# NLIGHT, INC. (LASR) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from NLIGHT, INC.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1124796/000112479624000018/lasr-20231231.htm
Accession: 0001124796-24-000018
Filing date: 2024-02-26
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/LASR/
All MD&A years: /company/LASR/mda/
Previous year: /company/LASR/mda/fy2022/ (FY 2022)
Next year: /company/LASR/mda/fy2024/ (FY 2024)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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,"

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"objective," "ongoing," "plan," "possible," "potential," "predict," "project," "propose," "rely," "should," "target," "will," "would" or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.

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

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

Overview

nLIGHT, Inc., headquartered in Camas, Washington, is a leading provider of high‑power semiconductor and fiber lasers for industrial, microfabrication, and aerospace and defense applications. We operate in two reportable segments consisting of the Laser Products segment and the Advanced Development segment. Sales of our semiconductor lasers, fiber lasers, fiber amplifiers, and directed energy products are included in the Laser Products segment, while revenue earned from research and development contracts are included in the Advanced Development segment.

Revenues decreased to $209.9 million in the year ended December 31, 2023 compared to $242.1 million in 2022 due to a decrease in sales in the Laser Products segment that was partially offset by an increase in sales in the Advanced Development segment. We generated a net loss of $41.7 million for the year ended December 31, 2023 compared to a net loss of $54.6 million in 2022.

Factors Affecting Our Performance

Demand for our Semiconductor and Fiber Laser Solutions

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

Demand for our products also fluctuates based on market cycles, continuously evolving industry supply chains, trade and tariff terms, as well as evolving competitive dynamics in each of our end-markets. Erosion of average

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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 product and manufacturing costs. Although we anticipate further increases in product volumes and the continued introduction of new and higher value products, ASP reduction may cause our revenues to decline or grow at a slower rate.

Technology and New Product Development

We invest heavily in the development of our semiconductor, fiber laser, directed energy, and laser-sensing 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 performance of our products provide a significant benefit to our customers. 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 product gross profit, in absolute dollars and as a percentage of revenues, is impacted by our product sales mix, sales volumes, changes in ASPs, production volumes, the corresponding absorption of manufacturing overhead expenses, the cost of purchased materials, 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. We have invested heavily in U.S.-based manufacturing capabilities in the last several years. Capacity utilization affects our gross margin because we have a high fixed cost base due to our vertically integrated business model. Increases in sales and production volumes drive favorable absorption of fixed costs, improved manufacturing efficiencies and lower production costs. Gross margins may fluctuate from period to period depending on product mix and the level of capacity utilization.

Our Development gross profit varies with the type and terms of contracts, contract volume, project mix, changes in the estimated cost of projects at completion, and successful execution on projects during the period. Most of our Development contracts have historically been structured as cost plus fixed fee due to the technical complexity of the research and development services, but we also perform work under fixed price contracts where gross margin can change from period to period based on the estimated cost of the project at completion.

Seasonality

Our quarterly revenues can fluctuate with general economic trends, the timing of capital expenditures by our customers, holidays, 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.

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Results of Operations

The following table sets forth our operating results as a percentage of revenues for the periods indicated (which may not add up due to rounding):

[[GREPCENT_TABLE]]
[["","","","","Year Ended December 31,"],["","","","","2023","","2022","","2021"],["Revenue:"],["","Products","","74.6","%","","79.6","%","","76.3","%"],["","Development","","25.4","","","20.4","","","23.7"],["","","Total revenue","","100.0","","","100.0","","","100.0"],["Cost of revenue:"],["","Products","","54.4","","","60.0","","","49.2"],["","Development","","23.6","","","19.0","","","22.2"],["","","Total cost of revenue","","78.0","","","79.0","","","71.4"],["","","Gross profit","","22.0","","","21.0","","","28.6"],["Operating expenses:"],["","Research and development","","22.0","","","22.2","","","20.3"],["","Sales, general and administrative","","21.8","","","19.9","","","19.5"],["","Restructuring","","0.4","","","1.6","","","\u2014"],["","","Total operating expenses","","44.2","","","43.8","","","39.8"],["","","Loss from operations","","(22.2)","","","(22.8)","","","(11.2)"],["Other income (expense):"],["","Interest income (expense), net","","0.5","","","0.2","","","(0.1)"],["","Other income, net","","1.3","","","0.1","","","0.1"],["","","Loss before income taxes","","(20.4)","","","(22.4)","","","(11.2)"],["Income tax expense (benefit)","","(0.5)","","","0.1","","","(0.1)"],["","","Net loss","","(19.9)","%","","(22.5)","%","","(11.1)","%"]]
[[/GREPCENT_TABLE]]

Revenues by End Market

Our revenues by end market were as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","% of Revenue","","2022","% of Revenue","","Amount","","%"],["Industrial","$","71,044","","33.8","%","","$","91,098","","37.6","%","","$","(20,054)","","","(22.0)","%"],["Microfabrication","47,483","","22.6","","","62,769","","25.9","","","(15,286)","","","(24.4)"],["Aerospace and Defense","91,394","","43.6","","","88,191","","36.4","","","3,203","","","3.6"],["","$","209,921","","100.0","%","","$","242,058","","100.0","%","","$","(32,137)","","","(13.3)","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","% of Revenue","","2021","% of Revenue","","Amount","","%"],["Industrial","$","91,098","","37.6","%","","$","94,795","","35.1","%","","$","(3,697)","","","(3.9)","%"],["Microfabrication","62,769","","25.9","","","70,412","","26.1","","","(7,643)","","","(10.9)"],["Aerospace and Defense","88,191","","36.4","","","104,939","","38.8","","","(16,748)","","","(16.0)"],["","$","242,058","","100.0","%","","$","270,146","","100.0","%","","$","(28,088)","","","(10.4)","%"]]
[[/GREPCENT_TABLE]]

The decrease in Industrial and Microfabrication market revenue for 2023 compared to 2022 was the result of decreased unit sales across all regions due primarily to lower customer demand and deteriorating market

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conditions. The increase in Aerospace and Defense market revenue in 2023 compared to 2022 was driven by new development contracts, offset partially by a decrease in product sales.

The decrease in Industrial and Microfabrication market revenue for 2022 compared to 2021 was driven by a decrease in unit sales in China, partially offset by an increase in unit sales outside of China. The closure of our Shanghai facility for approximately two months during the second quarter of 2022 due to the COVID-19 pandemic had a negative impact on unit sales in China. The decrease in revenue from the Aerospace and Defense market for 2022 compared to 2021 was due to decreased activity on development contracts, and a decrease in product sales in the second half of 2022 due primarily to supply chain disruptions.

Revenues by Segment

Our revenues by segment were as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","% of Revenue","","2022","% of Revenue","","Amount","","%"],["Laser Products","$","156,666","","74.6","%","","$","192,658","","79.6","%","","$","(35,992)","","","(18.7)","%"],["Advanced Development","53,255","","25.4","","","49,400","","20.4","","","3,855","","","7.8"],["","$","209,921","","100.0","%","","$","242,058","","100.0","%","","$","(32,137)","","","(13.3)","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","% of Revenue","","2021","% of Revenue","","Amount","","%"],["Laser Products","$","192,658","","79.6","%","","$","206,195","","76.3","%","","$","(13,537)","","","(6.6)","%"],["Advanced Development","49,400","","20.4","","","63,951","","23.7","","","(14,551)","","","(22.8)"],["","$","242,058","","100.0","%","","$","270,146","","100.0","%","","$","(28,088)","","","(10.4)","%"]]
[[/GREPCENT_TABLE]]

The decrease in Laser Products revenue for 2023 compared to 2022 was primarily due to decreased units sales to the Industrial and Microfabrication markets as discussed above. The increase in Advanced Development revenue was driven by new development contracts. Most of our Advanced Development revenue in 2023 was generated from cost plus fixed fee development contracts, and all Advanced Development revenue is included in the Aerospace and Defense market.

The decrease in Laser Products revenue for 2022 compared to 2021 was driven by decreased units sales across each end market as discussed above. The decrease in Advanced Development revenue for 2022 compared to 2021 was primarily due to decreased activity on development contracts.

Revenues by Geographic Region

Our revenues by geographic region were as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","% of Revenue","","2022","% of Revenue","","Amount","","%"],["North America","$","129,311","","61.6","%","","$","137,454","","56.8","%","","$","(8,143)","","","(5.9)","%"],["China","11,890","","5.7","","","21,287","","8.8","","","(9,397)","","","(44.1)"],["Rest of World","68,720","","32.7","","","83,317","","34.4","","","(14,597)","","","(17.5)"],["","$","209,921","","100.0","%","","$","242,058","","100.0","%","","$","(32,137)","","","(13.3)","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","% of Revenue","","2021","% of Revenue","","Amount","","%"],["North America","$","137,454","","56.8","%","","$","143,232","","53.0","%","","$","(5,778)","","","(4.0)","%"],["China","21,287","","8.8","","","55,446","","20.5","","","(34,159)","","","(61.6)"],["Rest of World","83,317","","34.4","","","71,468","","26.5","","","11,849","","","16.6"],["","$","242,058","","100.0","%","","$","270,146","","100.0","%","","$","(28,088)","","","(10.4)","%"]]
[[/GREPCENT_TABLE]]

Geographic revenue information is based on the location to which we deliver our products and services. 

The decrease in North America revenue for 2023 compared to 2022 was the result of decreased revenue from the Industrial and Microfabrication markets, partially offset by an increase in revenue from the Aerospace and Defense market. The decrease in China and Rest of World revenue for 2023 compared to 2022 was driven by decreases in revenue from the Industrial and Microfabrication markets as discussed above.

The decrease in North America revenue for 2022 compared to 2021 was primarily due to decreased revenue from the Aerospace and Defense market, partially offset by increased revenue from the Industrial market. The decrease in China revenue for 2022 compared to 2021 was the result of decreased sales in the Industrial and Microfabrication markets, primarily as a result of deteriorating market conditions. The closure of our Shanghai facility for approximately two months during the second quarter of 2022 due to the COVID-19 pandemic also had a negative impact on 2022 sales in China. The increase in Rest of World revenue for 2022 compared to 2021 was due to increased revenue from the Microfabrication and Industrial markets.

Cost of Revenues and Gross Margin

Cost of Laser Products revenue consists primarily of manufacturing materials, labor, shipping and handling costs, tariffs and manufacturing-related overhead. We order materials and supplies based on backlog and forecasted customer orders. We expense all warranty costs and inventory provisions as cost of revenues. Cost of Advanced Development revenue consists of materials, labor, subcontracting costs, an allocation of indirect costs including overhead and general and administrative.

Our gross profit and gross margin were as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2023"],["","Laser Products","","Advanced Development","","Corporate and Other","","Total"],["Gross profit","$","44,891","","","$","3,628","","","$","(2,406)","","","$","46,113"],["Gross margin","28.7","%","","6.8","%","","NM*","","22.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2022"],["","Laser Products","","Advanced Development","","Corporate and Other","","Total"],["Gross profit","$","50,063","","","$","3,435","","","$","(2,677)","","","$","50,821"],["Gross margin","26.0","%","","7.0","%","","NM*","","21.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2021"],["","Laser Products","","Advanced Development","","Corporate and Other","","Total"],["Gross profit","$","75,833","","","$","3,979","","","$","(2,505)","","","$","77,307"],["Gross margin","36.8","%","","6.2","%","","NM*","","28.6","%"]]
[[/GREPCENT_TABLE]]

*NM - Not meaningful.

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The increase in Laser Products gross margin for 2023 compared to 2022 was driven by a decrease in direct labor and other variable manufacturing costs, and a decrease in manufacturing variances, partially offset by the impact of lower production volumes on fixed manufacturing costs due to the decrease in customer demand. Manufacturing variances in 2022 included inventory charges related to business restructuring and the discontinuation of certain product lines in the fourth quarter of 2022. The decrease in Advanced Development gross margin for 2023 compared to 2022 was not significant and was primarily the result of changes in the composition of research and development contracts.

The decrease in Laser Products gross margin for 2022 compared to 2021 was driven by sales mix, decreased factory utilization, increased labor and material costs, and increased freight costs, partially offset by an increase in duty reclaim. In addition, Laser Products gross margin in 2022 was negatively impacted by inventory charges related to business restructuring and the discontinuation of certain product lines in the fourth quarter of 2022. The increase in Advanced Development gross margin for 2022 compared to 2021 was not significant and was primarily the result of changes in the mix of research and development contracts.

Operating Expenses

Our operating expenses were as follows (dollars in thousands):

Research and Development

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["Research and development","$","46,163","","","$","53,773","","","$","(7,610)","","","(14.2)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["Research and development","$","53,773","","","$","54,814","","","$","(1,041)","","","(1.9)"]]
[[/GREPCENT_TABLE]]

The decrease in research and development expense for 2023 compared to 2022 was due primarily to decreases in salary costs and project-related expenses, an increase in costs allocated from research and development to development projects, and a decrease in stock-based compensation of $1.8 million.

The decrease in research and development expense for 2022 compared to 2021 was driven by a decrease in stock-based compensation of $1.8 million and a decrease in purchased intangible amortization of $1.2 million, partially offset by increases in salary costs and project-related expenses.

Sales, General and Administrative

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["Sales, general, and administrative","$","45,899","","","$","48,258","","","$","(2,359)","","","(4.9)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["Sales, general, and administrative","$","48,258","","","$","52,710","","","$","(4,452)","","","(8.4)"]]
[[/GREPCENT_TABLE]]

The decrease in sales, general and administrative expense for 2023 compared to 2022 was primarily due to a decrease in salary costs and incentive compensation, and an increase in administrative costs allocated from sales, general and administrative to development projects, partially offset by an increase in stock-based compensation of $1.2 million.

The decrease in sales, general and administrative expense for 2022 compared to 2021 was primarily due to a decrease in stock-based compensation of $9.4 million, partially offset by increases in salary costs, professional service fees and facility expenses, and a decrease in administrative costs allocated from sales, general and

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administrative to development projects. The decrease in stock-based compensation was the result of forfeitures and decreases in expected achievement related to performance-based stock awards.

Restructuring

Restructuring included the following (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["Employee termination costs","$","737","","","$","1,271","","","$","(534)","","","(42.0)","%"],["Write-off of long-lived assets","\u2014","","","2,566","","","(2,566)","","","(100.0)"],["Other","79","","","55","","","24","","","43.6"],["","$","817","","","$","3,892","","","$","(3,075)","","","(79.0)","%"]]
[[/GREPCENT_TABLE]]

We implemented a restructuring plan in the fourth quarter of 2023 which resulted in a reduction of headcount in China. During the fourth quarter of 2022, we implemented a restructuring plan which included headcount reductions in both the U.S. and China, and the write-down of certain in-process capital equipment projects related to production capacity that were never completed or placed into service.

Interest Income (Expense), net

Interest income (expense), net was as follows (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["Interest income, net","$","1,342","","","$","529","","","$","813","","","153.7"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["Interest income (expense), net","$","529","","","$","(163)","","","$","692","","","424.5"]]
[[/GREPCENT_TABLE]]

The increase in net interest income for 2023 compared to 2022 was driven by an increase in marketable securities and interest rates. The increase in net interest income for 2022 compared to 2021 was driven by increases in interest rates and the investment in marketable securities during the second quarter of 2022, as well as the payoff of our long-term debt in the third quarter of 2021.

Other Income, net

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["Other income, net","$","2,776","","","$","338","","","$","2,438","","","721.3"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["Other income, net","$","338","","","$","336","","","$","2","","","0.6"]]
[[/GREPCENT_TABLE]]

The increase in other income, net, in 2023 compared to 2022, was driven by realized gains on the sale of marketable securities. The change in other income, net, in 2022 compared to 2021 was not significant and consisted primarily of net realized and unrealized foreign exchange transactions resulting from currency rate fluctuations.

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Income Tax Expense (Benefit)

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["Income tax expense (benefit)","$","(978)","","","$","344","","","$","(1,322)","","","(384.3)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["Income tax expense (benefit)","$","344","","","$","(375)","","","$","719","","","191.7"]]
[[/GREPCENT_TABLE]]

We record income tax expense for taxes in our foreign jurisdictions including Finland, Italy, Austria, and South Korea. While our tax expense is largely dependent on the geographic mix of earnings related to our foreign operations, we also record tax expense for uncertain tax positions taken and associated penalties and interest. We consider all available evidence, both positive and negative, in assessing the extent to which a valuation allowance should be applied against our deferred tax assets. Due to the uncertainty with respect to their ultimate realizability in the United States and China, we continue to maintain a full valuation allowance in these jurisdictions as of December 31, 2023. Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to U.S. federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates and deductibility of certain costs and expenses by jurisdiction.

The income tax benefit for 2023 compared to the income tax expense for 2022 was driven by a discrete tax benefit related to expiring statutes of limitations of unrecognized tax positions recorded in the second quarter of 2023. The increase in income tax expense for 2022 compared to 2021 was driven by a discrete tax benefit related to return to provision true ups and expiring statutes of limitations of unrecognized tax positions recorded in the second quarter of 2021.

Liquidity and Capital Resources

Total cash, cash equivalents and marketable securities were $113.1 million and $108.5 million as of December 31, 2023 and 2022, respectively. We had cash and cash equivalents of $53.5 million and $58.1 million as of December 31, 2023 and 2022, respectively, and marketable securities of $59.7 million and $50.4 million as of December 31, 2023 and 2022, respectively.

For the year ended December 31, 2023, our principal uses of liquidity were to fund operating activities, acquire plant and equipment and tax payments related to stock award issuances. The primary source of cash was collections from customers.

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

The following table summarizes our cash flows for the periods presented (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["Net cash provided by (used in) operating activities","$","10,091","","","$","(14,542)","","","$","(7,443)"],["Net cash used in investing activities","(14,100)","","","(72,381)","","","(21,853)"],["Net cash (used in) provided by financing activities","(859)","","","(1,306)","","","73,742"],["Effect of exchange rate changes on cash","256","","","(477)","","","(235)"],["Net (decrease) increase in cash, cash equivalents, and restricted cash","$","(4,612)","","","$","(88,706)","","","$","44,211"]]
[[/GREPCENT_TABLE]]

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Net Cash Provided by (Used in) Operating Activities

During the year ended December 31, 2023, net cash provided by operating activities was $10.1 million, which was the result of a $41.7 million net loss, offset by cash provided by working capital of $8.1 million and non‑cash expenses totaling $43.7 million related primarily to depreciation, amortization, and stock-based compensation. Changes in working capital were driven by a $14.9 million decrease in inventory, partially offset by a $4.5 million decrease in accounts payable.

During the year ended December 31, 2022, net cash used in operating activities was $14.5 million, which was the result of a $54.6 million net loss and use of cash for working capital of $8.2 million, offset partially by non‑cash expenses totaling $48.3 million related primarily to depreciation, amortization, and stock-based compensation. Changes in working capital were driven by a $5.9 million decrease in accounts payable and a $4.6 million decrease in inventory due to a decrease in inventory purchasing.

Net Cash Used in Investing Activities

During the year ended December 31, 2023, net cash used in investing activities was $14.1 million, including the net purchase of $8.8 million of marketable securities and $5.3 million of capital expenditures related to investments in directed energy, manufacturing equipment and facilities.

During the year ended December 31, 2022, net cash used in investing activities was $72.4 million, including the net purchase of $50.0 million of marketable securities and $21.4 million of capital expenditures related to investments in directed energy, manufacturing equipment and facilities.

Net Cash (Used in) Provided by Financing Activities

During the year ended December 31, 2023, net cash used in financing activities was $0.9 million, which was primarily driven by $4.0 million of withholding tax payments related to the vesting of stock awards, partially offset by $3.1 million of proceeds from stock options exercises and employee stock plan purchases.

During the year ended December 31, 2022, net cash used in financing activities was $1.3 million, which was primarily driven by $4.9 million of withholding tax payments related to the vesting of stock awards, partially offset by $3.6 million of proceeds from stock options exercises and employee stock plan purchases.

Credit Facilities

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

The LOC agreement contains restrictive and financial covenants and bears an unused credit fee of 0.20% on an annualized basis. The interest rate on the LOC is based on the Prime rate, minus a margin of 0.50% to 1.40% based on our liquidity levels. No amounts were outstanding under the LOC at December 31, 2023 and 2022 and we were in compliance with all covenants.

Contractual Obligations

The following table sets forth a summary of our significant contractual obligations to make future payments in cash as of December 31, 2023 (in thousands):

[[GREPCENT_TABLE]]
[["","Payments Due by Year"],["","2024","","2025","","2026","","2027","","2028","","Thereafter","","Total"],["Purchase commitments","$","33,979","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","33,979"],["Lease obligations","3,687","","","2,408","","","1,741","","","1,688","","","1,413","","","5,410","","","16,347"],["Total","$","37,666","","","$","2,408","","","$","1,741","","","$","1,688","","","$","1,413","","","$","5,410","","","$","50,326"]]
[[/GREPCENT_TABLE]]

Critical Accounting Policies and Significant Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the

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United States of America (GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. Our accounting policies are fundamental to understanding our financial condition and results of operations reported in our financial statements and related disclosures. We have identified the following accounting policies as being critical because they require our management to make particularly difficult, subjective and/or complex judgments about the effect of matters that are inherently uncertain.

Revenue Recognition

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

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

We often receive orders with multiple delivery dates that may extend across several reporting periods. We allocate the transaction price of the contract to each delivery based on the product standalone selling price and invoice for each scheduled delivery upon shipment or delivery and recognize revenues for such delivery at the point when transfer of control has occurred. As scheduled delivery dates are generally within one year, under the optional exemption provided by ASC 606-10-50-14a revenues allocated to future shipments of partially completed contracts are not disclosed as performance obligations for point in time revenue. Further, the Company recognizes over time revenue as per ASC 606-10-55-18 (invoice practical expedient) for its cost plus contracts and, accordingly, elects not to disclose information related to those performance obligations under ASC 606-10-50-14b.

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

Revenues recognized at a point in time consist of sales of semiconductor lasers, fiber lasers, and certain defense and other products. Revenues recognized over time generally consist of development arrangements that are structured based on our costs incurred. Because control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer. Billing under these arrangements generally occurs within one month after the work is completed.

Inventory Valuation

Inventory is stated at the lower of average cost (principally standard cost, which approximates actual cost on a first-in, first-out basis) and net realizable value. Inventory includes raw materials and components that may be specialized in nature and subject to obsolescence. On a quarterly basis, we review inventory quantities on hand in comparison to our past consumption, recent purchases, and other factors to determine what inventory quantities, if any, may not be sellable. Based on this analysis, we write down the affected inventory value for estimated excess and obsolescence charges. At the point of loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

Inflation

We do not believe that inflation had a material effect on our business, financial condition or results of operations during the year ended December 31, 2023. If our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could materially adversely affect our business, financial condition and results of operations.

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Recent Accounting Pronouncements

See Note 1 of Notes to Consolidated Financial Statements.