FORM 10-K
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| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
2021
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
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New Jersey | 22-2746503 | ||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
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2015 W. Chestnut Street, Alhambra, California, 91803 (Address of principal executive offices) (Zip Code)
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Registrant’s telephone number, including area code: (626) (626) 293-3400
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| Title of Each Class | | Trading Symbol | | | Name of Each Exchange on Which Registered | | |||||||||||||||
| Common stock, no par value | |
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36,990,099.
2021.
EMCORE Corporation
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NOTE
•our small size results in volatility in our cash flow, results of operations and growth prospects, and we could experience revenue fluctuations due to our dependence on a few products for our success;
we may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our shareholders;
we are substantially dependent on revenues from a small number of customers and may experience fluctuations in the mix of products and customers in any period;
•we are subject to the cyclical nature of the markets in which we compete and any future downturn or decline in spending for Cable TV (“CATV”) and optical communications networks may reduce demand for our products and revenue;
•customer demand is difficult to forecast and if we are unable to match production with customer demand, our results of operations could be negatively impacted;
•we are subject to risks related to our acquisitions, including that (i)(a) the revenues and net operating results obtained from the Systron Donner Inertial, Inc. ("SDI") business or any other acquired business may not meet our expectations, (ii)(b) the costs and cash expenditures for integration of the SDI business operations or any other acquired business may be higher than expected, (iii)(c) there could be losses and liabilities arising from the acquisition of SDI or any other acquired business that we will not be able to recover from any source, and (iv)(d) we may not realize sufficient scale in our Navigation and Inertial Sensing product line from the SDI
•our failure to successfully manage the transition of certain of our manufacturing operations from our Beijing facility to a contract manufacturer’s ("CM") facility could harm our business, financial condition or results of operations;
•changes in United States ("U.S.") and international trade policies, particularly with regard to China, may adversely impact our business and operating results;
•our substantial operations in China and significant international sales may expose us to risks inherent in doing business in these geographies;
•we face lengthy sales and qualification cycles for our new products due to the complexity of our products, and, in many cases, must invest a substantial amount of time and money before we receive orders;
•our production could be disrupted and our results of operations and cash flows could suffer if our production yields are low as a result of manufacturing difficulties;
•if we do not keep pace with rapid technological change, our products may not be competitive, and increased spending to develop and improve our technology may adversely impact our financial results;
•pressure from competitors may result in price reductions and periods of reduced demand for our products;
•a failure to attract and retain managerial, technical and other key personnel could reduce our revenue and operational effectiveness;
•our ability to achieve operational and material costs reductions and realize production efficiencies is critical to our ability to achieve long-term profitability;
•our operating results could be harmed if we are unable to obtain timely delivery of sufficient materials or components or if the prices of such materials or components increase;
•the failure of our contract manufacturersCM to timely deliver qualified products at reasonable prices could adversely affect our business;
•our vendor-managed inventory programs could result in increased inventory levels and/or decreased visibility into the timing of sales, and shifts in industry demand and inventories could result in significant inventory write-downs;
•any defects in our products may cause us to incur significant costs, divert management’s attention or result in a loss of customers or product liability claims;
our government contracts are subject to risks of budgetary constraints or spending reductions and may subject us to governmental audits, investigations or other scrutiny that could adversely affect our business;
•our business may be materially harmed if we fail to protect our intellectual property and other proprietary rights or are unable to successfully defend against claims of infringement of the rights of others;
•we could be subject to legal consequences if we fail to comply with the Modified Partial Award issued in connection with the proceedings commenced against us by Phoenix Navigation Components, LLC;
•a cyberattack or other failure or security breach of our information technology infrastructure, or the theft, loss or misuse of personal data, could adversely affect our business and operations;
•our costs of compliance, or failure to comply, with applicable state, federal and international legal and regulatory requirements could increase our operating costs and adversely affect our business;
•we may undergo an “ownership change” within the meaning of Section 382 of the Internal Revenue Code, which could affect our ability to offset U.S. federal income tax against our net operating losses and certain of our tax credit carryovers.
EMCORE Corporation
FORM 10-K
For the Fiscal Year ended September 30, 2020
TABLE OF CONTENTS
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5
PART I.
Beginning with the fiscal year ended September 30, 2020, as a result of the acquisition of SDI and the increased size and growth expectations of our aerospace and defense business, we began using
Other Optical Products.
We are subject to the information requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). We file periodic reports, current reports, proxy statements, and other information with the SEC. The SEC maintains a website at http://www.sec.gov that contains all of our information that has been filed or furnished electronically with the SEC. We make available free of charge on our website a link to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable, after such material is electronically filed with, or furnished to, the SEC.
Overview of Our Industries and Markets We Serve
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Specifically, within our Broadband reporting segment, our products serve the CATV, Wireless, Fiber-To-The-Premises (“FTTP”), Long-Term Evolution (“LTE”) and Data Center markets; and ourOur Aerospace and Defense products primarily serve the navigation and defense optoelectronics markets. Our Broadband products primarily serve the CATV, optical sensing, telecom and data center markets.
capabilities. Sales of our Navigation and Inertial Sensing products that are related to U.S. government contracts or subcontracts may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government or an agency thereof.
Systron Donner Inertial
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System Certification. Our QMEMS products provide precision system solutions and establish high standards for price and/or performance characteristics across guidance, navigation, control, pointing, and stabilization applications in commercial and military aircraft, unmanned autonomous vehicles, land vehicles, precision guided weapons, and industrial and marine platforms.
Defense Optoelectronics Product Line (Formerly Satellite/Microwave Communications Products)
We have an established history as a pioneer of innovative Radio Frequencyradio frequency (“RF”) over fiber solutions for high-performance fiber optic links in the terrestrial portion of satellite communications networks. Our satellite/Satellite/microwave band components and complete systems transport an ultra-broadband frequency range including IF, L, S, C, X, DBS, Ku, K, Ka, Q/V and Ultra-Widebandultra-wideband signal transport. A wide rangenumber of high-dynamic-range applications are supported, including satellite antenna remoting and signal distribution, inter- and intra-facility links, site diversity systems, high-performance supertrunking links, electronic warfare systems, and radar testing. OurThe complete line of satellite and microwave components, subassemblies and systems eliminateeliminates the distance limitationslimitation of copper-based coaxial systems. OurThe rack-mount Optiva Platformplatform RF & Microwave Fiber Optic Transport Systemand microwave fiber optic transport system features a wide range of Simple Network Management Protocolsimple network management protocol managed fiber optic transmitters, receivers, optical amplifiers, RF and optical switches, passive devices, and Ethernetethernet products that provide high-performance fiber optic transmission between satellite hub equipment and antenna dishes.We also offer a series of ruggedized microwave flange-mount transmitters, receivers, and optical delay line products that meet the reliability and durability requirements of the U.S. government and defense markets. These products are tailored to the6requirements of higher frequency applications such as microwave antenna signal distribution, electronic warfare systems, and radar system calibration and testing. They provide our customers with high frequency, dynamic range, compact form-factors, and extreme temperature, shock, and vibration tolerance. Sales of our satellite/microwave communicationsDefense Optoelectronics products that are related to U.S. government contracts or subcontracts may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government or an agency thereof.8
Cable TVCATV Lasers and Transmitters Product Line
In addition, we are a leading provider of optical components including lasers, receivers and photodetectors (also called “photodiodes”) for us in the cable television market. Our products include CWDM (“Coarse Wavelength Division Multiplexing”) and DWDM (“Dense Wavelength Division Multiplexing”), 1310 nm and 1550 nm DFB lasers and optical receivers optimized for CATV, DOCSIS 3.1 and wireless applications. In addition, we offer broadband photodiodes used in forward-and return-path broadband and FTTP applications.
transmitters.
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Telecommunications companies throughout the world have been extending their Passive Optical Networkpassive optical network (“PON”) infrastructure to business, enterprise, and residential customers for several years. From the time we began selling telecom module products in 2015, wecustomers. We have supported this market through commercialization of products developed in our InP wafer fab to become a merchant supplier of high-performance chip devices to the Telecomtelecom industry. We also develop other specialty chips for the telecom and data center markets. Our semiconductor wafer fabrication facility features metal-organic chemical vapor deposition (“MOCVD”) reactors for 2" or 3" wafer processing for InP-based devices including high-power gain chips, laser chips, Avalanche Photodiodeavalanche photodiode (“APD”) and P-type Intrinsic N-typep-type intrinsic n-type (“PIN”) photodetector chips. Our technical team has expertise in device design, epitaxial growth, wafer processing, device characterization, and Chip-On-Blockchip-on-block (“COB”), TO-CanTO-can, and Optical Sub-Assemblyoptical sub-assembly from development through manufacturing.
7•High-Power Gain Chips Products - Through experience in the telecom tunable module market, we have design and engineering expertise in the development and manufacturing of high-power gain chips for tunable lasers and transceivers utilized in coherent DWDM optical transmission systems.•Photodiode Products - In addition to gigabit passive optical network (“GPON”) and gain chip products, we also offer photodiodes for use in telecommunications and data center applications. These products include, but are not limited to, 2.5G and 10G APD top and bottom illuminated chips, 10G PIN photodiode chips, with additional products in development. In addition, we offer receiver arrays for light detecting and ranging ("LiDAR") applications on a customized basis.•GPON FTTP and Data Center Chip Products - Our chip device's portfolio is continually developing to support the latest advances in PON including GPON, 10G-EPON, XG-PON, XGS-PON, 4G LTE, and data center applications. Our laser chip devices offering includes 2.5G DFB laser chips.Other Optical Product LineOur Other Optical Product Line is comprised of lasersProductsLasers and subsystems are sold into a variety of applications including distributed sensing, LiDAR, and wireless.
•LiDAR and Distributed Sensing Products - We offer narrow linewidth 1310 and 1550 nm DFB lasers optimized for LiDAR and distributed sensing applications. With the development of autonomous vehicles advancing rapidly, we have designed a continuous wavelength, coherent optical source laser for frequency modulation continuous wavelength ("FMCW") sensing LiDAR applications that delivers low linewidths and high power, ideal for integrating into autonomous driving applications.•Wireless Communications Products - Wireless systems providers are building high-performance, integrated wireless distributed antenna system (“DAS”) networks in subway tunnels, stadiums, hotels, high-speed trains, and cruise ships. We have developed linear fiber optic products that are optimized for wireless applications, which we believe integrate extremely well into these systems. They enhance bandwidth and linearity to enable the delivery of consistent, reliable signals in areas where interference is high or signals are weak. Our products for wireless applications include DFB lasers and optical receivers specifically designed for wireless networks, 3 GHz and 6.5 GHz fiber optic links for cellular backhaul, 4G LTE and DAS.Strategic PlanOur strategy is to continue pioneering development of sensing and Light Detectinglinear optical systems serving aerospace and Ranging. (“LiDAR”).
defense and broadband communications markets. We aim to design and build innovative products that are valued by our customers with the intention to grow our sensing and linear product lines using innovative technology, either organically or through future acquisitions. We seek solutions that maximize performance in transformative aerospace and defense systems and high-speed communications networks. Our manufacturing approach is focused on the highest standards of precision that enable us to deliver leading-edge products.●Wireless Communications Products - The increasing dependence on wireless access for social media, text, email, uploading and downloading of apps, music, videos and photos has created greater demand for deployment of cost-effective, high-performance, integrated wireless Distributed Antenna System (“DAS”) networks. Wireless systems providers are building systems in subway tunnels, stadiums, hotels, high-speed trains and cruise ships. We have developed linear fiber optic products that are optimized for wireless applications which we believe integrate extremely well into these systems. They enhance bandwidth and linearity to enable the delivery of consistent, reliable signals in areas where interference is high or signals are weak. Our products for wireless applications include DFB lasers and optical receivers specifically designed for wireless networks, 3 GHz and 6.5 GHz fiber optic links for cellular backhaul, 4G LTE and DAS.10
Customers
Our majorWe have an increasingly global customer base that spans applications across telecommunications and CATV network infrastructure, satellite communications, defense, and aerospace. Major customers include: Cisco Systems Inc., Commscope Holding Company, Inc. and Raytheon Company and their respective affiliates. In the fiscal year ended September 30, 2020, Cisco Systems Inc., Commscope Holding Company, Inc. and Raytheon Company and their respective affiliates, each of whom represented greater than 10% of our consolidated revenue.revenue in the fiscal year ended September 30, 2021. See Note 1513 – Segment Data and RelatedRevenue Information in the notesNotes to our consolidated financial statementsConsolidated Financial Statements for additional information about our significant customers.
Strategic Plan
Strategy
In additionmarketing methods, including our website, participation at trade shows, and selective advertising to organic growthachieve these goals.
Acquisition of Systron Donner Inertial, Inc.
On June 7, 2019, we acquired SDI, a private-equity backed navigation systems provider with a scalable, chip-based platform for higher volume gyro applications utilizing QMEMS 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 810,698 shares of common stock with an aggregate value of approximately $3.0 million as of the closing date.
Following the closing, we began integrating SDI into our Navigation and Inertial Sensing product line and have included the financial results of SDI in our consolidated financial statements beginning on the acquisition date.
Sources of Raw Materials
targeted products.
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We are subject to rules promulgated by the SEC pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding the use of "conflict minerals". These rules have imposed and will continue to impose additional costs and may introduce new risks related to ourthe ability to verify the origin of any "conflict minerals" used in our products.
Manufacturing
Our various manufacturing processes involve extensive quality assurance systemsoffer superior price and performance testing. characteristics.
As part of the effort to better streamline operations and move to a variable cost model with respect to our Cable TVCATV Lasers and Transmitters product line, on October 25, 2019,products have typically shipped within the same quarter in which a purchase order is received, and therefore order backlog at any particular date is not necessarily indicative of actual revenue or the level of orders for any succeeding period and may not be comparable to prior periods.
Sales and Marketing
We sell our products worldwide through our direct sales force, application engineers, third party sales representatives and distributors. Our sales force communicates with our customers’ engineering, manufacturing, and purchasing personnel to provide optimized customer solutions through product design, qualifications, performance, and price. Our strategy is to use our direct sales force to sell to original equipment manufacturers and key accounts and to expand our use of distribution partners for increased coverage in both international markets and certain domestic segments.
Throughout our sales cycle, we work closely with our customers to qualify our products into their product lines and platforms. As a result, we often develop strategic and long-lasting customer relationships with products and services that are tailored to our customers’ requirements. We focus our marketing communication efforts on increasing brand awareness, communicating our technologies’ advantages, and generating leads for our sales force. We use a variety of marketing methods, including our website, participation at trade shows, and selective advertising to achieve these goals.
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Externally, our marketing group works with customers to define requirements, characterize market trends, define new product development activities, identify cost reduction initiatives, and manage new product introductions. Internally, our marketing group communicates and manages customer requirements with the goal of ensuring that our product development activities are aligned with our customers’ needs. These product development activities allow our marketing group to manage new product introductions and market trends.
Research and Development
Our research and development efforts have been focused on maintaining our technological competitive edge by working to improve the quality and features of our product lines. We are also making investments to expand our existing technology and infrastructure in an effort to develop new products and production technology that we can use to expand into new markets. Our industry is characterized by rapid changes in process technologies with increasing levels of functional integration. Our efforts are focused on designing new proprietary processes and products, on improving the performance of our existing materials, components, and subsystems, and on reducing costs in the product manufacturing process.
As part of the ongoing effort to cut costs, many of our projects have focused on developing lower cost versions of our existing products. In view of the high cost of development, we solicit research contracts that provide opportunities to enhance our core technology base and promote the commercialization of targeted products.
We believe that in order to remain competitive, we must invest significant financial resources in developing new product features and enhancements and in maintaining customer satisfaction worldwide. Research and development expense was $20.3 million, $19.4 million and $15.4 million for the fiscal years ended September 30, 2020, 2019 and 2018, respectively. As a percentage of revenue, research and development expenses were 18.4%, 22.3% and 18.0% for the fiscal years ended September 30, 2020, 2019 and 2018, respectively. Our research and development expense consists primarily of compensation expense, including non-cash stock-based compensation expense, as well as engineering and prototype costs, depreciation expense, and other overhead expenses, as they relate to the design, development, and testing of our products. These costs are expensed as incurred.
Intellectual Property and Licensing
We also have entered into license agreements with other organizations, under which we have obtained exclusive or non-exclusive rights to practice inventions claimed in various patents and applications issued or pending in the U.S. or other foreign jurisdictions. We do not believe our financial obligations under any of these agreements adversely affects our business, financial condition, or results of operations.
We rely on trade secrets to protect our intellectual property when we believe that publishing patents would make it easier for others to reverse engineer our proprietary processes. We also rely on other intellectual property rights such as trademarks and copyrights where appropriate.
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employee health and safety. The production of wafers and devices involves the use of certain hazardous raw materials, including, but not limited to, ammonia, phosphine, and arsine. We have in-house professionals to address compliance with applicable environmental, homeland security, and health and safety laws and regulations. We believe that we are currently in compliance with all applicable federal, state, and local environmental protection laws and regulations.
Competition
The markets for our products are extremely competitive
We also sell our products to current competitors and companies with the capability of becoming competitors. As the markets for our products grow, new competitors are likely to emerge and current competitors may increase their market share. In the European Union and certain countries throughout the world, political and legal arrangements encourage the purchase of domestically produced goods, which places us at a disadvantagecontinued success. Competition is intense in those regions or countries.
There are substantial barriers to entry by new competitors across our product lines. These barriers include the large number of existing patents, the time and costs required to develop products, the technical difficulty in manufacturing semiconductor-based products, the lengthy sales and qualification cycles, and the difficulties in hiring and retaining skilled employees with the required scientific and technical backgrounds. We believe that the primary competitive factors within our current markets are product cost, yield, throughput, performance and reliability, breadth of product line, product heritage, customer satisfaction, and customer commitment to competing technologies. Competitors may develop enhancements to or future generations of competitive products that offer superior price and performance characteristics. We believe that in order to remain competitive, we must invest significant financial resources in developing new product features and enhancements and in maintaining customer satisfaction worldwide.
Order Backlog
EMCORE’s product sales are made pursuant to purchase orders, often with short lead times. These orders are subject to revision or cancellation and often are made without deposits. For certain of our product categories, products typically shiprecruiting personnel within the same quarter in which a purchase order is received; therefore, our order backlog at any particular date is not necessarily indicativesemiconductor and fiber optics industries. We are focused on retaining key contributors, developing staff,
Seasonality
In certain of our previous fiscal years, we have experienced an increase in revenues in our third and fourth fiscal quarters due to increased sales of our CATV products resulting from an increased build of cable networks during seasons with warmer weather.
Employees
cultivating their continued commitment. As of September 30, 2020,2021, we had approximately 387365 employees, including approximately 10075 international employees that are located primarily in China. This represents a decrease of approximately 3322 employees when compared to September 30, 2019. None of our2020. We believe that employee relations are good. Our employees are not covered by a collective bargaining agreement. Weagreement, and we have never experienced any labor-related work stoppage and believe that our employee relations are good.
Competition is intense in the recruitingstoppage.
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worsen if there is an extended duration of any COVID-19 outbreak or a resurgence of COVID-19 infection in affected regions after they have begun to experience improvement.ITEM 1A.Risk FactorsYou should carefully consider the risks described below, some of which have manifested and any of which may occur in the future, in addition to the other information contained in this report before making an investment decision with respect to any of our securities. Our business, results of operations, and financial condition could be materially and adversely impacted by any of these risks, which could in turn adversely affect our stock price. Additional risks not currently known to us or other factors not perceived by us as material risks could also present significant risks to our business.Risks Related to the Effects of COVID-19 and Other Potential Future Public Health Crises, Epidemics, Pandemics or Similar Events.The full effects of COVID-19 and other potential future public health crises, epidemics, pandemics or similar events are uncertain and could have a material and adverse effect on our business, financial condition, operating results, and cash flows.The global outbreak of the coronavirus disease 2019 (“COVID-19”) was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020. Theongoing COVID-19 pandemic has negatively affected the U.S. and global economy, disrupted global supply chains, significantly restricted travel and transportation, resulted in mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets. The full extent of the COVID-19 impact on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, the emergence of new strains of the virus, the impact of vaccination efforts and related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which are uncertain, out of our control and cannot be predicted.In accordance with applicable U.S. state and county ordinances generally exempting essential businesses and/or critical infrastructure workforces from mandated closures and orders to “shelter-in-place,” our U.S. production facilities have continued to operate in support of essential products and services, subject to limitations and requirements pursuant to applicable state and county orders with regard to ongoing operations that have reduced the efficiency of our engineering and operational teams. However, facilityFacility closures or further work slowdowns or temporary stoppages could occur, and in some cases, our facilities and supplier facilities are not operating under full staffing as a result of COVID-19, which could have a longer-term impact and could delay our development efforts and our deliveries to customers. In addition,customers, and other countries have different practices and policies that can affect our international operations and the operations of our suppliers and customers. If significant portions of our workforce are unable to work effectively, including because of illness, quarantines, absenteeism, government actions, facility closures, travel restrictions or other restrictions in connection with the COVID-19 pandemic, our operations will be negatively impacted. For example, operationsCOVID-19 related staffing shortages at the Thailand facility of our Beijing facility ceased for one additional week beyondCM have negatively affected production levels of our CATV module and transmitter products by the Chinese New Year holiday in early Februarymanufacturer. We may be unable to perform fully on our contracts and our costs may increase as a result of the COVID-19 situation, and additional closuresoutbreak. The impact of COVID-19 could occur.In addition, the COVID-19 pandemic has negatively affected, and could have further negative effects on, the timing of the sale and transfer of certain CATV module and transmitter manufacturing equipment that we have agreed, as part of our efforts to streamline operations and move to a variable cost model in our CATV Lasers and Transmitters product line, to sell to Hytera HKShenzhen Fastrain Technology Co., Ltd. and Shenzhen Hytera (together with Hytera HK, the “Buyers”Hong Kong Fastrain Company Limited (collectively, “Fastrain”), for use by the BuyersFastrain in connection with the manufacturing of certain CATV module and transmitter products for us from a manufacturing facility located in Thailand. The sale and transfer of the equipment will occurthat remains in three separate closings, one of which occurred in the quarter ended December 31, 2019 and the other two of which areour possession is now expected to occurbe completed during the quartersquarter ending March 31, 2021 and June 30, 2021, respectively.2022. The timing and completion of these transfers may be further disrupted as a result of COVID-19, which could delay our recognition of the anticipated benefits of transferring this equipment and could disrupt our manufacturing activities for these products.If significant portions of our workforce are unable to work effectively, including because of illness, quarantines, absenteeism, government actions, facility closures, travel restrictions or other restrictions in connection with the COVID-19 pandemic, our operations will be negatively impacted. We may be unable to perform fully on our contracts and our costs may increase as a result of the COVID-19 outbreak. The impact of COVID-19 could worsen if there is an extended duration of any COVID-19 outbreak or a resurgence of COVID-19 infection in affected regions after they have begun to experience improvement.As described elsewhere in Item 1A, Risk Factors of this Annual Report on Form 10-K for the fiscal year ended September 30, 2020,2021, we rely on other companies to provide materials, major components and products, and to perform a portion of the services that are provided to our customers under the terms of most of our contracts where we rely on these third parties. Many of our suppliers have at times temporarily ceased or limited their operations as a result of COVID-19 and failed to deliver parts11or components to us. For example, COVID-19 driven component shortages and delays have required us to spend significant time sourcing critical components from alternative sources and, in the quarter ended June 30, 2020, unexpected push-outssome cases, forced us to design in alternative parts and cancellations of key component deliveries caused disruption to our business, and thesequalify them with customers on short schedules. These or similar actions may15
continue in the future. Anfuture, and an extended period of global supply chain disruption caused by the response to COVID-19 could impact our ability to perform on our contracts and, if we are not able to implement alternatives or other mitigations, product deliveries could be adversely impacted. In addition, the rapid decline in commercial airline traffic created shortages in air freight capacity, making it more difficult and costly to timely procure parts and components.
For
We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our shareholders.
We believe that our existing cash and cash equivalents, and cash flows from our operating activities and funds available under our credit facilities, will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, we operate in industries that makes our prospects difficult to evaluate. It is possible that we may not generate sufficient
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cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs, we may need additional financing to continue operations or execute on our current or future business strategies, including to:
If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing shareholders. We cannot be certain that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products, or otherwise respond to competitive pressures could be significantly limited. Furthermore, in the event adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition, results of operations, and cash flows may be adversely affected.
We are substantially dependent on revenues from a small number of customers. The loss of or decrease in sales from any one of these customers could adversely affect our business, financial condition, results of operations, and cash flows.
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Our futureFuture revenue is inherently unpredictable. As a result, our operating results are likely to fluctuate from period to period, and we may fail to meet the expectations of our analysts and/or investors, which may cause volatility in our stock price and may cause ourthe stock price to decline.
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•
disruptions or delays in our manufacturing processes or in our supply of raw materials or product components;
a failure to anticipate changing customer product requirements;
market acceptance of our products;
cancellations or postponements of previously placed orders;
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Customer demand is difficult to forecast and, as a result, we may be unable to optimally match production with customer demand.
Our
| problems integrating the acquired operations, personnel, technologies, or products with the existing business and products; • |
| failure to achieve cost savings or other financial or operating objectives with respect to an acquisition; |
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•
possible adverse short-term effects on cash flows or operating results, and the use of cash and other resources for the acquisition that might affect liquidity, and that could have been used for other purposes;
diversion of management's time and attention from our core business to the acquired business or joint venture;
potential failure to retain key technical, management, sales, and other personnel of the acquired business or joint venture;
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Hytera and Fastrain, as applicable. Travel into Thailand by our manufacturing engineers to support the transfer remainshas at times been difficult, and customer product qualification processes for products being manufactured in Thailand are beinghave been delayed at times due to our customers’ inability to access their facilities to perform testing. The timing and completion of these transfers may be further disrupted as a result of COVID-19, which could delay our recognition of the anticipated benefits of transferring this equipment and could disrupt our manufacturing activities for these products. This transition has also and will continue to cause us to incur costs associated with the shipment of complex manufacturing equipment. If we are unable to manage this transfer smoothly and comprehensively, we could suffer delays, resulting in harm to our reputation with our customers and potentially loss of customers. If we are unable to successfully manage the relocation or initiation of the manufacture of these products by our contract manufacturer,CM, our business, financial condition, results of operations and cash flows could be harmed.
Our historical
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parts, and the nature and extent of customization requirements by customers. Higher volume demand for more mature designs requiring less customization generally results in higher manufacturing yields than products with lower volumes, less mature designs and requiring extensive customization. Capacity constraints, raw materials shortages, logistics issues, the introduction of new product lines and changes in our customer requirements, manufacturing facilities, or processes or those of our third-party contract manufacturers (“CMs”)CMs and component suppliers have historically caused, and may in the future cause, significantly reduced manufacturing yields, negatively impacting the gross margins on, and our production capacity for, those products. Our abilityAbility to maintain sufficient manufacturing yields is particularly important with respect to certain products we manufacture, as a result of the long manufacturing process. Moreover, an increase in the rejection and rework rate of products during the quality control process
changing product specifications and customer requirements;
unanticipated engineering complexities;
expense reduction measures we have implemented and others we may implement;
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successfully, or incur budget overruns or delays in our research and development efforts, our business, financial condition, results of operations, and cash flows may be adversely affected.
24
A failure to attract and retain managerial, technical, and other key personnel could reduce our revenue and our operational effectiveness.
Our future
Our ability
Our operating
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of required components. Because some of these suppliers are located overseas, we may be faced with higher costs of purchasing these materials if the U.S. dollar weakens against other currencies, or if import tariffs are imposed on these materials. If we were to change any of our limited or sole source suppliers, we would be required to re-qualify each new supplier. Re-qualification could prevent or delay product shipments that could adversely affect our results of operations and cash flows. In addition, our reliance on these suppliers may adversely affect our production if the components vary in quality or quantity. If we are unable to obtain timely deliveries of sufficient components of acceptable quality or if the prices of components for which we do not have alternative sources increase, our business, financial condition, results of operations, and cash flows could be materially adversely affected.
unexpected changes in regulatory requirements;
legal uncertainties regarding liability, tariffs, and other trade barriers;
inadequate protection of intellectual property in some countries;
greater incidence of shipping delays;
greater difficulty in overseeing manufacturing operations;
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with no guarantee that any particular product qualification process will lead to profitable product sales, and our expectations as to the time periods required to qualify a product line and ship products in volumes to our customers may be erroneous. Delays in qualification can impair our expected timing of the transfer of a product line to our CM and may impair our expected amount of sales of the affectedeffected products. Any of these uncertainties or delays could adversely affect our operating results and customer relationships. For example, during the fiscal year ended September 30, 2020, customer product qualification processes for our CATV Laser and Transmitter products that were beginning to be manufactured at a CM’s facility in Thailand were delayed due to our customers’ inability to access their facilities to perform testing due to COVID-19, causing delays in ourthe ability to have such products manufactured from this location and increasing our costs to produce these products.
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result in product recalls, product liability claims, lost future sales of the affected product, and other products, as well as customer relations problems, litigation, and damage to our reputation.
customers can stop purchasing our products at any time without penalty;
customers may purchase products from competitors; and
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The majority of our development contracts are for a fixed price, and fixed-price development work inherently has more uncertainty than production contracts and, therefore, entails more variability in estimates of the cost to complete the work. Many of these development programs have very complex designs. As technical or quality issues arise, we may experience schedule delays and adverse cost impacts, which could increase our estimated cost to perform the work, either of which could adversely affect our results of operations. Some fixed-price development contracts include initial production units in their scope of work. Successful performance of these contracts depends on ourthe ability to meet production specifications and delivery rates. If we are unable to meet these contract requirements, revenue from these contracts could be reduced through the incorporation of liquidated damages, the contract could be terminated for default, and we could be subject to other financially significant consequences. We use our best judgment to estimate the cost to perform the work and the price we will eventually be paid on fixed-price development programs. While we believe the cost and price estimates used to prepare ourthe consolidated financial statements are appropriate, future events could result in unfavorable adjustments to those estimates which in turn would adversely affect our results of operations.
29
and regional levels) is extremely volatile and unpredictable. Our ability to operate in China may be adversely affected by changes in, or our failure to comply with, Chinese laws and regulations, such as those relating to taxation, import and export tariffs, environmental regulations, land use rights, intellectual property, labor and employment laws, and other matters, which laws and regulations remain underdeveloped and subject to change for political or other reasons, with little or no prior notice. Moreover, the enforceability of applicable existing Chinese laws and regulations is uncertain. For example, since Chinese administrative and court authorities have significant discretion in interpreting and implementing statutory and contract terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we would receive. These uncertainties may impede ourthe ability to enforce the contracts we have entered into with our distributors, business partners, customers, and suppliers. In addition, protections of intellectual property rights and confidentiality in China may not be as effective as in the U.S. or other countries or regions. All of these uncertainties could limit the legal protections available to us and could materially and adversely affect our business, financial condition, cash flows, and results of operations.
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We have a large amount of intercompany balances with our China entities, which may be subject to taxes and penalties when we try to pay them down or collect them.
•political and economic instability or changes in U.S. government policy with respect to the foreign countries where •we may experience difficulties in enforcing legal contracts or the collecting of foreign accounts receivable in a timely manner and we may be forced to write off these receivables; •tariffs and other barriers may make our products less cost competitive or may reduce gross margin on these products; •the laws of certain foreign countries may not adequately protect our trade secrets and intellectual property or may be burdensome to comply with; •potentially adverse tax consequences to customers may damage cost competitiveness; •customs, import/export, and other regulations of the countries in which we do business may adversely affect our business; • |
| different technical standards or requirements, such as country or region-specific requirements to eliminate the use of lead, which we may incorporate into certain |
31
•currency fluctuations may make our products less cost competitive, affecting overseas demand for our products or otherwise adversely affecting our business; and
Our failure
infringement claims (or claims for indemnification resulting from infringement claims) will not be asserted against us or that such claims will not be successful;
future assertions will not result in an injunction against the sale of infringing products, which could require us to cease the manufacture, use or sale of the infringing products, processes, or technology and expend significant resources to develop non-infringing technology, adversely affecting our business, results of operations, and cash flows;
Our success
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issued. We cannot guarantee that our pending applications will be approved by the applicable governmental authorities. Moreover, our existing and future patents and trademarks may not be sufficiently broad to protect our proprietary rights or may be held invalid or unenforceable in court. Failure to obtain patent registrations or a successful challenge to our registrations in the United StatesU.S. or other foreign countries may limit ourthe ability to protect the intellectual property rights that these applications and registrations are intended to cover.
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Our costsCosts of defending litigation have been significant in the past, may continue, to be costly, and may not be covered by our insurance policies. The defense of litigation could also result in diversion of our management's time and attention away from business operations, which could harm our business.
In the Interim Award incorporated by reference into the Modified Partial Final Award (in each case as defined in the disclosures under the caption “Legal Proceedings” in Note 1311 – Commitments and Contingencies in the notesNotes to our consolidated financial statements)Consolidated Financial Statements), the arbitrator determined and ordered that we are is required to pay Phoenix a royalty of 7.5% of the sale price on (i)(a) future customer payments for certain of our product contracts previously entered into at the time the Interim Award was issued and (ii)(b) customer payments for future sales of any product using any Deemed Trade Secret (as defined in the disclosures under the caption “Legal Proceedings” in Note 1311 – Commitments and Contingencies in the notesNotes to our consolidated financial statements)Consolidated Financial Statements), 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 we are required to concurrently submit to Phoenix a written report that sets forth the calculation of the amount of the royalty payment in a form
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Cyber attacks,Cyber-attacks, such as computer viruses, or other forms of cyber terrorism, may disrupt access to our network or storage applications. Such disruptions could result in delays or cancellations of customer orders or delays or interruptions in the production or shipment of our products. Data security breaches involving our data center customers could affect their financial condition and ability to continue to purchase our products. In addition, cyber attackscyber-attacks may cause us to incur significant remediation costs, result in product development delays, disrupt key business operations, and divert attention of management and key information technology resources. These incidents could also subject us to liability, expose us to significant expense, and cause significant harm to our reputation and our business.
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For a portion of our business, we are subject to extensive government regulation, and our failure to comply with applicable regulations could subject us to penalties that may restrict ourthe ability to conduct our business.
the Federal Acquisition Regulations, Defense Federal Acquisition Regulation Supplement and other supplemental agency regulations, which comprehensively regulate the formation and administration of, and performance under, U.S. government contracts;
the Truth in Negotiations Act, which requires certification and disclosure of all factual cost and pricing data in connection with contract negotiations;
Our failure
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illegal activities, then we could be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, suspension of payments, fines, and suspension or debarment from doing business with the U.S. government. We could experience serious harm to our reputation if allegations of impropriety or illegal acts were made against us, even if the allegations were inaccurate. In addition, responding to governmental audits or investigations may involve significant expense and divert management attention. Moreover, if any of our administrative processes and business systems are found not to comply with the applicable requirements, we may be subjected to increased government scrutiny or required to obtain additional governmental approvals that could delay or otherwise adversely affect ourthe ability to compete for or perform contracts. If any of the foregoing were to occur, our business, financial condition, operating results, and cash flows may be adversely affected.
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The Department of Homeland Security has commenced a program to evaluate the security of certain chemicals which may be of interest to terrorists, including chemicals utilized by us. This evaluation may lead to regulations or restrictions affecting ourthe ability to utilize these chemicals or the costs of doing so.
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We could be required to record an impairment charge as a result of changes to assumptions used in our impairment testing.
Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) could have a material effect on our balance sheet, revenue and result of operations, and could require a significant expenditure of time, attention and resources, especially by senior management.
Our accounting and financial reporting policies conform to U.S. GAAP, which are periodically revised and/or expanded. The application of accounting principles is also subject to varying interpretations over time. Accordingly, we are required to adopt new or revised accounting standards or comply with revised interpretations that are issued from time to time by various parties, including accounting standard setters and those who interpret the standards, such as the FASB and the SEC and our independent registered public accounting firm. Such new financial accounting standards may result in significant changes that could adversely affect our financial condition and results of operations. For example, in February 2016, the FASB issued ASU 2016-02, Leases, which requires all operating leases with lease terms longer than twelve months be recorded as lease assets and lease liabilities on our consolidated balance sheets. Implementing changes required by new standards, requirements or laws likely will require a significant expenditure of time, attention and resources. It is impossible to completely predict the impact, if any, on us of future changes to accounting standards and financial reporting and corporate governance requirements.
Refer to Note 1 - Description of Business, Note 2 - Summary of Significant Accounting Policies and Note 3 - Recent Accounting Pronouncements of the notes to the consolidated financial statements for further discussion of these new accounting standards, including the implementation status and potential impact to our consolidated financial statements.
could increase costs and affect the manufacturing and sale of our products.
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to determining the origin of any minerals used in our products.costs. Our supply chain is complex and we may be unable to verify the origins for all metals used in our products.
Our Paycheck Protection Program loan may not be forgiven and could subject us to enhanced scrutiny.
On May 3, 2020, we entered into a Paycheck Protection Program Promissory Note and Agreement with Wells Fargo Bank, N.A. under the Paycheck Protection Program (“PPP”) established under the Coronavirus Aid, Relief and Economic Security Act to receive loan proceeds of approximately $6.5 million, which we received on May 6, 2020. The PPP was implemented hastily in response to the unprecedented economic downturn related to COVID-19, and provides for loans of up to $10 million for eligible small businesses. Due to the speed of implementation of this program, official guidance and interpretations of the requirements of the program have been limited and have changed over time. On April 29, 2020, the U.S. Department of the Treasury updated its “Frequently Asked Questions” document regarding the PPP program to indicate its intention to review all loans obtained under the program that exceed $2 million. We have diligently considered all known guidance and determined that we meet all requirements for the program. However, we cannot predict with certainty how such a review might be conducted or what new information or interpretations might emerge prior to the completion of the review. As such, we cannot be certain whether our loan may be forgiven, even if we meet the currently understood requirements for forgiveness. The review could also subject us to additional scrutiny, which could adversely affect business, financial condition, results of operations and cash flows.
Company.
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Certain provisions of New Jersey law and our governing documents may make a takeover of our Company difficult even if such takeover could be beneficial to some of our shareholders.
provide that directors may be removed at any time, but only for cause and only by the affirmative vote of the holders of at least a majority of outstanding shares of capital stock entitled to vote generally in the election of directors cast at a meeting of shareholders called for that purpose;
provide that a super majority vote of shareholders is required to amend some portions of our amended and restated certificate of incorporation and amended and restated bylaws, including requiring approval by the holders of 80% or more of the outstanding shares of capital stock entitled to vote generally in the election of directors for certain business combinations unless these transactions meet certain fair price criteria and procedural requirements or are approved by two-thirds of continuing directors;
authorize the issuance of preferred stock, without any requirement of vote or class vote of shareholders, commonly referred to as “blank check” preferred stock, which shares of preferred stock may have rights senior to those of common stock;
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materially and adversely affected the market conditions in the industries in which we operate and caused many of our customers to reduce their spending plans, leading them to draw down their existing inventory, and reduce orders for our products, which, in turn, had an adverse impact on our revenues. We cannot predict the timing, strength, or duration of any economic slowdown or subsequent economic recovery, worldwide or within our industries. It is possible that economic conditions could result in further setbacks, and that these customers, or others, could as a result, significantly reduce their capital expenditures, draw down their inventories, reduce production levels of existing products, defer introduction of new products, or place orders and accept delivery for products for which they do not pay us due to their economic difficulties or other reasons. If any of these events occur, our business, financial condition, results of operations, and cash flows may be adversely affected.
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We may not pay additional dividends on our common stock and, consequently, the only opportunity to achieve a return on an investment in our common stock may be an increase in the price of our common stock.
which there is no guarantee.
| Aerospace and Defense and Broadband segments. The facility in Concord, California, with approximately 110,000 square feet, is leased through 2035 with an option to extend and is utilized as manufacturing and research and development for our Aerospace and Defense segment. One facility in Beijing, China, with approximately 23,000 square feet, is leased through April 2022 and is utilized for manufacturing for our Broadband segment and another facility in Beijing, China with approximately 5,000 square feet, is leased through January 2025 and is utilized for research and development for our Broadband segment.
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Footnotes
Securities ITEM 3.Legal ProceedingsSee the disclosures under the caption “Legal Proceedings” in Note 13-11 - Commitments and Contingencies in the notesNotes to our consolidated financial statementsConsolidated Financial Statements for disclosures related to our legal proceedings, which disclosures are incorporated herein by reference.ITEM 4.Mine Safety Disclosures4333ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of EquityMarket InformationOur common stock is traded on the Nasdaq Global Market and is quoted under the symbol "EMKR". As of November 30, 2020,29, 2021, we had approximately 6460 shareholders of record. Many of our shares of common stock are held by brokers and other institutions on behalf of shareholders, and we are unable to estimate the number of these shareholders.Dividend PolicyNo dividends have been declared during the two most recent fiscal years. Under the terms of our credit facility with Wells Fargo Bank, N. A., we are restricted from paying dividends that result in the liquidity of the Company being less than $25.0 million after paying the dividend if any amounts are outstanding under our credit facility. We expect to retain all of our earnings to finance the expansion and development of our business, and we do not currently intend to pay any cash dividends on our capital stock in the foreseeable future. The payment of dividends, if any, in the future is at the discretion of the Board of Directors.ITEM 6.Selected Financial DataInPart II, Item 6 is no longer required as the tables below, we have provided you with consolidated financial data. We derivedCompany has adopted certain provisions within the statement of operations data for the fiscal years ended September 30, 2020, 2019, and 2018 and the balance sheet data as of September 30, 2020 and 2019 from our audited consolidated financial statements included in Financial Statements and Supplementary Data underamendments to Regulation S-K that eliminate Item 8 within this Annual Report.We derived the statement of operations data for the years ended September 30, 2017 and 2016 and the selected balance sheet data as of September 30, 2018, 2017, and 2016 from audited consolidated financial statements that are not included in this Annual Report after giving effect to the discontinued operations of the Photovoltaics and Digital Products Businesses. You should read this financial data together with our Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 and Financial Statements and Supplementary Data under Item 8 within this Annual Report. Our historical results are not necessarily indicative of the results that may be expected in the future.44
Selected Financial Data
| | | | | | | | | | | | | | | |
Statements of Operations Data | | | | | | | | | | | | | | | |
(in thousands, except loss per share) | | For the Fiscal Years Ended September 30, | |||||||||||||
|
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 | |||||
Revenue | | $ | 110,128 | | $ | 87,265 | | $ | 85,617 | | $ | 122,895 | | $ | 91,998 |
Gross profit | |
| 35,582 | |
| 15,089 | |
| 18,487 | |
| 42,534 | |
| 30,954 |
Operating (loss) income | |
| (7,034) | |
| (36,132) | |
| (18,311) | |
| 7,741 | |
| 2,939 |
(Loss) income from continuing operations | |
| (7,000) | |
| (35,984) | |
| (17,453) | |
| 8,221 | |
| 2,619 |
Income from discontinued operations | |
| — | |
| — | |
| — | |
| 14 | |
| 5,647 |
Net (loss) income | |
| (7,000) | |
| (35,984) | |
| (17,453) | |
| 8,235 | |
| 8,266 |
Net (loss) income per basic share | |
| | |
| | |
| | |
| | |
| |
Continuing operations | | $ | (0.24) | | $ | (1.29) | | $ | (0.64) | | $ | 0.31 | | $ | 0.10 |
Discontinued operations | |
| — | |
| — | |
| — | |
| — | |
| 0.22 |
Net (loss) income per basic share | | $ | (0.24) | | $ | (1.29) | | $ | (0.64) | | $ | 0.31 | | $ | 0.32 |
Net (loss) income per diluted share | |
| | |
| | |
| | |
| | |
| |
Continuing operations | | $ | (0.24) | | $ | (1.29) | | $ | (0.64) | | $ | 0.30 | | $ | 0.10 |
Discontinued operations | |
| — | |
| — | |
| — | |
| — | |
| 0.21 |
Net (loss) income per diluted share | | $ | (0.24) | | $ | (1.29) | | $ | (0.64) | | $ | 0.30 | | $ | 0.31 |
| | | | | | | | | | | | | | | |
Balance Sheet Data | | | | | | | | | | | | | | | |
(in thousands) | | As of September 30, | |||||||||||||
|
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 | |||||
Cash, cash equivalents and restricted cash | | $ | 30,538 | | $ | 21,977 | | $ | 63,195 | | $ | 68,754 | | $ | 64,870 |
Working capital | |
| 61,057 | |
| 41,250 | |
| 88,848 | |
| 103,042 | |
| 92,957 |
Total assets | |
| 126,241 | |
| 109,562 | |
| 135,895 | |
| 144,084 | |
| 127,211 |
Long-term liabilities | |
| 23,039 | |
| 2,097 | |
| 1,891 | |
| 1,667 | |
| 1,635 |
Shareholders' equity | |
| 74,149 | |
| 76,746 | |
| 106,805 | |
| 120,774 | |
| 107,317 |
Working capital, calculated as current assets minus current liabilities, is a financial metric we use that represents available operating liquidity.
Significant Transactions
Significant transactions that affect the comparability of our operating results and financial condition include:
Fiscal 2020
Continuing Operations:
45
Fiscal 2019
Continuing Operations:
Fiscal 2018
Continuing Operations:
Fiscal 2017
Continuing Operations:
46
Fiscal 2016
Continuing Operations:
Discontinued Operations:
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Statements We have fully vertically-integrated manufacturing capability through our indium phosphide ("InP") 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 our vertically-integrated manufacturing strategy for quartz and ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsYou should read theThe following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto included in Financial Statements and Supplementary DataunderItem 18 within this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actualActual results could differ materially from those discussed in the forward-looking statements. See Cautionary Statement Note Regarding Forward-Looking Statements.Business OverviewEMCORE Corporation (referred to herein, together with its subsidiaries, as the “Company,” “we,” “our,” or “EMCORE”) was established in 1984 as a New Jersey corporation. We became publicly traded in 1997 and are listed on the Nasdaq Stock Exchange under the ticker symbol EMKR. We areis a leading provider of sensors for navigation in the Aerospaceaerospace and Defensedefense market as well as a manufacturer of lasers and optical subsystems for use in the Cable TV (“CATV”("CATV") industry.We pioneered the linear fiber optic transmission technology that enabled the world’s first delivery of CATV directly on fiber, and today is a leading provider of advanced Mixed-Signal Opticsmixed-signal products serving the aerospace and defense and broadband communications and Aerospace and Defense markets. The Mixed-Signal Opticsmixed-signal technology, at the heart of our broadband communications products, is shared with our fiber optic gyrosgyroscopes ("FOG") and inertial sensors to provide the aerospace and defense markets with state-of-the-art navigationsnavigation 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, we further expanded our portfolio of gyros and inertial sensors with SDI’s quartz MEMS gyro and accelerometer technology.fiber optic gyroFOG products for navigation systems, and for our chip, laser, transmitter, and receiver products for broadband applications.We have two reporting segments,segments: (a) Aerospace and Defense and (b) Broadband. Aerospace and Defense is comprised of two product lines: (i) Navigation and Inertial Sensing, and (ii) Defense Optoelectronics. The Broadband segment is comprised of three product lines: (i) CATV Lasers and Transmitters, (ii) Chip Devices, and (iii) Other. DueOther Optical Products.Recent DevelopmentsCOVID-19We are subject to ongoing risks and uncertainties as a shift in customer base, the previously existing Satellite/Microwave Communications product line has been renamed “Defense Optoelectronics.”Recent DevelopmentsCOVID-19The global outbreakresult of the coronavirus disease 2019 (“COVID-19”) was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020. The COVID-19 pandemic has negatively affected the U.S. and global economy, disrupted global supply chains, significantly restricted travel and transportation, resulted in mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets.pandemic. The full extent of the COVID-19 impact on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which areis highly uncertain, out of our control, and cannot be predicted.Each region we and our supply chain partners operate in has been affected by COVID-19 at varying times and magnitudes, often creating unforeseen challenges associated with logistics, raw material supply and labor shortages. In accordance with applicable U.S. state and county ordinances generally exempting essential businesses and/or critical infrastructure workforces from mandated closures and orders to “shelter-in-place,” our U.S. production facilities have48
continued to operate in support of essential products and services, subject to limitations and requirements pursuant to applicable state and county orders with regard to ongoing operations that have reduced the efficiency of our engineering and operational teams. While operations at our facility in China were delayed in early February 2020, we were at planned capacity by the end of February and throughout the quarters ended June 30 and September 30, 2020.
We rely on third party suppliers and contract manufacturers to provide materials, major components and products, and services. Many of our suppliers have at times temporarily ceased or limited operations as a result of COVID-19 and failed to deliver parts or components to us.
We remain diligent in continuing to identify and manage risks todisruptions of our business, given the changing uncertainties related to COVID-19inventory levels, operating results, and have plans in place intended to address or mitigate shortages of labor, material supplies and logistics services. While we believe that our supply chain, logistics and operations teams are currently in a position to meet expected customer demand levels in the coming quarters, we recognize that unpredictable events could create new challenges in the months ahead. We may not be able to address these challenges in a timely manner, which could negatively impact our financial results.
cash flows.
SDI Acquisition
On June 7, 2019, we completed the acquisition of SDI, a private-equity backed navigation systems provider with a scalable, chip-based platform for higher volume gyro applications utilizing Quartz MEMS technology. See Note 4 - Acquisition in the notes to our consolidated financial statements for additional information regarding this acquisition. Following the closing, we began integrating SDI into our current Navigation
HyteraFastrain Transactions
49
(“ (“Hytera HK”), and Shenzhen Hytera Communications Co., Ltd., a corporation formed under the laws of the P.R.C. (“Shenzhen Hytera”, and together with Hytera HK, the “Buyers”“Hytera”), pursuant to which the BuyersHytera agreed to purchase from EMCOREus certain CATV module and transmitter manufacturing equipment (the “Equipment”) that we owned by EMCORE and currentlythat was located at the manufacturing facility of our wholly-owned subsidiary, EMCORE Optoelectronics (Beijing) Co, Ltd., a corporation formed under the laws of the P.R.C..
$6.2 million, of which (a) $3.8 million had been paid to us as of September 30, 2021 and (b) $2.4 million remains to be paid to us in connection with Equipment currently located at our Beijing facility and to be transferred pursuant to one or more closings on dates mutually agreed between us and Fastrain.
Concurrently with entry into the Asset Purchase Agreement,2022.
Other Actions Related to CATV Business
In thePPP Loan was recognized during our fiscal quarter ended SeptemberJune 30, 2019, we also reduced2021.
Sale/Leaseback Transaction
SDI entered into a Standard Offer, Agreement and Escrow Instructions for Purchase of Real Estate (Non-Residential) (the “Concord Purchase Agreement”) dated as of December 31, 2019 with Parkview Management Group, Inc. pursuant to which the parties agreed to consummate a sale and leaseback transaction (the “Sale and Leaseback Transaction”). Under the terms of the Concord Purchase Agreement, SDI sold the property located in Concord, California (the “Concord Real Property”) to Eagle Rock Holdings, LP (“Buyer”), an affiliate of Parkview Management Group, Inc. on February 10, 2020 for a total purchase price of $13.2 million. SDI received net proceeds of $12.8 million after transaction commissions and expenses incurred in connection with the sale.
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 will 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 with Buyer under which EMCORE guaranteed the payment
50
when due of the monthly rent, and all other additional rent, interest and charges to be paid by SDI under the Lease Agreement.
Customer Settlement Agreement
statements. We develop estimates based on historical experience and on various assumptions about the future that are believed to be reasonable based on the best information available to us. OurThe reported financial position or results of operations may be materially different under changed conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information. A listing and description of our
Inventory
Inventory is stated atportrayal of our financial condition and results and which require our most difficult, complex, or subjective judgments or estimates. Based on this definition, our most critical accounting policies include revenue recognition, which impacts the lowerrecording of cost or net realizable value (first-in, first-out). Inventory that is expected to be used withinrevenue; inventory valuation, which impacts the next 12 months is classified as current inventory. We write-down inventory once it has been determined that conditions exist that may not allow the inventory to be sold for its intended purpose or the inventory is determined to be excess or obsolete based on assumptions about future demand and market conditions. The charge related to inventory write-downs is recorded as a cost of revenue. We evaluate inventory levels at least quarterly against sales forecasts on agoods sold and gross margin; assessment of goodwill and long-lived assets, which impacts the impairment of the respective assets; share-based compensation, which impacts costs of goods sold and operating expenses; loss contingencies, which impacts operating expenses; and income taxes, which impacts the income tax provision. These policies and significant part-by-part basis, in addition to determining its overall inventory risk.judgments involved are discussed further below. We have incurred, and may in the future incur, charges to write-down our inventory. See Note 8 - Inventory in the notes to the consolidated financial statements for additional information related to our inventory.
Income Taxes
In accordance with the authoritative guidance onother significant accounting for income taxes, we recognize income taxes using an asset and liability approach. This approach requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of eventspolicies that have been recognized in our consolidated financial statements or tax returns. The measurement of current and deferred taxes is based on provisions of the enacted tax law and the effects of future changes in tax laws or rates are not anticipated.
The authoritative guidance provides for recognition of deferred tax assets if the realization of such deferred tax assets is more likely than not to occur based on an evaluation of all available evidence, both positive and negative, and the relative weight of the evidence. We have determined that at this time it is more likely than not that deferred tax assets attributable to all other items will not be realized, primarily due to uncertainties related to our ability to utilize our net operating loss carryforwards before they expire. Accordingly, we have established a valuation allowance for such deferred tax assets which we do not expect to realize. If there isgenerally require subjective estimates or judgments or would not have a changematerial impact on our results of operations. Our significant accounting policies are described in our ability to realize our deferred tax assets for which a valuation allowance has been established, then our tax valuation allowance may decrease in the period in which we determine that realization is more likely than not. Likewise, if we determine that it is not more likely than not that deferred tax assets will be realized, then a valuation allowance may be established for such deferred tax assets and our tax provision may increase in the period in which we make the determination. See
51
Revenue Recognition
| For the Fiscal Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Revenue | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
| Cost of revenue | 61.2 | 67.7 | 82.7 | ||||||||||||||
| Gross profit | 38.8 | 32.3 | 17.3 | ||||||||||||||
| Operating expense: | |||||||||||||||||
| Selling, general, and administrative | 15.5 | 22.4 | 36.8 | ||||||||||||||
| Research and development | 11.0 | 18.4 | 22.3 | ||||||||||||||
| Loss (gain) on sale of assets | 0.3 | (2.1) | (0.3) | ||||||||||||||
| Total operating expense | 26.8 | 38.7 | 58.8 | ||||||||||||||
| Operating income (loss) | 12.0 | (6.4) | (41.5) | ||||||||||||||
| Other income: | |||||||||||||||||
| Gain on extinguishment of debt | 4.1 | — | — | ||||||||||||||
| Interest income (expense), net | 0.3 | (0.1) | 0.7 | ||||||||||||||
| Foreign exchange gain (loss) | 0.1 | 0.2 | (0.5) | ||||||||||||||
| Total other income | 4.6 | 0.1 | 0.2 | ||||||||||||||
| Income (loss) before income tax expense | 16.5 | (6.3) | (41.3) | ||||||||||||||
| Income tax expense | (0.4) | (0.1) | (0.1) | ||||||||||||||
| Net income (loss) | 16.2 | % | (6.4) | % | (41.2) | % | |||||||||||
| Foreign exchange translation adjustment | (0.1) | — | — | ||||||||||||||
| Comprehensive income (loss) | 16.0 | % | (6.4) | % | (41.2) | % | |||||||||||
| For the Fiscal Year Ended September 30, | |||||||||||||||||||||||
| (in thousands, except percentages) | 2021 | 2020 | Change | ||||||||||||||||||||
| Revenue | $ | 158,444 | $ | 110,128 | $ | 48,316 | 43.9 | % | |||||||||||||||
| Cost of revenue | 96,956 | 74,546 | 22,410 | 30.1 | |||||||||||||||||||
| Gross profit | 61,488 | 35,582 | 25,906 | 72.8 | |||||||||||||||||||
| Operating expense: | |||||||||||||||||||||||
| Selling, general, and administrative | 24,544 | 24,631 | (87) | (0.4) | |||||||||||||||||||
| Research and development | 17,448 | 20,269 | (2,821) | (13.9) | |||||||||||||||||||
| Loss (gain) on sale of assets | 515 | (2,284) | 2,799 | 122.5 | |||||||||||||||||||
| Total operating expense | 42,507 | 42,616 | (109) | (0.3) | |||||||||||||||||||
| Operating income (loss) | 18,981 | (7,034) | 26,015 | 369.8 | |||||||||||||||||||
| Other income: | |||||||||||||||||||||||
| Gain on extinguishment of debt | 6,561 | — | 6,561 | 100.0 | |||||||||||||||||||
| Interest income (expense), net | 466 | (104) | 570 | 548.1 | |||||||||||||||||||
| Foreign exchange gain | 207 | 198 | 9 | 4.5 | |||||||||||||||||||
| Total other income | 7,234 | 94 | 7,140 | 7595.7 | |||||||||||||||||||
| Income (loss) before income tax expense | 26,215 | (6,940) | 33,155 | 477.7 | |||||||||||||||||||
| Income tax expense | (572) | (60) | (512) | (853.3) | |||||||||||||||||||
| Net income (loss) | $ | 25,643 | $ | (7,000) | $ | 32,643 | 466.3 | % | |||||||||||||||
| Foreign exchange translation adjustment | (231) | (32) | (199) | (621.9) | |||||||||||||||||||
| Comprehensive income (loss) | $ | 25,412 | $ | (7,032) | $ | 32,444 | 461.4 | % | |||||||||||||||
| For the Fiscal Year Ended September 30, | |||||||||||||||||||||||
| (in thousands, except percentages) | 2021 | 2020 | Change | ||||||||||||||||||||
| Aerospace and Defense | $ | 50,838 | $ | 55,240 | $ | (4,402) | (8.0) | % | |||||||||||||||
| Broadband | 107,606 | 54,888 | 52,718 | 96.0 | |||||||||||||||||||
| Total revenue | $ | 158,444 | $ | 110,128 | $ | 48,316 | 43.9 | % | |||||||||||||||
| For the Fiscal Year Ended September 30, | |||||||||||||||||||||||
| (in thousands, except percentages) | 2021 | 2020 | Change | ||||||||||||||||||||
| Aerospace and Defense | $ | 13,705 | $ | 16,729 | $ | (3,024) | (18.1) | % | |||||||||||||||
| Broadband | 47,783 | 18,853 | 28,930 | 153.5 | |||||||||||||||||||
| Total gross profit | $ | 61,488 | $ | 35,582 | $ | 25,906 | 72.8 | % | |||||||||||||||
| | | | | | | |
| | For the Fiscal Years Ended | | ||||
| | September 30, | | ||||
|
| 2020 |
| 2019 |
| 2018 | |
Revenue | | 100.0 | % | 100.0 | % | 100.0 | % |
Cost of revenue | | 67.7 |
| 82.7 |
| 78.4 |
|
Gross profit | | 32.3 |
| 17.3 |
| 21.6 |
|
Operating expense: | |
|
|
|
|
|
|
Selling, general, and administrative | | 22.4 |
| 36.8 |
| 25.0 |
|
Research and development | | 18.4 |
| 22.3 |
| 18.0 |
|
(Gain) loss on sale of assets | | (2.1) |
| (0.3) |
| — |
|
Total operating expense | | 38.7 |
| 58.8 |
| 43.0 |
|
Operating loss | | (6.4) |
| (41.5) |
| (21.4) |
|
Other income: | |
|
|
|
|
|
|
Interest (expense) income, net | | (0.1) |
| 0.7 |
| 0.9 |
|
Foreign exchange gain (loss) | | 0.2 |
| (0.5) |
| (0.5) |
|
Other income | | — | | — | | 0.1 | |
Total other income | | 0.1 |
| 0.2 |
| 0.5 |
|
Loss before income tax benefit (expense) | | (6.3) |
| (41.3) |
| (20.9) |
|
Income tax (expense) benefit | | (0.1) |
| (0.1) |
| 0.5 |
|
Net loss | | (6.4) | % | (41.2) | % | (20.4) | % |
52
Comparison of Financial Results for the Fiscal Years ended September 30, 2020 and 2019
| | | | | | | | | | | | |
| | For the Fiscal Years Ended September 30, |
| |||||||||
(in thousands, except percentages) |
| 2020 |
| 2019 |
| $ Change |
| % Change | | |||
Revenue | | $ | 110,128 | | $ | 87,265 | | $ | 22,863 | | 26.2 | % |
Cost of revenue | |
| 74,546 | |
| 72,176 | |
| 2,370 |
| 3.3 | % |
Gross profit | |
| 35,582 | |
| 15,089 | |
| 20,493 |
| 135.8 | % |
Operating expense: | |
|
| |
|
| |
|
|
|
| |
Selling, general, and administrative | |
| 24,631 | |
| 32,080 | |
| (7,449) |
| (23.2) | % |
Research and development | |
| 20,269 | |
| 19,443 | |
| 826 |
| 4.2 | % |
Gain on sale of assets | |
| (2,284) | |
| (302) | |
| (1,982) |
| (656.3) | % |
Total operating expense | |
| 42,616 | |
| 51,221 | |
| (8,605) |
| (16.8) | % |
Operating loss | |
| (7,034) | |
| (36,132) | |
| 29,098 |
| 80.5 | % |
Other income (expense): | |
|
| |
|
| |
|
|
| | |
Interest (expense) income, net | |
| (104) | |
| 629 | |
| (733) |
| (116.5) | % |
Foreign exchange gain (loss) | |
| 198 | |
| (427) | |
| 625 |
| 146.4 | % |
Total other income | |
| 94 | |
| 202 | |
| (108) |
| (53.5) | % |
Loss before income tax expense | |
| (6,940) | |
| (35,930) | |
| 28,990 |
| 80.7 | % |
Income tax expense | |
| (60) | |
| (54) | |
| (6) |
| (11.1) | % |
Net loss | | $ | (7,000) | | $ | (35,984) | | $ | 28,984 |
| 80.5 | % |
| (in thousands, except percentages) | For the Fiscal Year Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||||||||
| Revenue | $ | 110,128 | $ | 87,265 | $ | 22,863 | 26.2 | % | |||||||||||||||
| Cost of revenue | 74,546 | 72,176 | 2,370 | 3.3 | |||||||||||||||||||
| Gross profit | 35,582 | 15,089 | 20,493 | 135.8 | |||||||||||||||||||
| Operating expense: | |||||||||||||||||||||||
| Selling, general, and administrative | 24,631 | 32,080 | (7,449) | (23.2) | |||||||||||||||||||
| Research and development | 20,269 | 19,443 | 826 | 4.2 | |||||||||||||||||||
| Gain on sale of assets | (2,284) | (302) | (1,982) | (656.3) | |||||||||||||||||||
| Total operating expense | 42,616 | 51,221 | (8,605) | (16.8) | |||||||||||||||||||
| Operating loss | (7,034) | (36,132) | 29,098 | 80.5 | |||||||||||||||||||
| Other income: | |||||||||||||||||||||||
| Interest (expense) income, net | (104) | 629 | (733) | (116.5) | |||||||||||||||||||
| Foreign exchange gain (loss) | 198 | (427) | 625 | 146.4 | |||||||||||||||||||
| Total other income | 94 | 202 | (108) | (53.5) | |||||||||||||||||||
| Loss before income tax expense | (6,940) | (35,930) | 28,990 | 80.7 | |||||||||||||||||||
| Income tax expense | (60) | (54) | (6) | (11.1) | |||||||||||||||||||
| Net loss | $ | (7,000) | $ | (35,984) | $ | 28,984 | 80.5 | % | |||||||||||||||
| Foreign exchange translation adjustment | (32) | 65 | (97) | (149.2) | |||||||||||||||||||
| Comprehensive loss | $ | (7,032) | $ | (35,919) | $ | 28,887 | 80.4 | % | |||||||||||||||
| | | | | | | | | | | |
| | For the Fiscal Years Ended September 30, | |||||||||
(in thousands, except percentages) | | 2020 |
| 2019 |
| $ Change | | % Change | |||
Aerospace and Defense revenue | | $ | 55,240 | | $ | 33,086 | | $ | 22,154 | | 67.0% |
Broadband revenue | | | 54,888 | | | 54,179 | | | 709 | | 1.3% |
Total revenue | | $ | 110,128 | | $ | 87,265 | | $ | 22,863 | | 26.2% |
| For the Fiscal Year Ended September 30, | |||||||||||||||||||||||
| (in thousands, except percentages) | 2020 | 2019 | Change | ||||||||||||||||||||
| Aerospace and Defense | $ | 55,240 | $ | 33,086 | $ | 22,154 | 67.0 | % | |||||||||||||||
| Broadband | 54,888 | 54,179 | 709 | 1.3 | |||||||||||||||||||
| Total revenue | $ | 110,128 | $ | 87,265 | $ | 22,863 | 26.2 | % | |||||||||||||||
53
Gross Profit
| | | | | | | | | | | |
| | For the Fiscal Years Ended September 30, | |||||||||
(in thousands, except percentages) | | 2020 |
| 2019 |
| $ Change | | % Change | |||
Aerospace and Defense gross profit | | $ | 16,729 | | $ | 9,207 | | $ | 7,522 | | 81.7% |
Broadband gross profit | | | 18,853 | | | 5,882 | | | 12,971 | | 220.5% |
Total gross profit | | $ | 35,582 | | $ | 15,089 | | $ | 20,493 | | 135.8% |
| For the Fiscal Year Ended September 30, | |||||||||||||||||||||||
| (in thousands, except percentages) | 2020 | 2019 | Change | ||||||||||||||||||||
| Aerospace and Defense | $ | 16,729 | $ | 9,207 | $ | 7,522 | 81.7 | % | |||||||||||||||
| Broadband | 18,853 | 5,882 | 12,971 | 220.5 | |||||||||||||||||||
| Total gross profit | $ | 35,582 | $ | 15,089 | $ | 20,493 | 135.8 | % | |||||||||||||||
Our cost of revenue consists of raw materials, compensation expense including non-cash stock-based compensation expense, depreciation expense and other manufacturing overhead costs, expenses associated with excess and obsolete inventories, and product warranty costs. Historically, our cost of revenue as a percentage of revenue, which we refer to as our gross margin, has fluctuated significantly due to product mix, manufacturing yields and sales volumes, and inventory and specific product warranty charges.
Stock-based compensation expense within cost of revenue totaled approximately $0.7 million and $0.5 million forduring each of the fiscal years ended September 30, 2020 and 2019, respectively.
SG&A consists primarily of compensation expense including non-cash stock-based compensation expense related to executive, finance, and human resources personnel, as well as sales and marketing expenses, professional fees, legal and patent-related costs, and other corporate-related expenses.
2019. SG&A expense for the fiscal year ended September 30, 2020 was lower thandecreased from the amount reported in the same period in the prior year primarilyby $7.4 million due to lower attorneys’ fees and costs arising from litigation proceedings, partially offset by an increase in compensation, insurance and bad debt expenses.
As a percentage of revenue, SG&A expenses were 22.4% and 36.8% for the fiscal years ended September 30, 2020 and 2019, respectively.
54
Research and Development (“R&D”)
R&D consists primarily of compensation expense including non-cash stock-based compensation expense, as well as engineering and prototype costs, depreciation expense, and other overhead expenses, as they relate to the design, development, and testing of our products. Our R&D costs are expensed as incurred. We believe that in order to remain competitive, we must invest significant financial resources in developing new product features and enhancements and in maintaining customer satisfaction worldwide.
2019. For the fiscal years ended September 30, 2020 and 2019, Aerospace and Defense R&D expense was $17.5 million and $10.4 million, respectively. For the fiscal years ended September 30, 2020 and 2019, Broadband R&D expense was $2.8 million and $9.0 million, respectively.
Total R&D expense for the fiscal year ended September 30, 2020 was higher thanincreased from the amounts reported in the same period in the prior year primarily due toby $0.8 million driven by the expense arising from the Customer Settlement Agreement of $1.5 million and an increase in compensation costs (including due to a higher R&D headcount than the prior period due to the SDI acquisition), partially offset by lower project spending, primarily in Aerospace and Defense, and an overall reduction in Broadband R&D expense.
spending. As a percentage of revenue, R&D expenses were 18.4% and 22.3% for the fiscal years ended September 30, 2020 and 2019, respectively.
Operating loss represents revenue less the cost of revenue and direct operating expenses incurred.
$0.8 million.
Gains or losses from foreign currency transactions denominated in currencies other than
a $(0.4) million, respectively.
For
55
expense partially offset by the reversal of a deferred tax liability related to the Concord Real Property. Income tax expense for the fiscal year ended September 30, 2019 is primarily comprised of state minimum tax expense.
Comparison of Financial Results for the Fiscal Years Ended September 30, 2019 and 2018
| | | | | | | | | | | | |
(in thousands, except percentages) | | For the Fiscal Years Ended September 30, |
| |||||||||
|
| 2019 |
| 2018 |
| $Change |
| % Change | | |||
Revenue | | $ | 87,265 | | $ | 85,617 | | $ | 1,648 |
| 1.9 | % |
Cost of revenue | |
| 72,176 | |
| 67,130 | |
| 5,046 |
| 7.5 | % |
Gross profit | |
| 15,089 | |
| 18,487 | |
| (3,398) |
| (18.4) | % |
Operating expense (income): | |
|
| |
|
| |
|
|
|
| |
Selling, general, and administrative | |
| 32,080 | |
| 21,377 | |
| 10,703 |
| 50.1 | % |
Research and development | |
| 19,443 | |
| 15,387 | |
| 4,056 |
| 26.4 | % |
(Gain) loss on sale of assets | |
| (302) | |
| 34 | |
| (336) |
| (988.2) | % |
Total operating expense | |
| 51,221 | |
| 36,798 | |
| 14,423 |
| 39.2 | % |
Operating (loss) income | |
| (36,132) | |
| (18,311) | |
| (17,821) |
| (97.3) | % |
Other income (expense): | |
|
| |
|
| |
|
|
|
| |
Interest income, net | |
| 629 | |
| 733 | |
| (104) |
| (14.2) | % |
Foreign exchange loss | |
| (427) | |
| (434) | |
| 7 |
| 1.6 | % |
Other income | |
| — | |
| 110 | |
| (110) |
| (100.0) | % |
Total other income | |
| 202 | |
| 409 | |
| (207) |
| (50.6) | % |
Loss before income tax benefit (expense) | |
| (35,930) | |
| (17,902) | |
| (18,028) |
| (100.7) | % |
Income tax benefit (expense) | |
| (54) | |
| 449 | |
| (503) |
| (112.0) | % |
Net loss | | $ | (35,984) | | $ | (17,453) | | $ | (18,531) |
| (106.2) | % |
Revenue
| | | | | | | | | | | |
| | For the Fiscal Years Ended September 30, | |||||||||
(in thousands, except percentages) | | 2019 |
| 2018 |
| $ Change | | % Change | |||
Aerospace and Defense revenue | | $ | 33,086 | | $ | 13,567 | | $ | 19,519 | | 143.9% |
Broadband revenue | | | 54,179 | | | 72,050 | | | (17,871) | | -24.8% |
Total revenue | | $ | 87,265 | | $ | 85,617 | | $ | 1,648 | | 1.9% |
Aerospace and Defense Revenue:
For the fiscal year ended September 30, 2019, our Aerospace and Defense revenue increased $19.5 million, or 144%, compared to the same period in the prior year. Included in Aerospace and Defense revenue is $9.8 million and $0 of revenue from SDI for the fiscal years ended September 30, 2019 and 2018, respectively. For the fiscal year ended September 30, 2019, our Navigation and Inertial Sensing product line revenue increased $16.0 million compared to the same period in the prior year, primarily due to the increase of SDI revenue of $9.8 million, and an increase of $3.5 million in our Defense Optoelectronics product line, and an increase in our other Aerospace and Defense revenue of $6.2 million. For the fiscal year ended September 30, 2019, our Defense Optoelectronics product line revenue increase was primarily due to an increase in products sold arising from increased customer demand.
Broadband Revenue:
For the fiscal year ended September 30, 2019, our Broadband revenue decreased $17.9 million, or 25%, compared to the same period in the prior year primarily due to lower customer demand in the CATV Lasers and Transmitters product lines partially offset by an increase in our Sensing and Chips product lines.
56
Gross Profit
| | | | | | | | | | | |
| | For the Fiscal Years Ended September 30, | |||||||||
(in thousands, except percentages) | | 2019 |
| 2018 |
| $ Change | | % Change | |||
Aerospace and Defense gross profit | | $ | 9,207 | | $ | 2,406 | | $ | 6,801 | | 282.7% |
Broadband gross profit | | | 5,882 | | | 16,081 | | | (10,199) | | -63.4% |
Total gross profit | | $ | 15,089 | | $ | 18,487 | | $ | (3,398) | | -18.4% |
Our cost of revenue consists of raw materials, compensation expense including non-cash stock-based compensation expense, depreciation expense and other manufacturing overhead costs, expenses associated with excess and obsolete inventories, and product warranty costs. Historically, our cost of revenue as a percentage of revenue, which we refer to as our gross margin, has fluctuated significantly due to product mix, manufacturing yields and sales volumes, and inventory and specific product warranty charges.
Consolidated gross margins were 17.3% and 21.6% for the fiscal years ended September 30, 2019 and 2018, respectively.
Stock-based compensation expense within cost of revenue totaled approximately $0.5 million during each of the fiscal years ended September 30, 2019 and 2018.
Aerospace and Defense Gross Profit:
For the fiscal year ended September 30, 2019, Aerospace and Defense gross profit increased $6.8 million, or 283%, compared to the same period in the prior year, primarily due to higher revenue, of which $2.6 million results from the inclusion of SDI gross profit in the fiscal year ended September 30, 2019, compared to a $0 inclusion of SDI gross profit in the fiscal year ended September 30, 2018. For the fiscal years ended September 30, 2019 and 2018, Aerospace and Defense gross margin was 27.8% and 17.7%, respectively. The higher gross margin in the fiscal year ended September 30, 2019 was primarily due to higher revenue and product mix.
Broadband Gross Profit:
For the fiscal year ended September 30, 2019, Broadband gross profit decreased $10.2 million, or 63%, compared to the same period in the prior year, primarily as a result of the decrease in revenue and product mix in the fiscal year ended September 30, 2019, and an increase in product costs and inventory related charges related to excess and obsolete inventory in the fiscal year ended September 30, 2019. For the fiscal years ended September 30, 2019 and 2018, Broadband gross margin was 10.9% and 22.3%, respectively. The lower gross margin in the fiscal year ended September 30, 2019 was primarily the result of product mix and higher product costs and inventory related charges.
Selling, General and Administrative (“SG&A”)
SG&A consists primarily of compensation expense including non-cash stock-based compensation expense related to executive, finance, and human resources personnel, as well as sales and marketing expenses, professional fees, legal and patent-related costs, and other corporate-related expenses.
Stock-based compensation expense within SG&A totaled approximately $1.5 million and $2.6 million for the fiscal years ended September 30, 2019 and 2018.
SG&A expense for the fiscal year ended September 30, 2019 was higher than the amount reported in the prior year primarily due to an increase in expense for professional services of $5.7 million, primarily as a result of the litigation proceedings with Phoenix, the recording of $3.8 million of attorneys’ fees and costs arising from the arbitrator's modified partial final award in the litigation proceedings with Phoenix, the inclusion of $1.8 million of expense at SDI for the period of June 7, 2019 through September 30, 2019 and costs related to the acquisition of SDI of $0.8 million, partially offset by a decrease in compensation expenses and an allowance for bad debt expenses.
57
As a percentage of revenue, SG&A expenses were 36.8% and 25.0% for the fiscal years ended September 30, 2019 and 2018, respectively.
Research and Development (“R&D”)
R&D consists primarily of compensation expense including non-cash stock-based compensation expense, as well as engineering and prototype costs, depreciation expense, and other overhead expenses, as they related to the design, development, and testing of our products. Our R&D costs are expensed as incurred. We believe that in order to remain competitive, we must invest significant financial resources in developing new product features and enhancements and in maintaining customer satisfaction worldwide.
Stock-based compensation expense within R&D totaled approximately $0.6 million for each of the fiscal years ended September 30, 2019 and 2018.
For the fiscal years ended September 30, 2019 and 2018, Aerospace and Defense R&D expense was $10.4 million and $4.2 million, respectively. For the fiscal years ended September 30, 2019 and 2018, Broadband R&D expense was $9.0 million and $11.2 million, respectively.
R&D expense for the fiscal year ended September 30, 2019 was higher than the amounts reported in the same period in 2018 primarily due to an increase in compensation costs and project spending, primarily in Navigation and Inertial Sensing.
As a percentage of revenue, R&D expenses were 22.3% and 18.0% for the fiscal years ended September 30, 2019 and 2018, respectively.
Operating Loss
Operating loss represents revenue less the cost of revenue and direct operating expenses incurred. Operating loss is a measure that executive management uses to assess performance and make decisions. As a percentage of revenue, our operating loss was (41.4)% and (21.5)% for the fiscal years ended September 30, 2019 and 2018, respectively. The increase in operating loss as a percentage of revenue in the fiscal year ended September 30, 2019 compared to the prior year is primarily due to a decrease in gross profit and an increase in SG&A and R&D expense in the fiscal year ended September 30, 2019.
Other Income
Interest Income, net
During the fiscal years ended September 30, 2019 and 2018, we recorded $1.0 million and $0.7 million, respectively, of interest income earned on cash and cash equivalents balances, which was partially offset by interest expense and letter of credit fees related to our Credit Facility (as defined below). Interest income for the fiscal year ended September 30, 2019 was higher than the amount reported in the prior year due to higher interest income earned on cash and cash equivalents balances.
Foreign Exchange
Gains or losses from foreign currency transactions denominated in currencies other than the U.S. dollar, both realized and unrealized, are recorded as foreign exchange gain (loss) on our consolidated statements of operations and comprehensive loss. The gain (losses) recorded relate to the change in value of the Yuan Renminbi relative to the U.S. dollar.
58
Income Tax Benefit (Expense)
For the fiscal year ended September 30, 2019, we recorded income tax expense of approximately $0.1 million. For the fiscal year ended September 30, 2018, we recorded income tax benefit of approximately $0.4 million. Income tax expense for the fiscal year ended September 30, 2019 is primarily comprised of state minimum tax expense. Income tax benefit for the fiscal year ended September 30, 2018 is primarily comprised of the effect of the Tax Cuts and Jobs Act of 2017 which eliminated Alternative Minimum Taxes and resulted in a refund of amounts that we paid in prior fiscal years.
Liquidity and Capital Resources
Historically in most periods we
As of September 30, 2020,2021, cash and cash equivalents totaled approximately $30.5$71.7 million and net working capital totaled approximately $61.1$116.5 million. Net working capital, calculated as current assets (including inventory) minus current liabilities, is a financial metric we use which represents available operating liquidity. With respect
The Credit Facility matures in November 2021support our operations and currentlymeet our obligations:
•In October 2019, we entered into the Hytera Asset Purchase Agreement pursuant to •In May 2020, we received PPP Loan proceeds of approximately $6.5 million under the PPP Loan Agreement. In July 2021, we received |
We have a historynotification from Wells Fargo that the SBA approved our PPP Loan forgiveness application for the entire PPP Loan balance of operating lossesapproximately $6.5 million, including all accrued interest thereon, and negative cash flowsthat the remaining PPP Loan balance is zero. The forgiveness of the PPP Loan was recognized during our fiscal quarter ended June 30, 2021.
59
reductions and other cost reductions. In addition, should
capital resources in the future. If we need to raise additional capital to support operations, we may be unable to access capital markets and additional capital may only be available to us on terms that could be significantly detrimental to our existing stockholders and to our business.
Net Cash (Used In) Provided By
| | | | | | | | | | | | | | | | | | | |
Operating Activities | | For the Fiscal Years Ended September 30, | | Fiscal 2020 vs Fiscal 2019 | | Fiscal 2019 vs Fiscal 2018 | |||||||||||||
(in thousands, except percentages) |
| 2020 |
| 2019 |
| 2018 |
| $ Change |
| % Change |
| $ Change |
| % Change | |||||
Net cash (used in) provided by operating activities (net of acquired assets and assumed liabilities) | | $ | (3,892) | | $ | (15,151) | | $ | 1,470 | | $ | 11,259 | | 74.3% | | $ | (16,621) | | -1130.7% |
| For the Fiscal Year Ended September 30, | |||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | 2021 | 2020 | 2019 | Change 2021 vs 2020 | Change 2020 vs 2019 | ||||||||||||||||||||||||||||||||||||
| Net cash provided by (used in) operating activities (net of acquired assets and assumed liabilities) | $ | 11,153 | $ | (3,892) | $ | (15,151) | $ | 15,045 | 386.6 | % | $ | 11,259 | 74.3 | % | |||||||||||||||||||||||||||
Fiscal 2020:
Fiscal 2019:
For the fiscal year ended September 30, 2019, our operating activities used cash of $15.2 million, primarily due to our net loss of $36.0 million, partially offset by a gain on disposal of equipment of $0.3 million, changes in our operating assets and liabilities (or working capital components, which includes non-current inventory) of $10.7 million, depreciation and amortization expense of $7.1 million, stock-based compensation expense of $2.6 million, warranty provision of $0.2 million and bad debt provision of $0.1 million. The change in our operating assets and liabilities was primarily the result of a decrease in accounts receivable of $4.0 million and an increase in accrued expenses and other liabilities of $5.0 million, partially offset by a decrease in inventory of $6.5 million and other assets of $0.2 million and a decrease in accounts payable of $4.5 million.
Fiscal 2018:
For the fiscal year ended September 30, 2018, our operating activities provided cash of $1.5 million primarily due to changes in our operating assets and liabilities (or working capital components, which includes non-current inventory) of $8.2 million, depreciation and amortization expense of $5.6 million, stock-based compensation expense of $3.6 million, provision for doubtful accounts of $0.6 million, warranty provision of $0.4 million and loss on disposal of equipment of $34,000 partially offset by our net loss of $17.5 million. The change in our operating assets and liabilities was primarily the result of a decrease in accounts receivable of $2.4 million, inventory of $5.1 million, other assets of $0.6 million and an increase in accounts payable of $0.5 million partially offset by a decrease in accrued expenses and other liabilities of $0.4 million.
60
Working Capital Components:Components
Inventory:
Net Cash Provided By (Used In)
| | | | | | | | | | | | | | | | | | | |
Investing Activities | | For the Fiscal Years Ended September 30, | | Fiscal 2020 vs Fiscal 2019 | | Fiscal 2019 vs Fiscal 2018 | |||||||||||||
(in thousands, except percentages) |
| 2020 |
| 2019 |
| 2018 |
| $ Change |
| % Change |
| $ Change |
| % Change | |||||
Net cash provided by (used) in investing activities | | $ | 10,887 | | $ | (31,803) | | $ | (6,501) | | $ | 42,690 | | 134.2% | | $ | (25,302) | | -389.2% |
| For the Fiscal Year Ended September 30, | |||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | 2021 | 2020 | 2019 | Change 2021 vs 2020 | Change 2020 vs 2019 | ||||||||||||||||||||||||||||||||||||
| Net cash (used) in provided by investing activities | $ | (3,837) | $ | 10,887 | $ | (31,803) | $ | (14,724) | (135.2) | % | $ | 42,690 | 134.2 | % | |||||||||||||||||||||||||||
leaseback of the Concord Real Property.
| For the Fiscal Year Ended September 30, | |||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | 2021 | 2020 | 2019 | Change 2021 vs 2020 | Change 2020 vs 2019 | ||||||||||||||||||||||||||||||||||||
| Net cash provided by financing activities | 33,725 | 1,499 | 5,799 | $ | 32,226 | 2,149.8 | % | $ | (4,300) | (74.2) | % | ||||||||||||||||||||||||||||||
Fiscal 2018:
For the fiscal year ended September 30, 2018, our investing activities used $6.5 million of cash for capital related expenditures of $6.6 million, primarily related to investment in our wafer fabrication facility, partially offset by the receipt of proceeds from the disposal of equipment of $0.1 million.
Net Cash Provided By (Used In) Financing Activities
| | | | | | | | | | | | | | | | | | | | |
Financing Activities | | For the Fiscal Years Ended September 30, | | Fiscal 2020 vs Fiscal 2019 | | Fiscal 2019 vs Fiscal 2018 |
| |||||||||||||
(in thousands, except percentages) |
| 2020 |
| 2019 |
| 2018 |
| $ Change |
| % Change |
| $ Change |
| % Change | | |||||
Net cash provided by (used in) financing activities | | $ | 1,499 | | $ | 5,799 | | $ | (487) | | $ | (4,300) | | -74.2% | | $ | 6,286 | | 1290.8% | |
61
Fiscal 2020:
For the fiscal year ended September 30, 2020, our financing activities provided cash of $1.5 million, primarily due to $6.5 million of borrowings from the PPP Loan and proceeds from stock plan transactions of $0.6 million, partially offset by net payments related to borrowings from our bank Credit Facility of $5.5 million and tax withholding paid on behalf of employees for stock-based awards of $0.1 million.
For the fiscal year ended September 30, 2019, our financing activities provided cash of $5.8 million, primarily from $5.5 million of proceeds related to borrowings from our bank credit facility and stock plan transactions of $0.5 million, partially offset by tax withholding paid on behalf of employees for stock-based awards of $0.2 million.
Fiscal 2018:
For the fiscal year ended September 30, 2018, our financing activities used cash of $0.5 million, primarily for tax withholding paid on behalf of employees for stock-based awards of $1.3 million, partially offset by proceeds from stock plan transactions of $0.8 million.
Our contractual
| | | | | | | | | | | | | | | |
(in thousands) | | | | | | | | | | | | | | | |
|
| | |
| |
| |
| |
| | ||||
| | Total | | Less than a year | | 1 to 3 years | | 4 to 5 years | | Over 5 years | |||||
Purchase obligations | | $ | 15,315 | | $ | 14,199 | | $ | 1,056 | | $ | 60 | | $ | — |
Asset retirement obligations | |
| 2,249 | |
| — | |
| 59 | |
| — | |
| 2,190 |
Operating lease obligations | |
| 21,138 | |
| 1,785 | |
| 3,655 | |
| 3,421 | |
| 12,277 |
Total contractual obligations and commitments | | $ | 38,702 | | $ | 15,984 | | $ | 4,770 | | $ | 3,481 | | $ | 14,467 |
2021:
| (in thousands) | Total | Less Than a Year | 1 to 3 Years | 4 to 5 Years | Over 5 Years | ||||||||||||||||||||||||
| Purchase obligations | $ | 21,536 | $ | 20,715 | $ | 821 | $ | — | $ | — | |||||||||||||||||||
| Asset retirement obligations | 2,262 | 58 | — | 2,066 | 138 | ||||||||||||||||||||||||
| Operating lease obligations | 19,594 | 1,955 | 3,542 | 3,505 | 10,592 | ||||||||||||||||||||||||
| Total contractual obligations and commitments | $ | 43,392 | $ | 22,728 | $ | 4,363 | $ | 5,571 | $ | 10,730 | |||||||||||||||||||
The contractual obligations and commitments table above also excludes unrecognized tax benefits, because we are unable to reasonably estimate the period during which this obligation may be incurred, if at all. As of September 30, 2020,2021, we had no unrecognized tax benefits of $0.4 million.
benefits.
Our purchase
The purchase obligations of $15.3
62
Asset Retirement Obligations
income. income (loss).ITEM 7A.Quantitative and Qualitative Disclosures aboutAbout Market RisksWe are exposed to financial market risks, including changes in currency exchange rates and interest rates. We do not use derivative financial instruments for speculative purposes.Foreign Currency Exchange RisksThe United States dollar is the reporting currency for ourthe consolidated financial statements. The functional currency for our China subsidiary is the Yuan Renminbi.We recognize translation adjustments due to the effect of changes in the value of the Yuan Renminbi relative to the U.S. dollar associated with our operations in China. The assets and liabilities of our foreign operations are translated from their respective functional currenciescurrency into U.S. dollars at the rates in effect at the consolidated balance sheet dates, and the revenue and expense amounts are translated at the average rate during the applicable periods reflected on the consolidated statements of operations and comprehensive loss.income (loss). Foreign currency translation adjustments are recorded as accumulated other comprehensive loss.Gains and losses from foreign currency transactions denominated in currencies other than the U.S. dollar, both realized and unrealized, are recorded as foreign exchange gain (loss) on ourthe consolidated statements of operations and comprehensive loss.During the normal course of business, we are exposed to market risks associated with fluctuations in foreign currency exchange rates due to the Yuan Renminbi. To reduce the impact of these risks on our earnings and to increase the predictability of cash flows, we use natural offsets in receipts and disbursements within the applicable currency as the primary means of reducing the risk.Some of our foreign suppliers may adjust their prices (in U.S. dollars) from time to time to reflect currency exchange fluctuations, and suchfluctuations. Such price changes could impact our future financial condition or results of operations. We do not currently hedge our foreign currency exposure.63
Interest Rate Risks
On November 11, 2010, we entered into a Credit and Security Agreement (as amended, the “Credit Facility”) with Wells Fargo. 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.
On July 27, 2017, we entered into a Ninth Amendment of the Credit Facility which adjusted A hypothetical reduction in the interest raterates on our cash and cash equivalents to LIBOR plus 1.75%. On November 7, 2018, we entered into a Tenth Amendmentzero would result in an immaterial reduction of the Credit Facility which extended the maturity date of the facility to November 2021. The Credit Facility currently provides usinterest income with a revolving credit linede minimis impact on income before taxes.
64
Income (Loss) 2019 For the Fiscal Year ended September 30, 2020 2019 2018 Revenue $ 110,128 $ 87,265 $ 85,617 Cost of revenue 74,546 72,176 67,130 Gross profit 35,582 15,089 18,487 Operating expense: Selling, general, and administrative 24,631 32,080 21,377 Research and development 20,269 19,443 15,387 (Gain) loss on sale of assets (2,284) (302) 34 Total operating expense 42,616 51,221 36,798 Operating loss (7,034) (36,132) (18,311) Other income: Interest (expense) income, net (104) 629 733 Foreign exchange gain (loss) 198 (427) (434) Other income — — 110 Total other income 94 202 409 Loss before income tax benefit (expense) (6,940) (35,930) (17,902) Income tax (expense) benefit (60) (54) 449 Net loss $ (7,000) $ (35,984) $ (17,453) Foreign exchange translation adjustment (32) 65 324 Comprehensive loss $ (7,032) $ (35,919) $ (17,129) Per share data: Net (loss) income per basic share: Net loss per basic and diluted share $ (0.24) $ (1.29) $ (0.64) Weighted-average number of basic and diluted shares outstanding 29,136 27,983 27,266 2020 As of September 30, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 30,390 $ 21,574 Restricted cash 148 403 Accounts receivable, net of allowance of $227 and $148, respectively 25,324 18,497 Contract assets 1,566 1,055 Inventory 25,525 24,051 Prepaid expenses and other current assets 5,589 6,389 Assets held for sale 1,568 — Total current assets 90,110 71,969 Property, plant, and equipment, net 21,052 37,223 Goodwill 69 69 Operating lease right-of-use assets 14,566 — Other intangible assets, net 202 239 Other non-current assets 242 62 Total assets $ 126,241 $ 109,562 LIABILITIES and SHAREHOLDERS’ EQUITY Current liabilities: Borrowings from credit facility $ — $ 5,497 Accounts payable 16,484 10,701 Accrued expenses and other current liabilities 11,577 14,521 Operating lease liabilities - current 992 — Total current liabilities 29,053 30,719 PPP liability - non-current 6,488 — Operating lease liabilities - non-current 13,735 — Asset retirement obligations 2,022 1,890 Other long-term liabilities 794 207 Total liabilities 52,092 32,816 Commitments and contingencies (Note 13) Shareholders’ equity: Common stock, 0 par value, 50,000 shares authorized; 36,461 shares issued and 29,551 shares outstanding as of September 30, 2020; 35,803 shares issued and 28,893 shares outstanding as of September 30, 2019 744,361 739,926 Treasury stock at cost; 6,910 shares (47,721) (47,721) Accumulated other comprehensive income 918 950 Accumulated deficit (623,409) (616,409) Total shareholders’ equity 74,149 76,746 Total liabilities and shareholders’ equity $ 126,241 $ 109,562 2019 For the Fiscal Year ended September 30, 2020 2019 2018 Shares of Common Stock Balance, beginning of period 28,893 27,577 27,028 Stock-based compensation 309 307 372 Stock option exercises 1 1 6 Issuance of common stock for acquisition — 811 — Issuance of restricted stock units 116 — — Issuance of common stock - ESPP 231 197 171 Balance, end of period 29,550 28,893 27,577 Value of Common Stock Balance, beginning of period $ 739,926 $ 734,066 $ 730,906 Stock-based compensation 3,517 2,607 3,648 Stock option exercises 2 1 28 Tax withholding paid on behalf of employees for stock-based awards (111) (203) (1,257) Issuance of common stock for acquisition — 2,951 — Issuance of restricted stock units 410 — — Issuance of common stock - ESPP 617 504 741 Balance, end of period 744,361 739,926 734,066 Treasury stock, beginning and ending of period (47,721) (47,721) (47,721) Accumulated Other Comprehensive Income Balance, beginning of period 950 885 561 Translation adjustment (32) 65 324 Balance, end of period 918 950 885 Accumulated Deficit Balance, beginning of period (616,409) (580,425) (562,972) Net loss (7,000) (35,984) (17,453) Balance, end of period (623,409) (616,409) (580,425) Total Shareholders’ Equity $ 74,149 $ 76,746 $ 106,805ITEM 8.Financial Statements and Supplementary DataConsolidated Statements of Operations and Comprehensive LossFor the Fiscal Years endedEnded September 30, 2021, 2020 2019 and 2018(in thousands, except per share data)For the Fiscal Year Ended September 30, 2021 2020 2019 Revenue $ 158,444 $ 110,128 $ 87,265 Cost of revenue 96,956 74,546 72,176 Gross profit 61,488 35,582 15,089 Operating expense: Selling, general, and administrative 24,544 24,631 32,080 Research and development 17,448 20,269 19,443 Loss (gain) on sale of assets 515 (2,284) (302) Total operating expense 42,507 42,616 51,221 Operating income (loss) 18,981 (7,034) (36,132) Other income: Gain on extinguishment of debt 6,561 — — Interest income (expense), net 466 (104) 629 Foreign exchange gain (loss) 207 198 (427) Total other income 7,234 94 202 Income (loss) before income tax expense 26,215 (6,940) (35,930) Income tax expense (572) (60) (54) Net income (loss) $ 25,643 $ (7,000) $ (35,984) Foreign exchange translation adjustment (231) (32) 65 Comprehensive income (loss) $ 25,412 $ (7,032) $ (35,919) Per share data: Net income (loss) income per basic share: $ 0.75 $ (0.24) $ (1.29) Weighted-average number of basic shares outstanding 34,020 29,136 27,983 Net income (loss) per basic and diluted share $ 0.72 $ (0.24) $ (1.29) Weighted-average number of diluted shares outstanding 35,789 29,136 27,983 6549Consolidated Balance SheetsAs of September 30, 20202021 and 2019(in thousands)As of September 30, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 71,621 $ 30,390 Restricted cash 61 148 Accounts receivable, net of allowance of $260 and $227, respectively 31,849 25,324 Contract assets 361 1,566 Inventory 32,309 25,525 Prepaid expenses and other current assets 6,877 5,589 Assets held for sale 1,241 1,568 Total current assets 144,319 90,110 Property, plant, and equipment, net 22,544 21,052 Goodwill 69 69 Operating lease right-of-use assets 13,489 14,566 Other intangible assets, net 167 202 Other non-current assets 225 242 Total assets $ 180,813 $ 126,241 LIABILITIES and SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 16,686 $ 16,484 Accrued expenses and other current liabilities 9,936 11,577 Operating lease liabilities - current 1,198 992 Total current liabilities 27,820 29,053 PPP Loan liability - non-current — 6,488 Operating lease liabilities - non-current 12,684 13,735 Asset retirement obligations 2,049 2,022 Other long-term liabilities 794 794 Total liabilities 43,347 52,092 Commitments and contingencies (Note 11) 0 0 Shareholders’ equity: Common stock, no par value, 50,000 shares authorized; 43,890 shares issued and 36,984 shares outstanding as of September 30, 2021; 36,461 shares issued and 29,551 shares outstanding as of September 30, 2020 782,266 744,361 Treasury stock at cost; 6,906 shares (47,721) (47,721) Accumulated other comprehensive income 687 918 Accumulated deficit (597,766) (623,409) Total shareholders’ equity 137,466 74,149 Total liabilities and shareholders’ equity $ 180,813 $ 126,241 6650Consolidated Statements of Shareholders’ EquityFor the Fiscal Years endedEnded September 30, 2021, 2020 2019 and 2018(in thousands)The accompanying notes are an integral part of these consolidated financial statements..67For the Fiscal Year Ended September 30, 2021 2020 2019 Shares of common stock Balance, beginning of period 29,550 28,893 27,577 Stock-based compensation 572 309 307 Stock option exercises 15 1 1 Issuance of common stock for acquisition — — 811 Issuance of restricted stock units — 116 — Issuance of common stock - ESPP 192 231 197 Sale of common stock 6,655 — — Balance, end of period 36,984 29,550 28,893 Value of common stock Balance, beginning of period $ 744,361 $ 739,926 $ 734,066 Stock-based compensation 4,180 3,517 2,607 Stock option exercises 77 2 1 Tax withholding paid on behalf of employees for stock-based awards (260) (111) (203) Issuance of common stock for acquisition — — 2,951 Issuance of restricted stock units — 410 — Issuance of common stock - ESPP 767 617 504 Sale of common stock, net of offering costs 33,141 — — Balance, end of period 782,266 744,361 739,926 Treasury stock, beginning and ending of period (47,721) (47,721) (47,721) Accumulated other comprehensive income Balance, beginning of period 918 950 885 Translation adjustment (231) (32) 65 Balance, end of period 687 918 950 Accumulated deficit Balance, beginning of period (623,409) (616,409) (580,425) Net income (loss) 25,643 (7,000) (35,984) Balance, end of period (597,766) (623,409) (616,409) Total shareholders’ equity $ 137,466 $ 74,149 $ 76,746
EMCORE CORPORATION
Consolidated Statements of Cash Flows
For the Fiscal Years ended September 30, 2020, 2019 and 2018
(in thousands)
| | | | | | | | | |
| | For the Fiscal Year ended September 30, | |||||||
|
| 2020 |
| 2019 |
| 2018 | |||
Cash flows from operating activities: | | | | | | | | | |
Net loss | | $ | (7,000) | | $ | (35,984) | | $ | (17,453) |
Adjustments to reconcile net loss to net cash provided by operating activities: | |
|
| |
|
| |
|
|
Depreciation and amortization expense | |
| 5,484 | |
| 7,142 | |
| 5,617 |
Stock-based compensation expense | |
| 3,517 | |
| 2,607 | |
| 3,648 |
Provision adjustments related to doubtful accounts | |
| 188 | |
| 62 | |
| 599 |
Provision adjustments related to product warranty | |
| 373 | |
| 186 | |
| 431 |
Net (gain) loss on disposal of property, plant and equipment | |
| (2,284) | |
| (302) | |
| 34 |
Other | |
| (342) | |
| 464 | |
| 412 |
Total non-cash adjustments | |
| 6,936 | |
| 10,159 | |
| 10,741 |
Changes in operating assets and liabilities: | |
|
| |
|
| |
|
|
Accounts receivable and contract assets | |
| (7,518) | |
| 3,980 | |
| 2,372 |
Inventory | |
| (1,226) | |
| 6,486 | |
| 5,067 |
Other assets | | | (13,465) | | | (238) | | | 784 |
Accounts payable | |
| 6,171 | |
| (4,539) | |
| 477 |
Accrued expenses and other current liabilities | |
| 12,210 | |
| 4,985 | |
| (518) |
Total change in operating assets and liabilities | |
| (3,828) | |
| 10,674 | |
| 8,182 |
Net cash used in operating activities | |
| (3,892) | |
| (15,151) | |
| 1,470 |
Cash flows from investing activities: | |
|
| |
|
| |
|
|
Purchase of equipment | |
| (4,516) | |
| (10,790) | |
| (6,583) |
Acquisition of business, net of cash acquired | |
| — | |
| (21,483) | |
| — |
Proceeds from disposal of property, plant and equipment | |
| 15,403 | |
| 470 | |
| 82 |
Net cash provided by (used in) investing activities | |
| 10,887 | |
| (31,803) | |
| (6,501) |
Cash flows from financing activities: | |
|
| |
|
| |
|
|
Proceeds from PPP loan | | | 6,488 | | | — | | | — |
Net (payments) proceeds from borrowings of credit facilities | | | (5,497) | | | 5,497 | | | — |
Proceeds from employe stock purchase plans and exercise of equity awards | |
| 619 | |
| 505 | |
| 770 |
Taxes paid related to net share settlement of equity awards | |
| (111) | |
| (203) | |
| (1,257) |
Net cash provided by financing activities | |
| 1,499 | |
| 5,799 | |
| (487) |
Effect of exchange rate changes provided by foreign currency | |
| 67 | |
| (63) | |
| (41) |
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| 8,561 | |
| (41,218) | |
| (5,559) |
Cash, cash equivalents and restricted cash at beginning of period | |
| 21,977 | |
| 63,195 | |
| 68,754 |
Cash, cash equivalents and restricted cash at end of period | | $ | 30,538 | | $ | 21,977 | | $ | 63,195 |
| | | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |
|
| |
|
| |
|
|
Cash paid during the period for interest | | $ | 113 | | $ | 126 | | $ | 63 |
Cash paid during the period for income taxes | | $ | 63 | | $ | 68 | | $ | 131 |
NON-CASH INVESTING AND FINANCING ACTIVITIES | |
|
| |
|
| |
|
|
Changes in accounts payable related to purchases of equipment | | $ | (520) | | $ | (180) | | $ | 755 |
Restricted stock units issued in settlement of bonus | | $ | 410 | | $ | — | | $ | — |
The accompanying notes are an integral part of these consolidated financial statements.
68
EMCORE CORPORATION
| For the Fiscal Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income (loss) | $ | 25,643 | $ | (7,000) | $ | (35,984) | |||||||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization expense | 4,061 | 5,484 | 7,142 | ||||||||||||||
| Stock-based compensation expense | 4,180 | 3,517 | 2,607 | ||||||||||||||
| Provision adjustments related to doubtful accounts | 33 | 188 | 62 | ||||||||||||||
| Provision adjustments related to product warranty | 322 | 373 | 186 | ||||||||||||||
| Loss (gain) on disposal of property, plant and equipment | 515 | (2,284) | (302) | ||||||||||||||
| Other | (658) | (342) | 464 | ||||||||||||||
| Total non-cash adjustments | 8,453 | 6,936 | 10,159 | ||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts receivable and contract assets | (5,348) | (7,518) | 3,980 | ||||||||||||||
| Inventory | (6,326) | (1,226) | 6,486 | ||||||||||||||
| Other assets | (1,500) | (13,465) | (238) | ||||||||||||||
| Accounts payable | (420) | 6,171 | (4,539) | ||||||||||||||
| Accrued expenses and other current liabilities | (9,349) | 12,210 | 4,985 | ||||||||||||||
| Total change in operating assets and liabilities | (22,943) | (3,828) | 10,674 | ||||||||||||||
| Net cash provided by (used) in operating activities | 11,153 | (3,892) | (15,151) | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Purchase of equipment | (5,358) | (4,516) | (10,790) | ||||||||||||||
| Acquisition of business, net of cash acquired | — | — | (21,483) | ||||||||||||||
| Proceeds from future sale of assets | 834 | — | — | ||||||||||||||
| Proceeds from disposal of property, plant and equipment | 687 | 15,403 | 470 | ||||||||||||||
| Net cash (used in) provided by investing activities | (3,837) | 10,887 | (31,803) | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Proceeds from PPP Loan | — | 6,488 | — | ||||||||||||||
| Net (payments) proceeds from borrowings of credit facilities | — | (5,497) | 5,497 | ||||||||||||||
| Proceeds from employee stock purchase plans and exercise of equity awards | 844 | 619 | 505 | ||||||||||||||
| Proceeds from sale of common stock | 35,937 | — | — | ||||||||||||||
| Issuance cost associated with sale of common stock | (2,796) | — | — | ||||||||||||||
| Taxes paid related to net share settlement of equity awards | (260) | (111) | (203) | ||||||||||||||
| Net cash provided by financing activities | 33,725 | 1,499 | 5,799 | ||||||||||||||
| Effect of exchange rate changes provided by foreign currency | 103 | 67 | (63) | ||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 41,144 | 8,561 | (41,218) | ||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 30,538 | 21,977 | 63,195 | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 71,682 | $ | 30,538 | $ | 21,977 | |||||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||||||||||||
| Cash paid during the period for interest | $ | 61 | $ | 113 | $ | 126 | |||||||||||
| Cash paid during the period for income taxes | $ | 975 | $ | 63 | $ | 68 | |||||||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | |||||||||||||||||
| Changes in accounts payable related to purchases of equipment | $ | 360 | $ | (520) | $ | (180) | |||||||||||
| Restricted stock units issued in settlement of bonus | $ | — | $ | 410 | $ | — | |||||||||||
NOTE 1.Description of BusinessBusiness OverviewEMCORE 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 is a leading provider of sensors for navigation in the Aerospaceaerospace and Defensedefense market as well as a manufacturer of lasers and optical subsystems for use in the cableCable TV ("CATV") industry. EMCORE pioneered the linear fiber optic transmission technology that enabled the world’s first delivery of Cable TVCATV directly on fiber, and today is a leading provider of advancedMixed-Signal Optics products that enable communications systems and service providers to meet growing demand for increased bandwidth and connectivity. The Mixed-Signal Opticstechnology at the heart of our broadband communications products is shared with our fiber optic gyrosgyroscope (“FOG”) 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”("SDI"), a navigation systems provider with a scalable, chip-based platform for higher volume gyro applications utilizing Quartz MEMSquartz micro-electromechanical system ("QMEMS") technology, in June 2019, EMCORE further expanded its portfolio of gyros and inertial sensors with SDI’s quartz MEMSQMEMS gyro and accelerometer technology. EMCORE has fully vertically-integrated manufacturing capability through our indium phosphide ("InP") 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 gyroFOG products, for navigation systems, and for our chip, laser, transmitter, and receiver products for broadband applications. With both analog and digital circuits on multiple chips, or even a single chip, the value of Mixed-Signal device solutions areis often farsubstantially greater than traditional digital applications and requires a specialized expertise held by EMCORE which is unique in the optics industry.We have 2 reporting segments, Aerospace and Defense, and Broadband. Aerospace and Defense is comprised of 2 product lines: (i) Navigation and Inertial Sensing, and (ii) Defense Optoelectronics. The Broadband segment is comprised of 3 product lines: (i) CATV Lasers and Transmitters, (ii) Chip Devices, and (iii) Other. Due to a shift in customer base, the previously existing Satellite/Microwave Communications product line has been renamed “Defense Optoelectronics.”NOTE 2.Summary of Significant Accounting PoliciesPrinciples of Consolidation: OurThe consolidated financial statements have been prepared in accordance with U.S. GAAP and include the assets, liabilities, shareholders’ equity, and operating results of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. We areThe Company is not the primary beneficiary of, nor do we hold a significant variable interest in, any variable interest entity.The Company has a history of operating losses and negative cash flows from operations. The Company has taken a number of actions to continue to support its operations and meet its obligations, including headcount reductions and cost reductions. In addition, we generated additional liquidity through the monetization of certain fixed assets and real estate.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 Company believes that its existing liquidity will be sufficient to meet anticipated cash needs for at least the next 12 months from the issuance date of these financial statements.Going Concern BasisThe consolidated financial statements included herein have been prepared on a going concern basis, which contemplates continuity of operations and the realization of assets and the repayment of liabilities in the ordinary course of business. Management evaluated the significance of the Company’s recent operating losses and determined that the Company’s69
current cash on hand, operating plan, and sources of capital will be sufficient for the Company to continue as a going concern.
The Company has taken a number of actions to continue to support its operations and meet its obligations, including headcount and cost reductions, monetization of certain fixed assets and real estate, and entering into financing activities. The Company believes that its existing liquidity will be sufficient to meet anticipated cash needs for at least the next 12 months from the issuance date of these financial statements.
assets. We depreciate equipment over three
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to ten years, furniture and fixtures over five years, computer hardware and software over five
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to seven years. Leasehold improvements are amortized over the lesser of the asset life or the lease term. Expenditures for repairs and maintenance are charged to expense as incurred. The costs for major renewals and improvements are capitalized and depreciated over their estimated useful lives of the related asset. The cost and related accumulated depreciation of the assets are removed from the accounts upon disposition and any resulting gain or loss is reflected in the consolidated statement of operations and comprehensive loss.
income (loss).
We have known asset retirement conditions, such as certain asset decommissioning and restoration of rented facilities to be performed in the future.
The Company uses the acquisition method of accounting for business combinations and recognizes assets acquired and liabilities assumed at their fair values on the date acquired. Goodwill represents the excess of the purchase price over the fair value of the net assets. The fair values of the assets and liabilities acquired are determined based upon the Company’s valuation using a combination of market, income or cost approaches. In certain circumstances, the allocations of the purchase price are based upon preliminary estimates and assumptions and subject to revision when we receive final information, including appraisals and other analysis. Accordingly, the measurement period for such purchase price allocations will end when the information, or the facts and circumstances, becomes available, but will not exceed twelve months. We will recognize measurement-period adjustments during the period of resolution, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date.
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performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.
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Revenue is also classified by major product category and is presented below:
| | | | | | | | | | | | | | | | |
| | For the Fiscal Years ended September 30, | ||||||||||||||
| | | | | % of | | | | | % of |
| | | | % of |
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(in thousands) |
| 2020 |
| Revenue |
| 2019 |
| Revenue |
| 2018 |
| Revenue | | |||
Navigation and Inertial Sensing | | $ | 38,983 | | 35 | % | $ | 23,203 | | 27 | % | $ | 7,149 | | 8 | % |
Defense Optoelectronics | | | 16,257 | | 15 | | | 9,883 | | 11 | | | 6,418 | | 8 | |
CATV Lasers and Transmitters | | | 44,457 | | 40 | | | 41,150 | | 47 | | | 62,000 | | 72 | |
Chip Devices | |
| 4,873 | | 5 | | | 10,828 | | 12 | | | 10,050 | | 12 | |
Other | |
| 5,558 | | 5 | | | 2,201 | | 3 | | | — | | — | |
Total revenue | | $ | 110,128 |
| 100 | % | $ | 87,265 |
| 100 | % | $ | 85,617 |
| 100 | % |
Leases
In February 2016, theConsolidated Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Statements.
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.
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The impact of the adoption of 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 withunder the sale/leaseback of non-residential real estate on February 10, 2020,modified retrospective approach. Therefore, the Company recorded an additional operating ROU assets and operating lease liabilities of $10.8 million duringconsolidated financial statements for the fiscal year ended September 30, 2020. See also Note 9 – Property, Plant2019 have not been adjusted and Equipment, net incontinued to be reported under previous U.S. GAAP guidance. Under the notes tonew lease standard, the consolidated financial statements.
The Company determines if an arrangement is a lease at its inception. ROURight of use (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 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,
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 fiscal year ended September 30, 2020, the Company recorded $1.8 million of operating lease expense. During the fiscal years ended September 30, 2019 and 2018, the Company recorded $1.3 million and $1.2 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):
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| | For the Fiscal Year Ended | |
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| September 30, 2020 | |
Operating cash outflows from operating leases | | $ | 1,592 |
Operating lease assets obtained in exchange for new lease liabilities | | $ | 10,791 |
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Maturities of operating lease liabilities as of September 30, 2020 were as follows (in thousands):
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| | Amount | | |
2021 | | $ | 1,792 | |
2022 | | | 1,806 | |
2023 | | | 1,857 | |
2024 | | | 1,686 | |
2025 | | | 1,730 | |
Thereafter | | | 12,366 | |
Total lease payments | | | 21,237 | |
Less imputed interest | | | (6,510) | |
Total | | $ | 14,727 | |
The following is a schedule of future minimum operating lease payments as of September 30, 2019 (in thousands):
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| | Amount | |
2020 | | $ | 988 |
2021 | | | 839 |
2022 | | | 824 |
2023 | | | 853 |
2024 | | | 655 |
Thereafter | | | 1,350 |
Total lease payments | | $ | 5,509 |
Weighted-average remaining lease term and discount rate related to operating leases are as follows:
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NOTE 3.Recent Accounting Pronouncements(a)Recent Accounting Standards or Updates Not Yet Effective●Recent Accounting Standards or Updates Not Yet EffectiveIn 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 does not expect the adoption of this new guidance to have a significant impact on its consolidated financial statements and related disclosures.NOTE 4.AcquisitionOn June 7, 2019, we completed the acquisition of SDI,FASB issued Accounting Standards Update ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing various exceptions, such as the exception to the incremental approach for intra-period tax allocation when there is a private-equity backed navigation systems provider withloss from continuing operations and income or a scalable, chip-based platformgain from other items. The amendments in this update also simplify the accounting for higher volume gyro applications utilizing Quartz MEMS technology.income taxes related to income-based franchise taxes and require that an entity reflect enacted tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The total purchase price was approximately $25.0 million, consisting of (i) approximately $22.0 millionnew standard is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. This accounting standard is effective in cash after working capital adjustments and (ii) the issuance of approximately 811 thousand shares of common stock with an aggregate value of approximately $3.0 million asfirst quarter of the closing date.Following the closing, we began integrating SDI into our current Navigation and Inertial Sensing product line and have included the financial results of SDI in our consolidated financial statements beginning on the acquisition date. Net
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revenue and net loss of SDI from the acquisition date of $9.8 million and $0.6 million, respectively, was included in our consolidated statements of operations and comprehensive loss for theCompany's fiscal year ended September 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.
2022. The Company finalizeddoes not expect the allocationadoption of this new guidance to have a material impact on the purchase price incondensed consolidated financial statements.
beginning October 1, 2020. The table below represents the purchase price allocation to the assets acquired and liabilities assumedadoption of SDI based on their estimated fair values as of the acquisition date. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions at the acquisition date.
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| Weighted |
| | | | | Average Useful |
(in thousands) | | Amount | | Life (years) | |
Purchase price | | $ | 24,978 |
| |
Developed technology | |
| 250 |
| 7 |
Cash acquired | | | 541 |
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Inventories | |
| 8,522 |
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Accounts receivable | |
| 4,291 |
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Other assets | |
| 355 |
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Land and building | |
| 12,890 |
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Equipment | |
| 2,913 |
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Net liabilities assumed | |
| (4,853) |
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Goodwill | | $ | 69 |
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Identifiable intangible assets - The estimated fair value of the developed technology was determined basedthis standard did not have a material impact on the expected future cost savings resulting from ownership of the asset. The present value of the expected future cash flows for the developed technology intangible asset was determined based on discount rates which incorporate a risk premium to take into account the risks inherent in those expected cash flows. The expected cash flows were estimated using available historical data adjusted based on the expectations of market participants.
Tangible assets acquired:
Inventories
Finished goods were valued at estimated selling price less costs of disposal and a reasonable profit allowance for the selling effort. Raw materials were valued at estimated replacement cost.
Property, plant and equipment
The property, plant and equipment acquired were valued using either the replacement cost or market approach, as appropriate, as of the acquisition date.
Goodwill
Goodwill represents the excess of the preliminary purchase price over the fair value of the assets acquired and liabilities assumed. The goodwill recognized is primarily attributable to the benefits the Company expects to derive from deepening the Company’s expertise in navigation systems products.
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For the fiscal year ended September 30, 2019, the Company incurred transaction costs of approximately $0.8 million in connection with the SDI acquisition, which were expensed as incurred and included in selling, general and administrative expenses within the consolidated statements of operations.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presented for the fiscal years ended September 30, 2019 and 2018 does not purport to be indicative of the results of operations that would have been achieved had the acquisition of SDI been consummated on October 1, 2017, 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.
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| | For the Fiscal Years ended | ||||
| | September 30, | ||||
(in thousands, except per share data) |
| 2019 |
| 2018 | ||
Revenue | | $ | 107,199 | | $ | 113,398 |
Net loss | | $ | (42,013) | | $ | (18,136) |
Net loss per basic and diluted share | | $ | (1.50) | | $ | (0.67) |
Weighted-average number of basic and diluted shares outstanding | |
| 27,983 | |
| 27,266 |
As of September 30, (in thousands) 2020 2019 2018 Cash $ 11,325 $ 4,338 $ 2,965 Cash equivalents 19,065 17,236 60,152 Restricted cash 148 403 78 Total cash, cash equivalents and restricted cash $ 30,538 21,977 63,195 As of September 30, (in thousands) 2020 2019 Accounts receivable, gross $ 25,551 $ 18,645 Allowance for doubtful accounts (227) (148) Accounts receivable, net $ 25,324 $ 18,497 Allowance for Doubtful Accounts For the Fiscal Years ended September 30, (in thousands) 2020 2019 2018 Balance at beginning of period $ 148 $ 548 $ 22 Provision adjustment - expense, net of recoveries 188 62 599 Write-offs and other adjustments - deductions to receivable balances (109) (462) (73) Balance at end of period $ 227 $ 148 $ 548 credit loss: As of September 30, (in thousands) 2020 2019 Raw materials $ 13,354 $ 11,510 Work in-process 8,381 8,176 Finished goods 3,790 4,365 Inventory balance at end of period $ 25,525 $ 24,051 As of September 30, (in thousands) 2020 2019 Land $ — $ 3,484 Building — 9,405 Equipment 35,218 42,308 Furniture and fixtures 1,125 1,109 Computer hardware and software 3,473 3,554 Leasehold improvements 3,169 2,676 Construction in progress 10,301 9,330 Property, plant, and equipment, gross $ 53,286 $ 71,866 Accumulated depreciation (32,234) (34,643) Property, plant, and equipment, net $ 21,052 $ 37,223 During the fiscal year ended September 30, 2021 and 2020 the Company sold certain equipment and recognized a (loss) gain on sale of assets of At the consummation of the As a result of the Concord Lease Agreement, the Company recorded net operating lease ROU assets and operating lease liabilities of $10.8 million during the fiscal year ended September 30, 2020. As of September 30, (in thousands) 2020 2019 Compensation $ 6,916 $ 5,185 Warranty 803 654 Legal expenses and other professional fees 211 4,407 Contract liabilities 502 541 Income and other taxes 1,265 1,135 Severance and restructuring accruals 17 172 Other 1,863 2,427 Accrued expenses and other current liabilities $ 11,577 $ 14,521 Product Warranty Accruals For the fiscal year ended September 30, (in thousands) 2020 2019 2018 Balance at beginning of period $ 654 $ 642 $ 684 Provision for product warranty - expense 626 186 431 Warranty liability assumed in acquisition liability — 80 — Adjustments and utilization of warranty accrual (477) (254) (473) Balance at end of period $ 803 $ 654 $ 642 Severance- Restructuring (in thousands) related accruals related accruals Total Balance as of September 30, 2019 $ 172 $ — $ 172 Expense - charged to accrual 626 — 626 Payments and accrual adjustments (781) — (781) Balance as of September 30, 2020 $ 17 $ — $ 17 Debt Facility The Credit Facility matures in 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. �� ��� Loss before income taxes For the Fiscal Years ended September 30, (in thousands) 2020 2019 2018 Domestic $ (7,159) $ (35,100) $ (16,752) Foreign 219 (830) (1,150) Loss before income taxes $ (6,940) $ (35,930) $ (17,902) Income tax (benefit) expense For the Fiscal Years Ended September 30, (in thousands) 2020 2019 2018 Federal: Current $ 30 $ — $ (502) Deferred (43) — — (13) — (502) State: Current 98 54 53 Deferred (25) — — 73 54 53 Foreign: Current — — — Deferred — — — — — — Total income tax expense (benefit) $ 60 $ 54 $ (449) Provision for Income Taxes For the Fiscal Years Ended September 30, (in thousands) 2020 2019 2018 Income tax benefit computed at U.S. federal statutory rate $ (1,457) $ (7,540) $ (4,346) State tax benefit, net of U.S. federal effect (156) (906) (168) Foreign tax rate differential 13 (28) 36 Effect due to change in tax rate (137) (183) 57,988 Shortfall from stock based compensation 432 248 681 Other 94 223 216 State net operating loss carryforward adjustment 533 139 (305) Change in valuation allowance 738 8,101 (54,551) Income tax expense (benefit) $ 60 $ 54 $ (449) Effective tax rate 1.0 % 0.2 % (2.5) % Deferred Tax Assets As of September 30 (in thousands) 2020 2019 Deferred tax assets: Federal net operating loss carryforwards $ 100,363 $ 99,298 Foreign net operating loss carryforwards 1,680 1,271 Income tax credit carryforwards 2,671 2,671 Inventory reserves 2,320 3,535 Accounts receivable reserves 55 50 Accrued warranty reserve 193 153 State net operating loss carryforwards 5,970 6,174 Stock compensation 806 704 Deferred compensation 443 404 Fixed assets and intangibles (348) (2,693) ROU lease liability 3,529 — ROU lease assets (3,467) — Other 1,322 2,255 Total deferred tax assets 115,537 113,822 Valuation allowance (115,537) (113,891) Net deferred tax liabilities $ — $ (69) for past AMT amounts paid and the current period operating loss. The Company uses some estimates to forecast permanent differences between book and tax accounting. Unrecognized Gross Tax Benefit (in thousands) Balance as of September 30, 2018 $ 419 Adjustments based on tax positions related to the current year — Adjustments based on tax positions of prior years — Balance as of September 30, 2019 419 Adjustments based on tax positions related to the current year — Adjustments based on tax positions of prior years — Balance as of September 30, 2020 $ 419 lease liabilities as of September 30, 2021 were as follows: In Accretion expense of Asset Retirement Obligations September 30, (in thousands) 2020 Balance at September 30, 2019 $ 1,890 Accretion expense 32 Revision in estimated cash flows 100 Balance at September 30, 2020 $ 2,022 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. In the Interim Award, the arbitrator further determined that EMCORE shall pay Phoenix a royalty of 7.5% of the sale price on We issue new shares of common stock to satisfy awards issued under our Equity Plans. In March 2021, our shareholders approved the Amended and Restated EMCORE Corporation 2019 Equity Incentive Plan, which was adopted by the Company’s Board of Directors in December 2020 and increased the maximum number of shares of the Company’s common stock that may be issued or transferred pursuant to awards under the 2019 Equity Incentive Plan by an additional 2,138,000 shares. Weighted Weighted Average Aggregate Average Remaining Intrinsic Number of Exercise Contractual Life Value (*) (in Shares Price (in years) thousands) Outstanding as of September 30, 2019 51,854 $ 5.00 Granted — — Exercised (650) 2.89 — Forfeited (1,952) 4.65 Expired (5,187) $ 4.25 Outstanding as of September 30, 2020 44,065 $ 5.14 3.70 $ — Exercisable as of September 30, 2020 41,877 $ 5.18 3.61 $ — Vested and expected to vest as of September 30, 2020 44,065 $ 5.14 3.70 $ — Plans. 2020. The following table summarizes the activity related to RSUs and RSAs subject to time-based vesting requirements for the fiscal year ended September 30, 2021: Restricted Stock Units Restricted Stock Awards Number of Weighted Average Number of Weighted Average Restricted Stock Activity Shares Grant Date Fair Value Shares Grant Date Fair Value Non-vested as of September 30, 2019 999,247 $ 4.66 8,154 $ 8.20 Granted 1,215,810 $ 2.88 — $ — Vested (471,208) $ 4.50 — $ — Forfeited (195,804) $ 3.85 — $ — Non-vested as of September 30, 2020 1,548,045 $ 3.41 8,154 $ 8.20 2021: Performance Stock Units Performance Stock Awards Weighted Weighted Number of Shares Average Grant Number of Shares Average Grant Performance Stock Activity (at Target) Date Fair Value (at Target) Date Fair Value Non-vested as of September 30, 2019 471,824 $ 7.03 33,333 $ 12.25 Granted 496,000 $ 3.81 — $ 0.00 Vested — $ 0.00 — $ 0.00 Forfeited (99,324) $ 10.55 (33,333) $ 12.25 Non-vested as of September 30, 2020 868,500 $ 4.79 — $ 0.00 As of September 30, 2020, there was by award type: Stock-based Compensation Expense - by award type For the Fiscal Years ended September 30, (in thousands) 2020 2019 2018 Employee stock options $ 13 $ 25 $ 32 Restricted stock units and awards 1,755 1,495 1,742 Performance stock units and awards 1,243 685 1,343 Employee stock purchase plan 214 180 276 Outside director equity awards and fees in common stock 291 221 255 Total stock-based compensation expense $ 3,516 $ 2,606 $ 3,648 Stock-based Compensation Expense - by expense type For the Fiscal Years ended September 30, (in thousands) 2020 2019 2018 Cost of revenue $ 692 $ 482 $ 450 Selling, general, and administrative 2,155 1,478 2,584 Research and development 669 646 614 Total stock-based compensation expense $ 3,516 $ 2,606 $ 3,648 2020. The following table sets forth the computation of basic and diluted Basic and Diluted Net Loss Per Share For the Fiscal Years ended September 30, (in thousands, except per share) 2020 2019 2018 Numerator: Loss from operations $ (7,000) $ (35,984) $ (17,453) Undistributed earnings allocated to common shareholders for basic and diluted net income per share (7,000) (35,984) (17,453) Denominator: Denominator for basic and fully diluted net loss per share - weighted average shares outstanding 29,136 27,983 27,266 Dilutive options outstanding, unvested stock units, unvested stock awards and ESPP — — — Denominator for diluted net loss per share - adjusted weighted average shares outstanding 29,136 27,983 27,266 Net loss per basic and fully diluted share $ (0.24) $ (1.29) $ (0.64) Weighted average antidilutive options, unvested restricted stock units and awards, unvested performance stock units and ESPP shares excluded from the computation 1,109 810 949 Average market price of common stock $ 3.03 $ 3.91 $ 5.87 Number of Common Exercise of outstanding stock options Unvested Unvested Issuance of stock-based awards under the Equity Plans Purchases under the officer and director share purchase plan Total reserved (in thousands) For the Fiscal Years Ended September 30, 2020 2019 2018 Revenue: Aerospace and Defense $ 55,240 $ 33,086 $ 13,567 Broadband 54,888 54,179 72,050 Total revenue $ 110,128 $ 87,265 $ 85,617 Segment Profit: Aerospace and Defense gross profit $ 16,729 $ 9,207 $ 2,406 Aerospace & Defense R&D expense 17,469 10,448 4,185 Aerospace and Defense segment loss $ (740) $ (1,241) $ (1,779) Broadband gross profit $ 18,853 $ 5,882 $ 16,081 Broadband R&D expense 2,800 8,995 11,202 Broadband segment profit (loss) $ 16,053 $ (3,113) $ 4,879 Total consolidated segment profit (loss) $ 15,313 $ (4,354) $ 3,100 Unallocated (income) expense: Selling, general and administrative 24,631 32,080 21,377 (Gain) loss on sale of assets (2,284) (302) 34 Interest expense (income), net 104 (629) (733) Foreign exchange (gain) loss (198) 427 434 Other income - - (110) Total unallocated expense 22,253 31,576 21,002 Loss before income tax expense $ (6,940) $ (35,930) $ (17,902) Revenue by Geographic Region For the Fiscal Years ended September 30, (in thousands) 2020 2019 2018 United States and Canada $ 91,205 $ 68,607 $ 69,543 Asia 9,397 11,637 10,386 Europe 5,559 6,209 5,422 Other 3,967 812 266 Total revenue $ 110,128 $ 87,265 $ 85,617 For the Three Months ended December 31, March 31, June 30, September 30, 2019 2020 2020 2020 Revenue $ 25,482 $ 23,850 $ 27,266 $ 33,530 Cost of revenue 18,008 17,423 18,048 21,067 Gross profit 7,474 6,427 9,218 12,463 Operating expense (income): Selling, general, and administrative 5,887 7,139 5,936 5,669 Research and development 4,642 4,584 4,807 6,236 Gain on sale of assets (1,602) (315) (312) (55) Total operating expense 8,927 11,408 10,431 11,850 Operating (loss) income (1,453) (4,981) (1,213) 613 Other income (expense): Interest (expense) income, net (15) 1 (40) (50) Foreign exchange gain (loss) 147 (156) (20) 227 Total other income (expense) 132 (155) (60) 177 Loss from operations before income tax expense (1,321) (5,136) (1,273) 790 Income tax (expense) benefit (14) 55 (14) (87) Net (loss) income $ (1,335) $ (5,081) $ (1,287) $ 703 Per share data: Net (loss) income per basic and diluted share $ (0.05) $ (0.18) $ (0.04) $ 0.02 Weighted-average number of basic and diluted shares outstanding 28,832 29,033 29,295 29,386 For the Three Months ended December 31, March 31, June 30, September 30, 2018 2019 2019 2019 Revenue $ 24,001 $ 21,745 $ 17,219 $ 24,300 Cost of revenue 18,193 15,936 13,515 24,532 Gross profit 5,808 5,809 3,704 (232) Operating expense (income): Selling, general, and administrative 7,593 6,956 9,288 8,243 Research and development 4,019 4,360 4,629 6,435 Gain on sale of assets — — — (302) Total operating expense 11,612 11,316 13,917 14,376 Operating loss (5,804) (5,507) (10,213) (14,608) Other income (expense): Interest income, net 267 224 99 39 Foreign exchange gain (loss) 14 304 (349) (396) Total other income (expense) 281 528 (250) (357) Loss from operations before income tax benefit (expense) (5,523) (4,979) (10,463) (14,965) Income tax expense (15) (15) (14) (10) Net loss $ (5,538) $ (4,994) $ (10,477) $ (14,975) Per share data: Net loss per basic and diluted share $ (0.20) $ (0.18) $ (0.37) $ (0.52) Weighted-average number of basic and diluted shares outstanding 27,534 27,652 28,005 28,734 On November and Internal Control Over Financial Reporting Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. opinions. stated within their report which appears herein. assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 2.1 4.1 10.19† 10.29 Consent of KPMG LLP, independent registered public accounting firm. Power of Attorney (see the signature page of this Annual Report on Form 10-K). Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1*** 32.2*** Inline XBRL Instance Document. Inline XBRL Taxonomy Extension Schema Document. Inline XBRL Taxonomy Extension Calculation Linkbase Document. Inline XBRL Taxonomy Extension Label Linkbase Document. Inline XBRL Taxonomy Extension Presentation Linkbase Document. Inline XBRL Taxonomy Extension Definition Linkbase Document. Cover Page Interactive Data File - formatted in Inline XBRL and contained in Exhibit 101. By: /s/ Jeffrey Rittichier /s/ Tom Minichiello Chief Executive Officer and Director (Principal Executive Officer) Chief Financial Officer (Principal Financial and Accounting Officer) Chairman of the Board Director Director DirectorNOTE 5.4. Cash, Cash Equivalents, and Restricted CashThe following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows:The Company’s restricted cash includes cash balances which are legally or contractually restricted to use. The Company’s restricted cash is included in current assets as of September 30, 2020, 2019 and 2018.NOTE 6.Fair Value AccountingASC 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 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.77As of September 30, (in thousands) 2021 2020 2019 Cash $ 16,547 $ 11,325 $ 4,338 Cash equivalents 55,074 19,065 17,236 Restricted cash 61 148 403 Total cash, cash equivalents and restricted cash $ 71,682 $ 30,538 $ 21,977 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, 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 7.5. Accounts ReceivableThe components of accounts receivable consisted of the following:As of September 30, (in thousands) 2021 2020 Accounts receivable, gross $ 32,109 $ 25,551 Allowance for credit loss (260) (227) Accounts receivable, net $ 31,849 $ 25,324 The allowance for doubtful accounts is based on the age of receivables and a specific identification of receivables considered at risk of collection.The following table summarizes changes in the allowance for doubtful accounts for the fiscal years ended September 30, 2020, 2019 and 2018.57For the Fiscal Year Ended September 30, (in thousands) 2021 2020 2019 Balance at beginning of period $ 227 $ 148 $ 548 Provision adjustment - expense, net of recoveries 90 188 62 Write-offs and other deductions (57) (109) (462) Balance at end of period $ 260 $ 227 $ 148 NOTE 8.6. InventoryInventoryThe components of inventory consisted of the following:78As of September 30, (in thousands) 2021 2020 Raw materials $ 16,146 $ 13,354 Work in-process 11,410 8,381 Finished goods 4,753 3,790 Inventory balance at end of period $ 32,309 $ 25,525 NOTE 9.7. Property, Plant, and Equipment, netThe components of property, plant, and equipment, net consisted of the following:As of September 30, (in thousands) 2021 2020 Equipment $ 37,985 $ 35,218 Furniture and fixtures 1,125 1,125 Computer hardware and software 3,575 3,473 Leasehold improvements 6,663 3,169 Construction in progress 9,247 10,301 Property, plant, and equipment, gross $ 58,595 $ 53,286 Accumulated depreciation (36,051) (32,234) Property, plant, and equipment, net $ 22,544 $ 21,052 Depreciation expense totaled $4.0 million, $5.5 million $7.1 million and $5.6$7.1 million during the fiscal years ended September 30, 2021, 2020 and 2019, and 2018, respectively.approximately $2.0 million.$(0.5) million and $2.3 million, respectively. In addition, in the fiscal year ended September 30, 2020, the Company entered into agreements to sell additional equipment and these assets have beenwere reclassified to assets held for sale.On The balance as of September 30, 2021 and 2020 was $1.2 million and $1.6 million, respectively.In 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"Concord Real Property”Property") to BuyerEagle Rock Holdings, LP ("Eagle Rock"), an affiliate of Parkview Management Group, Inc., 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 fiscal year ended September 30, 2020 related to this transaction.Sale and Leaseback Transaction,sale of the Concord Real Property, SDI entered into a Single-Tenant Triple Net Lease (the “Lease“Concord Lease Agreement”) with Buyer pursuant to which SDI leased back from BuyerEagle Rock the Concord Real Property for a term commencing on the consummation of the Sale and Leaseback Transactionin February 2020 and ending fifteen (15) years after the consummation of the Sale and Leaseback Transaction,February 2035, 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.79Geographical ConcentrationsLong-lived assets consist of land, building, and property, plant, and equipment. As of September 30, 2021 and 2020, approximately 96% and 97%, respectively, of long-lived assets were located in the United States. The remaining long-lived assets are primarily located in China.NOTE 10.8. Accrued Expenses and Other Current Liabilities58The components of accrued expenses and other current liabilities consisted of the following:As of September 30, (in thousands) 2021 2020 Compensation $ 7,192 $ 6,916 Warranty 1,125 803 Legal expenses and other professional fees 152 211 Contract liabilities 364 502 Income and other taxes 104 1,265 Severance and restructuring accruals — 17 Other 999 1,863 Accrued expenses and other current liabilities $ 9,936 $ 11,577 Warranty: The following table summarizes the changes in our product warranty accrual accounts:Severance and restructuring accruals: In an effort to better align our current and future business operations related to our CATV product lines, in August 2019 the Company reduced its workforce by approximately 40 individuals and recorded a charge for severance for the affected employees in the amount of $0.5 million in the fiscal year ended September 30, 2019. In January 2020, we further reduced our workforce and recorded a charge for severance for the affected employees in the amount of $0.6 million in the fiscal year ended September 30, 2020.Our severance and restructuring-related accruals specifically relate to the reductions in force. Expense related to severance and restructuring accruals is included in selling, general, and administrativeSG&A expense on ourthe consolidated statements of operations and comprehensive income (loss) income. . In an effort to better align current and future business operations related to CATV product lines, in August 2019 the Company reduced its workforce and recorded $0.5 million in severance expense in the fiscal year ended September 30, 2019. In January 2020, we further reduced our workforce and recorded $0.6 million in severance expense in the fiscal year ended September 30, 2020. There was $0.1 million in severance expense recorded in the fiscal year ended September 30, 2021. As of September 30, 2021 and 2020 there was $0 and $17.0 thousand accrued.The following table summarizes the changes in the severanceproduct warranty accrual accounts:For the Fiscal Year Ended September 30, (in thousands) 2021 2020 2019 Balance at beginning of period $ 803 $ 654 $ 642 Provision for product warranty expense 505 626 186 Warranty liability assumed in acquisition liability — — 80 Adjustments and utilization of warranty accrual (183) (477) (254) Balance at end of period $ 1,125 $ 803 $ 654 NOTE 9. Credit Facility and restructuring accrual account:Credit Facilities and DebtCredit FacilitiesOn November 11, 2010, we entered into a Credit and Security Agreement (as amended to date, the “Credit Facility”) with Wells Fargo Bank, N.A. (“Wells Fargo”). 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.November 2021February 2022 and currently provides us with a revolving credit line of up to $15.0 million at an interest rate equal to LIBOR plus 1.75%, subject to a borrowing base formula, that can be used for working capital requirements, letters of credit, acquisitions, and other general corporate purpose subject to a requirement, for80As of September 30, 2020,2021, there were 0no amounts outstanding under this Credit Facility and the Company was in compliance with all financial covenants. Also, as of September 30, 2020,2021, the Credit Facility had approximately $0.5 million reserved for 1 outstanding stand-by letter of credit and approximately $7.9$13.4 million available for borrowing. As of November 30, 2020, there was 0 outstanding balance under this Credit Facility, approximately $0.5 million reserved for 1 outstanding stand-by letter of credit and approximately $9.7 million available for borrowing.DebtOn 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”and administered by the U.S. Small Business Administration (the "SBA") to receive loan proceeds of approximately $6.5 million, (the “PPP Loan”), which the Company received on May 6, 2020.TheDuring 2021 the Company received a notification from Wells Fargo that the SBA approved the Company’s PPP Loan matures on May 3, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly. Monthly payments inforgiveness application for the amount of $273,160 will be due and payable beginning at such time as is in accordance with 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 theentire PPP Loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, benefits, rent,balance of approximately $6.5 million, including all accrued interest thereon, and utilities. No assurance is provided that the Company will obtainremaining PPP Loan balance is zero. The forgiveness of the PPP Loan in whole or in part. With respect to any portionwas recognized during the Company’s fiscal59quarter ended June 30, 2021. The Company expects to apply for forgivenessrecorded the gain on debt extinguishment in other income (expense) in the statements of the PPP loan during the fiscal year ending September 30, 2021.operations and comprehensive income (loss).NOTE 12.10. Income and Other TaxesThe Company’s lossincome (loss) from operations before income taxes consisted of the following:For the Fiscal Year Ended September 30, (in thousands) 2021 2020 2019 Domestic $ 25,744 $ (7,159) $ (35,100) Foreign 471 219 (830) Loss before income taxes $ 26,215 $ (6,940) $ (35,930) The Company’s income tax expense (benefit) consisted of the following:81For the Fiscal Year Ended September 30, (in thousands) 2021 2020 2019 Federal: Current $ — $ 30 $ — Deferred — (43) — — (13) — State: Current 990 98 54 Deferred — (25) — 990 73 54 Foreign: Current (418) — — Deferred — — — (418) — — Total income tax expense $ 572 $ 60 $ 54 EMCORE Corporation is incorporated in the state of New Jersey. A reconciliation of the provision for income taxes, with the amount computed by applying the statutory U.S. federal and state income tax rates to continuing operations income before provision for income taxes is as follows:For the Fiscal Year Ended September 30, (in thousands) 2021 2020 2019 Income tax expense (benefit) computed at U.S. federal statutory rate $ 5,506 $ (1,457) $ (7,540) State tax expense (benefit), net of U.S. federal effect 990 (156) (906) Foreign tax rate differential 24 13 (28) Effect due to change in tax rate — (137) (183) Shortfall from stock based compensation (122) 432 248 Other 103 94 223 Federal benefit on PPP loan forgiveness (1,363) — — Change in uncertain tax positions (419) — — State net operating loss carryforward adjustment 454 533 139 Change in valuation allowance (4,601) 738 8,101 Income tax expense $ 572 $ 60 $ 54 Effective tax rate 2.2 % 0.9 % 0.2 % Significant components of our deferred tax assets are as follows:60As of September 30, (in thousands) 2021 2020 Federal net operating loss carryforwards $ 96,289 $ 100,363 Foreign net operating loss carryforwards 1,372 1,680 Income tax credit carryforwards 2,510 2,671 Inventory reserves 2,229 2,320 Accounts receivable reserves 62 55 Accrued warranty reserve 269 193 State net operating loss carryforwards 6,356 5,970 Stock compensation 979 806 Deferred compensation 476 443 Fixed assets and intangibles (497) (348) ROU lease liability 3,289 3,529 ROU lease assets (3,195) (3,467) Other 1,372 1,322 Total deferred tax assets 111,511 115,537 Valuation allowance (111,511) (115,537) Net deferred tax liabilities $ — $ — For the fiscal years ended September 30, 2021, 2020 2019 and 2018,2019, the Company recorded income tax (expense) benefitexpense of approximately $(0.1)$0.6 million, $(0.1)$0.1 million and $0.4$0.1 million, respectively. Income tax expense for the fiscal year ended September 30, 2021 is comprised primarily of California state income tax due to temporary suspension of net operating loss credits and other state minimum tax expense, partially offset by the release of a reserve on uncertain tax benefits due to statutory limitation expiration. Income tax expense for the fiscal year ended September 30, 2020 is comprised primarily of state minimum tax expense partially offset by the reversal of a deferred tax liability related to the Concord Real Property. Income tax expense for the fiscal year ended September 30, 2019 is primarily comprised of state minimum tax expense. IncomeFor the fiscal years ended September 30, 2021, 2020 and 2019, the effective tax benefitrate on operations was 2.2%, 0.9% and 0.2%, respectively. The higher tax rate for the fiscal year ended September 30, 20182021 is primarily comprised of the effect of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) which eliminated Alternative Minimum Taxes (“AMT”) and resulted in a refunddue to the Companyhigher California state income tax due to temporary suspension of amounts paid in prior fiscal years, state minimum taxes, and foreign tax expense.For the fiscal years ended September 30, 2020, 2019 and 2018, the effective tax rate on operations was 1.0%, 0.2% and (2.5)%, respectively.net operating loss credits. The lower tax rate for the fiscal yearsyear ended September 30, 2020 and 2019 arewas primarily due to the operating loss and state minimum tax expense. The higher beneficiallower tax rate for the fiscal year ended September 30, 20182019 was primarily due to the effect of the Tax Cuts and Jobs Act of 2017, which resulted in a credit to the Company on future tax payments82We have not provided for income taxes on non-U.S. subsidiaries’ undistributed earnings as of September 30, 20202021 because we plan to indefinitely reinvest the unremitted earnings of ourthe non-U.S. subsidiaries and all of ourthe non-U.S. subsidiaries historically have negative earnings and profits.All deferred tax assets have a full valuation allowance at September 30, 2020. However, on2021. On a quarterly basis, the Company will evaluateevaluates 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 fiscal years ended September 30, 2021, the Company released the ASC 740-10 reserve on uncertain tax benefits due to statutory limitation expiration. During the fiscal year ended September 30, 2020, and 2019, there were no material increases or decreases in unrecognized tax benefits.As of September 30, 2020,2021, the Company had net operating loss carryforwards for U.S. federal income tax purposes of approximately $477.9$458.5 million which begin to expire in 2022. As of September 30, 2020,2021, the Company had foreign net operating loss carryforwards of $6.7$5.5 million which begin to expire in 2021,2022 as well as state net operating loss carryforwards of approximately $68.5$72.8 million which begin to expire in 2021.2022. As of September 30, 2020,2021, the Company also had tax credits (primarily foreign income and U.S. research and development tax credits) of approximately $2.7$2.5 million. The research credits will begin to expire in 2021.2022. Utilization of net operating loss and tax credit carryforwards are subject to a substantial annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382 of the Code and similar state provisions. The Company prepared an Internal Revenue Code 382 analysis to determine the annual limitations on the Company’s consolidated net operating loss carryforwards. As a result of the $477.9$458.5 million of U.S. net operating loss carryforwards, approximately $236.161$230.2 million is subject to an annual limitation and $241.8$228.3 million of the net operating losses are not subject to an annual limitation. Such annual limitations could result in the expiration of the net operating loss and tax credit carryforwards before utilization.A reconciliation of the beginning and ending amount of unrecognized gross tax benefits is as follows:(in thousands) Amount Balance as of September 30, 2019 $ 419 Adjustments based on tax positions related to the current year — Adjustments based on tax positions of prior years — Balance as of September 30, 2020 419 Adjustments based on tax positions related to the current year — Adjustments based on tax positions of prior years (419) Balance as of September 30, 2021 $ — As of September 30, 20202021 and 2019,2020, we had approximately $0.6$0 million and $0.5$0.6 million, respectively, of interest and penalties accrued as tax liabilities on ourthe balance sheet. We believe that itAs we released the entire unrecognized tax benefits, as well as the associated interest and penalties as of September 30, 2021, there is reasonably possible that none of theno uncertain tax positions that will be paid or settled within the next 12 months.months . Interest that is accrued on tax liabilities is recorded within interest expense on the consolidated statements of operations.NOTE 13.11. Commitments and ContingenciesLeases: Estimated future minimum lease payments under non-cancelable operating leases with an initial or remaining term of one year or more are $1.8 million, $1.8 million, $1.9 million, $1.7 million, $1.7 million and $12.4 million for the fiscal years ending September 30, 2021, 2022, 2023, 2024, 2025, and 2026 and beyond, respectively.Operating Lease Obligations: We lease certain facilities and equipment under non-cancelable operating leases. Operating lease amounts exclude property taxes, insurance, and maintenance expenses on leased properties. Our facilityAs of September 30, 2021, our operating leases typically provide for rental adjustments for increases in base rent (uphad remaining lease terms of 0.6 years to specific limits), property taxes, insurance, and general property maintenance that would be recorded as rent expense. Option periods have been13.4 years, some of which included in the83computation of rent expense where such options are likely to be exercised due to significant economic incentive. Rent expense was approximately $1.9 million, $1.3 million and $1.2 million forextend 5 additional years. During the fiscal years ended September 30, 2021 and 2020, 2019the Company recorded $2.2 million and 2018,$1.8 million of operating lease expense, respectively. ThereThe Company's finance leases and short term leases are no off-balance sheet arrangements other than ourimmaterial.Maturities of operating leases.(in thousands) Amount 2022 $ 1,955 2023 1,856 2024 1,686 2025 1,730 2026 1,775 Thereafter 10,592 Total lease payments $ 19,594 Less imputed interest (5,712) Total $ 13,882 Weighted-average remaining lease term and discount rate related to operating leases are as follows:As of September 30, 2021 2020 Weighted average remaining lease term (years) 11.9 14.4 Weighted average discount rate 6.1 % 6.1 % Supplemental cash information and non-cash activities related to operating leases are as follows:As of September 30, (in thousands) 2021 2020 Operating cash outflows from operating leases $ 1,975 $ 1,592 Right-of-use assets obtained in exchange for operating lease liabilities $ 10,358 $ 10,791 62Asset Retirement ObligationObligations: We have known conditional AROs such as certain asset decommissioning andThe Company’s ARO consists of legal requirements to decommission assets, restoration of rentedthe existing leased facilities to their original state, and certain environmental work to be performed indue to the future. Ourpresence of a manufacturing fabrication operation. ARO includes assumptions related to renewal option periods for those facilities where we expect to extend lease terms. The Company recognizes its estimate of the fair value of its ARO in the period incurred in long-term liabilities. The fair value of the ARO is also capitalized as property, plant and equipment.future periods,connection with the Company's lease agreements, we have recorded an ARO is accreted for the change in its present valueliability of $2.0 million and capitalized costs are depreciated over the useful life of the related assets. If the fair value of the estimated ARO changes, an adjustment will be recorded to both the ARO$2.0 million at September 30, 2021 and the asset retirement capitalized cost. Revisions in estimated liabilities can result from revisions of estimated inflation rates, changes in estimated retirement costs, and changes in the estimated timing of settling the ARO.September 30, 2020, respectively. The fair value of our ARO was estimated by discounting projected cash flows over the estimated life of the related assets using credit adjusted risk-free rates which ranged from 1.20%0.06% to 4.20%1.73%.$32,000, $0.1 million$47.6 thousand, $31.9 thousand and $0.1 million$54.2 thousand was recorded during the fiscal years ended September 30, 2020, 2019 and 2018, respectively.EMCORE leases its primary facility in Alhambra, California covering 5 buildings where manufacturing, research and development, and general and administrative work is performed. In March 2019, amendments to leases for these 5 buildings were signed, extending the terms of the leases for these buildings for an additional three years through September 2023, plus a three year EMCORE option to extend the leases through September 2026. Management has determined that there is a significant economic incentive to exercise the options and the lease period will include the option periods for accounting purposes. In connection with the lease agreement, the Company has recorded an ARO liability of $1.9 million and $1.8 million at September 30,2021, 2020 and September 30, 2019, respectively.The Company’s ARO consists of legal requirements to return the existing leased facilities to their original state and certain environmental work to be performed due to the presence of a manufacturing fabrication operation and significant changes to the facilities over the past thirty years.The following table summarizes ARO activity:(in thousands) Amount Balance at September 30, 2020 $ 2,022 Accretion expense 48 Revision in estimated cash flows (21) Balance at September 30, 2021 $ 2,049 IndemnificationsIndemnifications: 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 customer indemnification obligations. We enter into indemnification agreements with each of our directorsdirector and executive officersofficer 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 ourthe 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 andcircumstances involved in each particular claim.Legal Proceedings: We are subject to various legal proceedings, claims, and litigation, either asserted or unasserted, that arise in the ordinary course of business. Except as described below, 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 ultimate84a)Intellectual Property LawsuitsIntellectual Property LawsuitsWe 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 ourthe ability to obtain intellectual property protection for our research and development efforts. We 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 ProceedingsPhoenix Legal ProceedingsOn June 12, 2018, Phoenix commenced an arbitration against EMCORE with the American Arbitration Association (“AAA”)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, and63declaratory 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 gyroscopeFOG 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)(a) Phoenix’s claim for breach of the covenant of good faith and fair dealing was denied; (ii)(b) Phoenix’s claim for breach of the agreements entered with EMCORE for failure to provide funding for non-recurring engineering was denied; (iii)(c) Phoenix’s claim for unjust enrichment was denied; (iv)(d) 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; and (v)(e) 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)(a) EMCORE breached certain license agreements entered into with Phoenix by failing to make royalty payments due and failing to provide required accountings, (ii)accounting, (b) Phoenix and its members are no longer subject to prior exclusivity restrictions; (iii)(c) EMCORE’s claim for breach of the covenant of good faith and fair dealing was denied; and (iv)(d) 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 5 trade secret subparts (the “Deemed Trade Secrets”), and found that at least 1 Deemed Trade Secret was being used in 7 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)(a) sales through July 16, 2018 on all fiber optic gyroscopesFOGs sold by EMCORE, and (ii)(b) 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.85(i)(a) future customer payments for certain EMCORE product contracts previously entered into and (ii)(b) 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.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)(a) an award to Phoenix of attorneys’ fees and costs in the amount of approximately $3.8 million, (ii)(b) 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)(c) 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)(d) an order that EMCORE make the payments in the foregoing items (i)(a), (ii)(b) and (iii)(c) 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 and paid during the fiscal year ended September 30, 2020.During the fiscal year ended September 30, 2019, we recorded the award and settlement to Phoenix of attorneys’ fees and costs in the amount of approximately $3.8 million, and our legal expenses of approximately $5.7 million within selling, general and administrative expense on the consolidated statement of operations and comprehensive (loss) income.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) (a)64granted Phoenix a fully paid, perpetual nonexclusive license to the disputed patent and (ii)(b) 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.During the fiscal year ended September 30, 2020, wethe Company recorded the settlement of the Patent Claims in the amount of approximately $0.4 million within selling, general and administrative expense on the consolidated statement of operations and comprehensive loss.On June 21, 2018, Phoenix commenced a special proceeding against EMCORE in the New York Supreme Court, Commercial Division. 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.Resilience LitigationIn February 2021, Resilience Capital (“Resilience”) filed a complaint against us with the Delaware Chancery Court containing claims arising from the February 2020 sale of SDI’s real property (the “Concord Property Sale”) located in Concord, California (the “Concord Real Property”) to Eagle Rock and that certain Single-Tenant Triple Net Lease, dated as of February 10, 2020, entered into by and between SDI and Eagle Rock, pursuant to which SDI leased from Eagle Rock the Concord Real Property for a 15 year term. The Resilience complaint seeks, among other items, (a) a declaration that the Concord Property Sale included a non-cash component; (b) a decree requiring us and Resilience to follow the appraisal requirements set forth in that certain Purchase and Sale Agreement (the "SDI Purchase Agreement"), dated as of June 7, 2019, by and among the Company, The Resilience Fund IV, L.P., The Resilience Fund IV-A, L.P., Aerospace Newco Holdings, Inc. and Ember Acquisition Sub, Inc.; (c) recovery of Resilience’s costs and expenses; and (d) pre- and post-judgment interest.In April 2021, we filed with the Delaware Chancery Court our answer to the Resilience complaint and counterclaims against Resilience, in which we are seeking, among other items, (a) dismissal of the Resilience complaint and/or granting of judgment in favor of EMCORE with respect to the Resilience complaint, (b) entering final judgment against Resilience awarding damages to us for Resilience’s fraud and breaches of the SDI Purchase Agreement in an amount to be proven at trial and not less than $1,565,000, (c) a judicial determination of the respective rights and duties of us and Resilience under the SDI Purchase Agreement, (d) an award to us of costs and expenses and (e) pre- and post-judgment interest. We believe that the claims made by Resilience in its complaint are without merit and we intend to vigorously defend ourselves against them.NOTE 14.12. EquityEquityEquity PlansWe provide long-term incentives to eligible officers, directors, and employees in the form of equity-based awards. We maintain 3 equity incentive compensation plans, collectively described below as our “Equity Plans”:●the 2010 Equity Incentive Plan (“2010 Plan”),●the 2012 Equity Incentive Plan (“2012 Plan”), and●the 2019 Equity Incentive Plan (“2019 Plan” including the 2010 Equity Incentive Plan ("2010 Plan"), the 2012 Equity Incentive Plan ("2012 Plan"), and the 2019 Equity Incentive Plan ("2019 Plan").86Stock OptionsMost of our stock options vest and become exercisable over a four to five year periodyears and have a contractual life of 10 years. Certain stock options awarded are intended to qualify as incentive stock options pursuant to Section 422A of the Internal Revenue Code.The following table summarizes stock option activity under the Equity Plans for the fiscal year ended September 30, 2020:(*)Intrinsic value for stock options represents the “in-the-money” portion or the positive variance between a stock option’s exercise price and the underlying stock price. For the fiscal year ended September 30, 2019, the intrinsic value of options exercised was $0.Number of
SharesWeighted
Average
Exercise
PriceWeighted
Average
Remaining
Contractual Life
(in years)Aggregate
Intrinsic
Value (*)
(in thousands)Outstanding as of September 30, 2020 44,065 $ 5.14 Granted — — Exercised (15,025) 5.13 Forfeited — — Expired (9,171) 6.35 Outstanding as of September 30, 2021 19,869 $ 4.59 3.75 $ 57 Exercisable as of September 30, 2021 19,869 $ 4.59 3.75 $ 57 Vested and expected to vest as of September 30, 2021 19,869 $ 4.59 3.75 $ 57 (*) Intrinsic value for stock options represents the “in-the-money” portion or the positive variance between a stock option’s exercise price and the underlying stock price. For the fiscal year ended September 30, 2020, the intrinsic value of options exercised was $0.As of September 30, 2020,2021, there was approximately $2,700 ofno unrecognized stock-based compensation expense related to non-vested stock options granted under the Equity Plans which is expected to be recognized over an estimated weighted average life of 0.5 years.Valuation AssumptionsThere were 0no stock option grants for the fiscal years ended September 30, 20202021 and 2019.Time-Based Restricted StockTime-based restricted stock units (“RSUs”RSU”) and restricted stock awards (“RSAs”RSA”) granted to employees under the 2010 Plan, 2012 Plan or 2019 Plan typically vest over 3 to 4 years and are subject to forfeiture if employment terminates prior to the vesting or lapse of the restrictions, as applicable. RSUs are not considered issued or outstanding common stock until they vest. RSAs are considered issued and outstanding on the grant date and are subject to forfeiture if specified vesting conditions are not satisfied.872020:RSUs RSAs Number of Shares Weighted
Average Grant
Date Fair ValueNumber of
SharesWeighted
Average Grant
Date Fair ValueNon-vested as of September 30, 2020 1,548,045 $ 3.41 8,154 $ 8.20 Granted 1,045,673 5.55 — — Vested (598,986) 3.43 (8,154) 8.20 Forfeited (189,878) 3.70 — — Non-vested as of September 30, 2021 1,804,854 $ 4.61 — $ — As of September 30, 2020,2021, there was approximately $4.0$6.7 million of remaining unamortized stock-based compensation expense associated with RSUs, which will be expensed over a weighted average remaining service period of approximately 2.62.7 years. The 1.51.8 million outstanding non-vested and expected to vest RSUs have an aggregate intrinsic value of approximately $5.0$13.5 million and a weighted average remaining contractual term of 2.62.7 years. For the fiscal years ended September 30, 2021, 2020, 2019, and 2018,2019, the intrinsic value of RSUs vested was approximately $3.6 million, $1.3 million $1.4 million and $2.3$1.4 million, respectively. For the fiscal years ended September 30, 20192020 and 2018,2019, the weighted average grant date fair value of RSUs granted was $3.68$3.41 and $5.80$3.68 per share, respectively.For the fiscal year ended September 30, 2021, $27.3 thousand of RSAs vested. As of September 30, 2020,2021, there was approximately $1,000 ofno remaining unamortized stock-based compensation expense associated with RSAs, which will be expensed over a weighted average remaining service periodRSAs.66Performance StockPerformance based restricted stock units (“PSUs”PSU”) and performance based shares of restricted stock (“PRSAs”PRSA”) granted to employees under the 2012 Plan or 2019 Plan typically vest over 1 to 3 years and are subject to forfeiture in whole, if employment terminates, or in whole or in part, if specified vesting conditions are not satisfied, in each case prior to vesting. PSUs are not considered issued or outstanding common stock until they vest. PRSAs are considered issued and outstanding on the grant date and are subject to forfeiture if specified vesting conditions are not satisfied. PSUs and PRSAs that are granted to our executive officers and key employees are provided as long-term incentive compensation that is based on relative total shareholder return, which measures our performance against the Russell Microcap Index.The following table summarizes the activity related to PSUs and PRSAs for the fiscal year ended September 30, 2020:PSUs Number of Shares
(at Target)Weighted Average Grant Date Fair Value Non-vested as of September 30, 2020 868,500 $ 4.79 Granted 231,000 7.39 Vested (6,086) 7.91 Forfeited (126,414) 7.70 Non-vested as of September 30, 2021 967,000 $ 5.01 As of September 30, 2020,2021, there was approximately $2.1$2.4 million of remaining unamortized stock-based compensation expense associated with PSUs, which will be expensed over a weighted average remaining service period of approximately 1.71.3 years. The 0.91.0 million outstanding non-vested and expected to vest PSUs have an aggregate intrinsic value of approximately $2.8$7.2 million and a weighted average remaining contractual term of 1.71.3 years. There were 0 PSUs vested for the fiscal year ended September 30, 2020. For the fiscal years ended September 30, 20192021, 2020 and 2018,2019, the intrinsic value of PSUs vested was approximately $0.2$34.4 thousand, $0.0 million and $1.4$0.2 million, respectively. For the fiscal years ended September 30, 20192020 and 2018,2019, the weighted average grant date fair value of PSUs granted was $3.81 and $5.19 and $7.62,per share, respectively.880no remaining unamortized stock-based compensation expense associated with PRSAs.Stock-based compensationCompensationThe effect of recordingfollowing table set forth stock-based compensation expense was as follows:For the Fiscal Year Ended September 30, (in thousands) 2021 2020 2019 Employee stock options $ 2 $ 13 $ 25 RSUs and RSAs 2,093 1,755 1,495 PSUs and PRSAs 1,396 1,243 685 ESPP 307 214 180 Outside director equity awards and fees in common stock 382 291 221 Total stock-based compensation expense $ 4,180 $ 3,516 $ 2,606 The following table set forth stock-based compensation expense by expense type:For the Fiscal Year Ended September 30, (in thousands) 2021 2020 2019 Cost of revenue $ 767 $ 692 $ 482 Selling, general, and administrative 2,590 2,155 1,478 Research and development 823 669 646 Total stock-based compensation expense $ 4,180 $ 3,516 $ 2,606 Stock-based compensation within selling, general and administrativeSG&A expense was lower for the fiscal year ended September 30, 2019 due to the reversal of previously recognized expense associated with the forfeiture of unvested RSUs and PSUs of ourthe former CFO.Capital Stock67Table of ContentsOur authorizedAuthorized capital stock consists of 50 million shares of common stock, 0no par value, and 5,882,352 shares of preferred stock, $0.0001 par value.On February 16, 2021, the Company closed our offering of 6,655,093 shares of our common stock, which included the full exercise of the underwriters’ option to purchase 868,056 additional shares of common stock, at a price to the public of $5.40 per share, resulting in net proceeds to us from the offering, after deducting the underwriting discounts and commissions and other offering expenses, of approximately $33.1 million. The shares were sold by us pursuant to an underwriting agreement with Cowen and Company, LLC, dated as of February 10, 2021. As of September 30, 2021 and 2020, we had 36.543.9 million and 29.636.5 million shares of common stock issued and outstanding, respectively. There were 0no shares of preferred stock issued or outstanding as of September 30, 20202021 and 2019.401(k) PlanWe haveThe Company has a savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under this savings plan, participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. Since June 2015, all employer contributions are made in cash. Our matching contribution in cash for each of the fiscal years ended September 30, 2021, 2020 2019 and 20182019 was approximately $1.1 million, $1.0 million, and $0.6 million, and $0.5 million, respectively.89Earnings (Loss) per ShareLoss Per Sharenet lossearnings (loss) per share:For the Fiscal Year Ended September 30, (in thousands, except per share) 2021 2020 2019 Numerator Net income (loss) $ 25,643 $ (7,000) $ (35,984) Denominator Weighted average number of shares outstanding - basic 34,020 29,136 27,983 Effect of dilutive securities Stock options 7 — — PSUs, RSUs, and restricted stock 1,762 — — Weighted average number of shares outstanding - diluted 35,789 29,136 27,983 Earnings (loss) per share - basic $ 0.75 $ (0.24) $ (1.29) Earnings (loss) per share - diluted $ 0.72 $ (0.24) $ (1.29) Weighted average antidilutive options, unvested RSUs and RSAs, unvested PSUs and ESPP shares excluded from the computation 195 1,109 810 For diluted lossBasic EPS is computed by dividing net income per share,(loss) for the denominator includes allperiod by the weighted-average number of common stock outstanding during the period. Diluted EPS is computed by dividing net income (loss) for the period by the weighted average number of common stock outstanding during the period, plus the dilutive effect of outstanding RSUs and RSAs, PSUs, stock options, and shares and all potentialissuable under the Employee Stock Purchase Plan ("ESPP") as applicable pursuant to the treasury stock method. Certain of the Company's outstanding share-based awards, noted in the table above, were excluded because they were anti-dilutive, but they could become dilutive common shares to be issued.in the future. The anti-dilutivedilutive stock options and unvested stock were excluded from the computation of diluted net loss per share for the fiscal years ended September 30, 2020 2019 and 20182019 due to the Company incurring a net loss for the period.Employee Stock Purchase PlanWe maintain an Employee Stock Purchase Plan (“ESPP”) that providesESPPUntil September 2021, we maintained the ESPP, which provided employees an opportunity to purchase common stock through payroll deductions. The ESPP iswas a 6-month duration plan with new participation periods beginning on approximately February 25 and August 26 of each year. Theyear, with the purchase price is set at 85% of the average high and low market price of our common stock on either the first or last trading day of the participation period, whichever iswas lower, and annual contributions arewere limited to the lower of 10% of an employee’s compensation or $25,000.Per$25.0 thousand. In September 2021, the amended ESPP and after giving effect toCompensation Committee of our Board Directors approved the special dividend paid in July 2016, the total numbertermination of shares of common stock on which options may be granted under the ESPP, were 3,515,574 shares. We issueeffective immediately.68Prior to termination of the ESPP, we issued new shares of common stock to satisfy the issuance of shares under this stock-based compensation plan. Common stock issued under the ESPP during the fiscal years ended September 30, 2021, 2020 2019 and 20182019 totaled approximately 231,000, 197,000192.0 thousand, 231.0 thousand and 171,000197.0 thousand shares, respectively. As of September 30, 2020,2021, the total amount of common stock issued under the ESPP totaled 3,203,1003,395,090 shares and the total shares remaining available for issuance under the ESPP totaled 312,474.0.90As of September 30, 2020,2021, we had common stock reserved for the following future issuances:
Stock Shares Available for
Future IssuancesFuture IssuancesFuture Issuances19,869 44,065restricted stock unitsRSUs and awards1,804,854 1,556,199performance stock unitsPSUs and awardsPRSAs (at 200% maximum payout)1,934,000 1,737,000Purchases under the employee stock purchase plan312,4741,751,234 842,82288,741 88,7415,598,698 4,581,301NOTE 15.13. Segment Data and RelatedRevenue InformationThe reportable segments reportedReportable SegmentsReported below are the Company’s segments for which separate financial information is available and upon which operating results are evaluated by the chief operating decision maker, the Chief Executive Officer, to assess performance and to allocate resources. As a result of organizational changes effective in the beginning of fiscal year 2020, the Company has reassessed its reportable segments and determined that it has 2 reportable segments, (i) Aerospace and Defense and (ii) Broadband. All prior-period amounts have been adjusted retrospectively to reflect our reportable segment changes.The Company’s Chief Executive Officer is the chief operating decision maker and he assesses the performance of the operating segments and allocates resources based on segment profits. We do not allocate sales and marketing or general and administrative expenses, or interest expense and interest income to our segments, because management does not include the information in its measurement of the performance of the operating segments. Also, totala measure of segment assets interest expense and interest income areliabilities has not presented by segment because management doesbeen provided to the Company's chief operating decision maker and therefore is not include this information in its measurement of the performance of the operating segments.91The Aerospace and Defense segment is comprised of 2 product lines: (i) Navigation and Inertial Sensing; and (ii) Defense Optoelectronics. The Broadband segment is comprised of 3 product lines: (i) CATV Lasers and Transmitters; (ii) Chip Devices; and (iii) Other. Information on reportable segments utilized by ourthe chief operating decision maker is as follows:(in thousands) For the Fiscal Year Ended September 30, 2021 2020 2019 Revenue Aerospace and Defense $ 50,838 $ 55,240 $ 33,086 Broadband 107,606 54,888 54,179 Total revenue $ 158,444 $ 110,128 $ 87,265 Segment income (loss) Aerospace and Defense gross profit $ 13,705 $ 16,729 $ 9,207 Aerospace and Defense research and development expense 14,616 17,469 10,448 Aerospace and Defense segment loss $ (911) $ (740) $ (1,241) Broadband gross profit $ 47,783 $ 18,853 $ 5,882 Broadband research and development expense 2,832 2,800 8,995 Broadband segment income (loss) $ 44,951 $ 16,053 $ (3,113) Consolidated segment income (loss) $ 44,040 $ 15,313 $ (4,354) Unallocated operating expense Selling, general, and administrative $ 24,544 $ 24,631 $ 32,080 Loss (gain) on sale of assets 515 (2,284) (302) Total unallocated operating expense $ 25,059 $ 22,347 $ 31,778 Operating income (loss) $ 18,981 $ (7,034) $ (36,132) Product CategoriesRevenue is also classified by major product category and is presented below:69RevenueTable of ContentsFor the Fiscal Year Ended September 30, (in thousands) 2021 2020 2019 Aerospace and Defense Navigation and Inertial Sensing $ 36,539 $ 38,983 $ 23,203 Defense Optoelectronics 14,299 16,257 9,883 Broadband CATV Lasers and Transmitters 95,255 44,457 41,150 Chip Devices 3,106 4,873 10,828 Other Optical Products 9,245 5,558 2,201 Total revenue $ 158,444 $ 110,128 $ 87,265 : Geographical ConcentrationThe following table sets forth revenue by geographic region with revenue assigned to geographic regionsarea based on our customers’ billing address.address:For the Fiscal Year Ended September 30, (in thousands) 2021 2020 2019 United States and Canada $ 139,443 $ 91,205 $ 68,607 Asia 11,836 9,397 11,637 Europe 4,802 5,559 6,209 Other 2,363 3,967 812 Total revenue $ 158,444 $ 110,128 $ 87,265 Significant Customers: Significant customers are defined as customers representing greater than 10% of our consolidated revenue. Revenue from 3, 3three, three and 2 of ourthree significant customers represented an aggregate of 57%70%, 57% and 55% and 60% of our consolidated revenue for the fiscal years ended September 30, 2021, 2020 and 2019, and 2018, respectively. The percentage from significant customers increased driven by higher Broadband revenue.Significant portions of the Company’s sales are concentrated among a limited number of customers. The duration, severity, and future impact of the COVID-19 pandemic are highly uncertain and could result in significant disruptions to the business operations of the Company’s customers. If one or more of these significant customers significantly decreasedecreases their orders for the Company’s products, or if we are unable to deliver finished products to the customer in connection with such orders, the Company’s business could be materially and adversely affected.Long-lived Assets: Long-lived assets consist of land, building and property, plant, and equipment. As of September 30, 2020 and 2019, approximately 97% and 85%, respectively, of our long-lived assets were located in the United States. The remaining long-lived assets are primarily located in Asia.92NOTE 16.Selected Quarterly Financial Information (unaudited)The following tables present our unaudited consolidated results of operations for the eight most recently ended quarters. We believe that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below to present fairly the selected quarterly information when read in conjunction with the consolidated financial statements and notes included elsewhere in this Annual Report. Our results from operations vary substantially from quarter to quarter. Accordingly, the operating results for a quarter are not necessarily indicative of results for any subsequent quarter or for the full year. We have experienced and expect to continue to experience significant fluctuations in quarterly results.EMCORE CORPORATIONQuarterly Consolidated Statements of OperationsFor the Fiscal Year ended September 30, 2020(in thousands, except income per share)(unaudited)93EMCORE CORPORATIONQuarterly Consolidated Statements of OperationsFor the Fiscal Year ended September 30, 2019(in thousands, except income per share)(unaudited)NOTE 17.Subsequent Event17, 2020, the Company1, 2021, we entered into an agreementAmendment to Lease (the “New Alhambra Lease Amendment”) to that certain Standard Industrial/Commercial Single-Tenant Lease – Net, dated as of October 1, 2017, by and between the Company and CHESTNUT2015 LLC (the “Alhambra Lease”), as previously amended by that certain Amendment to Lease, dated as of March 31, 2019 (the “Original Alhambra Lease Amendment”). Pursuant to the terms of the New Alhambra Lease Amendment, we agreed to extend the term of the lease for our corporate headquarters, manufacturing and research and development facilities located in Alhambra, California (the “Leased Facilities”) through September 30, 2031, with a customerfive-year Company option to resolveextend beyond such expiration date. Under the terms of the New Alhambra Lease Amendment, base rent for the Leased Facilities will remain unchanged from the rates of $51,500 per month during the fiscal year ending September 30, 2022 and $53,500 per month during the fiscal year ending September 30, 2023, in each case as previously agreed in the Original Alhambra Lease Amendment, and we continue to be responsible for certain potential product claims. In exchange for a release of any and all potential claims the customer may haveother monthly expenses related to the applicable product, the Company has agreed to provide up to $1.5 million of product discounts on future purchases by the customer from the Company. The Company has recorded the full potential expense of $1.5 million inLeased Facilities, including taxes and utilities. Base rent for the fiscal year endedending September 30, 2020 within Research and Development expense. As2024 will be based on a mutually determined fair market value, subject to the customer is not expected to utilizeappraisal process set forth in New Alhambra Lease Amendment, which amount shall be at least 2% greater than the entire $1.5 million product discount withinmonthly rent paid during the next twelve months, $0.7 million has been recorded within accrued expenses and other current liabilities and $0.8 million has been recorded as other long-term liabilities on the Balance Sheet as offiscal year ending September 30, 2020.9470To the Shareholders and Board of DirectorsEMCORE Corporation:OpinionOpinions on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of EMCORE Corporation and subsidiaries (the Company) as of September 30, 20202021 and 2019,2020, the related consolidated statements of operations and comprehensive loss,income (loss), shareholders’ equity, and cash flows for each of the years in the three yearthree-year period ended September 30, 2020,2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control – Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 20202021 and 2019,2020, and the results of its operations and its cash flows for each of the years in the three yearthree-year period ended September 30, 2020,2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2021 based on criteria established in Change in Accounting PrincipleAs discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases as of October 1, 2019 due to the adoption of the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC)FASB's ASC Topic 842, Leases.Basis for OpinionTheseOpinionsThe Company’s management is responsible for these consolidated financial statements, are the responsibilityfor maintaining effective internal control over financial reporting, and for its assessment of the Company’s management.effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding offraud, and whether effective internal control over financial reporting but not for the purpose of expressing an opinion on the effectivenesswas maintained in all material respects.Our audits of the Company’s internal control overconsolidated financial reporting. Accordingly, we express no such opinion.Our auditsstatements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and71dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Critical Audit MatterThe critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.Net realizable value of inventoryAs discussed in Note 2 and Note 6 to the consolidated financial statements, the Company has inventory of $32.3 million as of September 30, 2021, which is stated at the lower of cost or net realizable value. The Company writes-down inventory once it has been determined that conditions exist that may not allow the inventory to be sold for its intended purpose or the inventory is determined to be excess or obsolete. The determination of the excess and obsolete inventory requires management to make assumptions related to estimates of future inventory demand and market conditions.We identified the evaluation of net realizable value of inventory as a critical audit matter. Subjective auditor judgment was required to evaluate future inventory demand and market conditions, including whether past consumption and recent purchases used in the Company’s model were indicative of future inventory demand.The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the inventory process, including controls over the assumptions described above. We evaluated historical write down trends, historical sales of older inventory, and relevant changes in the overall business environment, including changes in key customers, product lines, and competitors, in order to assess the Company’s model. For a sample of products within inventory, we compared the Company’s determination of past consumption and recent purchases used to estimate future inventory demand of the product to supporting documentation./s/ KPMG LLPWe have served as the Company’s auditor since 2010.Irvine, California95Not applicable.ITEM 9A.Controls and Proceduresa.Evaluation of Disclosure ControlsControl and ProceduresOur management,Management, with the participation of its Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer and Accounting Officer), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) (the “Exchange Act”))Act) as of the end of the period covered by this Annual Report on Form 10-K. Based upon this evaluation, ourthe Chief Executive Officer and ourthe Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.b.Management’s Annual Report on Internal ControlsControl over Financial ReportingOur management72Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act. Under the supervision of ourthe Chief Executive Officer and Chief Financial Officer and with the participation of our management, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 20202021 based on the framework in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of September 30, 2020.This Annual Report on Form 10-K does not include an attestation report of our2021.The Company’s independent registered public accounting firm regardinghas issued an audit report on the effectiveness of the Company’s internal control over financial reporting because we qualify as a “non-accelerated filer” (i.e., we do not qualify as either an “accelerated filer” or a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act).c.Changes in Internal Control over Financial ReportingThere were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during the quarter ended September 30, 20202021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Due to the ongoing COVID-19 pandemic, a significant number of our employees are now working from home. The design of our processes, systems, and controls allows for remote execution with accessibility to secure data.d.Limitations on Effectiveness of Controls and ProceduresOur management,Management, including ourthe Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by individual acts, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events, and there can be no96ITEM 9B.Other Information9773ITEM 10.Directors, Executive Officers, and Corporate GovernanceInformation regarding our executive officers and directors required by this Item is incorporated by reference to the section entitled “Proposal I: Election of Directors - Directors and Executive Officers” that will be included in ourthe Definitive Proxy Statement in connection with ourthe Annual Meeting of Stockholders (the “Proxy Statement”), which will be filed with the SEC within 120 days after the fiscal year ended September 30, 2020.2021. Information required by Items 407(c)(3), (d)(4), and (d)(5) of Regulation S-K is incorporated by reference to the information under the caption “Governance of the Company - Board Committees” in the Proxy Statement.We have adopted a code of ethics entitled the “EMCORE Corporation Code of Business Conduct and Ethics,” which is applicable to all employees, officers, and directors of the Company. The full text of ourthe Code of Business Conduct and Ethics is included with the Corporate Governance information available on our website (www.emcore.com). We intend to disclose any changes in or waivers from ourthe code of ethics for our directors and executive officers to the extent disclosure is required by the applicable rules of the SEC and Nasdaq Stock Market LLC by posting such information on our website or by filing a Current Report on Form 8-K.ITEM 11.Executive CompensationInformation required by this Item is incorporated by reference to the information under the captions “Director Compensation for Fiscal Year 2020,2021,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation Committee Report”, and “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersInformation regarding security ownership of certain beneficial owners and management is incorporated by reference to the information under the caption “Ownership of Securities - Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.Information regarding our equity compensation plans is incorporated by reference to the information under caption “Ownership of Securities - Equity Compensation Plan Information” in the Proxy Statement.ITEM 13.Certain Relationships, Related Transactions, and Director IndependenceInformation required by this Item is incorporated by reference to information under the captions entitled “Governance of the Company - Related Person Transaction Approval Policy” and “Governance of the Company - Director Independence” in the Proxy Statement.ITEM 14.Principal Accounting Fees and ServicesInformation required by this Item is incorporated by reference to the information under the caption “Ratification of the Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement.9874ITEM 15.Exhibits and Financial Statement Schedules(a)(1)Financial StatementsIncluded in PartII, Item8 of this Annual Report on Form 10-K:●Consolidated Statements of Operations and Comprehensive (Loss) Income for the fiscal years ended September 30, 2020, 2019, and 2018●Consolidated Balance Sheets as of September 30, 2020 and 2019●Consolidated Statements of Shareholders’ Equity for the fiscal years ended September 30, 2020, 2019, and 2018●Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2020, 2019, and 2018●Notes to Consolidated Financial Statements●Report of Independent Registered Public Accounting Firm•Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2021, 2020, and 2019(a)(2)Financial Statement SchedulesThe applicable financial statement schedules required under this Item 15(a)(2) are presented in ourthe consolidated financial statements and notes thereto under Part II, Item 8 of this Annual Report on Form 10-K.(a)(3) ExhibitsExhibitsSee Item 5(b)15(b) below. Each management contract or compensatory plan or arrangement required to be filed has been identified.(b)Exhibits2.22.22.32.32.52.43(i).13(i).13(i).2993(i).23(i).33(i).33(i).43(i).4753(i).53(i).53(i).63(ii).63(ii).74.2**4.2**10.110.110.2†10.2†10.3†10.3†10.4†10.4†10.5†10.5†10.6†10.6†10.7†10.7†10.8†10.8†10010.9†10.9†10.10†10.10†10.11†10.11†10.12†10.12†10.13†10.13†10.14†10.14†10.15†10.15†**10.16†10.16†10.17†10.17†10.18†7610.18†10.20† 10.2110.2010.2210.21†10.24† 10.2510.2210.2610110.2310.2710.2410.2810.30 10.31 10.32 10.33 10.34 10.35 7710.36 10.37 10.38** 10.39** 10.40** 10.41** 10.42** 10.43** 10.44** 21.1** 23.1**23.1**24.124.131.1**31.1**31.2**31.2**101.INS**101.INS**101.SCH**101.SCH**101.CAL**101.CAL**101.LAB**101.LAB**101.PRE**101.PRE**101.DEF**101.DEF**104104†Management contract or compensatory plan** Filed herewith102Not applicable.78Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.EMCORE CORPORATIONEMCORE CORPORATIONDate:Date: December 7, 20203, 2021Jeffrey Rittichier Chief Executive Officer
(Principal Executive Officer)Date:December 3, 2021By:Date:December 7, 2020By:Tom Minichiello Chief Financial Officer
(Principal Financial and Accounting Officer)Each person whose signature appears below constitutes and appoints and hereby authorizes Jeffrey Rittichier such person’s true and lawful attorney-in-fact, with full power of substitution or resubstitution, for such person and in his name, place and stead, in any and all capacities, to sign on such person’s behalf, individually and in each capacity stated below, any and all amendments to this Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorney-in-fact, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated, on December 7, 2020.3, 2021.SignatureTitleSignatureTitle/s/ Jeffrey Rittichier Jeffrey Rittichier /s/ Tom Minichiello Tom Minichiello /s/ Stephen L. Domenik Stephen L. Domenik /s/ Bruce E. Grooms Bruce E. Grooms /s/ Noel Heiks Noel Heiks /s/ Rex S. Jackson Rex S. Jackson 10379