Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

August 6, 2020

EMCORE CORP0000808326--09-302020Q3false10800000P15Y108000000P15Y0000808326us-gaap:TreasuryStockMember2020-06-300000808326us-gaap:RetainedEarningsMember2020-06-300000808326us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-06-300000808326us-gaap:RetainedEarningsMember2020-03-310000808326us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-03-310000808326us-gaap:RetainedEarningsMember2019-09-300000808326us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-09-300000808326us-gaap:TreasuryStockMember2019-06-300000808326us-gaap:RetainedEarningsMember2019-06-300000808326us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-06-300000808326us-gaap:RetainedEarningsMember2019-03-310000808326us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-03-310000808326us-gaap:RetainedEarningsMember2018-09-300000808326us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-09-300000808326emkr:RestrictedStockUnitsRSUsAndRestrictedStockMember2020-06-300000808326srt:EuropeMember2020-04-012020-06-300000808326exch:XPST2020-04-012020-06-300000808326emkr:UNITEDSTATESANDCANADAMember2020-04-012020-06-300000808326emkr:OtherGeographicRegionMember2020-04-012020-06-300000808326srt:EuropeMember2019-10-012020-06-300000808326exch:XPST2019-10-012020-06-300000808326emkr:UNITEDSTATESANDCANADAMember2019-10-012020-06-300000808326emkr:OtherRevenueMember2019-10-012020-06-300000808326emkr:OtherGeographicRegionMember2019-10-012020-06-300000808326emkr:NavigationAndInertialSensingMember2019-10-012020-06-300000808326emkr:DefenseOptoelectronicsMember2019-10-012020-06-300000808326emkr:ChipsMember2019-10-012020-06-300000808326emkr:CableTvLasersAndTransmittersMember2019-10-012020-06-300000808326srt:EuropeMember2019-04-012019-06-300000808326exch:XPST2019-04-012019-06-300000808326emkr:UNITEDSTATESANDCANADAMember2019-04-012019-06-300000808326emkr:OtherGeographicRegionMember2019-04-012019-06-300000808326srt:EuropeMember2018-10-012019-06-300000808326exch:XPST2018-10-012019-06-300000808326emkr:UNITEDSTATESANDCANADAMember2018-10-012019-06-300000808326emkr:OtherRevenueMember2018-10-012019-06-300000808326emkr:OtherGeographicRegionMember2018-10-012019-06-300000808326emkr:NavigationAndInertialSensingMember2018-10-012019-06-300000808326emkr:DefenseOptoelectronicsMember2018-10-012019-06-300000808326emkr:ChipsMember2018-10-012019-06-300000808326emkr:CableTvLasersAndTransmittersMember2018-10-012019-06-300000808326us-gaap:LeaseholdImprovementsMember2020-06-300000808326us-gaap:FurnitureAndFixturesMember2020-06-300000808326us-gaap:EquipmentMember2020-06-300000808326us-gaap:ConstructionInProgressMember2020-06-300000808326us-gaap:ComputerEquipmentMember2020-06-300000808326us-gaap:LeaseholdImprovementsMember2019-09-300000808326us-gaap:LandMember2019-09-300000808326us-gaap:FurnitureAndFixturesMember2019-09-300000808326us-gaap:EquipmentMember2019-09-300000808326us-gaap:ConstructionInProgressMember2019-09-300000808326us-gaap:ComputerEquipmentMember2019-09-300000808326us-gaap:BuildingAndBuildingImprovementsMember2019-09-300000808326emkr:PhoenixNavigationComponentsLLCLegalProceedingsMember2019-10-102019-10-100000808326us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-04-012020-06-300000808326us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-10-012020-06-300000808326us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-04-012019-06-300000808326us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-10-012019-06-300000808326srt:RestatementAdjustmentMemberus-gaap:AccountingStandardsUpdate201602Member2019-10-010000808326us-gaap:OperatingSegmentsMember2020-04-012020-06-300000808326us-gaap:OperatingSegmentsMember2019-10-012020-06-300000808326us-gaap:OperatingSegmentsMember2019-04-012019-06-300000808326us-gaap:OperatingSegmentsMember2018-10-012019-06-300000808326us-gaap:RetainedEarningsMember2020-04-012020-06-300000808326us-gaap:RetainedEarningsMember2019-10-012020-06-300000808326us-gaap:RetainedEarningsMember2019-04-012019-06-300000808326us-gaap:RetainedEarningsMember2018-10-012019-06-300000808326emkr:PhoenixNavigationComponentsLLCLegalProceedingsMemberemkr:DeemedTradeSecretsMember2019-06-210000808326emkr:PhoenixNavigationComponentsLLCLegalProceedingsMember2019-06-212019-06-210000808326emkr:PhoenixNavigationComponentsLLCLegalProceedingsMemberemkr:DeemedTradeSecretsMember2019-06-212019-06-210000808326emkr:PhoenixNavigationComponentsLLCLegalProceedingsMember2020-07-310000808326emkr:PhoenixNavigationComponentsLLCLegalProceedingsMember2020-04-300000808326emkr:PhoenixNavigationComponentsLLCLegalProceedingsMember2020-01-310000808326emkr:PhoenixNavigationComponentsLLCLegalProceedingsMemberus-gaap:RoyaltyMember2019-10-010000808326emkr:PhoenixNavigationComponentsLLCLegalProceedingsMember2019-12-012019-12-310000808326emkr:PhoenixNavigationComponentsLLCLegalProceedingsMember2019-10-012020-06-300000808326emkr:PhoenixNavigationComponentsLLCLegalProceedingsMemberus-gaap:RoyaltyMember2019-10-012019-10-010000808326emkr:PhoenixNavigationComponentsLLCLegalProceedingsMemberemkr:InterestMember2019-10-012019-10-010000808326emkr:PhoenixNavigationComponentsLLCLegalProceedingsMemberemkr:LegalExpenseMember2019-06-212019-06-210000808326srt:MaximumMemberemkr:TenthAmendmentMemberus-gaap:RevolvingCreditFacilityMember2020-06-300000808326us-gaap:RevolvingCreditFacilityMember2020-06-300000808326us-gaap:OperatingSegmentsMemberemkr:BroadbandMember2020-04-012020-06-300000808326us-gaap:OperatingSegmentsMemberemkr:AerospaceAndDefenseMember2020-04-012020-06-300000808326us-gaap:OperatingSegmentsMemberemkr:BroadbandMember2019-10-012020-06-300000808326us-gaap:OperatingSegmentsMemberemkr:AerospaceAndDefenseMember2019-10-012020-06-300000808326us-gaap:OperatingSegmentsMemberemkr:BroadbandMember2019-04-012019-06-300000808326us-gaap:OperatingSegmentsMemberemkr:AerospaceAndDefenseMember2019-04-012019-06-300000808326us-gaap:OperatingSegmentsMemberemkr:BroadbandMember2018-10-012019-06-300000808326us-gaap:OperatingSegmentsMemberemkr:AerospaceAndDefenseMember2018-10-012019-06-300000808326emkr:PaycheckProtectionProgramMember2020-05-062020-05-060000808326emkr:PaycheckProtectionProgramMember2020-05-060000808326us-gaap:SalesRevenueSegmentMemberus-gaap:CustomerConcentrationRiskMember2020-04-012020-06-300000808326emkr:OtherRevenueMember2020-04-012020-06-300000808326emkr:NavigationAndInertialSensingMember2020-04-012020-06-300000808326emkr:DefenseOptoelectronicsMember2020-04-012020-06-300000808326emkr:ChipsMember2020-04-012020-06-300000808326emkr:CableTvLasersAndTransmittersMember2020-04-012020-06-300000808326emkr:OtherRevenueMemberus-gaap:RevenueFromContractWithCustomerMemberus-gaap:ProductConcentrationRiskMember2019-10-012020-06-300000808326emkr:NavigationAndInertialSensingMemberus-gaap:RevenueFromContractWithCustomerMemberus-gaap:ProductConcentrationRiskMember2019-10-012020-06-300000808326emkr:DefenseOptoelectronicsMemberus-gaap:RevenueFromContractWithCustomerMemberus-gaap:ProductConcentrationRiskMember2019-10-012020-06-300000808326emkr:ChipsMemberus-gaap:RevenueFromContractWithCustomerMemberus-gaap:ProductConcentrationRiskMember2019-10-012020-06-300000808326emkr:CableTvLasersAndTransmittersMemberus-gaap:RevenueFromContractWithCustomerMemberus-gaap:ProductConcentrationRiskMember2019-10-012020-06-300000808326us-gaap:SalesRevenueSegmentMemberus-gaap:CustomerConcentrationRiskMember2019-10-012020-06-300000808326us-gaap:RevenueFromContractWithCustomerMemberus-gaap:ProductConcentrationRiskMember2019-10-012020-06-300000808326us-gaap:SalesRevenueSegmentMemberus-gaap:CustomerConcentrationRiskMember2019-04-012019-06-300000808326emkr:OtherRevenueMember2019-04-012019-06-300000808326emkr:NavigationAndInertialSensingMember2019-04-012019-06-300000808326emkr:DefenseOptoelectronicsMember2019-04-012019-06-300000808326emkr:ChipsMember2019-04-012019-06-300000808326emkr:CableTvLasersAndTransmittersMember2019-04-012019-06-300000808326emkr:OtherRevenueMemberus-gaap:RevenueFromContractWithCustomerMemberus-gaap:ProductConcentrationRiskMember2018-10-012019-06-300000808326emkr:NavigationAndInertialSensingMemberus-gaap:RevenueFromContractWithCustomerMemberus-gaap:ProductConcentrationRiskMember2018-10-012019-06-300000808326emkr:DefenseOptoelectronicsMemberus-gaap:RevenueFromContractWithCustomerMemberus-gaap:ProductConcentrationRiskMember2018-10-012019-06-300000808326emkr:ChipsMemberus-gaap:RevenueFromContractWithCustomerMemberus-gaap:ProductConcentrationRiskMember2018-10-012019-06-300000808326emkr:CableTvLasersAndTransmittersMemberus-gaap:RevenueFromContractWithCustomerMemberus-gaap:ProductConcentrationRiskMember2018-10-012019-06-300000808326us-gaap:SalesRevenueSegmentMemberus-gaap:CustomerConcentrationRiskMember2018-10-012019-06-300000808326us-gaap:RevenueFromContractWithCustomerMemberus-gaap:ProductConcentrationRiskMember2018-10-012019-06-300000808326us-gaap:CommonStockMember2020-06-300000808326us-gaap:CommonStockMember2020-03-310000808326us-gaap:CommonStockMember2019-09-300000808326us-gaap:CommonStockMember2019-06-300000808326us-gaap:CommonStockMember2019-03-310000808326us-gaap:CommonStockMember2018-09-3000008083262018-09-3000008083262019-06-300000808326emkr:SystronDonnerInertialInc.Memberus-gaap:LandAndBuildingMember2020-06-300000808326emkr:SystronDonnerInertialInc.Memberemkr:PropertyAndEquipmentMember2020-06-300000808326emkr:SystronDonnerInertialInc.Memberus-gaap:TechnologyBasedIntangibleAssetsMember2020-06-300000808326emkr:SystronDonnerInertialInc.Member2020-06-300000808326emkr:SystronDonnerInertialInc.Member2020-04-012020-06-300000808326emkr:SystronDonnerInertialInc.Member2019-10-012020-06-300000808326emkr:SystronDonnerInertialInc.Member2019-06-072019-06-070000808326emkr:SystronDonnerInertialInc.Memberus-gaap:CommonStockMember2019-06-072019-06-070000808326srt:RestatementAdjustmentMember2019-10-0100008083262019-10-010000808326srt:ScenarioPreviouslyReportedMember2019-09-300000808326us-gaap:SellingGeneralAndAdministrativeExpensesMember2020-04-012020-06-300000808326us-gaap:ResearchAndDevelopmentExpenseMember2020-04-012020-06-300000808326us-gaap:PerformanceSharesMember2020-04-012020-06-300000808326us-gaap:EmployeeStockOptionMember2020-04-012020-06-300000808326us-gaap:CostOfSalesMember2020-04-012020-06-300000808326emkr:RestrictedStockUnitsRSUsAndRestrictedStockMember2020-04-012020-06-300000808326emkr:OutsideDirectorFeesInCommonStockMember2020-04-012020-06-300000808326emkr:EmployeeStockPurchasePlanMember2020-04-012020-06-300000808326us-gaap:SellingGeneralAndAdministrativeExpensesMember2019-10-012020-06-300000808326us-gaap:ResearchAndDevelopmentExpenseMember2019-10-012020-06-300000808326us-gaap:PerformanceSharesMember2019-10-012020-06-300000808326us-gaap:EmployeeStockOptionMember2019-10-012020-06-300000808326us-gaap:CostOfSalesMember2019-10-012020-06-300000808326emkr:RestrictedStockUnitsRSUsAndRestrictedStockMember2019-10-012020-06-300000808326emkr:OutsideDirectorFeesInCommonStockMember2019-10-012020-06-300000808326emkr:EmployeeStockPurchasePlanMember2019-10-012020-06-300000808326us-gaap:SellingGeneralAndAdministrativeExpensesMember2019-04-012019-06-300000808326us-gaap:ResearchAndDevelopmentExpenseMember2019-04-012019-06-300000808326us-gaap:PerformanceSharesMember2019-04-012019-06-300000808326us-gaap:EmployeeStockOptionMember2019-04-012019-06-300000808326us-gaap:CostOfSalesMember2019-04-012019-06-300000808326emkr:RestrictedStockUnitsRSUsAndRestrictedStockMember2019-04-012019-06-300000808326emkr:OutsideDirectorFeesInCommonStockMember2019-04-012019-06-300000808326emkr:EmployeeStockPurchasePlanMember2019-04-012019-06-300000808326us-gaap:SellingGeneralAndAdministrativeExpensesMember2018-10-012019-06-300000808326us-gaap:ResearchAndDevelopmentExpenseMember2018-10-012019-06-300000808326us-gaap:PerformanceSharesMember2018-10-012019-06-300000808326us-gaap:EmployeeStockOptionMember2018-10-012019-06-300000808326us-gaap:CostOfSalesMember2018-10-012019-06-300000808326emkr:RestrictedStockUnitsRSUsAndRestrictedStockMember2018-10-012019-06-300000808326emkr:OutsideDirectorFeesInCommonStockMember2018-10-012019-06-300000808326emkr:EmployeeStockPurchasePlanMember2018-10-012019-06-300000808326us-gaap:CommonStockMember2020-04-012020-06-300000808326us-gaap:CommonStockMember2019-10-012020-06-300000808326us-gaap:CommonStockMember2019-04-012019-06-300000808326us-gaap:CommonStockMember2018-10-012019-06-300000808326emkr:SystronDonnerInertialInc.Memberus-gaap:TechnologyBasedIntangibleAssetsMember2020-04-012020-06-300000808326emkr:LIBORRateLoanMemberus-gaap:RevolvingCreditFacilityMember2020-06-300000808326emkr:PerformanceStockUnitsMember2020-06-3000008083262020-02-202020-02-200000808326emkr:PhoenixNavigationComponentsLLCLegalProceedingsMember2019-06-210000808326srt:MinimumMemberus-gaap:RevolvingCreditFacilityMember2020-06-3000008083262019-09-300000808326emkr:EmployeeStockPurchasePlanMember2019-10-012020-06-3000008083262019-04-012019-06-3000008083262020-04-012020-06-3000008083262018-10-012019-06-3000008083262020-06-3000008083262020-08-0300008083262019-10-012020-06-30iso4217:USDxbrli:sharesemkr:segmentxbrli:sharesiso4217:USDemkr:customerxbrli:pureemkr:claimemkr:productemkr:planiso4217:USDutr:sqftemkr:LetterOfCredit

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

or

   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File Number 001-36632

Graphic

 EMCORE Corporation

(Exact name of registrant as specified in its charter)

New Jersey

    

22-2746503

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

2015 W. Chestnut Street, Alhambra, California, 91803

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:  (626) 293-3400

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Common stock, no par value

EMKR

The Nasdaq Stock Market LLC (Nasdaq Global Market)

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 Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the 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 Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes þ No

As of August 3, 2020, the number of shares outstanding of our no par value common stock totaled 29,408,087.

Table of Contents

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.

Table of Contents

EMCORE Corporation

FORM 10-Q

For The Quarterly Period Ended June 30, 2020

TABLE OF CONTENTS

    

    

Page

Part I:

Financial Information

4

Item 1.

Financial Statements (Unaudited)

4

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended June 30, 2020 and 2019

4

Condensed Consolidated Balance Sheets as of June 30, 2020 and September 30, 2019

5

Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended June 30, 2020 and 2019

6

Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2020 and 2019

7

Notes to our Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

36

Item 4.

Controls and Procedures

37

Part II:

Other Information

37

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

37

Item 6.

Exhibits

40

SIGNATURES

41

3

Table of Contents

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

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Revenue

$

27,266

$

17,219

$

76,598

$

62,965

Cost of revenue

 

18,048

 

13,515

 

53,479

 

47,644

Gross profit

 

9,218

 

3,704

 

23,119

 

15,321

Operating expense:

 

  

 

  

 

  

 

  

Selling, general, and administrative

 

5,936

 

9,288

 

18,962

 

23,877

Research and development

 

4,807

 

4,629

 

14,033

 

13,008

Gain from change in estimate on ARO obligation

 

 

 

 

(40)

Gain on sale of assets

 

(312)

 

 

(2,229)

 

Total operating expense

 

10,431

 

13,917

 

30,766

 

36,845

Operating loss

 

(1,213)

 

(10,213)

 

(7,647)

 

(21,524)

Other income:

 

  

 

  

 

  

 

  

Interest (expense) income, net

 

(40)

 

99

 

(54)

 

590

Foreign exchange (loss) gain

 

(20)

 

(349)

 

(29)

 

(31)

Total other (expense) income

 

(60)

 

(250)

 

(83)

 

559

Loss before income tax (expense) benefit

 

(1,273)

 

(10,463)

 

(7,730)

 

(20,965)

Income tax (expense) benefit

 

(14)

 

(14)

 

27

 

(44)

Net loss

$

(1,287)

$

(10,477)

$

(7,703)

$

(21,009)

Foreign exchange translation adjustment

 

2

 

9

 

(5)

 

36

Comprehensive loss

$

(1,285)

$

(10,468)

$

(7,708)

$

(20,973)

Per share data:

 

  

 

  

 

  

 

  

Net loss per basic and diluted share

$

(0.04)

$

(0.37)

$

(0.27)

$

(0.76)

Weighted-average number of basic and diluted shares outstanding used in computing net loss per share

 

29,295

 

28,005

 

29,052

 

27,730

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Table of Contents

EMCORE CORPORATION

Condensed Consolidated Balance Sheets

As of June 30, 2020 and September 30, 2019

(in thousands)

(unaudited)

    

As of

    

As of

June 30, 

September 30, 

2020

2019

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

29,497

$

21,574

Restricted cash

 

185

 

403

Accounts receivable, net of allowance of $303 and $148, respectively

 

19,854

 

18,497

Contract assets

2,079

1,055

Inventory

 

24,410

 

24,051

Prepaid expenses and other current assets

 

5,440

 

6,389

Assets held for sale

1,580

Total current assets

 

83,045

 

71,969

Property, plant, and equipment, net

 

21,210

 

37,223

Goodwill

 

69

 

69

Operating lease right-of-use assets

14,886

Other intangible assets, net

 

211

 

239

Other non-current assets

 

217

 

62

Total assets

$

119,638

$

109,562

LIABILITIES and SHAREHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Borrowings from credit facility

$

$

5,497

PPP liability - current

2,458

Accounts payable

13,075

10,701

Accrued expenses and other current liabilities

 

10,788

 

14,521

Operating lease liabilities - current

1,020

Total current liabilities

 

27,341

 

30,719

PPP liability - non-current

4,030

Operating lease liabilities - non-current

13,981

Asset retirement obligations

 

2,014

 

1,890

Other long-term liabilities

 

 

207

Total liabilities

 

47,366

 

32,816

Commitments and contingencies (Note 13)

 

  

 

  

Shareholders’ equity:

 

  

 

  

Common stock, no par value, 50,000 shares authorized; 36,318 shares issued and 29,408 shares outstanding as of June 30, 2020; 35,803 shares issued and 28,893 shares outstanding as of September 30, 2019

 

743,160

 

739,926

Treasury stock at cost; 6,910 shares

 

(47,721)

 

(47,721)

Accumulated other comprehensive income

 

945

 

950

Accumulated deficit

 

(624,112)

 

(616,409)

Total shareholders’ equity

 

72,272

 

76,746

Total liabilities and shareholders’ equity

$

119,638

$

109,562

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents

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

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Shares of Common Stock

Balance, beginning of period

 

29,291

 

27,856

 

28,893

 

27,577

Stock-based compensation

 

117

 

93

 

283

 

305

Stock option exercises

 

 

 

1

 

1

Issuance of common stock for acquisition

 

 

811

 

 

811

Issuance of restricted stock units

116

Issuance of common stock - ESPP

 

 

 

115

 

66

Balance, end of period

 

29,408

 

28,760

 

29,408

 

28,760

Value of Common Stock

 

  

 

  

 

  

 

  

Balance, beginning of period

$

742,416

$

735,257

$

739,926

$

734,066

Stock-based compensation

 

779

 

677

 

2,625

 

1,824

Stock option exercises

 

 

 

2

 

1

Tax withholding paid on behalf of employees for stock-based awards

 

(35)

 

(9)

 

(82)

 

(203)

Issuance of common stock for acquisition

 

 

2,916

 

 

2,916

Issuance of restricted stock units

410

Issuance of common stock - ESPP

 

 

 

279

 

237

Balance, end of period

 

743,160

 

738,841

 

743,160

 

738,841

Treasury stock, beginning and ending of period

 

(47,721)

 

(47,721)

 

(47,721)

 

(47,721)

Accumulated Other Comprehensive Income

 

  

 

  

 

  

 

  

Balance, beginning of period

 

943

 

912

 

950

 

885

Translation adjustment

 

2

 

9

 

(5)

 

36

Balance, end of period

 

945

 

921

 

945

 

921

Accumulated Deficit

 

  

 

  

 

  

 

  

Balance, beginning of period

 

(622,825)

 

(590,957)

 

(616,409)

 

(580,425)

Net loss

 

(1,287)

 

(10,477)

 

(7,703)

 

(21,009)

Balance, end of period

 

(624,112)

 

(601,434)

 

(624,112)

 

(601,434)

Total Shareholders’ Equity

$

72,272

$

90,607

$

72,272

$

90,607

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

Table of Contents

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, 

    

2020

    

2019

Cash flows from operating activities:

Net loss

$

(7,703)

$

(21,009)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization expense

 

4,359

 

5,011

Stock-based compensation expense

 

2,625

 

1,824

Provision adjustments related to doubtful accounts

 

188

 

62

Provision adjustments related to product warranty

 

178

 

139

Net gain on disposal of property, plant and equipment

 

(2,229)

 

Issuance of restricted stock units

410

Other

 

(113)

 

(72)

Total non-cash adjustments

 

5,418

 

6,964

Changes in operating assets and liabilities:

 

  

 

  

Accounts receivable anc contract assets

 

(2,566)

 

5,119

Inventory

 

(293)

 

(1,211)

Other assets

 

(13,706)

 

(3,899)

Accounts payable

 

2,738

 

(4,508)

Accrued expenses and other current liabilities

 

10,707

 

6,835

Total change in operating assets and liabilities

 

(3,120)

 

2,336

Net cash used in operating activities

 

(5,405)

 

(11,709)

Cash flows from investing activities:

 

  

 

  

Purchase of equipment

 

(3,391)

 

(8,615)

Acquisition of business, net of cash acquired

 

 

(22,246)

Proceeds from disposal of property, plant and equipment

 

15,300

 

Net cash provided by (used in) investing activities

 

11,909

 

(30,861)

Cash flows from financing activities:

 

  

 

  

Net payments on credit facilities

(5,497)

Proceeds from PPP loan

6,488

Proceeds from exercise of equity awards

 

281

 

238

Taxes paid related to net share settlement of equity awards

 

(82)

 

(203)

Net cash provided by financing activities

 

1,190

 

35

Effect of exchange rate changes provided by foreign currency

 

11

 

1

Net increase (decrease) in cash, cash equivalents and restricted cash

 

7,705

 

(42,534)

Cash, cash equivalents and restricted cash at beginning of period

 

21,977

 

63,195

Cash, cash equivalents and restricted cash at end of period

$

29,682

$

20,661

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

  

 

  

Cash paid during the period for interest

$

98

$

96

Cash paid during the period for income taxes

$

60

$

59

NON-CASH INVESTING AND FINANCING ACTIVITIES

 

  

 

  

Changes in accounts payable related to purchases of equipment

$

(357)

$

(338)

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

Table of Contents

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

Table of Contents

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 $4.8 million and operating lease liabilities of $4.8 million, as of October 1, 2019. The standard did not have an impact on our consolidated results of operations or cash flow.

The impact of the adoption of Accounting Standards Codification (“ASC”) 842 on the balance sheet as of October 1, 2019 was:

As Reported

Balance

September 30, 2019

Increase

October 1, 2019

(in thousands)

Operating lease right-of-use assets

$

-

$

4,800

$

4,800

Total assets

109,562

4,800

114,362

Operating lease liabilities

-

800

800

Total current liabilities

30,719

800

31,519

Operating lease liabilities non-current

-

4,000

4,000

Total liabilities

32,816

4,800

37,616

Total liabilities and equity

109,562

4,800

114,362

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 liabilities of $10.8 million during the nine months ended June 30, 2020. See also Note 9 – Property, Plant and Equipment, net in the notes to the condensed consolidated financial statements.

(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

Table of Contents

the term of the lease, which is derived from information available at the lease commencement date. The lease term includes renewal options when it is reasonably certain that the option will be exercised, and excludes termination options. To the extent that the Company’s agreements have variable lease payments, the Company includes variable lease payments that depend on an index or a rate and excludes those that depend on facts or circumstances occurring after the commencement date, other than the passage of time. Lease expense for these leases is recognized on a straight-line basis over the lease term. The Company has elected not to recognize ROU assets and lease liabilities that arise from short-term (12 months or less) leases for any class of underlying asset. Operating leases are included in operating lease ROU assets, current operating lease liabilities, and non-current operating lease liabilities in the Company's condensed consolidated balance sheet.

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 five years following expiration of the original lease term.

During the three and nine months ended June 30, 2020, the Company recorded $0.6 million and $1.3 million of operating lease expense, respectively. During the three and nine months ended June 30, 2019, the Company recorded $0.3 million and $1.0 million of rent expense, respectively. The Company's finance leases and short-term leases are immaterial.

Supplemental cash information and non-cash activities related to operating leases are as follows (in thousands):

Nine Months Ended

    

June 30, 2020

Operating cash outflows from operating leases

$

1,111

Operating lease assets obtained in exchange for new lease liabilities

$

10,791

Maturities of operating lease liabilities as of June 30, 2020 were as follows (in thousands):

Amount

2020

$

1,788

2021

1,830

2022

1,849

2023

1,730

2024

1,719

Thereafter

12,802

Total lease payments

21,718

Less imputed interest

(6,717)

Total

$

15,001

The following is a schedule of future minimum operating lease payments as of September 30, 2019 (in thousands):

Amount

2020

$

988

2021

839

2022

824

2023

853

2024

655

Thereafter

1,350

Total lease payments

$

5,509

10

Table of Contents

Weighted-average remaining lease term and discount rate related to operating leases are as follows:

June 30, 2020

Weighted average remaining lease term (years)

14.7

Weighted average discount rate

6.1

%

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, 

 

% of

% of

% of

% of

 

(in thousands)

    

2020

    

Revenue

    

2019

    

Revenue

    

2020

    

Revenue

    

2019

    

Revenue

 

Navigation and Inertial Sensing

$

9,861

36

%  

5,604

32

%  

$

28,970

38

%  

12,157

19

%

Defense Optoelectronics

4,164

16

%  

2,514

15

%  

11,772

15

%  

6,974

11

%

CATV Lasers and Transmitters

10,905

40

%  

6,849

40

%  

29,070

38

%  

32,383

52

%

Chip Devices

 

1,443

 

5

%  

1,854

 

11

%  

 

4,033

 

5

%  

9,570

 

15

%

Other

 

893

 

3

%  

398

 

2

%  

 

2,753

 

4

%  

1,881

 

3

%

Total revenue

$

27,266

 

100

%  

$

17,219

 

100

%  

$

76,598

 

100

%  

$

62,965

 

100

%

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 $25.0 million, consisting of (i) approximately $22.0 million in cash after working capital adjustments and (ii) the issuance of 811,000 shares of common stock with an aggregate value of approximately $3.0 million as of the closing date.

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 $7.7 million and $1.1 million, respectively, is included in our condensed consolidated statements of operations and comprehensive loss for the three months ended June 30, 2020. Net revenue and net loss of SDI of $22.1 million and $0.3 million, respectively, is included in our condensed consolidated statements of operations and comprehensive loss for the nine months ended June 30, 2020. Net revenue and net loss of SDI from the acquisition date of $2.0 million and $5,000, respectively, was included in our condensed consolidated statements of operations and comprehensive loss for the three and nine months ended June 30, 2019.

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

Table of Contents

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

$

24,978

 

Developed technology

 

250

 

7

Cash acquired

541

 

  

Inventories

 

8,522

 

  

Accounts receivable

 

4,291

 

  

Other assets

 

355

 

  

Land and building

 

12,890

 

  

Equipment

 

2,913

 

  

Net liabilities assumed

 

(4,853)

 

  

Goodwill

$

69

 

  

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

$

27,266

$

21,976

$

76,598

$

84,911

Net loss

$

(1,287)

$

(14,024)

$

(7,703)

$

(27,069)

Net loss per basic and diluted share

$

(0.04)

$

(0.50)

$

(0.27)

$

(0.98)

Weighted-average number of basic and diluted shares outstanding

 

29,295

 

28,005

 

29,052

 

27,730

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

$

10,435

$

4,338

$

3,368

Cash equivalents

19,062

17,236

17,135

Restricted cash

 

185

 

403

 

158

Total cash, cash equivalents and restricted cash

$

29,682

 

21,977

 

20,661

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

Table of Contents

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.

Cash consists primarily of bank deposits or highly liquid short-term investments with a maturity of three months or less at the time of purchase. Restricted cash represents temporarily restricted deposits held as compensating balances against short-term borrowing arrangements. Cash, cash equivalents and restricted cash are based on Level 1 measurements.

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

$

20,157

$

18,645

Allowance for doubtful accounts

 

(303)

 

(148)

Accounts receivable, net

$

19,854

$

18,497

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

$

12,616

$

11,510

Work in-process

 

8,390

 

8,176

Finished goods

 

3,404

 

4,365

Inventory balance at end of period

$

24,410

$

24,051

13

Table of Contents

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

$

$

3,484

Building

 

 

9,405

Equipment

 

34,577

 

42,308

Furniture and fixtures

 

1,125

 

1,109

Computer hardware and software

 

3,460

 

3,554

Leasehold improvements

 

3,061

 

2,676

Construction in progress

 

10,058

 

9,330

Property, plant, and equipment, gross

$

52,281

$

71,866

Accumulated depreciation

 

(31,071)

 

(34,643)

Property, plant, and equipment, net

$

21,210

$

37,223

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 $0.3 million and $1.9 million, respectively. In addition, the Company entered into agreements to sell additional equipment and these assets have been reclassified to assets held for sale.

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 $13.2 million. The Company received net proceeds of $12.8 million after reducing for transaction commissions and expenses incurred in connection with the sale. The Company recorded a gain on the sale of assets of approximately $0.3 million in the nine months ended June 30, 2020 related to this transaction.

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 fifteen (15) years after the consummation of the Sale and Leaseback Transaction, unless earlier terminated or extended in accordance with the terms of the Lease Agreement. Under the Lease Agreement, SDI’s financial obligations include base monthly rent of $0.75 per square foot, or approximately $77,500 per month, which rent will increase on an annual basis at three percent (3%) over the life of the lease. SDI is also responsible for all monthly expenses related to the Concord Real Property, including insurance premiums, taxes and other expenses, such as utilities. In connection with the execution of the Lease Agreement, EMCORE executed a Lease Guaranty (the “Guaranty”) with Buyer under which EMCORE guaranteed the payment when due of the monthly rent and all other additional rent, interest and charges to be paid by SDI under the Lease Agreement.

As a result of the Lease Agreement, the Company recorded net operating lease ROU assets and operating lease liabilities of $10.8 million during the nine months ended June 30, 2020.

14

Table of Contents

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

$

6,136

$

5,185

Warranty

 

644

 

654

Legal expenses and other professional fees

230

4,407

Contract liabilities

1,011

541

Income and other taxes

 

1,176

 

1,135

Severance and restructuring accruals

 

62

 

172

Other

 

1,529

 

2,427

Accrued expenses and other current liabilities

$

10,788

$

14,521

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 $15.0 million, subject to a borrowing base formula, that can be used for working capital requirements, letters of credit, acquisitions, and other general corporate purposes subject to a requirement, for certain specific uses, that the Company have liquidity of at least $25.0 million after such use. The Credit Facility requires us to maintain (a) liquidity of at least $10.0 million and (b) excess availability of at least $1.0 million.

As of June 30, 2020, there was no amount outstanding under this Credit Facility and the Company was in compliance with all financial covenants. Also, as of June 30, 2020, the Credit Facility had approximately $0.5 million reserved for one outstanding stand-by letter of credit and $3.5 million available for borrowing.

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 $6.5 million (the “PPP Loan”), which the Company received on May 6, 2020.

The PPP Loan matures on May 3, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly. Monthly payments in the amount of $273,160 will be due and payable beginning in November 2020 (subject to further deferral pursuant to the terms of the Paycheck Protection Flexibility Act of 2020) and continuing each month thereafter until maturity of the PPP Loan. There is no prepayment penalty. Under the terms of the PPP, all or a portion of the principal may be forgiven if the PPP Loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, benefits, rent, and utilities. No assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. With respect to any portion of the PPP Loan that is not forgiven, the PPP Loan will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults and breaches of the provisions of the PPP Loan Agreement.

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 $14,000. Income tax expense for the three months ended June 30, 2020 and 2019 is composed primarily of state minimum tax expense.

15

Table of Contents

For the nine months ended June 30, 2020 and 2019, the Company recorded income tax benefit (expense) of approximately $27,000 and $(44,000), respectively. Income tax benefit for the nine months ended June 30, 2020 is composed primarily of the reversal of a deferred tax liability related to the Concord Real Property partially offset by state minimum tax expense. Income tax expense for the nine months ended June 30, 2019 is primarily comprised of state minimum tax expense.

For the three months ended June 30, 2020 and 2019, the effective tax rate on continuing operations was 0.0% and 0.1%, respectively. The lower tax rate for the three months ended June 30, 2020 is primarily due to higher revenue in the three months ended June 30, 2020. For the nine months ended June 30, 2020 and 2019, the effective tax rate on continuing operations was 0.0% and 0.1%, respectively. The lower tax rate for the nine months ended June 30, 2020 is primarily due to the federal income tax benefit associated with the sale of the Concord Real Property. The Company uses some estimates to forecast permanent differences between book and tax accounting.

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 $0.5 million of interest and penalties accrued as tax liabilities on our balance sheet. We do not believe that it is reasonably possible that any of the uncertain tax positions will be paid or settled within the next 12 months. Interest that is accrued on tax liabilities is recorded within interest expense on the condensed consolidated statements of operations.

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. Professional legal fees are expensed when incurred. We accrue for contingent losses when such losses are probable and reasonably estimable. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information. Should we fail to prevail in any legal matter or should several legal matters be resolved against the Company in the same reporting period, then the financial results of that particular reporting period could be materially affected.

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

Table of Contents

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 $21.2 million in total damages, plus attorneys’ fees and costs, in the Interim Award, the arbitrator found in the Interim Award that (i) Phoenix's claim for breach of the covenant of good faith and fair dealing was denied; (ii) Phoenix's claim for breach of the agreements entered with EMCORE for failure to provide funding for non-recurring engineering was denied; (iii) Phoenix's claim for unjust enrichment was denied; (iv) Phoenix's claim for conversion was granted, but damages for that claim duplicate the damages on the breach of contract and misappropriation of trade secret claims described below and no incremental damages were awarded based on the granting of this claim; (v) EMCORE's request for a declaration that, as between EMCORE and Phoenix, EMCORE owns its proprietary IOC and transceiver was granted.

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 97 trade secret subpart claims by Phoenix, the arbitrator found in the Interim Award that EMCORE had misappropriated a total of five trade secret subparts (the “Deemed Trade Secrets”) and found that at least one Deemed Trade Secret was being used in seven EMCORE products (the “EMCORE Products”). The arbitrator found that as a result of the foregoing, royalties of 7.5% of the sale price are owed, to the extent not previously paid, on (i) sales through July 16, 2018 on all fiber optic gyroscopes sold by EMCORE, and (ii) sales from July 16, 2018 through May 31, 2019 of the EMCORE Products, whether standalone or incorporated into a larger product, in each case together with interest at the New York statutory rate of 9% simple interest. In addition, the arbitrator found in the Interim Award that Phoenix was the prevailing party, and Phoenix was awarded attorneys' fees and costs in the amount of approximately $3.7 million, which amount was reduced 10% from Phoenix’s attorneys’ fees request.

In the Interim Award, the arbitrator further determined that EMCORE shall pay Phoenix a royalty of 7.5% of the sale price on (i) future customer payments for certain EMCORE product contracts previously entered into and (ii) customer payments for future sales of any product using any Deemed Trade Secret, in each case payable in a single lump sum within one month of completion of the calendar quarter in which payment has been received from the customer, and shall concurrently submit to Phoenix a written report that sets forth the calculation of the amount of the royalty payment in a form similar to previous royalty reports, provided that following the first $1 million of royalty payments on the EMP-1 product only, inclusive of payments made to date, EMCORE will pay to Phoenix a royalty of 2.25% of the sale price (net of any warranty work, returns, rebates, discounts or credits). EMCORE is required to continue to make royalty payments in this manner until such time as it has in good faith determined, and can so document, that it has completely ceased use of the Deemed Trade Secrets, and at such time, EMCORE shall provide Phoenix written notice of same by certified letter, return receipt requested.

17

Table of Contents

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 $3.8 million, (ii) an award to Phoenix of $1.0 million in damages owing for unpaid royalties through June 30, 2019, of which $0.6 million remained to be paid as of the issuance of the Modified Partial Final Award, (iii) an award to Phoenix of $0.1 million in pre-judgment interest, calculated at the New York statutory rate of 9% simple interest, and (iv) an order that EMCORE make the payments in the foregoing items (i), (ii) and (iii) on or before October 14, 2019. On October 10, 2019, EMCORE made the foregoing payments to Phoenix in an aggregate amount equal to approximately $4.5 million. This amount was accrued as of September 30, 2019.

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 $0.4 million, of which $0.2 million was paid in January 2020, $0.1 million was paid in April 2020 and $0.1 million was paid in July 2020.

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 four equity incentive compensation plans, collectively described below as our “Equity Plans”:

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

$

4

$

6

$

13

$

20

Restricted stock units and awards

 

403

 

380

 

1,331

 

1,162

Performance stock units and awards

 

255

 

188

 

910

 

357

Employee stock purchase plan

 

52

 

50