor equipment companies. The semiconductor equipment market has historically been characterized by sudden and severe cyclical variations in product supply and demand, which have often severely affected the demand for manufacturing equipment, including laser-based tools and systems. The timing, severity and duration of these market cycles are difficult to predict, which limits our ability to predict our business prospects and financial results in this market and we may not be able to respond effectively to these cycles.

During industry downturns in the past, our revenues from this market declined suddenly and significantly, and this is likely to occur again in the event of industry downturns in the future.
We have a history of losses, and as our operating costs increase we may not be able to generate sufficient revenues to achieve or maintain profitability in the future.
Although we first became profitable in 2017, we incurred net losses since our inception in 2000 through 2016, and in the first two quarters of 2019. We had net income (loss) of $(1.4) million and $7.6 million for the six months ended June 30, 2019 and 2018,

23

respectively, and $13.9 million for the year ended December 31, 2018. We had an accumulated deficit of $(106.0) million as of June 30, 2019.
We expect our operating costs to continue to increase in future periods as we expend substantial financial and other resources on, among other things, business and headcount expansion in operations, sales and marketing, research and development, and administration as a public company. These expenditures may not result in additional revenues or the growth of our business. If we fail to grow revenues or to sustain profitability while our operating costs increase, our business, financial condition, results of operations and growth prospects will be materially adversely affected.
We have high levels of fixed costs and inventory levels that may materially adversely affect our gross profits and results of operations in the event that demand for our products declines or we maintain excess inventory levels.
We conduct our own manufacturing operations and have a high fixed cost base, including significant costs for the employees in our manufacturing operations. We may not be able to adjust our production levels or fixed costs quickly enough or sufficiently to adapt to rapidly changing market conditions. Gross profit, in absolute dollars and as a percentage of revenues, is impacted by our volumes, product sales mix, the corresponding absorption of fixed manufacturing overhead expenses, production costs and manufacturing yields. In addition, because we design and manufacture our key components, insufficient demand for our products will subject us to the risks of high inventory carrying costs and increased inventory obsolescence. If our capacity and production levels are not properly sized in relation to expected demand, we may need to record write-downs for excess or obsolete inventory. For example, we typically increase our inventory levels in the period leading up to Chinese New Year, which occurs during our first fiscal quarter, in anticipation of increased sales to our Chinese customers after completion of the holiday. If these anticipated sales do not occur, we may need to record write-downs for excess inventory.
The markets for our products are highly competitive. If we fail to compete successfully, our business, financial condition, results of operations and growth prospects will be materially adversely affected.
The industries in which we operate have significant price and technological competition. We compete not only with companies providing semiconductor and fiber lasers, but with companies offering conventional laser or non-laser solutions for the applications we target. Some of our competitors are larger and have substantially greater manufacturing, financial and research and development resources and larger installed customer bases than we do. Some of these competitors may receive substantial government subsidies allowing them to compete more aggressively. Certain of these competitors also have higher sales volume than we do, which can enable such competitors to lower the prices of their products. To compete, we may be forced to lower our prices, which could negatively impact our revenues and gross margins. For example, certain of our competitors have substantially reduced the price of their fiber lasers sold in the China market. In some instances, we have reduced the price of our fiber lasers sold in China. It is unclear whether our competitors' price reductions will continue for the foreseeable future; however, the recent decline in the selling price of certain of our current fiber laser product offerings could negatively affect our near-term results of operations. Consolidation in our industry could intensify the competitive pressures that we face. Our competitors worldwide include BWT Beijing Ltd., Coherent, Inc., II-VI Incorporated, IPG Photonics Corporation, Lumentum Holdings Inc., Maxphotonics Co., Ltd., Raycus Fiber Laser Technologies Co. Ltd. and Trumpf GmbH + Co. KG.
We also compete with widely used non-laser production methods, such as plasma cutting, water-jet cutting and resistance welding. We believe that competition will be particularly intense from makers of CO2, YAG and disc lasers, as makers of these laser solutions may lower their prices in order to maintain market share and have committed significant research and development resources to pursue opportunities related to these technologies. If manufacturers of these non-laser and legacy laser solutions offer significantly lower prices than we do for our products, customers may choose to purchase their products instead of ours, despite any technical or performance advantage our products may offer.
Our OEM customers' internal production of laser technologies presents additional competitive pressure. To the extent our OEM customers move towards using such in-house technologies, we may need to lower our prices to remain competitive, otherwise our market share and revenues may be materially adversely affected.
To be competitive, we believe that we will be required to continue to invest significantly in research and development and manufacturing facilities. We may not have sufficient resources to continue to make these investments and we may not be able to make the technological advances or price adjustments necessary to compete successfully. Any failure to compete successfully will materially adversely affect our business, financial condition, results of operations and growth prospects.
Our inability to manage risks associated with our international customers and operations could materially adversely affect our business.
Approximately 62% and 65% of our revenues were to customers outside of North America for the six months ended June 30, 2019 and 2018, respectively, and approximately 63% for the year ended December 31, 2018. We anticipate that foreign revenues,

24

particularly revenues from Asia, will continue to account for a significant portion of our revenues in the foreseeable future. Our products are sold in over 30 countries. Our principal markets outside of North America include China, Japan, South Korea, Thailand and other Asian countries, and Germany, U.K. and other European countries. Our primary offices outside of the United States are in Lohja, Finland, Shanghai, China and Seoul, South Korea. We have substantial tangible assets outside of the United States, particularly in China and Finland.
Our foreign operations and revenues are subject to a number of risks, including the impact of recessions and other economic conditions in economies outside the United States, unexpected changes in regulatory requirements, certification requirements, environmental regulations, reduced protection for intellectual property rights in some countries, potentially adverse tax consequences, political and economic instability, import/export regulations, tariffs and trade barriers, compliance with applicable United States and foreign anti-corruption laws, cultural and management differences, reliance in some jurisdictions on third-party revenues from channel partners, preference for locally produced products, shipping, or other logistics complications, and longer accounts receivable collection periods.
Our business could also be impacted by international conflicts, terrorist and military activity, civil unrest and pandemic illness which could cause a slowdown in customer orders, cause customer order cancellations or negatively impact availability of supplies or limit our ability to timely service our installed base of products. Political, economic and monetary instability and changes in governmental regulations or policies, including trade tariffs and protectionism, could materially adversely affect both our ability to effectively operate our foreign offices and the ability of our foreign suppliers to supply us with required materials or services. Any interruption or delay in the supply of our required components, products, materials or services, or our inability to obtain these components, materials, products or services from alternate sources at acceptable prices and within a reasonable amount of time, could impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders.
Our failure to manage the foregoing risks associated with our operations in Finland, China and South Korea and our other existing and potential future international business operations could materially adversely affect our business, financial condition, results of operations and growth prospects.
We have substantial sales and 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 June 30, 2019, we had approximately 470 full-time employees at our Shanghai facility where we have high-volume manufacturing, fiber laser assembly and sales operations. Moreover, approximately 35% and 41% of our revenues were derived from China for the six months ended June 30, 2019 and 2018, respectively, and 37% for the year ended December 31, 2018. 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 have proposed to impose a number of additional tariffs. 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, 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.
Tariffs and global trade policies could increase the cost of our products, which could adversely impact the competitiveness of our products and our financial results.

25

The United States Government has recently imposed new or higher tariffs on specified products imported from China to penalize China for what it characterizes as unfair trade practices and China has responded by imposing new or higher tariffs on specified products imported from the United States. On September 17, 2018, the Office of the United States Trade Representative finalized List 3 under Section 301 of the Trade Act of 1974. On May 10, 2019, tariffs on List 3 goods from China increased to 25%. In response, China has imposed additional tariffs on a number of U.S. goods. Based on our initial experience with the tariff changes, the new tariffs have a direct impact on our operations and financial results, as we maintain a significant portion of our operations, sales, and manufacturing in China. While there is uncertainty as to the duration of the tariffs or potential future increases, and we are actively taking remedial actions to minimize the financial impact, the additional tariffs may materially increase the cost of our raw materials and finished goods, and may negatively impact our margins as we may not be able to pass on the additional cost through increasing the prices of our products. Proposed tariffs may cause the depreciation of the RMB currency and a contraction of certain industries that will likely be affected by the proposed tariffs, including the industrial fiber laser market. As such, there may be potential decrease in the spending powers of our Chinese customers which may lead to fewer business opportunities and our operation may be negatively impacted. In addition, future actions or escalations by either the United States or China that affect trade relations may cause global economic uncertainty and potentially have a negative impact on our business and we cannot provide any assurances as to whether such actions will occur or the form that they may take.
Our manufacturing capacity and operations may not be appropriate for future levels of demand and may materially adversely affect our gross margins.
When market demand increases, we must be able to rapidly and effectively increase our manufacturing capacity to meet increases in customer demand, and if we fail to do so we may lose business to our competitors and our relationships with our customers may be harmed. To maintain our competitive position and to meet anticipated demand for our products, we have invested significantly in the expansion and automation of our manufacturing and operations throughout the world and may continue to do so in the future. If the demand for our products does not increase or if our revenues decrease from current levels, we may have significant excess manufacturing capacity and under-absorption of our fixed costs, which could in turn materially adversely affect our gross margins and profitability.
In connection with any expansion, we may incur cost overruns, construction delays, labor difficulties or regulatory issues which could cause our capital expenditures to be higher than what we currently anticipate, possibly by a material amount, which would in turn adversely impact our results of operations. Expansion activities can also cause disruptions to existing manufacturing capabilities. Moreover, we may experience higher costs due to yield loss, production inefficiencies and equipment problems until any operational issues associated with the addition of new equipment or opening of new manufacturing facilities are resolved.
We rely on a small number of customers for a significant portion of our revenues, and if we lose any of these customers or they significantly curtail their purchases of our products, our results of operations could be materially adversely affected.
We rely on a few customers for a significant portion of our revenues. In the aggregate, our top ten customers accounted for approximately 53% and 56% of our revenues during the six months ended June 30, 2019 and 2018, and 56% for the year ended December 31, 2018. Raytheon accounted for 10% of our revenues for the six months ended June 30, 2019, and Quick Laser Technology Co., Ltd accounted for 16% of our revenues for the six months ended June 30, 2018 and 13% for the year ended December 31, 2018. We generally do not enter into long-term purchase agreements with our customers obligating them to purchase our products. Our business is characterized by short-term purchase orders issued by our customers, which are likely to be favorable to those customers. If any of our principal customers discontinues its relationship with us, develops its own products instead of using ours, replaces us as a vendor for certain products or suffers downturns in its business resulting in a cancellation of orders or an inability to place new orders, then our business, financial condition, results of operations and growth prospects could be materially adversely affected.
If we are unable to protect our proprietary technology and intellectual property rights, our competitive position could be harmed and our results of operations could be materially adversely affected.
Our success depends in part upon our ability to obtain, maintain and enforce patents, trade secrets, trademarks and other intellectual property rights and to operate without infringing on or otherwise violating the proprietary rights of others or having third parties infringe, misappropriate or circumvent the rights we own or license. We rely on a variety of intellectual property rights, including patents, copyrights, trademarks, trade secrets, technical know-how and other unpatented proprietary information to protect our products, product development and manufacturing activities from unauthorized copying by third parties.
Our patents do not cover all of our technologies, systems, products and product components and our competitors or others may design around our patented technologies. Some of our know-how or technology is not patented or patentable and may constitute trade secrets. To protect our trade secrets, we have a policy of requiring our employees, consultants, advisors and other collaborators who contribute to or access our material intellectual property to enter into invention assignment and confidentiality agreements. We also rely on customary contractual protections with our suppliers and customers, and we implement security measures intended

26

to protect our trade secrets, know-how or other proprietary information. However, we cannot guarantee we have entered into appropriate agreements with all parties that have had access to our trade secrets, know-how or other proprietary information. We also cannot assure you that those agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Our trade secrets, know-how or other proprietary information could be obtained by third parties as a result of breaches of our physical or electronic security systems or our suppliers, employees or consultants could assert rights to our intellectual property.
We have significant international operations and we are subject to foreign laws which differ in many respects from U.S. laws. Effective intellectual property protection may be unavailable or more limited in foreign jurisdictions in which we operate, such as China, relative to those protections available in the United States. Although we typically enter into invention assignment and confidentiality agreements with our employees who contribute to our material intellectual property to protect our proprietary information, our ability to enforce such agreements in foreign jurisdictions is uncertain. In the past, certain of our employees have been hired by our competitors. These former employees are contractually prohibited from misappropriating our confidential information, including trade secrets; however, we cannot be certain that such contractual obligations will be honored. While we monitor our competitors' activities for evidence of infringement of our proprietary rights, we cannot be certain that such infringement will be detected. If we pursue litigation to assert our intellectual property rights, an adverse decision in any legal action could limit our ability to assert our intellectual property rights, limit the value of our technology or otherwise materially adversely affect our business, financial condition or results of operations.
Monitoring unauthorized use of our intellectual property is difficult and costly. Unauthorized use of our intellectual property may have already occurred or may occur in the future. The steps that we take to acquire ownership of our employees' inventions and trade secrets in foreign countries may not have been effective under all such local laws, which could expose us to potential claims or the inability to protect intellectual property developed by our employees. Furthermore, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may materially adversely affect our ability to enforce our trade secret and intellectual property positions. Our failure to identify unauthorized use or otherwise adequately protect our intellectual property could jeopardize our competitive advantage and materially adversely affect our business. Moreover, any litigation in connection with unauthorized use of our intellectual property could be time consuming, and we could be forced to incur significant costs and divert our attention and the efforts of our employees, which could, in turn, result in lower revenues and higher expenses, and we may not be successful in enforcing our intellectual property rights.
Intellectual property claims could result in costly litigation and harm our business.
There has been significant litigation involving intellectual property rights in many technology-based industries, including our own. We continue to face risks and uncertainties in connection with any patent litigation, including the risk that patents issued to others may harm our ability to do business; that there could be existing patents of which we are unaware that could be pertinent to our business; and that it is not possible for us to know whether there are patent applications pending that our products might infringe upon, since patent applications often are not disclosed until a patent is issued or published. Moreover, the frequency with which new patents are granted and the diversity of jurisdictions in which they are granted make it impractical and expensive for us to monitor all patents that may be relevant to our business.
From time to time, we have been notified of allegations and claims that we may be infringing patents or otherwise violating intellectual property rights owned by third parties. In the future, we may be a party to litigation as a result of an alleged infringement, misappropriation, or other violation of others' intellectual property, whether through direct claims or by way of indemnification claims of our customers or suppliers. If any pending or future intellectual property-related litigation proceedings result in an adverse outcome then we could be required to:
•
cease the manufacture, use or sale of the infringing products, processes or technology;
•
pay substantial damages for infringement;
•
expend significant resources to develop non-infringing products, processes or technology;
•
license technology from the party claiming infringement, which license may not be available on commercially reasonable terms, or at all;
•
cross-license our technology to a competitor to resolve an infringement claim, which could weaken our ability to compete with that competitor; or
•
pay substantial damages to our direct or indirect customers to cause our end users to discontinue their use of, or replace, infringing products with non-infringing products.
In addition, intellectual property lawsuits can be brought by third parties against our customers and end-users that incorporate our products into their systems or processes. Because we generally indemnify customers against third-party infringement claims relating to our products, we may incur liabilities in connection with lawsuits against our customers. Any such lawsuits, whether

27

or not they have merit, could be time-consuming to defend, damage our reputation and result in substantial and unanticipated costs.
Having to defend any such lawsuits, and any adverse consequences that might arise, could materially adversely affect our business, financial condition, results of operations and growth prospects.
If we are unable to develop new products, applications and end markets for our high-performance lasers and increase our market share in existing applications, our business, financial condition, results of operations and growth prospects will be materially adversely affected.
Any future success will depend in part on our ability to continue to generate sales of semiconductor lasers and fiber lasers in applications where legacy lasers have been used, or in new and developing markets and applications for lasers where they have not been used previously. As semiconductor and fiber lasers reach higher levels of penetration in core materials processing applications, the development of new applications, end markets and products outside our core applications becomes more important to our growth.
Our current and potential customers may have substantial investment in, and know-how related to, their existing laser and non-laser technologies. They may perceive risks relating to the reliability, quality, usefulness and profitability of integrating semiconductor lasers or fiber lasers in their systems when compared to other laser or non-laser technologies available in the market or that they manufacture themselves. Although we believe that semiconductor lasers and fiber lasers generally exhibit superior performance compared to other lasers or tools, customers may be reluctant to change from incumbent suppliers or cease using their own solutions, or we may miss the design and procurement cycles of our customers. Many of our target markets, such as industrial and aerospace and defense, have historically been slow to adopt new technologies. These markets often require long testing and qualification periods or lengthy government approval processes before adopting new technologies.
Introduction of new products and product enhancements will require that we effectively transfer production processes from research and development to manufacturing and coordinate our efforts with those of our suppliers to achieve increased production volume rapidly. If we are unable to implement our strategy to develop new applications and end markets for our products or develop new products, our business, financial condition, results of operations and growth prospects could be materially adversely affected. In addition, any newly developed or enhanced products may not achieve market acceptance or may be rendered obsolete or less competitive by the introduction of new products by other companies.
Fluctuations in our quarterly results of operations may increase the volatility of our stock price and may be difficult to predict.
We have experienced, and expect to continue to experience, fluctuations in our quarterly results of operations. We believe that fluctuations in quarterly results may cause the market price of our common stock to increase or decrease, perhaps substantially. In addition, we experience seasonality in our results of operations typically impacted by lower demand from our Chinese customers during Chinese New Year. Factors which have had or may in the future have an influence on our results of operations in a particular quarter include:
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the increase, decrease, cancellation or rescheduling of significant customer orders;
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declines in selling prices for our products;
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delays in our product-shipment timing, obtaining licenses or other import/export approvals, customer or end-user sales or deployment cycles, or work performed under development contracts;
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seasonality attributable to different purchasing patterns and levels of activity throughout the year in the areas where we operate;
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the timing of revenue recognition based on the installation or acceptance of certain products shipped to our customers;
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timing variability in product introductions, enhancements, services and technologies by us and our competitors and market acceptance of these new or enhanced products, services and technologies;
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our ability to obtain export licenses for our products on a timely basis or at all;
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changes in tariffs imposed by the U.S., China and other foreign governments;
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the rate at which our present and future customers and end users adopt our technologies;
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the gain or loss of a key customer;
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product or customer mix;
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competitive pricing pressures and new market entrants;
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our ability to design, manufacture and introduce new products on a cost-effective and timely basis;
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our ability to manage our inventory levels and any write-downs for excess or obsolete inventory;
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our ability to collect outstanding accounts receivable balances;
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changes in the amount and timing of our operating costs, including those related to the expansion of our business, operations and infrastructure;
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impairment of values for goodwill, intangibles and other long-lived assets;

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different capital expenditure and budget cycles for our customers, which affect the timing of their spending;
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foreign currency fluctuations;
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changes in jurisdictional income mix and tax rules and regulations in countries where we operate; and
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economic and market conditions in a particular geography or country;
A substantial portion of our operating expenses are fixed for the short-term, and as a result, fluctuations in revenues or unanticipated expenses can have a material and immediate impact on our profitability. In addition, we often recognize a substantial portion of our revenues in the last month of each fiscal quarter. Our expenses for any given quarter are typically based on expected revenues, and if revenues are below expectations in any given quarter, the adverse impact of the shortfall on our results of operations may be magnified by our inability to adjust spending quickly enough to compensate for the shortfall. We also base our manufacturing on our forecasted product mix for the quarter. If the actual product mix varies significantly from our forecast, we may not be able to fill some orders during that quarter, which would result in delays in the shipment of our products. Accordingly, variations in timing of sales, particularly for our higher priced, higher margin products, can cause significant fluctuations in quarterly results of operations.
Due to these and other factors, particularly varying product mix from quarter to quarter, we believe that quarter-to-quarter and year-to-year comparisons of our historical results of operations may not be meaningful. You should not rely on our results for any quarter or year as an indication of our future performance. Our results of operations in future quarters and years may be below public market analysts' or investors' expectations, which would likely cause the price of our stock to fall, perhaps significantly. In addition, over the past several years, U.S. and global equity markets have experienced significant price and volume fluctuations that have affected the stock prices of many technology companies both in and outside our industry. There has not always been a direct correlation between this volatility and the performance of particular companies subject to these stock price fluctuations. These factors, as well as general economic and political conditions or investors' concerns regarding the credibility of corporate financial statements, may materially adversely affect the market price of our stock in the future.
Products in the laser industry are experiencing declining average selling prices, and any future success depends in part on our ability to increase our volumes and decrease our costs to offset potential declines in the average selling prices of our products.
Products in the laser industries generally, and our products specifically, are experiencing and may in the future continue to experience a significant decline in average selling prices, or ASPs, on maturing products as a result of increased competition and price pressures from customers. As competing products become more widely available, the ASPs of our products may decrease. Due to the fixed cost of production, the average cost per unit of our products typically declines as our production volumes rise. For this reason, we may decide to offer products at ASPs that result in low initial gross margins to us with an intention to drive sales and production volumes higher, in turn lowering our average cost per unit. Because of these factors, we have experienced and we may continue to experience fluctuations in our results of operations on a quarterly or annual basis. If the ASPs of our products decline and we are unable to increase our unit volumes, introduce new or enhanced products with higher ASPs or reduce manufacturing costs to offset anticipated decreases in the prices of our existing products, our gross margins could decline, which in turn could materially adversely affect our business, financial condition, results of operations and growth prospects.
We participate in markets that are subject to rapid technological change and require significant research and development expenses to develop and maintain products that are able to achieve market acceptance.
The markets for our products are characterized by rapid technological change, frequent product introductions, substantial capital investment, volatility of product supply and demand, changing customer requirements and evolving industry standards. Our future performance will depend in part on the successful development, introduction and market acceptance of new and enhanced products that address these changes as well as current and potential customer requirements. We expect that new technologies will emerge as competition and our customers' need for higher and more cost-effective tools increase. The introduction of new and enhanced products may cause our customers to defer or cancel orders for existing products. To the extent customers defer or cancel orders for existing products due to a slowdown in demand or in the expectation of a new product release, or if there is any delay in development or introduction of our new products or enhancements of our products, our business, financial condition, results of operations and growth prospects would be materially adversely affected. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements, or to license these technologies from third parties. Product development delays may result from numerous factors, including:
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changing product specifications and customer requirements;
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unanticipated engineering complexities;
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expense reduction measures we have implemented, and others we may implement, to conserve our cash and attempt to sustain profitability;
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difficulties in hiring and retaining necessary technical personnel;
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difficulties in reallocating engineering resources and overcoming resource limitations; and

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changing market or competitive product requirements.
The development of new, technologically advanced products is a complex and uncertain process that requires the accurate prediction of technological and market trends, as well as the investment of significant research and development expenses. Further, we typically invest substantial resources in advance of material sales of our products to our customers. Our research and development costs were $12.9 million and $9.2 million for the six months ended June 30, 2019 and 2018, respectively, and $21.1 million for the year ended December 31, 2018. We cannot assure you that our expenditures for research and development will result in the introduction of new products or, if such products are introduced, that those products will achieve sufficient market acceptance or generate revenues to offset the costs of development. Ramping of production capacity also entails risks of delays which can limit our ability to realize the full benefit of the new product introduction. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Further, we cannot assure you that our new products will gain market acceptance or that we will be able to respond effectively to product announcements by competitors, technological changes or emerging industry standards. Many of these factors are beyond our control. Any failure to respond to technological change would materially adversely affect our business, financial condition, results of operations and growth prospects.
Additionally, our product offerings may become obsolete given the frequent introduction of alternative technologies. In the event either our customers or our products fail to gain and maintain market acceptance, it would likely materially adversely affect our business, financial condition, results of operations and growth prospects.
Reliance on customers in the aerospace and defense industry for a significant portion of our revenues could materially adversely affect our business, financial condition, results of operations and growth prospects.
For the six months ended June 30, 2019 and 2018, we derived approximately 20% and 16%, respectively, of our revenues from customers in the aerospace and defense industry, and approximately 18% of our revenues for the year ended December 31, 2018. From time to time, we have experienced declining aerospace and defense-related revenues. The aerospace and defense market is largely dependent upon government budgets, in particular defense budgets, which are driven by numerous factors, including geopolitical events, macroeconomic conditions and the ability of the U.S. government to enact relevant legislation. As a result, our future revenues are subject in part to the uncertainties of governmental budgeting and appropriations and national defense policies and priorities, constraints of the budgetary process and timing and potential changes to these policies and priorities. Future spending levels are subject to a wide range of outcomes, depending on Congressional action, all of which are beyond our control. Moreover, no assurance can be given that an increase in defense spending will be allocated to programs that would benefit our business.
Many of our customers in the defense industry are subcontractors that must negotiate our proposals with the U.S. government. Our continuing relationship and the ability of these customers to pay for our products is dependent on the U.S. government's decision to accept or reject our customers' terms, which can be delayed for a substantial period of time and is largely outside of our control. Such delays could result in decreased revenues and could materially adversely harm our results of operations in any given period.
Our agreements with the U.S. government and suppliers to the U.S. government subject us to unique risks.
We must comply with and are affected by laws and regulations relating to the award, administration and performance of U.S. government contracts. The U.S. government contracting party may require us to increase production of certain solutions sold to the U.S. government due to changes in U.S. national security strategy and/or priorities or other reasons, in which case we may be required to decrease production of other products or sales to other customers to meet the requirements of the U.S. government. In addition, the U.S. government routinely retains rights to intellectual property developed in connection with a government contract. The U.S. government could exercise these rights in certain circumstances in the future, which could have the effect of decreasing the benefit we are able to realize commercially from such intellectual property.
U.S. government agencies, including the Defense Contract Audit Agency, the Defense Contract Management Agency and various agency Inspectors General, routinely audit and investigate government contractors. These agencies review a contractor's performance under its contracts, its cost structure, its business systems and compliance with applicable laws, regulations and standards. The U.S. government has the ability to decrease or withhold certain payments when it deems systems subject to its review to be inadequate. Additionally, any costs found to be misclassified may be subject to repayment. We have unaudited and unsettled incurred cost claims related to past years, which places risk on our ability to issue final billings on contracts for which authorized and appropriated funds may be expiring.
If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and administrative sanctions, including reductions of the value of contracts, contract modifications or terminations, forfeiture of profits, suspension of payments, penalties, fines and suspension, or prohibition from doing business with the U.S. government. In addition, we could

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suffer serious reputational harm if allegations of impropriety were made against us. Similar government oversight exists in most other countries where we conduct business. Any such imposition of penalties, or the loss of such government contracts, could materially adversely affect our business, financial condition, results of operations and growth prospects.
We are exposed to foreign currency risk, which may materially adversely affect our revenues, cost of revenues and operating margins and could result in exchange losses.
We conduct our business and incur costs in the local currency of most countries in which we operate. For the six months ended June 30, 2019 and 2018, our revenues outside North America represented approximately 62% and 65%, respectively, of our revenues, and approximately 63% of our revenues for the year ended December 31, 2018. We incur currency transaction risk whenever one or more of our operating subsidiaries enter into a transaction using currencies different than their functional currency. Changes in exchange rates can also affect our results of operations when the value of revenues and expenses of foreign subsidiaries are translated to U.S. dollars. We do not actively hedge our foreign currency exposure and we cannot accurately predict the impact of future exchange rate fluctuations on our results of operations. Further, given the volatility of exchange rates, we may not be able to effectively manage our currency risks, and any volatility in currency exchange rates may increase the price of our products in local currency to our foreign customers or increase the manufacturing cost of our products, which could decrease demand for our products in such markets. Any of the foregoing could materially adversely affect our business, financial condition, results of operations and growth prospects.
The long sales cycles for our products may cause us to incur significant expenses without offsetting revenues.
Our products represent a large investment for our customers and they typically expend significant effort in evaluating, testing and qualifying our products before making a decision to purchase them, resulting in a lengthy initial sales cycle. While our customers are evaluating our products and before they place an order with us, we may incur substantial sales and marketing and research and development expenses to customize our products to the customers’ needs. We may also expend significant management efforts, increase manufacturing capacity and order long lead-time components or materials prior to receiving an order. Even after this evaluation process, a potential customer may not purchase our products. As a result, these long sales cycles may cause us to incur significant expenses without receiving revenues to offset such expenses soon thereafter or at all. This, in turn, can materially adversely affect our business, financial condition, our results of operations and growth prospects.
Because we lack long-term purchase commitments from our customers, our revenues can be difficult to predict, which could lead to excess or obsolete inventory and materially adversely affect our results of operations.
We generally do not enter into long-term agreements with our customers obligating them to purchase our products. Our business is characterized by short-term purchase orders and shipment schedules and, in some cases, orders may be canceled or delayed without penalty. As a result, it is difficult to forecast our revenues and to determine the appropriate levels of inventory required to meet future demand. This could lead to increased inventory levels and increased carrying costs and risk of excess or obsolete inventory due to unanticipated reductions in purchases by our customers. Write-downs have been recorded as a result of changes in demand or uncertainties related to the recoverability of the value of inventories due to technological and product changes. If we are unable to accurately forecast the demand for our products, fail to accurately forecast the timing of such demand, or are unable to consistently negotiate acceptable purchase order terms with customers, we could incur significant expenses, and our business, financial condition, results of operations and growth prospects may be materially adversely affected.
If we fail to effectively manage our growth or, alternatively, our spending during downturns, our business could be disrupted, which could materially adversely affect our results of operations.
Growth in revenues, combined with the challenges of managing geographically dispersed operations, can place a significant strain on our management systems and resources, and our anticipated growth in future operations could continue to place such a strain. The failure to effectively manage our growth could disrupt our business and materially adversely affect our results of operations. Our ability to successfully offer our products and implement our business plan in evolving markets requires an effective planning and management process. Even if executed successfully, our expansion may not deliver the anticipated increase in revenues and other benefits to compensate for the expenses incurred. This could materially adversely affect our business, financial condition, results of operations and growth prospects. In economic downturns, we must effectively manage our spending and operations to ensure that our competitive position during the downturn, as well as our future opportunities when the economy improves, remains intact. The failure to effectively manage our spending and operations could disrupt our business and materially adversely affect our results of operations.
Our estimates of market opportunity and forecasts of market growth may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

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Our market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Similarly, our estimates regarding the continued reduction in cost per brilliant watt and increase in power output of semiconductor lasers is based on assumptions and prior experience, and may not continue at the same rate, which could materially adversely affect the growth of high-power fiber lasers generally, and our growth specifically. Even if the markets in which we compete meet our size estimates and growth forecasts, and even if semiconductor lasers continue to become less expensive and more powerful, our business could fail to grow for a variety of reasons, which would adversely affect our results of operations.
We depend upon internal production and on outside single or limited-source suppliers for many of our key components and raw materials, including cutting-edge optics and materials. Any interruption in the supply of these key components and raw materials could materially adversely affect our business, financial condition, results of operations and growth prospects.
We rely exclusively on our own production capabilities to manufacture certain of our key components, such as semiconductor lasers, specialty optical fibers and optical components. Certain of our components, such as our semiconductor lasers, which are manufactured at our Vancouver, Washington facility, and our active fibers, which are manufactured at our Lohja, Finland facility, rely on processes and equipment that cannot be easily moved or replaced. If our manufacturing activities were obstructed or hampered significantly at these, or our other facilities, it could take a considerable length of time, at an increased cost, for us to resume manufacturing, which could materially harm our business and results of operations.
Also, we purchase certain raw materials and components, which are key elements to manufacture our products, from single- or limited-source suppliers. We generally do not have guaranteed supply arrangements with our suppliers. Some of our suppliers are relatively small private companies that may discontinue their operations at any time and may be particularly susceptible to prevailing economic conditions. Some of our suppliers are also our competitors. Our key suppliers may not have the ability to increase their production in line with our customers' demands. This can become acute during times of high growth in our customers' businesses. As a result, we experienced, and may in the future experience, longer lead times or delays in fulfillment of our orders. Furthermore, other than our current suppliers, there may be a limited number of entities from which we could obtain these supplies. We do not anticipate that we would be able to purchase these materials that we require in a short period of time or at the same cost from other sources in commercial quantities or that have our required performance specifications. In addition, if quality issues arise with these outsourced materials and go undetected by us, the use of such defective materials in our products could compromise their quality and harm our reputation.
For certain long lead-time supplies or in order to lock in pricing, we may be obligated to place purchase orders which are not cancelable or otherwise assume liability for a large amount of the ordered supplies, which limits our ability to adjust down our inventory liability in the event of market downturns or other customer cancellations or rescheduling of their purchase orders for our products. Some of our products require designs and specifications which are at the cutting-edge of available technologies. Our and our customers' designs and specifications frequently change to meet rapidly evolving market demands. Accordingly, certain of our products require components and supplies which may be technologically difficult and unpredictable to manufacture. By their very nature, these types of components may only be available by a single supplier. These characteristics place further pressure on the timely delivery of such components. Any interruption or delay in the supply of any of these components or materials, or the inability to obtain these components and materials from alternate sources at acceptable prices and within a reasonable amount of time, could materially adversely affect our ability to meet customer orders. If our suppliers face financial or other difficulties, do not maintain sufficient inventory on hand or if there are significant changes in demand for the components and materials we obtain from them, they could limit the availability of these components and materials to us. Any of the foregoing could materially adversely affect our business, financial condition, results of operations and growth prospects.
We depend on our OEM customers and system integrators to incorporate our products into their systems.
Our revenues depend in part on our ability to maintain existing and secure new OEM customers. Our revenues also depend in part upon the ability of our current and potential OEM customers and system integrators to incorporate our products into their systems, and to sell such systems successfully. The commercial success of these systems depends to a substantial degree on the efforts of these OEM customers and system integrators to develop and market products that incorporate our technologies. Relationships and experience with traditional laser makers, limited marketing resources, reluctance to invest in research and development and other factors affecting these OEM customers and third-party system integrators could have a substantial impact upon demand for our products, and in turn upon our revenues and financial results. If OEM customers or integrators are not able to adapt existing tools or develop new systems to take advantage of the features and benefits of lasers, or if they perceive us to be an actual or potential competitor, then the opportunities to expand our revenues and increase our margins may be severely limited or delayed. In addition, some of our OEM customers are developing their own laser sources. If they are successful, this may reduce our revenues from these customers.

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Failure to effectively maintain and expand our field service and support organization could materially adversely affect our business, financial condition, results of operations and growth prospects.
It is important for us to provide rapid, responsive service directly to our customers throughout the world and to maintain and expand our own personnel resources to provide these services. Any actual or perceived lack of adequate field service in the locations where we sell or try to sell our products may negatively impact our sales efforts and, consequently, our revenues. This requires us to recruit and train additional qualified field service and support personnel as well as maintain effective and highly trained organizations that can provide service to our customers in various countries. We may not be able to attract and train additional qualified personnel to expand our direct support operations successfully, in a cost-effective manner or at all. We also may not be able to find and engage additional qualified third-party resources to supplement and enhance our direct support operations. Further, we may incur significantly higher costs in providing these field and support services if competition for or unavailability of these services is limited. Failure to implement and manage our support operation effectively could materially adversely affect our relationships with our customers, as well as our business, financial condition, results of operations and growth prospects.
Our products could contain defects, which may reduce sales of those products, harm market acceptance of our high-performance laser products or result in claims against us.
The manufacture of our high-performance lasers involves highly complex and precise processes. Despite testing by us and our customers, errors have been found in our products and may be found in the future. In addition, some of our products are combined with products from other vendors, which may contain defects. As a result, should problems occur, it may be difficult to identify the source of the problem. Our products are typically sold with warranty provisions that require us to remedy deficiencies in quality or performance over a specified period of time at no cost to our customers. Reserves for estimated warranty claims are recorded during the period of sale. The determination of such reserves requires us to make estimates of failure rates and expected costs to repair or replace the products under warranty. We typically establish warranty reserves based on historical warranty costs for each product line. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to cost of revenues may be required in future periods, which could materially adversely affect our results of operations. These defects may cause us to incur significant warranty, support and repair costs, incur additional costs related to a recall, divert the attention of our engineering personnel from our product development efforts and harm our relationships with our customers. These problems could result in, among other things, loss of revenues or a delay in revenue recognition, loss of market share, harm to our reputation or a delay or loss of market acceptance of our laser products. Defects, integration issues or other performance problems in our products could also result in personal injury or financial or other damages to our customers, which in turn could damage market acceptance of our products. Our customers could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, could be time-consuming and costly to defend, and could harm our reputation. We cannot assure investors that our product liability insurance would adequately protect our assets from the financial impact of defending a product liability claim. Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing insurance coverage in the future.
We may experience lower than expected manufacturing yields, which would adversely affect our gross margins.
The manufacture of semiconductor lasers and their packaging is a highly complex process. Manufacturers often encounter difficulties in achieving acceptable product yields from laser and packaging operations. We have from time to time experienced lower than anticipated manufacturing yields for our lasers. If we do not achieve planned yields, our product costs could increase, resulting in lower gross margins, and key component availability would decrease, which could result in delays in fulfilling customer orders or rolling out new product lines.
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 our 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

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measures, thereby exposing us to material adverse effects on our business, financial condition, results of operations and growth prospects.
Our business could be materially adversely affected if one or more members of our executive management team or key personnel departed.
Any future success is substantially dependent on the continued contributions of our executive officers, including Scott Keeney, our chairman of the board, president and chief executive officer. We are also dependent on key technologists, and other key engineering, sales, marketing, manufacturing and support personnel, any of whom may leave, which could harm our business and reputation in the market. Our business requires engineering staff with experience in several disciplines, including semiconductor physics, chemistry, material science, electrical engineering, optical engineering, and mechanical engineering. We will need to continue to recruit and retain highly skilled engineers for certain functions.
Any future success also depends in part on our ability to identify, attract, hire, train, retain and motivate highly skilled research and development, managerial, operations, sales, marketing and customer service personnel. We are continually recruiting such personnel. However, competition for such personnel can be strong and we can provide no assurance that we will be successful in attracting or retaining such personnel now or in the future. In addition, particularly in the high-technology industry, the value of stock options, restricted stock units, grants or other share-based compensation is an important element in the retention of employees. Declines in the value of our common stock could materially adversely affect our ability to retain employees and we may have to take additional steps to make the equity component of our compensation packages more appealing to attract and retain employees. These steps could result in dilution to stockholders.
If we fail to attract, integrate and retain the necessary personnel, our ability to extend and maintain our scientific expertise and grow our business could suffer significantly. The loss of any key employee, the failure of any key employee to adequately perform in his or her current position, our inability to attract, train and retain skilled employees as needed or the inability of our key employees to expand, train and manage our employee base as needed, could materially adversely affect our business, financial condition, results of operations and growth prospects.
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 then 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, beginning with our second annual report on Form 10-K, 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 the later of the year following our first annual report to be filed with the SEC, or the date we are no longer an "emerging growth company" as defined in the JOBS Act if we take advantage of the exemptions contained in the JOBS Act. Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. Section 404 compliance will divert resources and take significant time and effort to complete, and our compliance costs will correspondingly increase. We may be unable to successfully complete the procedures and certification and attestation requirements of Section 404 in a timely manner. 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," 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

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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 operations are conducted in a limited number of locations. Any disruption at our facilities could delay revenues or increase our expenses.
An earthquake, fire, flood or other natural or manmade disaster could disable our facilities, disrupt operations or cause catastrophic losses. Our major manufacturing facilities are located in Vancouver, Washington; Hillsboro, Oregon; Shanghai, China; and Lohja, Finland. Some of our facilities, such as our headquarters and key manufacturing and development facilities in Vancouver, Washington, are located in areas with a known history of seismic and volcanic activity. We also have facilities in areas with a known history of flooding, such as our location in Shanghai, China, and there is a risk of flooding and snowstorms at our location in Lohja, Finland. A loss at any of these or other of our or our suppliers' facilities could disrupt operations, delay production and shipments, reduce revenues and generate potentially significant expenses to repair or replace damaged facilities. The insurance we maintain against earthquakes, floods and other natural or manmade disasters may not be adequate to cover our losses in any particular case.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.
The U.S. and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of certain products, technologies and software. We must export our products in compliance with U.S. export controls, including the Commerce Department's Export Administration Regulations, the State Department's International Traffic in Arms Regulations, or ITAR, and various economic and trade sanctions established by the Treasury Department's Office of Foreign Assets Controls. We may not always be successful in obtaining necessary export licenses, and our failure to obtain required import or export approval for our products or limitations on our ability to export or sell our products imposed by these laws may harm our international and domestic revenues. Noncompliance with these laws could have negative consequences, including government investigations, penalties and reputational harm.
In addition, compliance with the directives of the Directorate of Defense Trade Controls, or DDTC, may result in substantial expenses and diversion of management attention. Any failure to adequately address the directives of DDTC could result in civil fines or suspension or loss of our export privileges, any of which could materially adversely affect our business, financial condition, results of operations and growth prospects.
Changes in our products or changes in export, import and economic sanctions laws and regulations may delay our introduction of new products in international markets, prevent our customers from deploying our products internationally or, in some cases, prevent the export or import of our products to or from certain countries altogether. In addition to the tariffs imposed by the U.S. Government on certain items imported from China, it is possible that additional sanctions or restrictions may be imposed by the United States on items imported into the United States from China. Similarly, in addition to the tariffs imposed by China on certain items imported from the United States, it is possible that additional sanctions or restrictions may be imposed by China on items imported into China from the United States. Any such measures could further adversely affect our ability to sell our products to existing or potential customers and harm our ability to compete internationally and grow our business. Any change in export or import regulations or legislation, shift or change in enforcement, or change in the countries, persons or technologies targeted by these regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. In such event, our business, financial condition, results of operations and growth prospects could be materially adversely affected.
We are subject to anti-corruption, anti-bribery, anti-money laundering and similar laws, and non-compliance with such laws can subject us to criminal penalties or significant fines and harm our business and reputation.
We are subject to anti-corruption and anti-bribery and similar laws, such as the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the U.K. Bribery Act 2010, the Proceeds of Crime Act 2002 and possibly other anti-corruption, anti-bribery and anti-money laundering laws in countries in which we conduct activities. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly and prohibit companies and their employees and agents from promising, authorizing, making, offering, soliciting or accepting improper payments or other benefits to or from government officials and others in the public and private sectors. We can be held liable for the corrupt or other illegal activities of our employees, representatives, contractors, business partners and agents, even if we do not explicitly authorize or have actual knowledge of such activities. China also strictly prohibits bribery of government officials and commercial bribery. Our operations in China create the risk of unauthorized payments or offers of payments by our employees, consultants, sales agents or distributors, even though they may not always be subject to our control.

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While we have policies and procedures in this area, we cannot guarantee that improprieties committed by our employees or third parties will not occur. Noncompliance with these laws could subject us to investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, suspension or debarment from contracting with certain persons, the loss of export privileges, whistleblower complaints, reputational harm, adverse media coverage and other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, financial condition, results of operations and growth prospects could be materially adversely affected. In addition, responding to any action will likely result in a materially significant diversion of management's attention and resources and significant defense and compliance costs and other professional fees. In certain cases, enforcement authorities may even require us to appoint an independent compliance monitor, which can result in added costs and administrative burdens. Any investigations, actions or sanctions or other previously mentioned harm could materially adversely affect our business, financial condition, results of operations and growth prospects.
Changes in U.S. or foreign tax law may materially adversely affect our business, financial condition, results of operations and growth prospects.
The Tax Cuts and Jobs Act, or 2017 Tax Act, brought about extensive changes to the U.S. corporate tax system. The 2017 Tax Act includes changes that reduce U.S. corporate tax rates, change how U.S. multinational corporations, like us, are taxed on international earnings, repeal domestic manufacturing deduction, accelerate tax revenue recognition, allow capitalization of research and development expenditures, place additional limitations on executive compensation and limitations on the deductibility of interest. We continue to examine the impact the 2017 Tax Act may have on our business. Due to the large and expanding scale of our international business activities, any changes in the U.S. or foreign taxation of such activities may increase our worldwide effective tax rate and the amount of taxes we pay and seriously harm our business.
Additionally, under the applicable laws and regulations in China, arrangements and transactions among related parties may be subject to audit or challenge by the Chinese tax authorities. We would be subject to adverse tax consequences if the Chinese tax authorities were to determine that the transactions with or between our subsidiaries were not executed on an arm's-length basis, and as a result the Chinese tax authorities could require that our Chinese subsidiaries adjust their taxable income upward for Chinese tax purposes. Such an adjustment could materially adversely affect us by increasing our tax expenses.
We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different than the treatment reflected in our historical income tax provisions and accruals, which could materially adversely affect our business, financial condition, results of operations and growth prospects.
We could be subject to additional income tax liabilities.
We are subject to income taxes in the United States and certain other foreign jurisdictions. Judgment is required in evaluating our worldwide provision for income taxes. During the ordinary course of business, there are many transactions for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in foreign currency exchange rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. We are subject to audit in various jurisdictions, and such jurisdictions may assess additional income tax against us. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material adverse effect on our operating results or cash flows in the period or periods for which that determination is made.
Our international operations subject us to potential adverse tax consequences.
We generally conduct our international operations through wholly-owned subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. We believe that our financial statements reflect adequate reserves to cover such a contingency, but there can be no assurances in that regard.
Our reported financial results may be materially adversely affected by changes in accounting principles generally accepted in the United States.

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Generally accepted accounting principles in the United States, or GAAP, are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.
In particular, in February 2016 the FASB issued ASU No. 2016‑02, Leases (Topic 842). ASU 2016‑02 requires a lessee to recognize a right of use asset and a lease liability for virtually all leases, other than leases that meet the definition of short‑term. The standard is effective for annual reporting periods of emerging growth companies beginning after December 15, 2019. We expect to implement the provisions of ASU 2016‑02, as amended, as of January 1, 2020. We are currently evaluating the impact of this ASU, as amended, and cannot reasonably estimate the quantitative impact on the financial statements.
We are subject to various environmental laws and regulations that could impose substantial costs upon us and may materially adversely affect our business, financial condition, results of operations and growth prospects.
We are subject to a variety of federal, state, local and foreign environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing process or requiring design changes or recycling of products we manufacture. We could incur costs, fines and civil or criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. Liability under environmental laws can be joint and several and without regard to comparative fault. Compliance with current or future environmental laws and regulations could restrict our ability to expand our facilities or require us to acquire additional expensive equipment, modify our manufacturing processes or incur other significant expenses in order to remain in compliance with such laws and regulations. At this time, we do not believe the costs to maintain compliance with current environmental laws to be material. If such costs were to become material in the future, whether due to unanticipated changes in environmental laws or their interpretations, unanticipated changes in our operations or other unanticipated changes, we may be required to dedicate additional staff or financial resources in order to maintain compliance. There can be no assurance that violations of environmental laws or regulations will not occur in the future as a result of the lack of, or failure to obtain, permits, human error, accident, equipment failure or other causes.
Results of future litigation could materially adversely affect our business, financial condition, results of operations and growth prospects.
From time to time, we have been subject to litigation. The outcome of any litigation, regardless of its merits, is inherently uncertain. Future litigation could result in significant damages payable by us, and could harm our reputation. Even if we are successful in our defense, such litigation could still result in a diversion of management's attention and our resources and we may be required to incur significant expenses defending against these claims. We cannot predict our future commitments with respect to any matters encountered in the future, or their eventual outcome. Where we can make a reasonable estimate of the liability relating to pending litigation and determine that it is probable, we record a related liability. As additional information becomes available, we assess the potential liability and revise estimates as appropriate. However, because of uncertainties relating to litigation, the amount of our estimates could be wrong. Any adverse determination related to litigation could require us to change our technology or our business practices, pay monetary damages or fines, or enter into royalty or licensing arrangements, which could materially adversely affect our cash flows, harm our reputation, or otherwise materially adversely affect our business, financial condition, results of operations and growth prospects.
The outcome of any government inquiries and investigations involving our business is unpredictable and an adverse decision in any such matter could materially adversely affect our business, financial condition, results of operations and growth prospects.
We have been involved in certain disputes and have also received requests for information from government authorities. For example, we entered into a civil settlement agreement with the U.S. Department of Justice in March 2015 concerning a matter related to our eligibility for certain contracts awarded to us under the Small Business Innovation Research, or SBIR, Program. We have also received information requests from the Criminal Division of the U.S. Attorney's Office related to our SBIR eligibility and the Criminal Division has interviewed certain of our current and past employees. We have responded to the U.S. Attorney's requests with a production of documents. Although we have not received further inquiries from the Criminal Division since 2015, the Criminal Division has contacted certain of our former employees as recently as June 2017 and the inquiry may be ongoing, and we do not know when it will conclude or whether the Criminal Division will pursue claims against us or our employees. If the Criminal Division or a federal court determines that we or our employees are criminally liable, our business, financial condition, results of operations and growth prospects could be materially adversely affected.
Acquisitions could result in operating difficulties and may materially adversely affect our business, financial condition, results of operations and growth prospects.

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We have evaluated, and expect to continue evaluating, 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.

Our debt obligations contain restrictions that impact our business and expose us to risks that could materially adversely affect our liquidity and financial condition.
In September 2018, we entered into an amended and restated loan facility, or loan facility, with Pacific Western Bank, as lender. This loan facility imposes certain covenants and restrictions on our business and our ability to obtain additional financing. As of June 30, 2019, we had no outstanding principal amount under the revolving loan facility.
Among other things, our loan facility requires the lender's consent to:
•
merge or consolidate;
•
sell or transfer assets outside the ordinary course of business;
•
make certain types of investments and capital expenditures;
•
incur additional indebtedness or guarantee indebtedness of others;
•
pay dividends, redeem or repurchase our capital stock;
•
enter into transactions with affiliates outside the ordinary course of business; and
•
create liens on our assets.
Our loan facility also contains affirmative covenants, including a maximum capital expenditures covenant, determined in relation to our Adjusted EBITDA for the quarter, in the event our total cash reserves fall below a certain threshold. The facility contains events of default, including, among others, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross-defaults to other indebtedness, judgment defaults, bankruptcy and insolvency defaults and a change of control default.
If we experience a decline in cash flow due to any of the factors described in this "Risk Factors" section or otherwise, we could have difficulty paying interest due and principal amounts outstanding in the future, and meeting the financial covenants set forth in our loan facility. If we are unable to generate sufficient cash flow or otherwise obtain the funds necessary to make required payments under our loan facility, or if we fail to comply with the requirements of our indebtedness, we could default under our loan facility. Any default that is not cured or waived could result in the acceleration of the obligations under the loan facility, an increase in the applicable interest rate under the loan facility, and would permit our lender to exercise remedies with respect to all of the collateral that is securing the loan facility, which includes substantially all of our assets. Any such default could materially adversely affect our liquidity and financial condition.
Even if we comply with all of the applicable covenants, the restrictions on the conduct of our business could materially adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that may be beneficial to the business. Even if the loan facility were terminated, additional debt we could incur in the future may subject us to similar or additional covenants, which could place restrictions on the operation of our business.

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Our ability to use net operating losses to offset future taxable income may be limited.
As of June 30, 2019, we had U.S. federal and state net operating loss carryforwards, or NOLs, of $77.5 million and $12.6 million, respectively, and federal and state research development credit carryforwards of $5.6 million and $22.2 thousand, respectively, which we may use to reduce future taxable income or offset income taxes due. The NOLs and credit carryforwards start expiring in 2023 and 2019, respectively. Insufficient future taxable income will adversely affect our ability to deploy these NOLs and credit carryforwards. In addition, under Section 382 of the U.S. Internal Revenue Code, or the Code, a corporation that experiences a more than 50% ownership change over a three-year testing period is limited in its ability to use its pre-change NOLs and other tax assets to offset future taxable income or income taxes due. Our existing NOLs and credit carryforwards are subject to limitations arising from previous ownership changes. Our ability to use our NOLs and credit carryforwards could be further limited by Section 382 of the Code if we undergo an ownership change. Future changes in our stock ownership, the causes of which may be outside our control, could result in an ownership change under Section 382 of the Code. Our NOLs may also be impaired under state law. As a result of these limitations, we may not be able to utilize a material portion of, or possibly any of, the NOLs and credit carryforwards, which could materially adversely affect our cash flows.
Risks Related to Ownership of Our Common Stock
The market price of our common stock may be volatile, and the value of your investment could decline significantly.
Technology stocks have historically experienced high levels of volatility. The trading price of our common has been and is likely to continue to be volatile. Factors that could cause fluctuations in the trading price of our common stock include the following:

•
price and volume fluctuations in the overall stock market from time to time;
•
changes in operating performance, stock market valuations and volatility in the market prices of other technology companies generally, or those in our industry in particular;
•
actual or anticipated quarterly variations in our results of operations or those of our competitors;
•
actual or anticipated changes in our growth rate relative to our competitors;
•
announcements by us or our competitors of acquisitions, new products, significant contracts, commercial relationships or capital commitments;
•
manufacturing or supply interruptions;
•
developments with respect to intellectual property rights;
•
our ability to develop and market new and enhanced products on a timely basis;
•
commencement of, or our involvement in, litigation;
•
major changes in our Board of Directors or management;
•
changes in governmental regulations or in the status of our regulatory approvals;
•
the trading volume of our stock;
•
any future sales of our common stock or other securities;
•
failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company or our failure to meet these estimates or the expectations of investors;
•
fluctuations in the values of companies perceived by investors to be comparable to us;
•
the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; and
•
general economic conditions and slow or negative growth of related markets.
The stock market in general, and market prices for the securities of technology companies like ours in particular, have from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. In several recent situations when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and materially adversely affect our results of operations.
If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our business, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us issues an adverse opinion about our company, our stock price would likely decline. If one or more of these analysts ceases research coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

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Future sales of our common stock could cause our stock price to fall.
Our stock price could decline as a result of sales of a large number of shares of our common stock or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
The holders of 3.8 million shares, or approximately 10.2% of our common stock, have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders, based on our shares outstanding as of June 30, 2019.
In the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with a financing, acquisition, commercial relationship, litigation settlement, employee arrangements or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and could cause our stock price to decline.

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, for as long as we continue to be an "emerging growth company," we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to "emerging growth companies," including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, 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. We could be an "emerging growth company" for up to five years following the first sale of our common stock pursuant to an effective registration statement under the Securities Act, although, if we have more than $1.07 billion in annual revenues, if the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year, or we issue more than $1.0 billion of non-convertible debt over a three-year period before the end of that five-year period, we would cease to be an "emerging growth company" as of the following December 31. If some investors find our common stock less attractive as a result of any choices to reduce future 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;

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•
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 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 will be 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 such 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 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. To the extent the Delaware Supreme Court makes a final determination that provisions such as the Federal Forum Provision are not valid as a matter of Delaware law, our Board of Directors intends to amend our Bylaws to remove the federal forum provision.
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.
ITEM 6. EXHIBITS

(a) Exhibits


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Exhibit
Number
 
Incorporated by Reference
Filed
Herewith
Description
Form
File No.
Exhibit
Filing Date
3.1
10-Q
001-38462
3.1
May 25, 2018
 
3.2
10-Q
001-38462
3.2
May 25, 2018
 
4.1
S-1/A
333-224055
4.1
April 16, 2018
 
4.2
S-1
333-224055
4.2
March 30, 2018
 
31.1
 
 
 
 
X
31.2
 
 
 
 
X
32.1*
 
 
 
 
X
101.INS
XBRL Instance Document.
 
 
 
 
X
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
 
 
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
 
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
X
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
X
*
The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
NLIGHT, INC.
 
 
(Registrant)
 
 
 
 
 
 
August 7, 2019
By:
/s/ SCOTT KEENEY
Date
 
Scott Keeney
 
 
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
August 7, 2019
By:
/s/ RAN BAREKET
Date
 
Ran Bareket
 
 
Chief Financial Officer
(Principal Accounting and Financial Officer)
 
 
 


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