10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 6, 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from ___ to ___
Commission File Number
(Exact name of registrant as specified in its charter)
2015 W. Chestnut Street,
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Trading Symbol |
Name of Each Exchange on Which Registered |
The |
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. þ
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). þ
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 definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☑
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).
As of August 3, 2020, the number of shares outstanding of our no par value common stock totaled
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes 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 (the “Exchange Act”). These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Such forward-looking statements include, in particular, projections about our future results included in our Exchange Act reports and statements about our plans, strategies, business prospects, changes and trends in our business and the markets in which we operate, including the expected impact of the COVID-19 pandemic on our business and operations. These forward-looking statements may be identified by the use of terms and phrases such as “anticipates,” “believes,” “can,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “targets,” “will,” “would,” and similar expressions or variations of these terms and similar phrases. Additionally, statements concerning future matters such as our expected liquidity, development of new products, enhancements or technologies, sales levels, expense levels, expectations regarding the outcome of legal proceedings and other statements regarding matters that are not historical are forward-looking statements. Management cautions that these forward-looking statements relate to future events or our future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance, or achievements of our business or our industry to be materially different from those expressed or implied by any forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation the following: (a) uncertainties regarding the effects of the COVID-19 pandemic and the impact of measures intended to reduce its spread on our business and operations, which is evolving and beyond our control; (b) the rapidly evolving markets for the Company’s products and uncertainty regarding the development of these markets; (c) the Company’s historical dependence on sales to a limited number of customers and fluctuations in the mix of products and customers in any period; (d) delays and other difficulties in commercializing new products; (e) the failure of new products: (i) to perform as expected without material defects, (ii) to be manufactured at acceptable volumes, yields, and cost, (iii) to be qualified and accepted by our customers, and (iv) to successfully compete with products offered by our competitors; (f) uncertainties concerning the availability and cost of commodity materials and specialized product components that we do not make internally; (g) actions by competitors; (h) risks and uncertainties related to applicable laws and regulations, including the impact of changes to applicable tax laws and tariff regulations; (i) acquisition-related risks, including that (1) the revenues and net operating results obtained from the Systron Donner Inertial, Inc. ("SDI") business may not meet our expectations, (2) the costs and cash expenditures for integration of the SDI business operations may be higher than expected, (3) there could be losses and liabilities arising from the acquisition of SDI that we will not be able to recover from any source, and (4) we may not realize sufficient scale in our Navigation and Inertial Sensing product line from the SDI acquisition and will need to take additional steps, including making additional acquisitions, to achieve our growth objectives for this product line; (j) risks related to our ability to obtain capital; (k) risks related to the transition of certain of our manufacturing operations from our Beijing facility to a contract manufacturer’s facility; and (l) other risks and uncertainties discussed in Part II, Item 1A, Risk Factors in this Quarterly Report on Form 10-Q and in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, as such risk factors may be amended, supplemented or superseded from time to time by our subsequent periodic reports we file with the Securities and Exchange Commission (“SEC”). These cautionary statements apply to all forward-looking statements wherever they appear in this Quarterly Report.
Forward-looking statements are based on certain assumptions and analysis made in light of our experience and perception of historical trends, current conditions and expected future developments as well as other factors that we believe are appropriate under the circumstances. While these statements represent our judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results. All forward-looking statements in this Quarterly Report are made as of the date hereof, based on information available to us as of the date hereof, and subsequent facts or circumstances may contradict, obviate, undermine, or otherwise fail to support or substantiate such statements. We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. Certain information included in this Quarterly Report may supersede or supplement forward-looking statements in our other reports filed with the SEC. We do not intend to update any forward-looking statement to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.
EMCORE Corporation
FORM 10-Q
For The Quarterly Period Ended June 30, 2020
TABLE OF CONTENTS
3
PART I. Financial Information.
ITEM 1.Financial Statements
EMCORE CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Loss
For three and nine months ended June 30, 2020 and 2019
(in thousands, except per share data)
(unaudited)
For the three months ended |
For the nine months ended |
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June 30, |
June 30, |
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2020 |
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2019 |
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2020 |
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2019 |
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Revenue |
$ |
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$ |
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$ |
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$ |
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Cost of revenue |
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Gross profit |
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Operating expense: |
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Selling, general, and administrative |
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Research and development |
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Gain from change in estimate on ARO obligation |
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— |
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— |
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( |
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Gain on sale of assets |
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( |
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— |
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( |
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Total operating expense |
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Operating loss |
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( |
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Other income: |
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Interest (expense) income, net |
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( |
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( |
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Foreign exchange (loss) gain |
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( |
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( |
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( |
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Total other (expense) income |
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( |
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( |
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( |
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Loss before income tax (expense) benefit |
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( |
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( |
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( |
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( |
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Income tax (expense) benefit |
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( |
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( |
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( |
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Net loss |
$ |
( |
$ |
( |
$ |
( |
$ |
( |
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Foreign exchange translation adjustment |
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( |
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Comprehensive loss |
$ |
( |
$ |
( |
$ |
( |
$ |
( |
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Per share data: |
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Net loss per basic and diluted share |
$ |
( |
$ |
( |
$ |
( |
$ |
( |
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Weighted-average number of basic and diluted shares outstanding used in computing net loss per share |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
EMCORE CORPORATION
Condensed Consolidated Balance Sheets
As of June 30, 2020 and September 30, 2019
(in thousands)
(unaudited)
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As of |
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As of |
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June 30, |
September 30, |
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2020 |
2019 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ |
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$ |
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Restricted cash |
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Accounts receivable, net of allowance of $ |
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Contract assets |
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Inventory |
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Prepaid expenses and other current assets |
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Assets held for sale |
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Total current assets |
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Property, plant, and equipment, net |
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Goodwill |
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Operating lease right-of-use assets |
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Other intangible assets, net |
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Other non-current assets |
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Total assets |
$ |
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$ |
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LIABILITIES and SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Borrowings from credit facility |
$ |
— |
$ |
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PPP liability - current |
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Accounts payable |
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Accrued expenses and other current liabilities |
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Operating lease liabilities - current |
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Total current liabilities |
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PPP liability - non-current |
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Operating lease liabilities - non-current |
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Asset retirement obligations |
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Other long-term liabilities |
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— |
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Total liabilities |
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Commitments and contingencies (Note 13) |
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Shareholders’ equity: |
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Common stock, |
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Treasury stock at cost; |
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( |
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( |
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Accumulated other comprehensive income |
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Accumulated deficit |
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( |
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( |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
EMCORE CORPORATION
Condensed Consolidated Statements of Shareholders’ Equity
For the three and nine months ended June 30, 2020 and 2019
(in thousands)
(unaudited)
For the three months ended |
For the nine months ended |
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June 30, |
June 30, |
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2020 |
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2019 |
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2020 |
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2019 |
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Shares of Common Stock |
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Balance, beginning of period |
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Stock-based compensation |
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Stock option exercises |
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Issuance of common stock for acquisition |
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— |
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— |
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Issuance of restricted stock units |
— |
— |
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— |
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Issuance of common stock - ESPP |
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— |
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— |
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Balance, end of period |
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Value of Common Stock |
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Balance, beginning of period |
$ |
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$ |
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$ |
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$ |
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Stock-based compensation |
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Stock option exercises |
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Tax withholding paid on behalf of employees for stock-based awards |
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( |
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( |
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( |
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( |
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Issuance of common stock for acquisition |
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— |
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— |
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Issuance of restricted stock units |
— |
— |
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— |
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Issuance of common stock - ESPP |
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— |
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— |
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Balance, end of period |
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Treasury stock, beginning and ending of period |
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( |
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( |
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( |
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( |
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Accumulated Other Comprehensive Income |
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Balance, beginning of period |
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Translation adjustment |
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( |
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Balance, end of period |
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Accumulated Deficit |
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Balance, beginning of period |
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( |
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( |
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( |
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( |
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Net loss |
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( |
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( |
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( |
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( |
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Balance, end of period |
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( |
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( |
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( |
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( |
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Total Shareholders’ Equity |
$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
6
EMCORE CORPORATION
Condensed Consolidated Statements of Cash Flows
For the nine months ended June 30, 2020 and 2019
(in thousands)
(unaudited)
For the nine months ended June 30, |
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2020 |
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2019 |
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Cash flows from operating activities: |
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Net loss |
$ |
( |
$ |
( |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization expense |
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Stock-based compensation expense |
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Provision adjustments related to doubtful accounts |
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Provision adjustments related to product warranty |
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Net gain on disposal of property, plant and equipment |
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( |
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Issuance of restricted stock units |
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Other |
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( |
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( |
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Total non-cash adjustments |
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Changes in operating assets and liabilities: |
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Accounts receivable anc contract assets |
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( |
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Inventory |
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( |
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( |
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Other assets |
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( |
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( |
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Accounts payable |
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( |
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Accrued expenses and other current liabilities |
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Total change in operating assets and liabilities |
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( |
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Net cash used in operating activities |
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( |
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( |
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Cash flows from investing activities: |
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Purchase of equipment |
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( |
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( |
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Acquisition of business, net of cash acquired |
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( |
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Proceeds from disposal of property, plant and equipment |
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Net cash provided by (used in) investing activities |
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( |
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Cash flows from financing activities: |
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Net payments on credit facilities |
( |
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Proceeds from PPP loan |
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Proceeds from exercise of equity awards |
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Taxes paid related to net share settlement of equity awards |
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( |
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( |
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Net cash provided by financing activities |
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Effect of exchange rate changes provided by foreign currency |
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Net increase (decrease) in cash, cash equivalents and restricted cash |
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( |
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Cash, cash equivalents and restricted cash at beginning of period |
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Cash, cash equivalents and restricted cash at end of period |
$ |
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$ |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
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Cash paid during the period for interest |
$ |
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$ |
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Cash paid during the period for income taxes |
$ |
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$ |
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NON-CASH INVESTING AND FINANCING ACTIVITIES |
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Changes in accounts payable related to purchases of equipment |
$ |
( |
$ |
( |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
EMCORE Corporation
Notes to our Condensed Consolidated Financial Statements
NOTE 1. Description of Business
Business Overview
EMCORE Corporation (referred to herein, together with its subsidiaries, as the “Company,” “we,” “our,” or “EMCORE”) was established in 1984 as a New Jersey corporation. The Company became publicly traded in 1997 and is listed on the Nasdaq stock exchange under the ticker symbol EMKR. EMCORE pioneered the linear fiber optic transmission technology that enabled the world’s first delivery of Cable TV (“CATV”) directly on fiber, and today is a leading provider of advanced Mixed-Signal Optics products that enable communications systems and service providers to meet growing demand for increased bandwidth and connectivity. The Mixed-Signal Optics technology at the heart of our broadband communications products is shared with our fiber optic gyros and inertial sensors to provide the aerospace and defense markets with state-of-the-art navigation systems technology. With the acquisition of Systron Donner Inertial, Inc. (“SDI”), a navigation systems provider with a scalable, chip-based platform for higher volume gyro applications utilizing Quartz MEMS technology, in June 2019, EMCORE further expanded its portfolio of gyros and inertial sensors with SDI’s quartz MEMS gyro and accelerometer technology. EMCORE has fully vertically-integrated manufacturing capability through our indium phosphide compound semiconductor wafer fabrication facility at our headquarters in Alhambra, CA, and through our quartz processing and sensor manufacturing facility in Concord, CA. These facilities support EMCORE’s vertically-integrated manufacturing strategy for quartz and fiber optic gyro products, for navigation systems, and for our chip, laser, transmitter, and receiver products for broadband applications.
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for annual financial statements. In our opinion, the interim financial statements reflect all adjustments, which are all normal recurring adjustments, that are necessary to provide a fair presentation of the financial results for the interim periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for an entire fiscal year. The condensed consolidated balance sheet as of September 30, 2019 has been derived from the audited consolidated financial statements as of such date. For a more complete understanding of our business, financial position, operating results, cash flows, risk factors and other matters, please refer to our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. If these estimates differ significantly from actual results, the impact to the condensed consolidated financial statements may be material. There have been no material changes in our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. Please refer to Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 for a discussion of our critical accounting policies and estimates.
NOTE 2. Recent Accounting Pronouncements
(a) | New Accounting Updates Recently Adopted |
● | In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). ASU 2016-02 introduces a lessee model that requires recognition of |
8
assets and liabilities arising from qualified leases on the consolidated balance sheets and disclosure of qualitative and quantitative information about lease transactions. The new standard was effective for our fiscal year beginning October 1, 2019. We adopted Topic 842 using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at the beginning of the period of adoption. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to carry forward the historical lease classification and we elected the hindsight practical expedient to determine the lease term for existing leases. Additionally, the Company elected an accounting policy to not record operating lease right-of-use (“ROU”) assets and lease liabilities for leases with an initial term of twelve months or less on its condensed consolidated balance sheet. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. |
Adoption of the new standard resulted in the recording of net operating lease ROU assets of $
● | The impact of the adoption of Accounting Standards Codification (“ASC”) 842 on the balance sheet as of October 1, 2019 was: |
As Reported |
Balance |
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September 30, 2019 |
Increase |
October 1, 2019 |
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(in thousands) |
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Operating lease right-of-use assets |
$ |
- |
$ |
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$ |
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Total assets |
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Operating lease liabilities |
- |
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Total current liabilities |
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Operating lease liabilities non-current |
- |
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Total liabilities |
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Total liabilities and equity |
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In connection with the sale/leaseback of non-residential real estate on February 10, 2020, the Company recorded an additional operating ROU assets and operating lease
(b) | Recent Accounting Standards or Updates Not Yet Effective |
● | In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the way entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net earnings. The new standard is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. The new standard will be effective for our fiscal year beginning October 1, 2020 and early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact it may have on its condensed consolidated financial statements and related disclosures. |
NOTE 3. Summary of Significant Accounting Policies
Our significant accounting policies are detailed in “Note 2 - Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended September 30, 2019. Significant changes to our accounting policies as a result of adopting Topic 842 are discussed below:
The Company determines if an arrangement is a lease at its inception. ROU assets and operating lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate in determining the present value of lease payments considering
9
the term of the lease, which is derived from information available at the lease commencement date. The lease term includes
The Company’s lease arrangements consist primarily of corporate, manufacturing and other facility agreements as well as various office equipment agreements. The leases expire at various dates through 2035, some of which include options to extend the lease term. The options with the longest potential total lease term consist of options for extension of up to
During the three and nine months ended June 30, 2020, the Company recorded $
Supplemental cash information and non-cash activities related to operating leases are as follows (in thousands):
Nine Months Ended |
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June 30, 2020 |
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Operating cash outflows from operating leases |
$ |
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Operating lease assets obtained in exchange for new lease liabilities |
$ |
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Maturities of operating lease liabilities as of June 30, 2020 were as follows (in thousands):
Amount |
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2020 |
$ |
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2021 |
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2022 |
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2023 |
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2024 |
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Thereafter |
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Total lease payments |
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Less imputed interest |
( |
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Total |
$ |
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The following is a schedule of future minimum operating lease payments as of September 30, 2019 (in thousands):
Amount |
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2020 |
$ |
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2021 |
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2022 |
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2023 |
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2024 |
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Thereafter |
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Total lease payments |
$ |
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10
Weighted-average remaining lease term and discount rate related to operating leases are as follows:
June 30, 2020 |
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Weighted average remaining lease term (years) |
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Weighted average discount rate |
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% |
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Disaggregation of Revenue - Revenue is classified based on the product line of business. For additional information on the disaggregated revenues by geographical region, see Note 15 - Geographical Information in the notes to the condensed consolidated financial statements.
Revenue is also classified by major product category and is presented below:
For the three months ended June 30, |
For the nine months ended June 30, |
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% of |
% of |
% of |
% of |
|
|||||||||||||||||
(in thousands) |
|
2020 |
|
Revenue |
|
2019 |
|
Revenue |
|
2020 |
|
Revenue |
|
2019 |
|
Revenue |
|
||||
Navigation and Inertial Sensing |
$ |
|
|
% |
|
|
% |
$ |
|
|
% |
|
|
% |
|||||||
Defense Optoelectronics |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|||||||||
CATV Lasers and Transmitters |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|||||||||
Chip Devices |
|
|
|
|
% |
|
|
|
% |
|
|
|
|
% |
|
|
|
% |
|||
Other |
|
|
|
|
% |
|
|
|
% |
|
|
|
|
% |
|
|
|
% |
|||
Total revenue |
$ |
|
|
|
% |
$ |
|
|
|
% |
$ |
|
|
|
% |
$ |
|
|
|
% |
NOTE 4. Acquisition
On June 7, 2019, we completed the acquisition of Systron Donner Inertial, Inc. (“SDI”), a private-equity backed navigation systems provider with a scalable, chip-based platform for higher volume gyro applications utilizing Quartz MEMS technology. The total purchase price was approximately $
Following the closing, we incorporated SDI’s products into our Navigation and Inertial Sensing product line and have included the financial results of SDI in our condensed consolidated financial statements beginning on the acquisition date. Net revenue and net income of SDI of $
Purchase Price Allocation
The total purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date.
The Company finalized the allocation of the purchase price in the quarter ended March 31, 2020, which resulted in no change from the preliminary purchase price recorded at September 30, 2019.
11
The table below represents the purchase price allocation to the assets acquired and liabilities assumed of SDI based on their estimated fair values as of the acquisition date. The fair values assigned to assets acquired and liabilities assumed were based on management’s best estimates and assumptions at the acquisition date.
|
|
Weighted |
|||
Average Useful |
|||||
(in thousands) |
Amount |
Life (years) |
|||
Purchase price |
$ |
|
|
||
Developed technology |
|
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|
||
Cash acquired |
|
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||
Inventories |
|
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Accounts receivable |
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Other assets |
|
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|
Land and building |
|
|
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|
|
Equipment |
|
|
|
|
|
Net liabilities assumed |
|
( |
|
|
|
Goodwill |
$ |
|
|
|
Pro Forma Financial Information
The following unaudited pro forma financial information presented for the three and nine months ended June 30, 2020 and 2019 does not purport to be indicative of the results of operations that would have been achieved had the acquisition been consummated on October 1, 2018, nor of the results which may occur in the future. The pro forma amounts are based upon available information and certain assumptions that the Company believes are reasonable.
For the three months ended |
For the nine months ended |
|||||||||||
June 30, |
June 30, |
|||||||||||
(in thousands, except per share data) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
Revenue |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Net loss |
$ |
( |
$ |
( |
$ |
( |
$ |
( |
||||
Net loss per basic and diluted share |
$ |
( |
$ |
( |
$ |
( |
$ |
( |
||||
Weighted-average number of basic and diluted shares outstanding |
|
|
|
|
|
|
|
|
NOTE 5. Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited consolidated balance sheets that sum to the total of the same amounts shown in the unaudited statements of consolidated cash flows:
|
As of |
|
As of |
|
As of |
||||
June 30, |
September 30, |
June 30, |
|||||||
(in thousands) |
2020 |
2019 |
2019 |
||||||
Cash |
$ |
|
$ |
|
$ |
|
|||
Cash equivalents |
|
|
|
||||||
Restricted cash |
|
|
|
|
|
|
|||
Total cash, cash equivalents and restricted cash |
$ |
|
|
|
|
|
The Company’s restricted cash includes cash balances which are legally or contractually restricted in use. The Company’s restricted cash is included in current assets as of June 30, 2020, September 30, 2019 and June 30, 2019.
NOTE 6. Fair Value Accounting
ASC Topic 820 (“ASC 820”), Fair Value Measurements, establishes a valuation hierarchy for disclosure of the inputs to valuation techniques used to measure fair value. This standard describes a fair value hierarchy based on three levels of
12
inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
● | Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. |
● | Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly, through market corroboration, for substantially the full term of the financial instrument. |
● | Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets or liabilities at fair value. |
Classification of an asset or liability within this hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs.
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, contract assets, other current assets, and accounts payable approximate fair value because of the short maturity of these instruments. See Note 4 - Acquisition for discussion of the fair value measurement of assets acquired and liabilities assumed in the SDI acquisition.
NOTE 7. Accounts Receivable
The components of accounts receivable consisted of the following:
As of |
||||||
(in thousands) |
|
June 30, 2020 |
|
September 30, 2019 |
||
Accounts receivable, gross |
$ |
|
$ |
|
||
Allowance for doubtful accounts |
|
( |
|
( |
||
Accounts receivable, net |
$ |
|
$ |
|
The allowance for doubtful accounts is based on the age of receivables and a specific identification of receivables considered at risk of collection.
NOTE 8. Inventory
The components of inventory consisted of the following:
As of |
||||||
(in thousands) |
|
June 30, 2020 |
|
September 30, 2019 |
||
Raw materials |
$ |
|
$ |
|
||
Work in-process |
|
|
|
|
||
Finished goods |
|
|
|
|
||
Inventory balance at end of period |
$ |
|
$ |
|
13
NOTE 9. Property, Plant, and Equipment, net
The components of property, plant, and equipment, net consisted of the following:
As of |
||||||
(in thousands) |
|
June 30, 2020 |
|
September 30, 2019 |
||
Land |
$ |
— |
$ |
|
||
Building |
|
— |
|
|
||
Equipment |
|
|
|
|
||
Furniture and fixtures |
|
|
|
|
||
Computer hardware and software |
|
|
|
|
||
Leasehold improvements |
|
|
|
|
||
Construction in progress |
|
|
|
|
||
Property, plant, and equipment, gross |
$ |
|
$ |
|
||
Accumulated depreciation |
|
( |
|
( |
||
Property, plant, and equipment, net |
$ |
|
$ |
|
During the three and nine months ended June 30, 2020, the Company sold certain equipment and recognized a gain on sale of assets of approximately $
On February 10, 2020, SDI completed a sale and leaseback transaction with Eagle Rock Holdings LP (“Buyer”) of non-residential real estate (the “Sale and Leaseback Transaction”). Under the terms of the applicable purchase agreement, SDI sold its property located in Concord, California (the “Concord Real Property”) to Buyer for a total purchase price of $
At the consummation of the Sale and Leaseback Transaction, SDI entered into a Single-Tenant Triple Net Lease (the “Lease Agreement”) with Buyer pursuant to which SDI leased back from Buyer the Concord Real Property for a term commencing on the consummation of the Sale and Leaseback Transaction and ending
As a result of the Lease Agreement, the Company recorded net operating lease ROU assets and operating lease
14
NOTE 10. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities consisted of the following:
As of |
||||||
(in thousands) |
|
June 30, 2020 |
|
September 30, 2019 |
||
Compensation |
$ |
|
$ |
|
||
Warranty |
|
|
|
|
||
Legal expenses and other professional fees |
|
|
||||
Contract liabilities |
|
|
||||
Income and other taxes |
|
|
|
|
||
Severance and restructuring accruals |
|
|
|
|
||
Other |
|
|
|
|
||
Accrued expenses and other current liabilities |
$ |
|
$ |
|
NOTE 11. Credit Facilities and Debt
Credit Facilities
On November 11, 2010, we entered into a Credit and Security Agreement (as amended to date, the “Credit Facility”) with Wells Fargo Bank, N.A. The Credit Facility is secured by the Company’s assets and is subject to a borrowing base formula based on the Company’s eligible accounts receivable, inventory, and machinery and equipment accounts.
The Credit Facility matures in November 2021 and currently provides us with a revolving credit line of up to $
As of June 30, 2020, there was
Debt
On May 3, 2020, the Company entered into a Paycheck Protection Program Promissory Note and Agreement (the “PPP Loan Agreement”) with Wells Fargo Bank, N.A. under the Paycheck Protection Program (“PPP”) established under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) to receive loan proceeds of approximately $
The PPP Loan matures on May 3, 2022 and bears interest at a fixed rate of
NOTE 12. Income and Other Taxes
During each of the three months ended June 30, 2020 and 2019, the Company recorded income tax expense of approximately $
15
For the nine months ended June 30, 2020 and 2019, the Company recorded income tax benefit (expense) of approximately $
For the three months ended June 30, 2020 and 2019, the effective tax rate on continuing operations was
We have not provided for income taxes on non-U.S. subsidiaries’ undistributed earnings as of June 30, 2020 because we plan to indefinitely reinvest the unremitted earnings of our non-U.S. subsidiaries and all of our non-U.S. subsidiaries historically have negative earnings and profits.
All deferred tax assets have a full valuation allowance at June 30, 2020. On a quarterly basis, the Company evaluates the positive and negative evidence to assess whether the more likely than not criteria has been satisfied in determining whether there will be further adjustments to the valuation allowance.
During the three and nine months ended June 30, 2020 and 2019, there were no material increases or decreases in unrecognized tax benefits. As of June 30, 2020 and September 30, 2019, we had approximately $
NOTE 13. Commitments and Contingencies
Indemnifications: We have agreed to indemnify certain customers against claims of infringement of intellectual property rights of others in our sales contracts with these customers. Historically, we have not paid any claims under these indemnification obligations. We enter into indemnification agreements with each of our directors and executive officers pursuant to which we agree to indemnify them for certain potential expenses and liabilities arising from their status as a director or executive officer of the Company. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and executive officers in certain circumstances. It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.
Legal Proceedings: We are subject to various legal proceedings, claims, and litigation, either asserted or unasserted, that arise in the ordinary course of business. The outcome of these matters is currently not determinable and we are unable to estimate a range of loss, should a loss occur, from these proceedings. The ultimate outcome of legal proceedings involves judgments, estimates and inherent uncertainties and the results of these matters cannot be predicted with certainty.
a) | Intellectual Property Lawsuits |
We protect our proprietary technology by applying for patents where appropriate and, in other cases, by preserving the technology, related know-how and information as trade secrets. The success and competitive position of our product lines are impacted by our ability to obtain intellectual property protection for our research and development efforts. We
16
have, from time to time, exchanged correspondence with third parties regarding the assertion of patent or other intellectual property rights in connection with certain of our products and processes.
b) | Phoenix Navigation Components, LLC (“Phoenix”) Legal Proceedings |
On June 12, 2018, Phoenix commenced an arbitration against EMCORE with the American Arbitration Association (“AAA”) in New York. On August 31, 2018, Phoenix filed a First Amended Demand for Arbitration, asserting the following claims: breach of contract, breach of the covenant of good faith and fair dealing, misappropriation of trade secrets (under the Defend Trade Secrets Act, 18 U.S.C. § 1836, and New York law), conversion, unjust enrichment, correction of inventorship relating to U.S. Patent No. 8,773,665, and declaratory relief, relating to EMCORE’s termination of certain agreements entered into between EMCORE and Phoenix related to the purported license of certain intellectual property related to fiber optic gyroscope technology and disputed royalty payments related thereto. On September 14, 2018, EMCORE filed an Answering Statement and Counterclaim, denying all of Phoenix’s claims and asserting counterclaims for breach of the implied covenant of good faith and fair dealing and declaratory relief.
On June 21, 2019, an interim award (the “Interim Award”) was issued in connection with all claims in the AAA proceeding other than the claims related to correction of inventorship and declaratory relief relating to U.S. Patent No. 8,773,665 (the “Patent Claims”). While Phoenix ultimately sought $
The arbitrator also found in the Interim Award that (i) EMCORE breached certain license agreements entered into with Phoenix by failing to make royalty payments due and failing to provide required accountings; (ii) Phoenix and its members are no longer subject to prior exclusivity restrictions; (iii) EMCORE's claim for breach of the covenant of good faith and fair dealing was denied; and (iv) the proceedings for the Patent Claims and EMCORE's counterclaim with respect thereto would be established by a future proceeding.
Further, out of the original
In the Interim Award, the arbitrator further determined that EMCORE shall pay Phoenix a royalty of
17
On October 1, 2019, the arbitrator issued a Modified Partial Final Award, which incorporated by reference the terms of the Interim Award and ordered and awarded, among other items, (i) an award to Phoenix of attorneys’ fees and costs in the amount of approximately $
The Patent Claims were not determined in the Interim Award or the Modified Partial Final Award. In December 2019, EMCORE and Phoenix entered into a settlement agreement with respect to the Patent Claims pursuant to which EMCORE (i) granted Phoenix a fully paid, perpetual nonexclusive license to the disputed patent and (ii) agreed to pay Phoenix a total of $
On June 21, 2018, Phoenix commenced a special proceeding against EMCORE in the New York Supreme Court, Commercial Division (the “Special Proceeding”). As part of the Special Proceeding, Phoenix filed an application for a preliminary injunction in aid of arbitration pursuant to CLPR 7502(c), in connection with the AAA arbitration proceeding in New York. The application resulted in a so-ordered stipulated injunction between EMCORE and Phoenix, which was entered in August 2018. In January 2020, the court granted a motion to confirm the Modified Partial Final Award, vacated the so-ordered stipulated injunction entered in August 2018, and disposed of the Special Proceeding.
NOTE 14. Equity
Equity Plans
We provide long-term incentives to eligible officers, directors, and employees in the form of equity-based awards. We maintain
● | the 2000 Stock Option Plan, |
● | the 2010 Equity Incentive Plan (“2010 Plan”), |
● | the 2012 Equity Incentive Plan (“2012 Plan”), and |
● | the 2019 Equity Incentive Plan (“2019 Plan”). |
We issue new shares of common stock to satisfy awards issued under our Equity Plans.
Stock-based compensation
The effect of recording stock-based compensation expense was as follows:
For the three months |
For the nine months |
|||||||||||
Stock-based Compensation Expense - by award type |
ended June 30, |
ended June 30, |
||||||||||
(in thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
Employee stock options |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Restricted stock units and awards |
|
|
|
|
|
|
|
|
||||
Performance stock units and awards |
|
|
|
|
|
|
|
|
||||
Employee stock purchase plan |
|
|
|
|
|
|