UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended June 30, 20222023 |
| or |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ___ to ___ |
Commission File NumberNumber: 001-36632
EMCORE Corporation
(Exact name of registrant as specified in its charter)
| | | | | | | | |
| New Jersey | | 22-2746503 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
2015 W. Chestnut Street, Alhambra, California, 91803
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (626) 293-3400
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | |
Title of Each Classeach class | Trading Symbol | Name of Each Exchangeeach exchange on Which Registeredwhich registered |
| Common stock, no par value | EMKR | The Nasdaq Stock Market LLC | (Nasdaq Global Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ☐ Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☑ Smaller reporting company ☐ Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the E changeExchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
As of August 5, 2022,7, 2023, the number of shares outstanding of our no par value common stock totaled 37,549,905.54,160,478.
EMCORE CorporationCORPORATION
FORM 10-Q
For the Quarterly Period Ended June 30, 2022
TABLE OF CONTENTS
CAUTIONARY NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations and projections about future events and financial trends affecting the financial condition of our business. Such forward-looking statements include, in particular, projections about our future results included in our Exchange Act reports and statements about plans, strategies, business prospects, changes and trends in our business and the markets in which we operate. These forward-looking statements may be identified by the use of terms and phrases such as “anticipates,” “believes,” “can,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “targets,” “will,” “would,” and similar expressions or variations of these terms and similar phrases. Additionally, statements concerning future matters such as our expected liquidity, development of new products, enhancements, or technologies, sales levels, expense levels, expectations regarding the outcome of legal proceedings, and other statements regarding matters that are not historical are forward-looking statements. Management cautions that these forward-looking statements relate to future events or our future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance, or achievements of our business or the industries in which we operate to be materially different from those expressed or implied by any forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation the following:
•uncertainties regarding risks related to our ability to obtain capital;
•any disruptions to our operations as a result of our restructuring activities;
•costs and expenses incurred in connection with restructuring activities and anticipated operational costs savings arising from the restructuring actions;
•the effects of personnel losses;
•risks and uncertainties related to customer and vendor relationships and contractual obligations with respect to the COVID-19 pandemicshutdown of the Broadband business segment and the impactdiscontinuance of measures intendedour defense optoelectronics product line;
•risks and uncertainties related to reduce its spread onthe closing of the manufacturing support and engineering center in China;
•risks related to any potential sale of our wafer fabrication facility and/or our remaining Broadband businesses, including without limitation the failure to achieve any anticipated proceeds from any such sale or to fully realize the anticipated benefits of such a transaction, diversion of management's time and attention from our remaining businesses to the sale of such businesses, third party costs incurred by the Company related to any such transaction, and risks associated with any liabilities related to any such assets or business and operations, which is evolving and beyond our control;that are retained by the Company in any sale transaction;
•the effect of component shortages and any alternatives thereto;
•the rapidly evolving markets for our products and uncertainty regarding the development of these markets;
•our historical dependence on sales to a limited number of customers and fluctuations in the mix of products and customers in any period;
•delays and other difficulties in commercializing new products;
•the failure of new products: (a) to perform as expected without material defects, (b) to be manufactured at acceptable volumes, yields, and cost, (c) to be qualified and accepted by our customers, and (d) to successfully compete with products offered by our competitors;
•uncertainties concerning the availability and cost of commodity materials and specialized product components that we do not make internally;
•actions by competitors;
•risks and uncertainties related to the outcome of legal proceedings;
•risks and uncertainties related to applicable laws and regulations, including the impact of changes to applicable tax laws and tariff regulations;
•acquisition-related risks, including that (a) revenue and net operating results obtained from the Systron Donner Inertial, Inc. (“SDI”) business, the L3Harris Space and Navigation (“S&N”) business, or the Inertial Navigation Systems business line acquired from(“EMCORE Chicago”) of KVH Industries, Inc. (the "KVH IN Business"(“KVH”) may not meet our expectations, (b) the costs and cash expenditures for integration of the S&N business operations or the KVH IN BusinessEMCORE Chicago may be higher than expected, (c) there could be losses and liabilities arising from the acquisition of SDI, S&N, or the KVH IN BusinessEMCORE Chicago that we will not be able to recover from any source, (d) we may not recognize the anticipated synergies from the acquisition of SDI, S&N, or the KVH IN Business,EMCORE Chicago, and (e) we may not realize sufficient scale in our Navigation and Inertial Sensing product line from the SDI acquisition, the S&N acquisition, and the KVH IN BusinessEMCORE Chicago acquisition and will need to take additional steps, including making additional acquisitions, to achieve our growth objectives for this product line;
•risks related to our ability to obtain capital;
•risks related to the transition of certain of our manufacturing operations from our Beijing facility to a contract manufacturer’s facility;
•risks and uncertainties related to manufacturing and production capacitycapacity; and expansion plans related thereto; and
•other risks and uncertainties discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021,2022, as such risk factors may be amended, supplemented, or superseded from time to time by our subsequent periodic reports we file with the Securities and Exchange Commission (“SEC”).
These cautionary statements apply to all forward-looking statements wherever they appear in this Quarterly Report. Forward-looking statements are based on certain assumptions and analysis made in light of experience and perception of historical trends, current conditions, and expected future developments as well as other factors that we believe are appropriate under the
circumstances. While these statements represent judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results. All forward-looking statements in this Quarterly Report are made as of the date hereof, based on information available to us as of the date hereof, and subsequent facts or circumstances may contradict, obviate, undermine, or otherwise fail to support or substantiate such statements. We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.2022. Certain information included in this Quarterly Report may supersede or supplement forward-looking statements in our other reports filed with the SEC. We do not intend to update any forward-looking statement to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial InformationStatements (Unaudited)
ITEM 1. Financial Statements
EMCORE CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive (Loss) IncomeCONDENSED CONSOLIDATED BALANCE SHEETS
For the three and nine months ended June 30, 2022 and 2021
(in thousands, except per share data)
(unaudited)(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Nine Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenue | $ | 23,675 | | | $ | 42,658 | | | $ | 98,561 | | | $ | 114,490 | |
| Cost of revenue | 19,777 | | | 25,433 | | | 69,849 | | | 70,059 | |
| Gross profit | 3,898 | | | 17,225 | | | 28,712 | | | 44,431 | |
| Operating expense: | | | | | | | |
| Selling, general, and administrative | 7,800 | | | 6,081 | | | 22,550 | | | 17,941 | |
| Research and development | 4,513 | | | 4,500 | | | 13,675 | | | 12,567 | |
| Severance | — | | | — | | | 1,318 | | | — | |
| (Gain) loss on sale of assets | (1,318) | | | 250 | | | (1,919) | | | 439 | |
| Total operating expense | 10,995 | | | 10,831 | | | 35,624 | | | 30,947 | |
| Operating (loss) income | (7,097) | | | 6,394 | | | (6,912) | | | 13,484 | |
| Other (expense) income: | | | | | | | |
| Gain on extinguishment of debt | — | | | 6,561 | | | — | | | 6,561 | |
| Interest income (expense), net | 9 | | | 579 | | | (14) | | | 481 | |
| Foreign exchange (loss) gain | (185) | | | 87 | | | (160) | | | 256 | |
| Pension expense | (349) | | | — | | | (349) | | | — | |
| Total other (expense) income | (525) | | | 7,227 | | | (523) | | | 7,298 | |
| (Loss) income before income tax expense | (7,622) | | | 13,621 | | | (7,435) | | | 20,782 | |
| Income tax expense | (27) | | | (6) | | | (25) | | | (214) | |
| Net (loss) income | $ | (7,649) | | | $ | 13,615 | | | $ | (7,460) | | | $ | 20,568 | |
| Foreign exchange translation adjustment | 69 | | | (5) | | | 91 | | | (26) | |
| Comprehensive (loss) income | $ | (7,580) | | | $ | 13,610 | | | $ | (7,369) | | | $ | 20,542 | |
| Per share data | | | | | | | |
| Net (loss) income per basic share | $ | (0.20) | | | $ | 0.37 | | | $ | (0.20) | | | $ | 0.62 | |
| Weighted-average number of basic shares outstanding | 37,425 | | | 36,768 | | | 37,197 | | | 33,069 | |
| Net (loss) income per diluted share | $ | (0.20) | | | $ | 0.35 | | | $ | (0.20) | | | $ | 0.59 | |
| Weighted-average number of diluted shares outstanding | 37,425 | | | 38,893 | | | 37,197 | | | 34,777 | |
| | | | | | | | | | | |
| (in thousands) | June 30, 2023 | | September 30, 2022 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 19,717 | | | $ | 25,625 | |
| Restricted cash | 495 | | | 520 | |
| Accounts receivable, net of credit loss of $363 and $337, respectively | 17,451 | | | 18,073 | |
| Contract assets | 5,163 | | | 4,560 | |
| Inventory | 35,833 | | | 37,035 | |
| Prepaid expenses | 3,378 | | | 4,061 | |
| Other current assets | 2,431 | | | 3,063 | |
| Total current assets | 84,468 | | | 92,937 | |
| Property, plant, and equipment, net | 24,388 | | | 37,867 | |
| Goodwill | 19,043 | | | 17,894 | |
| Operating lease right-of-use assets | 26,534 | | | 23,243 | |
| Other intangible assets, net | 15,294 | | | 14,790 | |
| Other non-current assets | 2,326 | | | 2,351 | |
| Total assets | $ | 172,053 | | | $ | 189,082 | |
| LIABILITIES and SHAREHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 11,164 | | | $ | 12,729 | |
| Accrued expenses and other current liabilities | 10,775 | | | 8,124 | |
| Contract liabilities | 1,359 | | | 5,300 | |
| Loan payable - current | 852 | | | 852 | |
| Operating lease liabilities - current | 2,740 | | | 2,213 | |
| Total current liabilities | 26,890 | | | 29,218 | |
| Line of credit | 6,485 | | | 9,599 | |
| Loan payable - non-current | 4,403 | | | 5,042 | |
| Operating lease liabilities - non-current | 24,737 | | | 21,625 | |
| Asset retirement obligations | 4,143 | | | 4,664 | |
| Other long-term liabilities | 8 | | | 106 | |
| Total liabilities | 66,666 | | | 70,254 | |
| Commitments and contingencies (Note 13) | | | |
| Shareholders’ equity: | | | |
| Common stock, no par value, 100,000 shares authorized; 61,059 shares issued and 54,153 shares outstanding as of June 30, 2023; 44,497 shares issued and 37,591 shares outstanding as of September 30, 2022 | 807,605 | | | 787,347 | |
| Treasury stock at cost; 6,906 shares as of June 30, 2023 and September 30, 2022 | (47,721) | | | (47,721) | |
| Accumulated other comprehensive income | 1,380 | | | 1,301 | |
| Accumulated deficit | (655,877) | | | (622,099) | |
| Total shareholders’ equity | 105,387 | | | 118,828 | |
| Total liabilities and shareholders’ equity | $ | 172,053 | | | $ | 189,082 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
EMCORE CORPORATION
Condensed Consolidated Balance SheetsCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
As of June 30, 2022 and September 30, 2021
(in thousands)
(unaudited)(Unaudited)
| | | | | | | | | | | |
| As of |
| June 30, 2022 | | September 30, 2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 74,609 | | | $ | 71,621 | |
| Restricted cash | 520 | | | 61 | |
| Accounts receivable, net of credit loss of $267 and $260, respectively | 24,287 | | | 31,849 | |
| Contract assets | 7,439 | | | 361 | |
| Inventory | 29,206 | | | 32,309 | |
| Prepaid expenses and other current assets | 6,471 | | | 6,877 | |
| Assets held for sale | 480 | | | 1,241 | |
| Total current assets | 143,012 | | | 144,319 | |
| Property, plant, and equipment, net | 26,079 | | | 22,544 | |
| Goodwill | 354 | | | 69 | |
| Operating lease right-of-use assets | 20,938 | | | 13,489 | |
| Other intangible assets, net | 1,548 | | | 167 | |
| Other non-current assets | 1,592 | | | 225 | |
| Total assets | $ | 193,523 | | | $ | 180,813 | |
| LIABILITIES and SHAREHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 13,335 | | | $ | 16,686 | |
| Accrued expenses and other current liabilities | 11,651 | | | 9,568 | |
| Contract liabilities | 9,042 | | | 368 | |
| Operating lease liabilities - current | 2,156 | | | 1,198 | |
| Total current liabilities | 36,184 | | | 27,820 | |
| Operating lease liabilities - non-current | 19,240 | | | 12,684 | |
| Asset retirement obligations | 4,516 | | | 2,049 | |
| Other long-term liabilities | 9 | | | 794 | |
| Total liabilities | 59,949 | | | 43,347 | |
| Commitments and contingencies (Note 11) | 0 | | 0 |
| Shareholders’ equity: | | | |
| Common stock, no par value, 50,000 shares authorized; 44,449 shares issued and 37,543 shares outstanding as of June 30, 2022; 43,890 shares issued and 36,984 shares outstanding as of September 30, 2021 | 785,743 | | | 782,266 | |
| Treasury stock at cost; 6,906 shares as of June 30, 2022 and September 30, 2021 | (47,721) | | | (47,721) | |
| Accumulated other comprehensive income | 778 | | | 687 | |
| Accumulated deficit | (605,226) | | | (597,766) | |
| Total shareholders’ equity | 133,574 | | | 137,466 | |
| Total liabilities and shareholders’ equity | $ | 193,523 | | | $ | 180,813 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
(in thousands, except per share data) | 2023 | | 2022 | | 2023 | | 2022 |
| Revenue | $ | 26,698 | | | $ | 23,675 | | | $ | 78,471 | | $ | 98,561 |
| Cost of revenue | 23,198 | | | 19,777 | | | 68,201 | | 69,849 |
| Gross profit | 3,500 | | | 3,898 | | | 10,270 | | 28,712 |
| Operating expense: | | | | | | | |
| Selling, general, and administrative | 6,452 | | | 7,800 | | | 26,347 | | 22,550 |
| Research and development | 5,171 | | | 4,513 | | | 16,319 | | 13,675 |
| Severance | 1,838 | | | — | | | 2,296 | | | 1,318 | |
| Gain on sale of assets | — | | | (1,318) | | | (1,147) | | (1,919) |
| Total operating expense | 13,461 | | | 10,995 | | | 43,815 | | 35,624 |
| Operating loss | (9,961) | | (7,097) | | (33,545) | | (6,912) |
| Other income (expense): | | | | | | | |
| Interest (expense) income, net | (219) | | | 9 | | | (682) | | | (14) |
| Foreign exchange gain (loss) | 321 | | | (185) | | | 442 | | | (160) |
| Other income (expense) | 31 | | | (349) | | | 184 | | (349) |
| Total other income (expense) | 133 | | | (525) | | | (56) | | (523) |
| Loss before income tax expense | (9,828) | | (7,622) | | (33,601) | | (7,435) |
| Income tax expense | (29) | | | (27) | | | (177) | | | (25) | |
| Net loss | $ | (9,857) | | | $ | (7,649) | | | $ | (33,778) | | $ | (7,460) |
| Foreign exchange translation adjustment | (134) | | | 69 | | | (79) | | | 91 | |
| Comprehensive loss | $ | (9,991) | | | $ | (7,580) | | | $ | (33,857) | | $ | (7,369) |
| Per share data: | | | | | | | |
| Net loss per basic share | $ | (0.18) | | | $ | (0.20) | | | $ | (0.74) | | $ | (0.20) | |
| Weighted-average number of basic shares outstanding | 53,926 | | | 37,425 | | | 45,546 | | 37,197 |
| Net loss per diluted share | $ | (0.18) | | | $ | (0.20) | | | $ | (0.74) | | $ | (0.20) | |
| Weighted-average number of diluted shares outstanding | 53,926 | | | 37,425 | | | 45,546 | | 37,197 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
EMCORE CORPORATION
Condensed Consolidated Statements of Shareholders’ EquityCONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the three and nine months ended June 30, 2022 and 2021
(in thousands)
(unaudited)(Unaudited)
| | | For the Three Months Ended June 30, | | For the Nine Months Ended June 30, | | | Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 | | |
(in thousands) | | (in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Shares of common stock | Shares of common stock | | | | | | | | | Shares of common stock | | | | | | | |
| Balance, beginning of period | Balance, beginning of period | 37,395 | | | 36,775 | | | 36,984 | | | 29,551 | | | Balance, beginning of period | 53,884 | | | 37,395 | | | 37,591 | | | 36,984 | |
| Stock-based compensation | Stock-based compensation | 148 | | | 101 | | | 553 | | | 534 | | | Stock-based compensation | 269 | | | 148 | | | 1,107 | | | 553 | |
| Stock option exercises | Stock option exercises | — | | | 5 | | | 6 | | | 15 | | | Stock option exercises | — | | | — | | | — | | | 6 | |
| Issuance of common stock - ESPP | — | | | — | | | — | | | 126 | | | |
| Sale of common stock | Sale of common stock | — | | | — | | | — | | | 6,655 | | | Sale of common stock | — | | | — | | | 15,455 | | | — | |
| Balance, end of period | Balance, end of period | 37,543 | | | 36,881 | | | 37,543 | | | 36,881 | | | Balance, end of period | 54,153 | | | 37,543 | | | 54,153 | | | 37,543 | |
| Value of common stock | Value of common stock | | | | | | | | | Value of common stock | | | | | | | |
| Balance, beginning of period | Balance, beginning of period | $ | 784,371 | | | $ | 779,681 | | | $ | 782,266 | | | $ | 744,361 | | | Balance, beginning of period | $ | 806,100 | | | $ | 784,371 | | | $ | 787,347 | | | $ | 782,266 | |
| Stock-based compensation | Stock-based compensation | 1,523 | | | 1,176 | | | 3,755 | | | 3,010 | | | Stock-based compensation | 1,713 | | | 1,523 | | | 4,982 | | | 3,755 | |
| Stock option exercises | Stock option exercises | — | | | 31 | | | 29 | | | 77 | | | Stock option exercises | — | | | — | | | — | | | 29 | |
| Tax withholding paid on behalf of employees for stock-based awards | Tax withholding paid on behalf of employees for stock-based awards | (151) | | | (112) | | | (307) | | | (195) | | | Tax withholding paid on behalf of employees for stock-based awards | (17) | | | (151) | | | (161) | | | (307) | |
| Issuance of common stock - ESPP | — | | | — | | | — | | | 382 | | | |
| Sale of common stock, net of offering costs | — | | | — | | | — | | | 33,141 | | | |
| Sale of common stock | | Sale of common stock | (191) | | | — | | | 15,437 | | | — | |
| Balance, end of period | Balance, end of period | 785,743 | | | 780,776 | | | 785,743 | | | 780,776 | | | Balance, end of period | 807,605 | | | 785,743 | | | 807,605 | | | 785,743 | |
| Treasury stock, beginning and ending of period | (47,721) | | | (47,721) | | | (47,721) | | | (47,721) | | | |
| Treasury stock, beginning and end of period | | Treasury stock, beginning and end of period | (47,721) | | | (47,721) | | | (47,721) | | | (47,721) | |
| Accumulated other comprehensive income | Accumulated other comprehensive income | | | | | | | | | Accumulated other comprehensive income | | | | | | | |
| Balance, beginning of period | Balance, beginning of period | 709 | | | 897 | | | 687 | | | 918 | | | Balance, beginning of period | 1,246 | | | 709 | | | 1,301 | | | 687 | |
| Translation adjustment | Translation adjustment | 69 | | | (5) | | | 91 | | | (26) | | | Translation adjustment | 134 | | | 69 | | | 79 | | | 91 | |
| Balance, end of period | Balance, end of period | 778 | | | 892 | | | 778 | | | 892 | | | Balance, end of period | 1,380 | | | 778 | | | 1,380 | | | 778 | |
| Accumulated deficit | Accumulated deficit | | | | | | | | | Accumulated deficit | | | | | | | |
| Balance, beginning of period | Balance, beginning of period | (597,577) | | | (616,456) | | | (597,766) | | | (623,409) | | | Balance, beginning of period | (646,020) | | | (597,577) | | | (622,099) | | | (597,766) | |
| Net (loss) income | (7,649) | | | 13,615 | | | (7,460) | | | 20,568 | | | |
| Net loss | | Net loss | (9,857) | | | (7,649) | | | (33,778) | | | (7,460) | |
| Balance, end of period | Balance, end of period | (605,226) | | | (602,841) | | | (605,226) | | | (602,841) | | | Balance, end of period | (655,877) | | | (605,226) | | | (655,877) | | | (605,226) | |
| Total shareholders’ equity | Total shareholders’ equity | $ | 133,574 | | | $ | 131,106 | | | $ | 133,574 | | | $ | 131,106 | | | Total shareholders’ equity | $ | 105,387 | | | $ | 133,574 | | | $ | 105,387 | | | $ | 133,574 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
EMCORE CORPORATION
Condensed Consolidated Statements of Cash FlowsCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 2022 and 2021
(in thousands)
(unaudited)(Unaudited)
| | | For the Nine Months Ended June 30, | | | Nine Months Ended June 30, | |
| 2022 | | 2021 | | |
(in thousands) | | (in thousands) | 2023 | | 2022 | |
| Cash flows from operating activities: | Cash flows from operating activities: | | | | | Cash flows from operating activities: | | | | |
| Net (loss) income | $ | (7,460) | | | $ | 20,568 | | | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Net loss | | Net loss | $ | (33,778) | | | $ | (7,460) | | |
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | |
| Depreciation and amortization expense | Depreciation and amortization expense | 3,292 | | | 3,053 | | | Depreciation and amortization expense | 6,496 | | | 3,292 | | |
| Stock-based compensation expense | Stock-based compensation expense | 3,755 | | | 3,010 | | | Stock-based compensation expense | 4,982 | | | 3,755 | | |
| Provision adjustments related to credit loss | Provision adjustments related to credit loss | 187 | | | (35) | | | Provision adjustments related to credit loss | 25 | | | 187 | | |
| Provision adjustments related to product warranty | Provision adjustments related to product warranty | 174 | | | 313 | | | Provision adjustments related to product warranty | (57) | | | 174 | | |
| (Gain) loss on disposal of property, plant, and equipment | (1,919) | | | 439 | | | |
| Gain on disposal of property, plant, and equipment | | Gain on disposal of property, plant, and equipment | (1,147) | | | (1,919) | | |
| Other | Other | 299 | | | (396) | | | Other | 124 | | | 299 | | |
| Total non-cash adjustments | | Total non-cash adjustments | 10,423 | | | 5,788 | | |
| Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | | Changes in operating assets and liabilities: | | |
| Accounts receivable and contract assets | Accounts receivable and contract assets | 7,306 | | | (4,827) | | | Accounts receivable and contract assets | (7) | | | 7,306 | | |
| Inventory | Inventory | 3,380 | | | (7,395) | | | Inventory | (2,158) | | | 3,380 | | |
| Other assets | Other assets | (5,263) | | | (345) | | | Other assets | (2,000) | | | (5,263) | | |
| Accounts payable | Accounts payable | (4,706) | | | 1,423 | | | Accounts payable | (1,230) | | | (4,706) | | |
| Accrued expenses and other current liabilities | 6,941 | | | (9,116) | | | |
| Contract liabilities | Contract liabilities | 2,650 | | | (124) | | | Contract liabilities | (3,941) | | | 2,650 | | |
| Operating lease liabilities - current | Operating lease liabilities - current | (487) | | | 161 | | | Operating lease liabilities - current | 527 | | | (487) | | |
| Net cash provided by operating activities | 8,149 | | | 6,729 | | | |
| Accrued expenses and other liabilities | | Accrued expenses and other liabilities | 5,729 | | | 6,941 | | |
| Total change in operating assets and liabilities | | Total change in operating assets and liabilities | (3,080) | | | 9,821 | | |
| Net cash (used in) provided by operating activities | | Net cash (used in) provided by operating activities | (26,435) | | | 8,149 | | |
| Cash flows from investing activities: | Cash flows from investing activities: | | | Cash flows from investing activities: | | | | |
| Purchase of equipment | Purchase of equipment | (4,743) | | | (3,004) | | | Purchase of equipment | (2,026) | | | (4,743) | | |
| Proceeds from disposal of property, plant, and equipment | Proceeds from disposal of property, plant, and equipment | 2,820 | | | 582 | | | Proceeds from disposal of property, plant, and equipment | 10,915 | | | 2,820 | | |
| Acquisition of business | (2,439) | | | — | | | |
| Net cash used in investing activities | (4,362) | | | (2,422) | | | |
| Acquisition of business, net of cash acquired | | Acquisition of business, net of cash acquired | 96 | | | (2,439) | | |
| Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | 8,985 | | | (4,362) | | |
| Cash flows from financing activities: | Cash flows from financing activities: | | | Cash flows from financing activities: | | | | |
| Proceeds from employee stock purchase plan and equity awards | 29 | | | 451 | | | |
| Proceeds from borrowings from line of credit | | Proceeds from borrowings from line of credit | 393 | | | — | | |
| Payments towards line of credit | | Payments towards line of credit | (3,507) | | | — | | |
| Payments towards note payable | | Payments towards note payable | (639) | | | — | | |
| Proceeds from sale of common stock | Proceeds from sale of common stock | — | | | 35,937 | | | Proceeds from sale of common stock | 15,437 | | | — | | |
| Issuance cost associated with sale of common stock | — | | | (2,796) | | | |
| Proceeds from employee stock purchase plans and exercise of equity awards | | Proceeds from employee stock purchase plans and exercise of equity awards | — | | | 29 | | |
| Taxes paid related to net share settlement of equity awards | Taxes paid related to net share settlement of equity awards | (307) | | | (195) | | | Taxes paid related to net share settlement of equity awards | (161) | | | (307) | | |
| Net cash (used in) provided by financing activities | (278) | | | 33,397 | | | |
| Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 11,523 | | | (278) | | |
| Effect of exchange rate changes provided by foreign currency | Effect of exchange rate changes provided by foreign currency | (62) | | | 55 | | | Effect of exchange rate changes provided by foreign currency | (6) | | | (62) | | |
| Net increase in cash, cash equivalents, and restricted cash | 3,447 | | | 37,759 | | | |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | | Net (decrease) increase in cash, cash equivalents, and restricted cash | (5,933) | | | 3,447 | | |
| Cash, cash equivalents, and restricted cash at beginning of period | Cash, cash equivalents, and restricted cash at beginning of period | 71,682 | | | 30,538 | | | Cash, cash equivalents, and restricted cash at beginning of period | 26,145 | | | 71,682 | | |
| Cash, cash equivalents, and restricted cash at end of period | Cash, cash equivalents, and restricted cash at end of period | $ | 75,129 | | | $ | 68,297 | | | Cash, cash equivalents, and restricted cash at end of period | $ | 20,212 | | | $ | 75,129 | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | |
| Cash paid during the period for interest | Cash paid during the period for interest | $ | 40 | | | $ | 46 | | | Cash paid during the period for interest | $ | 932 | | | $ | 40 | | |
| Cash paid during the period for income taxes | Cash paid during the period for income taxes | $ | 547 | | | $ | 547 | | | Cash paid during the period for income taxes | $ | 120 | | | $ | 547 | | |
| NON-CASH INVESTING AND FINANCING ACTIVITIES | NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | |
| Changes in accounts payable related to purchases of equipment | Changes in accounts payable related to purchases of equipment | $ | (76) | | | $ | 1,026 | | | Changes in accounts payable related to purchases of equipment | $ | (373) | | | $ | (76) | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
EMCORE CorporationCORPORATION
Notes to Condensed Consolidated Financial StatementsNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Description of Business
EMCORE Corporation (referred to herein, together with its subsidiaries, as the “Company,” “we,” “our,” or “EMCORE”) is a leading provider of sensorsinertial navigation products for navigation in the aerospace and defense market as well as a manufacturermarkets. We leverage industry-leading Photonic Integrated Chip (PIC), Quartz MEMS, and Lithium Niobate chip-level technology to deliver state-of-the-art component and system-level products across our end-market applications. Over the last four years, we have expanded our scale and portfolio of lasers and optical subsystems for use in the broadband industry. We pioneered the linear fiber optic transmission technology that enabled the world’s first delivery of Cable TV (“CATV”) directly on fiber, and today are a leading provider of advancedinertial sensor products that enable communications systems and service providers to meet growing demand for increased bandwidth and connectivity. The technology at the heart of our broadband communications products is shared with our fiber optic gyroscope (“FOG”) and inertial sensors to provide the aerospace and defense markets with state-of-the-art navigation systems technology. Withthrough the acquisitions of (a) Systron Donner Inertial, Inc. (“SDI”), a navigation systems provider with a scalable, chip-based platform for higher volume gyro applications utilizing quartz micro-electromechanical system (“QMEMS”) technology, in June 2019, and (b) the L3Harris Space and Navigation (“S&N”) business of L3Harris Technologies, Inc. (“L3H”) in April 2022, we further expanded our portfolio of gyros and inertial sensors with SDI’s QMEMS gyro and accelerometer technology and S&N'sthe FOG and ring laser gyroInertial Navigation Systems business (“RLG”EMCORE Chicago”) technology.of KVH Industries, Inc. (“KVH”) in August 2022. We have fully vertically-integrated manufacturing capability through our indium phosphide (“InP”) compound semiconductor wafer fabrication facility at our headquarters in Alhambra, CA, and throughat our QMEMS processing and sensor manufacturing facilityfacilities in Budd Lake, NJ, Concord, CA, and Tinley Park, IL (the “Tinley Park Facility”). Our manufacturing facilities maintain ISO 9001 quality management certification, and we are AS9100 aerospace quality certified at our FOGheadquarters in Alhambra, CA and RLG manufacturing facilityat our facilities in Budd Lake, NJ.NJ and Concord, CA. These facilities support our vertically-integrated manufacturing strategy for QMEMS,quartz, FOG, and RLGRing Laser Gyro products for navigation systems, and, with respect to our Alhambra, CA facility, 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 is often substantially greater than traditional digital applications and requires a specialized expertise held by us which is unique in the optics industry.systems.
NOTE 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the SEC.Securities and Exchange Commission (“SEC”). Accordingly, they do not include all information and notes required by U.S. GAAP for annual financial statements. In our opinion, the interim financial statements reflect all adjustments, which are all normal recurring adjustments, that are necessary to provide a fair presentation of the financial results for the interim periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for an entire fiscal year. The condensed consolidated balance sheet as of September 30, 20212022 has been derived from the audited consolidated financial statements as of such date. For a more complete understanding of our business, financial position, operating results, cash flows, risk factors, and other matters, please refer to our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.2022.
SignificantWe follow the Financial Accounting PoliciesStandards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles-Goodwill and EstimatesOther (“ASC 350”). ASC 350 requires the completion of a goodwill impairment test at least annually based on either an optional qualitative assessment or a quantitative analysis comparing the estimated fair value of a reporting unit to its carrying value as of the test date. In the current interim period ending June 30, 2023, we have elected to change our annual test date from December 31st of each year to July 1st of each year, unless there are indications requiring a more frequent impairment test. Any impairment charges would be based on the quantitative analysis. We performed our last test at December 31, 2022 and will perform our next test on July 1, 2023.
Pension PlanGoing Concern
WithThese consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles assuming we will continue as a going concern. The going concern assumption contemplates the acquisitionrealization of S&N, we acquired the assets and assumedsatisfaction of liabilities in the liabilities associated withnormal course of business. However, substantial doubt about our ability to continue as a pension plan, now named the Emcore Space & Navigation Corporation Pension Plan (the “Pension Plan”), which is a defined benefit pension plan providing postretirement benefits to certain employees. Subsequent to quarter end, as of July 1, 2022, the Pension Plan was amended to freeze benefit plan accruals for participants.going concern exists.
The investmentsWe have recently experienced significant losses from our operations and used a significant amount of cash, amounting to a net loss of $33.8 million and net cash outflows from operations of $26.4 million for the nine months ended June 30, 2023, and we expect to continue to incur losses and use cash in our operations as we continue to restructure our business. As a result of our recent cash outflows, we have taken actions to manage our liquidity and will need to continue to manage our liquidity as we continue to restructure our operations to focus on our Aerospace & Defense business. As of June 30, 2023, our cash and cash equivalents totaled $20.2 million and we had $10.6 million available under our Credit Agreement (as defined in Note 11 - Credit Agreement in the Pension PlanNotes to Condensed Consolidated Financial Statements).
We are measured at fair value using quoted market prices evaluating the sufficiency of our existing balances of cash and cash equivalents, cash flows from operations, and amounts expected to be available under our Credit Agreement, together with additional actions we could take (including those
made in connection with our restructuring program announced in April 2023) to further reduce our expenses and/or potentially raising capital through additional debt or equity issuances, or from the net asset value per sharepotential monetization of certain assets. However, we may not be successful in executing on our plans to manage our liquidity, including recognizing the expected benefits from our previously announced restructuring program, or raising additional funds if we elect to do so, and as a practical expedient. The projected benefit obligations associated with the Pension Plan are determined based on actuarial models utilizing mortality tables and discount rates appliedresult substantial doubt about our ability to the expected benefit term.continue as a going concern exists.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. If theseSuch estimates include accounts receivable, inventories, goodwill, long-lived assets, product warranty liabilities, legal contingencies, income taxes, asset retirement obligations, and pension obligation, as well as the evaluation associated with the Company's assessment of its ability to continue as a going concern.
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. Our 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 significantly from actual results, the impactadjustments are made in subsequent periods to the condensed consolidated financial statements may be material.
Recent Accounting Pronouncements
We recently adopted the following accounting standards, which had the following impacts on our condensed consolidated financial statements:
In December 2019, the 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 loss from continuing operations and income or a gain from other items. The amendments in this update also simplify the accounting for 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 new standard was effective for our fiscal year beginning October 1, 2021. The adoption of this new standard did not have a material impact on the condensed consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which provides an exception to fair value measurement for contract assets and contract liabilities related to revenue contracts acquired in a business combination. The ASU required an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contract. The ASU is effective for the Company for our annual and interim periods beginning October 1, 2023. We early adopted this standard effective with our fiscal year beginning October 1, 2021. The early adoption of this new standard did not have a material impact on the condensed consolidated financial statements.
Other accounting standards that have been issued or proposed by FASB and do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows, or disclosures.more current information.
NOTE 3. AcquisitionAcquisitions
On April 29,August 9, 2022, we completed the acquisition of EMCORE Chicago, pursuant to which we acquired substantially all of KVH's assets and liabilities primarily related to its FOG and Inertial Navigation Systems business, including property interests in the L3Harris Technologies, Inc. (“L3H”) Space and Navigation business (“S&N”)Tinley Park Facility, for a total purchase priceaggregate consideration of approximately $5.0$55.0 million, in cash, exclusive of transaction costs and expenses and subject to certain post-closing working capital adjustments, resulting in a cash payment at closing of the acquisition of approximately $2.4 million.adjustments. Following the closing, we began integrating S&N intoEMCORE Chicago results are included in our Aerospace and DefenseA&D reportable segment and have included the financial results of S&N in our condensed consolidated financial statements beginning on the acquisition date. Revenue and net lossincome of S&N from the acquisition dateEMCORE Chicago of $4.3$9.3 million and $0.7$0.4 million, respectively, is included in our condensed consolidated statements of operations and comprehensive (loss) incomeloss for the three months ended June 30, 2023. Revenue and net income of EMCORE Chicago of $25.9 million and $2.1 million, respectively, is included in our condensed consolidated statements of operations and comprehensive loss for the nine months ended June 30, 2022.2023.
PreliminaryFinal Purchase Price Allocation
The total purchase price for the EMCORE Chicago acquisition was allocated to the assets acquired and liabilities assumed based on theirthe estimated fair values as of the acquisition date. Due toSince the fact that the acquisition, occurred in the current interim period, the Company's fair value estimates for the purchase price allocation are preliminary. The final determination of fair value for the assets acquired and liabilities assumed is subjectEMCORE Chicago changed by a $3.3 million reduction to further change and will be completed as soon as possible, but no later than one year from the acquisition date. The preliminary estimates that are not yet finalized relateinventory resulting in a corresponding increase to identifiable intangible assets and asset retirement obligations. Any changes ingoodwill acquired. Goodwill is measured as the excess of the fair valuesvalue of the assets acquired and liabilities assumed duringpurchase consideration transferred over the measurement period may result in a material adjustment to goodwill.fair value of the identifiable net assets.
The table below represents the preliminaryfinal purchase price allocation to the assets acquired and liabilities assumed of S&NEMCORE Chicago based on their estimated fair values as of the acquisition date based on management’s best estimates and assumptions:
| | | | | |
| (in thousands) | Amount |
| Tangible assets acquired: | |
| Accounts receivable | $ | 8034,977 | |
| Inventory | 3707,479 | |
ContractPrepaid expenses and other current assets | 6,206 | |
Operating lease right-of-use assets | 1,5291,483 | |
| Property, plant, and equipment | 1,996 | |
Net pension benefit assets | 1,72714,442 | |
| Intangible assets acquired | 1,46013,470 | |
| Goodwill | 28515,867 | |
| Liabilities assumed: | |
Accounts payable and accrued | (1,699) | |
| Accrued expenses | (1,848)(485) | |
| Contract liabilities | (6,024)(637) | |
Operating leaseOther long-term liabilities | (1,565) | |
Asset retirement obligations | (2,500)(8) | |
| Total purchase consideration | $ | 2,43954,889 | |
Included in intangible assets acquired are customer relationships of $3.0 million, technology of $2.4 million, in-process research and development of $5.9 million, and trademarks of $2.2 million.
For the three and nine months ended June 30, 2022,2023, the Company incurred transitional and transaction costs of approximately $0.3 million and $0.8$3.6 million, respectively, in connection with the S&N acquisition,and EMCORE Chicago acquisitions, which were expensed as incurred and included in selling, general, and administrative (“SG&A”) expenses within the accompanying condensed consolidated statements of operations and comprehensive (loss) income.loss. Goodwill from the acquisition totaled $15.9 million which is 83.3% of total goodwill.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presented for the three and nine months ended June 30, 2022 does not purport to be indicative of the results of operations that would have been achieved had the EMCORE Chicago acquisition been consummated on October 1, 2021, 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| Historical | | | | |
| (in thousands, except per share data) | EMCORE Corporation
(excluding EMCORE Chicago) | | EMCORE Chicago | | Pro Forma Adjustments | | Pro Forma Combined |
| Revenue | $ | 23,675 | | | $ | 7,698 | | | $ | — | | | $ | 31,373 | |
| Cost of revenue | 19,777 | | | 5,827 | | | 171 | | (a) | 25,775 | |
| Gross profit | 3,898 | | | 1,871 | | | (171) | | | 5,598 | |
| Operating expense: | | | | | | | |
| Selling, general, and administrative | 7,800 | | | 2,905 | | | (1,026) | | (a)(b) | 9,679 | |
| Research and development | 4,513 | | | 1,443 | | | (264) | | (a)(b) | 5,692 | |
| Severance | — | | | — | | | — | | | — | |
| Gain on sale of assets | (1,318) | | | — | | | — | | | (1,318) | |
| Total operating expense | 10,995 | | | 4,348 | | | (1,290) | | | 14,053 | |
| Operating loss | (7,097) | | | (2,477) | | | 1,119 | | | (8,455) | |
| Other expense: | | | | | | | |
| Interest income, net | 9 | | | — | | | 318 | | (c) | 327 | |
| Foreign exchange loss | (185) | | | — | | | — | | | (185) | |
| Other expense | (349) | | | 34 | | | — | | | (315) | |
| Total other expense | (525) | | | 34 | | | 318 | | | (173) | |
| Loss before income tax expense | (7,622) | | | (2,443) | | | 1,437 | | | (8,628) | |
| Income tax expense | (27) | | | (13) | | | (6) | | (d)(e) | (46) | |
| Net loss | (7,649) | | | (2,456) | | | 1,431 | | | (8,674) | |
| Foreign exchange translation adjustment | 69 | | | — | | | — | | | 69 | |
| Comprehensive loss | $ | (7,580) | | | $ | (2,456) | | | 1,431 | | | $ | (8,605) | |
| Per share data: | | | | | | | |
| Net loss per basic share | $ | (0.20) | | | | | $ | — | | | $ | (0.23) | |
| Weighted-average number of basic shares outstanding | 37,425 | | | | | — | | | 37,425 | |
| Net loss per diluted share | $ | (0.20) | | | | | $ | — | | | $ | (0.23) | |
| Weighted-average number of diluted shares outstanding | 37,425 | | | | | — | | | 37,425 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, 2022 |
| Historical | | | | |
| (in thousands, except per share data) | EMCORE Corporation
(excluding EMCORE Chicago) | | EMCORE Chicago | | Pro Forma Adjustments | | Pro Forma Combined |
| Revenue | $ | 98,561 | | | $ | 23,094 | | | $ | — | | | $ | 121,655 | |
| Cost of revenue | 69,849 | | | 17,482 | | | 512 | | (a) | 87,843 | |
| Gross profit | 28,712 | | | 5,612 | | | (512) | | | 33,812 | |
| Operating expense: | | | | | | | |
| Selling, general, and administrative | 22,550 | | | 8,329 | | | (3,077) | | (a)(b) | 27,802 | |
| Research and development | 13,675 | | | 4,330 | | | (793) | | (a)(b) | 17,212 | |
| Severance | 1,318 | | | — | | | — | | | 1,318 | |
| Gain on sale of assets | (1,919) | | | — | | | — | | | (1,919) | |
| Total operating expense | 35,624 | | | 12,659 | | | (3,870) | | | 44,413 | |
| Operating loss | (6,912) | | | (7,047) | | | 3,358 | | | (10,601) | |
| Other expense: | | | | | | | |
| Interest expense, net | (14) | | | — | | | 954 | | (c) | 940 | |
| Foreign exchange loss | (160) | | | — | | | — | | | (160) | |
| Other expense | (349) | | | 102 | | | — | | | (247) | |
| Total other expense | (523) | | | 102 | | | 954 | | | 533 | |
| Loss before income tax expense | (7,435) | | | (6,945) | | | 4,312 | | | (10,068) | |
| Income tax expense | (25) | | | (38) | | | (17) | | (d)(e) | (80) | |
| Net loss | (7,460) | | | (6,983) | | | 4,295 | | | (10,148) | |
| Foreign exchange translation adjustment | 91 | | | — | | | — | | | 91 | |
| Comprehensive loss | $ | (7,369) | | | $ | (6,983) | | | 4,295 | | | $ | (10,057) | |
| Per share data: | | | | | | | |
| Net loss per basic share | $ | (0.20) | | | | | $ | — | | | $ | (0.27) | |
| Weighted-average number of basic shares outstanding | 37,197 | | | | | — | | | 37,197 | |
| Net loss per diluted share | $ | (0.20) | | | | | $ | — | | | $ | (0.27) | |
| Weighted-average number of diluted shares outstanding | 37,197 | | | | | — | | | 37,197 | |
(a) Reflects the impact to depreciation expense and amortization expense as a result of the change in fair value of property, plant, and equipment and intangible assets acquired.
(b) Reflects the deduction of various sales, general, and administrative and research and development expenses allocated from corporate overhead to EMCORE Chicago during the periods presented that will not be incurred on an ongoing basis as a result of existing EMCORE management structures in place, which will provide the same support to EMCORE Chicago upon completion of a transition services agreement entered into between EMCORE and KVH in connection with the EMCORE Chicago acquisition. Amounts were estimated based on historical allocation included in the stand-alone financial statements of EMCORE Chicago. However, actual costs to be incurred associated with corporate support may vary under the EMCORE structure.
(c) Reflects the impact of interest expense related to cash from borrowing facility for funding of the transaction.
(d) Reflects the current tax expense due to additional income and deferred income tax expense related to deferred tax liability generated from annual tax amortization of indefinite-lived assets that were acquired for the periods presented. Such amounts were determined based on the effective tax rate of EMCORE rather than statutory tax rates as a result of a tax valuation allowance covering substantially all deferred tax assets and the existence of tax loss carryforwards present at both entities.
(e) Reflects the deduction of the income tax expense related to the FIN 48 liability of EMCORE Chicago that is not assumed by EMCORE.
NOTE 4. Cash, Cash Equivalents, and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total of the same amounts shown in the unaudited condensed consolidated statements of cash flows:
| | | | | | | | | | | |
| As of |
| (in thousands) | June 30, 2022 | | September 30, 2021 |
| Cash | $ | 19,482 | | | $ | 16,547 | |
| Cash equivalents | 55,127 | | | 55,074 | |
| Restricted cash | 520 | | | 61 | |
| Total cash, cash equivalents, and restricted cash | $ | 75,129 | | | $ | 71,682 | |
The balance of restricted cash as of June 30, 2022 increased from September 30, 2021 due to an additional reserve related to our workers' compensation insurance policy. A reserve was taken as of June 30, 2022 in lieu of a corresponding letter of credit that was previously in place under our Credit and Security Agreement with Wells Fargo Bank, N.A., which terminated in May 2022 pursuant to its terms. | | | | | | | | | | | |
| (in thousands) | June 30, 2023 | | September 30, 2022 |
| Cash | $ | 13,936 | | | $ | 20,011 | |
| Cash equivalents | 5,781 | | | 5,614 | |
| Restricted cash | 495 | | | 520 | |
| Total cash, cash equivalents, and restricted cash | $ | 20,212 | | | $ | 26,145 | |
NOTE 5. Accounts Receivable, net
The components of accounts receivable, net consisted of the following:
| | | As of | | | | | | | | | | |
| (in thousands) | (in thousands) | June 30, 2022 | | September 30, 2021 | (in thousands) | June 30, 2023 | | September 30, 2022 |
| Accounts receivable, gross | Accounts receivable, gross | $ | 24,554 | | | $ | 32,109 | | Accounts receivable, gross | $ | 17,814 | | | $ | 18,410 | |
| Allowance for credit loss | Allowance for credit loss | (267) | | | (260) | | Allowance for credit loss | (363) | | | (337) | |
| Accounts receivable, net | Accounts receivable, net | $ | 24,287 | | | $ | 31,849 | | Accounts receivable, net | $ | 17,451 | | | $ | 18,073 | |
NOTE 6. Inventory
The components of inventory consisted of the following:
| | | As of | | | | | | | | | | |
| (in thousands) | (in thousands) | June 30, 2022 | | September 30, 2021 | (in thousands) | June 30, 2023 | | September 30, 2022 |
| Raw materials | Raw materials | $ | 15,217 | | | $ | 16,146 | | Raw materials | $ | 21,714 | | | $ | 22,927 | |
| Work in-process | Work in-process | 10,716 | | | 11,410 | | Work in-process | 9,005 | | | 9,587 |
| Finished goods | Finished goods | 3,273 | | | 4,753 | | Finished goods | 5,114 | | | 4,521 |
| Inventory | Inventory | $ | 29,206 | | | $ | 32,309 | | Inventory | $ | 35,833 | | | $ | 37,035 | |
NOTE 7. Property, Plant, and Equipment, net
The components of property, plant, and equipment, net consisted of the following:
| | | As of | | | | | | | | | | |
| (in thousands) | (in thousands) | June 30, 2022 | | September 30, 2021 | (in thousands) | June 30, 2023 | | September 30, 2022 |
| Land | | Land | $ | — | | | $ | 995 | |
| Building | | Building | — | | | 8,805 | |
| Equipment | Equipment | $ | 42,932 | | | $ | 37,985 | | Equipment | 47,711 | | | 42,330 | |
| Furniture and fixtures | Furniture and fixtures | 1,380 | | | 1,125 | | Furniture and fixtures | 1,571 | | | 1,394 | |
| Computer hardware and software | Computer hardware and software | 3,589 | | | 3,575 | | Computer hardware and software | 3,377 | | | 3,378 | |
| Leasehold improvements | Leasehold improvements | 7,186 | | | 6,663 | | Leasehold improvements | 9,794 | | | 7,180 | |
| Construction in progress | Construction in progress | 8,956 | | | 9,247 | | Construction in progress | 3,278 | | | 9,886 | |
| Property, plant, and equipment, gross | Property, plant, and equipment, gross | $ | 64,043 | | | $ | 58,595 | | Property, plant, and equipment, gross | $ | 65,731 | | | $ | 73,968 | |
| Accumulated depreciation | Accumulated depreciation | (37,964) | | | (36,051) | | Accumulated depreciation | (41,343) | | | (36,101) | |
| Property, plant, and equipment, net | Property, plant, and equipment, net | $ | 26,079 | | | $ | 22,544 | | Property, plant, and equipment, net | $ | 24,388 | | | $ | 37,867 | |
During the fiscal year ended September 30, 2020, the Company entered into agreements to sell equipment and these assets were reclassified to assets held for sale. The balance as of June 30, 2022 and September 30, 2021 was $0.5Depreciation expense totaled $2.4 million and $1.2$5.4 million respectively. The balance of assets held for sale will be sold induring the quarter ending September 30, 2022. During the three and nine months ended June 30, 20222023, respectively and 2021, the Company sold certain equipment and recognized a (gain) loss on sale of assets of $(1.3)$1.2 million and $0.3$3.2 million during the three and nine months ended June 30, 2022, respectively. During the nine months ended June 30, 2022 and 2021,2023, the Company consummated the sale of the real property interests in the Tinley Park Facility to 8400 W 185TH STREET INVESTORS, LLC, resulting in net proceeds of approximately $10.3 million and a gain on sale of assets of
$1.2 million. During the three and nine months ended June 30, 2022, we sold certain equipment and recognizedincurred a (gain) lossgain on sale of assets of $(1.9)$1.3 million and $0.4$1.9 million, respectively.
During the quarter ended September 30, 2022, there was a triggering event of negative cash flows and operating losses at the FOG asset group level within the Inertial Navigation product line of the A&D segment that indicated the carrying amounts of our long-lived assets may not be recoverable. In accordance with ASC 360, with regard to our long-lived assets, we performed an undiscounted cash flow analysis and concluded that the carrying value of the asset group was not recoverable. Accordingly, we then performed an analysis to estimate the fair value of the other long-lived assets and recognized an impairment charge within operating expenses of $3.0 million against the FOG property, plant, and equipment by the amount by which the carrying value of the asset group's other long-lived assets exceeded their estimated fair value for the fiscal year ended September 30, 2022. Key assumptions utilized in the determination of fair value include expected future cash flows and working capital requirements. While we believe the expectations and assumptions about the future are reasonable, they are inherently uncertain.
During the quarter ended June 30, 2023, the Company announced a restructuring program which caused the Company to accelerate depreciation on the Broadband segment and defense optoelectronics assets to an end-of-life date of December 2023, resulting in depreciation expense of $0.8 million for each of the three and nine months ended June 30, 2023.
Geographical Concentrations
Long-lived assets consist of land, building, property, plant, and equipment. As of June 30, 20222023 and September 30, 2021, 93%2022, 95.4% and 96%95.4%, respectively, of our long-lived assets were located in the United States. The remaining long-lived assets are primarily located in Thailand. The increase in long-lived assets in Thailand was a result of consigning additional equipment in CIP for production purposes for use predominantly in the CATV Lasers and Transmitters product line.
NOTE 8. Intangible Assets and Goodwill
Intangible assets arose from the acquisition of SDI in fiscal year 2019 and the acquisitions of S&N and EMCORE Chicago in fiscal year 2022 and are reported within the A&D segment. Definite-lived intangible assets are amortized on a straight-line basis over the estimated useful life of: (a) 7.0 years for patents, (b) 8.0 years for customer relationships, and (c) 2.0-8.0 years for technology. In-process research and development (“IPR&D”) is indefinite-lived until completion of the related development project, at which point amortization of the carrying value of the technology will commence. Trademarks are indefinite-lived.
The following table summarizes changes in intangible assets, net:
| | | | | | | | | | | |
| (in thousands) | June 30, 2023 | | September 30, 2022 |
| Balance at beginning of period | $ | 14,790 | | | $ | 167 | |
| Changes from acquisition | 1,470 | | 14,740 |
| Amortization | (966) | | | (117) | |
| Balance at end of period | $ | 15,294 | | | $ | 14,790 | |
The weighted average remaining useful lives by definite-lived intangible asset category are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 |
| (in thousands, except weighted average remaining life) | Weighted Average Remaining Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| Technology | 2.7 | | $ | 11,001 | | | $ | (8,750) | | | $ | 2,251 | |
| Customer relationships | 3.8 | | 4,690 | | | (527) | | | 4,163 | |
| Definite-lived intangible assets total | | | $ | 15,691 | | | $ | (9,277) | | | $ | 6,414 | |
As of June 30, 2023, IPR&D and trademarks were approximately $6.7 million and $2.2 million, respectively.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| (in thousands, except weighted average remaining life) | Weighted Average Remaining Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| Technology | 5.4 | | $ | 10,991 | | | $ | (8,261) | | | $ | 2,730 | |
| Customer relationships | 4.6 | | 3,260 | | | (50) | | | 3,210 | |
| Definite-lived intangible assets total | | | $ | 14,251 | | | $ | (8,311) | | | $ | 5,940 | |
As of September 30, 2022, IPR&D and trademarks were approximately $6.7 million and $2.2 million, respectively.
Estimated future amortization expense for intangible assets recorded by the Company as of June 30, 2023 is as follows:
| | | | | |
| (in thousands) | Amount |
| 2023 | $ | 309 | |
| 2024 | 1,218 | |
| 2025 | 1,192 | |
| 2026 | 790 | |
| 2027 | 766 | |
| Thereafter | 2,139 | |
| Total amortization expense | $ | 6,414 | |
Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. None of the Company's goodwill is deductible for tax purposes. The following table summarizes changes in goodwill:
| | | | | | | | | | | |
| (in thousands) | June 30, 2023 | | September 30, 2022 |
| Balance at beginning of period | $ | 17,894 | | | $ | 69 | |
| Adjustments to preliminary purchase price allocation | 1,149 | | | 17,825 |
| Balance at end of period | $ | 19,043 | | | $ | 17,894 | |
NOTE 9. Benefit Plans
We assumed a defined benefit pension plan (the “Pension Plan”) on April 29, 2022 as a result of the acquisition of S&N. The Pension Plan was frozen to new hires as of March 31, 2007 and employees hired on or after April 1, 2007 are not eligible to participate in the Pension Plan. Subsequent to quarter end, as ofOn July 1, 2022, the Pension Plan was amended to freeze benefit plan accruals for participants. As a result of the freeze, a curtailment was triggered and a restatement of the benefit obligation and plan assets occurred, although no gain or loss resulted. The annual measurement date for the Pension Plan is September 30. Benefits are based on years of credited service at retirement. Annual contributions to the Pension Plan are not less than the minimum funding standards outlined in the Employee Retirement Income Security Act of 1974, as amended. We make contributions tomaintain the Pension Plan with the goal of ensuring that it is adequately funded to meet its future obligations. We did not make any contributions to the Pension Plan during the period from April 29, 2022 tothree and nine months ended June 30, 20222023 and do not anticipate making any contributions for the remainder of 2022.
The weighted average discount rate used to determine the projected benefit obligation of the Pension Plan as of the date of the S&N acquisition on April 29, 2022 was 4.40%. The weighted average discount rate used to determine interest cost related to the Pension Plan for the period from April 29, 2022 to Junefiscal year ending September 30, 2022 was 4.40%.2023.
The components of thenet periodic pension expensecost are as follows:
| | | | | | | | | |
(in thousands) | For the Three and Nine Months Ended June 30, 2022 | | |
Interest cost | $ | 60 | | | | | |
Loss on Pension Plan assets | 349 | | | | | |
Total pension expense | $ | 409 | | | | | |
| | | | | | | | | | | | | | | |
| (in thousands) | Three Months Ended June 30, 2023 | | Nine Months Ended June 30, 2023 | | | | |
| Service cost | $ | 26 | | | $ | 78 | | | | | |
| Interest cost | 93 | | | 279 | | | | | |
| Expected return on plan assets | (84) | | | (252) | | | | | |
| Net periodic pension cost | $ | 35 | | | $ | 105 | | | | | |
TotalThe service cost component of total pension expense is included as a component of other (expense) incomecost of revenue on the condensed consolidated statements of operations and comprehensive (loss) incomeloss for the three and nine months ended June 30, 2022.
2023. The netinterest cost and expected return on plan assets components of total pension asset assumed withexpense are included as components of other income (expense) on the S&N acquisition is as follows:
| | | | | | | | | |
| As of | | | | |
(in thousands) | June 30, 2022 | | |
Benefit obligation | $ | 8,203 | | | | | |
Fair value of Pension Plan assets | 9,581 | | | | | |
Net pension asset | $ | 1,378 | | | | | |
condensed consolidated statements of operations and comprehensive loss for the three and nine months ended June 30, 2023.
Net pension asset is included as a component of other non-current assets on the condensed consolidated balance sheets as of June 30, 2022.2023. As of June 30, 20222023, the Pension Plan assets consist of cash and cash equivalents.equivalents, and we manage a liability driven investment strategy intended to maintain fully-funded status.
401(k) Plan
We have 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. During each ofOur matching contribution in cash for the three and nine months ended June 30, 20222023, was
$0.4 million and 2021, our$1.0 million, respectively. Our matching contribution was $0.2 million in cash respectively. During each offor the three and nine months ended June 30, 2022, was $0.2 million and 2021, our matching contribution was $0.8 million, in cash, respectively.
NOTE 9.10. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities consisted of the following:
| | | As of | | | | | | | | | | |
| (in thousands) | (in thousands) | June 30, 2022 | | September 30, 2021 | (in thousands) | June 30, 2023 | | September 30, 2022 |
| Compensation | Compensation | $ | 6,783 | | | $ | 7,192 | | Compensation | $ | 5,796 | | | $ | 4,213 | |
| Warranty | Warranty | 1,381 | | | 1,125 | | Warranty | 1,478 | | | 1,504 |
| Commissions | | Commissions | 389 | | | 228 |
| Consulting | | Consulting | 277 | | | 241 |
| Legal expenses and other professional fees | Legal expenses and other professional fees | 202 | | | 152 | | Legal expenses and other professional fees | 170 | | | 275 |
| Auditor fees | | Auditor fees | 183 | | | 186 | |
| Income and other taxes | Income and other taxes | — | | | 104 | | Income and other taxes | 56 | | | — | |
| Severance and restructuring accruals | Severance and restructuring accruals | 525 | | | — | | Severance and restructuring accruals | 1,732 | | | 423 |
| Litigation settlement | Litigation settlement | 575 | | | 70 | | Litigation settlement | 72 | | | 341 |
| Other | Other | 2,185 | | | 925 | | Other | 622 | | | 713 |
| Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | $ | 11,651 | | | $ | 9,568 | | Accrued expenses and other current liabilities | $ | 10,775 | | | $ | 8,124 | |
The components of accrued severance and restructuring accruals consisted of the following:
| | | | | | | | | | | |
| (in thousands) | June 30, 2023 | | September 30, 2022 |
| Balance at beginning of period | $ | 423 | | | $ | — | |
| Expense | 2,296 | | | 1,353 |
| Payments | (987) | | (930) |
| Balance at end of period | $ | 1,732 | | | $ | 423 | |
In an effort to better align business operations related to CATV product lines, we reduced our workforce and recorded $1.8 million and $1.3 million in severance expense during the three months ended June 30, 2023 and nine months ended June 30, 2022, respectively. Severance and restructuring-related accruals specifically relate to the reductions in force. Expense related to severance and restructuring accruals is included in SG&A expense on the condensed consolidated statements of operations and comprehensive loss. We expect all severance related to these workforce reductions that occurred in the nine months ended June 30, 2023 to be fully paid by the quarter ending September 30, 2024.
NOTE 11. Credit Agreement
Wingspire Credit Agreement
On August 9, 2022, EMCORE and EMCORE Space & Navigation Corporation, our wholly-owned subsidiary, entered into that certain Credit Agreement with the lenders party thereto and Wingspire Capital LLC (“Wingspire”), as administrative agent for the lenders, as amended pursuant to that First Amendment to Credit Agreement, dated as of October 25, 2022, among EMCORE and EMCORE Space & Navigation Corporation, EMCORE Chicago Inertial Corporation, our wholly-owned subsidiary (together with the Company and S&N, the “Borrowers”), the lenders party thereto and Wingspire, to add EMCORE Chicago as a Borrower and include certain of its assets in the borrowing base (as amended, the “Credit Agreement”). The Credit Agreement provides for two credit facilities: (a) an asset-based revolving credit facility in an aggregate principal amount of up to $40.0 million, subject to a borrowing base consisting of eligible accounts receivable and eligible inventory (subject to certain reserves), and (b) a term loan facility in an aggregate principal amount of approximately $6.0 million.
The proceeds of the loans made under the Credit Agreement may be used for general corporate purposes. Borrowings under the Credit Agreement will mature on August 8, 2026, and bear interest at a rate per annum equal to term SOFR plus a margin of (i) 3.75% or 5.50% in the case of revolving loans, depending on the applicable assets corresponding to the borrowing base pursuant to which the applicable loans are made and (ii) 5.50% in the case of the term loan. In addition, the Borrowers are responsible for Wingspire’s annual collateral monitoring fees as well as the lenders’ fees and expenses, including a closing fee of 1.0% of the aggregate principal amount of the commitments as of the closing with respect to revolving loans and 1.50% of the aggregate principal amount of the term loan. The Borrowers may also be required to pay an unused line fee of 0.50% in
respect to the undrawn portion of the revolving commitments, which is generally based on average daily usage of the revolving facility during the immediately preceding month.
The Credit Agreement contains representations and warranties, affirmative and negative covenants that are generally customary for credit facilities of this type. Among others, the Credit Agreement contains various covenants that, subject to agreed upon exceptions, limit the Borrowers’ and their respective subsidiaries’ ability to incur indebtedness, grant liens, enter into sale and leaseback transactions, enter into swap agreements, make loans, acquisitions and investments, change the nature of their business, acquire or sell assets, or consolidate or merge with or into other persons or entities, declare or pay dividends or make other restricted payments, enter into transactions with affiliates, enter into burdensome agreements, change fiscal year, amend organizational documents, and use proceeds to fund any activities of or business with any person that is the subject of governmental sanctions. In addition, the Credit Agreement requires that, for any period commencing upon the occurrence of an event of default or excess availability under the Credit Agreement being less than the greater of $5.0 million and 15% of the revolving commitments until such time as no event of default shall be continuing and excess availability under the Credit Agreement shall be at least the greater of $5.0 million and 15% of the revolving commitments for a period of 60 consecutive days, the Borrowers satisfy a consolidated fixed charge coverage ratio of not less than 1.10:1.00.
The Credit Agreement also includes customary events of default, the occurrence of which, following any applicable grace period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Borrowers under the Credit Agreement to be immediately due and payable, and exercise rights and remedies available to the lenders under the Credit Agreement or applicable law or equity. In connection with the Credit Agreement, the Borrowers entered into a pledge and security agreement pursuant to which the obligations under the Credit Agreement are secured on a senior secured basis (subject to permitted liens) by substantially all assets of the Borrowers and substantially all assets of any future guarantors.
As of June 30, 2023, an aggregate principal amount of $6.5 million was outstanding pursuant to the revolving credit facility and an aggregate principal amount of $5.3 million was outstanding pursuant to the term loan facility. As of September 30, 2022, an aggregate principal amount of $9.6 million was outstanding pursuant to the revolving credit facility and an aggregate principal amount of $5.9 million was outstanding pursuant to the term loan facility. Also, as of June 30, 2023, the revolving credit facility had approximately $10.6 million available for borrowing. Provided that no event of default has occurred, and subject to availability limitations, loans under the revolving credit facility can continue to be drawn/redrawn/outstanding until expiration in 2025.
Our future term loan repayments as of June 30, 2023 is as follows:
| | | | | |
| (in thousands) | Amount |
| 2023 | $ | 212 | |
| 2024 | 852 | |
| 2025 | 852 | |
| 2026 | 3,339 | |
| Total loan payments | $ | 5,255 | |
NOTE 10.12. Income and Other Taxes
During the three and nine months ended June 30, 2022 and 2021,2023, the Company recorded an income tax expense of $27,000$29 thousand and $6,000, respectively. Income tax expense during the three months ended June 30, 2022 is composed primarily of Texas gross margin taxes. Income tax expense during the three months ended June 30, 2021 is$177 thousand, respectively, composed primarily of state tax expense which is driven byand tax expense generated from the State of California's temporary suspension of net operating loss ("NOL") utilization.tax amortization on acquired indefinitely lived assets. For the three and nine months ended June 30, 2023 the effective tax rate on continuing operations was 0.3% and 0.5%, respectively.
During the three and nine months ended June 30, 2022, and 2021, the Company recorded an income tax expense of $25,000$27 thousand and $214,000, respectively. Income tax expense for the nine months ended June 30, 2022 is$25 thousand, respectively, composed primarily of Texas gross margin taxes. Income tax expense forFor the three and nine months ended June 30, 2021 is composed primarily of state tax expense which is driven by the State of California's temporary suspension of NOL utilization.
For the three months ended June 30, 2022 and 2021 the effective tax rate on continuing operations was 0.4% and 0.0%0.3%, respectively. For the nine months ended June 30, 2022 and 2021 the effective tax rate on continuing operations was 0.3% and 1.0%, respectively. The tax rate for the three and nine months ended June 30, 2022 is primarily driven by Texas gross margin taxes.
The Company uses estimates to forecast the results from continuing operations for the current fiscal year as well as permanent differences between book and tax accounting.
We have not provided for income taxes on non-U.S. subsidiaries’ undistributed earnings as of June 30, 20222023 because we plan to indefinitely reinvest the unremitted earnings of our non-U.S. subsidiaries and all of our non-U.S. subsidiaries historically have negative earnings and profits.
All deferred tax assets have a full valuation allowance as of June 30, 2022,2023, except for the tax amortization of indefinitely lived goodwill, which cannot be utilized to reduce deferred tax assets. On a quarterly basis, the Company evaluates the positive and negative evidence to assess whether the more likely than notmore-likely-than-not criteria has been satisfied in determining whether there will be further adjustments to the valuation allowance.
As of June 30, 20222023 and September 30, 2021,2022, we did not accrue any significant uncertain tax benefit, interest, or penalties as tax liabilities on our condensed consolidated balance sheets. During the three and nine months ended June 30, 2022,2023, there were no material increases or decreases in unrecognized tax benefits.
NOTE 11.13. Commitments and Contingencies
Indemnifications
We have agreed to indemnify certain customers against claims of infringement of intellectual property rights of others in our sales contracts with these customers. Historically, we have not paid any claims under these customer indemnification obligations. We enter into indemnification agreements with each of our directors and executive officers pursuant to which we agree to indemnify them for certain potential expenses and liabilities arising from their status as a director or executive officer of the Company. We maintain directors and officers insurance, which covers certain liabilities relating to our obligation to indemnify our directors and executive officers in certain circumstances. It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular 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. The outcome of these matters is currently not determinable and we are unable to estimate a range of loss, should a loss occur, from these proceedings. The ultimate outcome of legal proceedings involves judgments, estimates, and inherent uncertainties and the results of these matters cannot be predicted with certainty. Professional legal fees are expensed when incurred. We accrue for contingent losses when such losses are probable and reasonably estimable. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information. Should we fail to prevail in any legal matter, or should several legal matters be resolved against the Company in the same reporting period, then the financial results of that particular reporting period could be materially affected.
Intellectual Property Lawsuits
We protect our proprietary technology by applying for patents where appropriate and, in other cases, by preserving the technology, related know-how, and information as trade secrets. The success and competitive position of our product lines are impacted by our ability to obtain intellectual property protection for our research and development efforts. We 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.
Resilience Litigation
In 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 Holdings, LP (“Buyer”) and that certain Single-Tenant Triple Net Lease, dated as of February 10, 2020, entered into by and between SDI and the Buyer, pursuant to which SDI leased from the Buyer the
Concord Real Property for a 15 year15-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“SDI Purchase Agreement"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
On April 24, 2023, the claimsCompany and Resilience entered into a Settlement and Release Agreement (the “Resilience Settlement Agreement”). The material financial terms of the Resilience Settlement Agreement required (i) a payment of $500,000 by the Company to Resilience, which payment was made by Resiliencethe Company during the three months ended June 30, 2023, (ii) an appraisal of the Concord Real Property as of January 2, 2020, which could trigger a further future payment by the Company in its complaint are without meritan amount to be determined by said appraisal, and if triggered, is expected to be made during the three months ending September 30, 2023, and (iii) a mutual release of all claims, including claims arising under the SDI Purchase Agreement, and a dismissal of the litigation by all parties.
On April 24, 2023, the underwriters of the representation and warranty insurance policies the Company acquired in connection with the SDI Purchase Agreement agreed to pay the Company $1.15 million within 15 business days in exchange for a release of any and all claims under the policies. We received payment during the three months ended June 30, 2023.
Contingent Inventory Obligations
Pursuant to that certain Manufacturing Supply Agreement, dated August 9, 2021 (as amended, the “Fastrain Manufacturing Agreement”), by and between the Company and each of Shenzhen Fastrain Technology Co., Ltd., Hong Kong Fastrain Company Limited and Fastrain Technology Malaysia SDN. BHD. (collectively, “Fastrain”), we intendmay be liable to vigorously defend ourselves against them.Fastrain for certain unused inventory. As of the quarter ended June 30, 2023, we had accrued $0.4 million pursuant to such inventory obligations in connection with our restructuring announced in April 2023 and estimate a potential range of total future additional liability pursuant to such inventory obligations of a minimum of $0 and a maximum of $3.2 million.
NOTE 12.14. Equity
Equity Plans
We provide long-term incentives to eligible officers, directors, and employees in the form of equity-based awards. We maintain 3four equity incentive compensation plans, collectively described as our “Equity Plans”: (a) the 2010 Equity Incentive Plan (the “2010 Plan”), (b) the 2012 Equity Incentive Plan and(the “2012 Plan”), (c) the Amended and Restated 2019 Equity Incentive Plan (the “2019 Plan”), and (d) the 2022 New Employee Inducement Plan.
We issue new shares of common stock to satisfy awards granted under our Equity Plans. In MarchDecember 2022, 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 2021, and increasedapproved an amendment to the 2019 Plan, which, subject to shareholder approval at our 2023 annual meeting of shareholders, would increase 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 1.91.549 million shares.
Stock-Based Compensation
The following table sets forth stock-based compensation expense by award type:
| | | For the Three Months Ended June 30, | | For the Nine Months Ended June 30, | | | Three Months Ended June 30, | | Nine Months Ended June 30, |
| (in thousands) | (in thousands) | 2022 | | 2021 | | 2022 | | 2021 | | (in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Employee stock options | $ | — | | | $ | 1 | | | $ | — | | | $ | 3 | | | |
| RSUs and RSAs | RSUs and RSAs | 692 | | | 573 | | | 1,795 | | | 1,505 | | | RSUs and RSAs | $ | 1,113 | | | $ | 692 | | | $ | 2,869 | | | $ | 1,795 | |
| PSUs and PRSAs | PSUs and PRSAs | 708 | | | 403 | | | 1,602 | | | 989 | | | PSUs and PRSAs | 517 | | | 708 | | | 1,818 | | | 1,602 | |
| ESPP | — | | | 85 | | | — | | | 258 | | | |
| Outside director equity awards and fees in common stock | Outside director equity awards and fees in common stock | 123 | | | 114 | | | 358 | | | 255 | | | Outside director equity awards and fees in common stock | 83 | | | 123 | | | 295 | | | 358 | |
| Total stock-based compensation expense | Total stock-based compensation expense | $ | 1,523 | | | $ | 1,176 | | | $ | 3,755 | | | $ | 3,010 | | | Total stock-based compensation expense | $ | 1,713 | | | $ | 1,523 | | | $ | 4,982 | | | $ | 3,755 | |
The following table sets forth stock-based compensation expense by expense type:
| | | For the Three Months Ended June 30, | | For the Nine Months Ended June 30, | | | Three Months Ended June 30, | | Nine Months Ended June 30, |
| (in thousands) | (in thousands) | 2022 | | 2021 | | 2022 | | 2021 | | (in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Cost of revenue | Cost of revenue | $ | 275 | | | $ | 220 | | | $ | 604 | | | $ | 564 | | | Cost of revenue | $ | 436 | | | $ | 275 | | | $ | 1,154 | | | $ | 604 | |
| Selling, general, and administrative | Selling, general, and administrative | 1,001 | | | 752 | | | 2,537 | | | 1,830 | | | Selling, general, and administrative | 980 | | | 1,001 | | | 3,006 | | | 2,537 | |
| Research and development | Research and development | 247 | | | 204 | | | 614 | | | 616 | | | Research and development | 297 | | | 247 | | | 822 | | | 614 | |
| Total stock-based compensation expense | Total stock-based compensation expense | $ | 1,523 | | | $ | 1,176 | | | $ | 3,755 | | | $ | 3,010 | | | Total stock-based compensation expense | $ | 1,713 | | | $ | 1,523 | | | $ | 4,982 | | | $ | 3,755 | |
(Loss) IncomeLoss Per Share
The following table sets forth the computation of basic and diluted net (loss) incomeloss per share:
| | | For the Three Months Ended June 30, | | For the Nine Months Ended June 30, | | Three Months Ended June 30, | | Nine Months Ended June 30, |
| (in thousands, except per share data) | (in thousands, except per share data) | 2022 | | 2021 | | 2022 | | 2021 | (in thousands, except per share data) | 2023 | | 2022 | | 2023 | | 2022 |
| Numerator | Numerator | | | | | | | | Numerator | | | | | | | |
| Net (loss) income | $ | (7,649) | | | $ | 13,615 | | | $ | (7,460) | | | $ | 20,568 | | |
| Net loss | | Net loss | $ | (9,857) | | | $ | (7,649) | | | $ | (33,778) | | | $ | (7,460) | |
| Denominator | Denominator | | | | | | | | Denominator | | | | | | | |
| Weighted average number of shares outstanding - basic | Weighted average number of shares outstanding - basic | 37,425 | | | 36,768 | | | 37,197 | | | 33,069 | | Weighted average number of shares outstanding - basic | 53,926 | | | 37,425 | | | 45,546 | | | 37,197 | |
| Effect of dilutive securities | Effect of dilutive securities | | | | | | | | Effect of dilutive securities | | | | | | | |
| Stock options | Stock options | — | | | 10 | | | — | | | 5 | | Stock options | — | | | — | | | — | | | — | |
| PSUs, RSUs, and restricted stock | PSUs, RSUs, and restricted stock | — | | | 2,115 | | | — | | | 1,703 | | PSUs, RSUs, and restricted stock | — | | | — | | | — | | | — | |
| Weighted average number of shares outstanding - diluted | Weighted average number of shares outstanding - diluted | 37,425 | | | 38,893 | | | 37,197 | | | 34,777 | | Weighted average number of shares outstanding - diluted | 53,926 | | | 37,425 | | | 45,546 | | | 37,197 | |
| Earnings per share - basic | Earnings per share - basic | $ | (0.20) | | | $ | 0.37 | | | $ | (0.20) | | | $ | 0.62 | | Earnings per share - basic | $ | (0.18) | | | $ | (0.20) | | | $ | (0.74) | | | $ | (0.20) | |
| Earnings per share - diluted | Earnings per share - diluted | $ | (0.20) | | | $ | 0.35 | | | $ | (0.20) | | | $ | 0.59 | | Earnings per share - diluted | $ | (0.18) | | | $ | (0.20) | | | $ | (0.74) | | | $ | (0.20) | |
| Weighted average antidilutive options, unvested restricted RSUs and RSAs, unvested PSUs and ESPP shares excluded from the computation | 3,163 | | | 2,138 | | | 1,315 | | | 1,947 | | |
| Weighted average antidilutive options, unvested RSUs and RSAs, and unvested PSUs excluded from the computation | | Weighted average antidilutive options, unvested RSUs and RSAs, and unvested PSUs excluded from the computation | 3,823 | | | 3,163 | | | 2,533 | | | 1,315 | |
Basic earnings per share ("EPS"(“EPS”) is computed by dividing net (loss) income for the period by the weighted-average number of common stock outstanding during the period. Diluted EPS is computed by dividing net (loss) income for the period by the weighted average number of common stock outstanding during the period, plus the dilutive effect of outstanding restricted stock units ("RSUs"(“RSUs”) and restricted stock awards ("RSAs"(“RSAs”), performance stock units ("PSUs"(“PSUs”), and stock options and shares issuable 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 in the future. The anti-dilutive stock options and shares of outstanding and unvested restricted stock were excluded from the computation of earnings per share for the three and nine months ended June 30, 2023 and 2022 due to the Company incurring a net loss for such periods.period.
Public Offering
On February 17, 2023, we closed our offering of 15,454,546 shares of our common stock at a price of $1.10 per share, resulting in net proceeds to us from the offering, after deducting the placement agent commissions and other offering expenses, of $15.4 million. The shares were sold by us pursuant to a Securities Purchase Agreement, dated as of February 17, 2023, between the Company and each purchaser named in the signature pages thereto and a Placement Agency Agreement, dated as of February 15, 2023, by and between the Company and A.G.P./Alliance Global Partners.
Future Issuances
Common stock reserved for future issuances as of June 30, 2023 was as follows:
| | | | | |
| As ofAmount |
| June 30, 2022 |
| Exercise of outstanding stock options | 13,8849,981 | |
| Unvested RSUs and RSAs | 2,587,3024,491,733 | |
Unvested PSUs and PRSAs (at 200%100% maximum payout) | 3,618,1061,750,068 | |
| Issuance of stock-based awards under the Equity Plans | 341,304599,585 | |
| Purchases under the officer and director share purchase plan | 88,741 | |
| Total reserved | 6,649,3376,940,108 | |
NOTE 13.15. Segment and Revenue Information
Reportable Segments
Reported 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. We do not allocate sales and marketing, 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, a measure of segment assets and liabilities has not been provided to the Company's chief operating decision maker and therefore is not shown below.
Information on reportable segments utilized by the chief operating decision maker is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| (in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Revenue | | | | | | | |
| Aerospace and Defense | $ | 27,001 | | | $ | 13,416 | | | $ | 73,879 | | | $ | 32,322 | |
| Broadband | (303) | | | 10,259 | | | 4,592 | | | 66,239 | |
| Total revenue | $ | 26,698 | | | $ | 23,675 | | | $ | 78,471 | | | $ | 98,561 | |
| Segment profit | | | | | | | |
| Aerospace and Defense gross profit | $ | 7,163 | | | $ | 1,551 | | | $ | 16,786 | | | $ | 4,468 | |
| Aerospace and Defense research and development expense | 4,448 | | | 3,834 | | | 14,050 | | | 12,037 | |
| Aerospace and Defense gross profit less research and development expense | $ | 2,715 | | | $ | (2,283) | | | $ | 2,736 | | | $ | (7,569) | |
| Broadband gross profit | $ | (3,663) | | | $ | 2,347 | | | $ | (6,516) | | | $ | 24,244 | |
| Broadband research and development expense | 723 | | | 679 | | | 2,269 | | | 1,638 | |
| Broadband gross profit less research and development expense | $ | (4,386) | | | $ | 1,668 | | | $ | (8,785) | | | $ | 22,606 | |
| Total gross profit less research and development expense | $ | (1,671) | | | $ | (615) | | | $ | (6,049) | | | $ | 15,037 | |
Table of Contents
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | For the Three Months Ended June 30, | | For the Nine Months Ended June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
| Revenue | | | | | | | | | | | |
| Aerospace and Defense | $ | 13,416 | | | $ | 12,327 | | | $ | 32,322 | | | $ | 39,097 | | | | | |
| Broadband | 10,259 | | | 30,331 | | | 66,239 | | | 75,393 | | | | | |
| Total revenue | $ | 23,675 | | | $ | 42,658 | | | $ | 98,561 | | | $ | 114,490 | | | | | |
| Segment profit | | | | | | | | | | | |
| Aerospace and Defense gross profit | $ | 1,551 | | | $ | 3,872 | | | $ | 4,468 | | | $ | 11,747 | | | | | |
| Aerospace and Defense research and development expense | 3,834 | | | 3,598 | | | 12,037 | | | 10,441 | | | | | |
| Aerospace and Defense segment profit | $ | (2,283) | | | $ | 274 | | | $ | (7,569) | | | $ | 1,306 | | | | | |
| Broadband gross profit | $ | 2,347 | | | $ | 13,353 | | | $ | 24,244 | | | $ | 32,684 | | | | | |
| Broadband research and development expense | 679 | | | 902 | | | 1,638 | | | 2,126 | | | | | |
| Broadband segment profit | $ | 1,668 | | | $ | 12,451 | | | $ | 22,606 | | | $ | 30,558 | | | | | |
| Total segment profit | $ | (615) | | | $ | 12,725 | | | $ | 15,037 | | | $ | 31,864 | | | | | |
| Unallocated expense (income) | | | | | | | | | | | |
| Selling, general, and administrative | $ | 7,800 | | | $ | 6,081 | | | $ | 22,550 | | | $ | 17,941 | | | | | |
| Severance | — | | | — | | | 1,318 | | | — | | | | | |
| (Gain) loss on sale of assets | (1,318) | | | 250 | | | (1,919) | | | 439 | | | | | |
| Gain on extinguishment of debt | — | | | (6,561) | | | — | | | (6,561) | | | | | |
| Interest (income) expense, net | (9) | | | (579) | | | 14 | | | (481) | | | | | |
| Foreign exchange loss (gain) | 185 | | | (87) | | | 160 | | | (256) | | | | | |
| Pension expense | 349 | | | — | | | 349 | | | — | | | | | |
| Total unallocated expense (income) | $ | 7,007 | | | $ | (896) | | | $ | 22,472 | | | $ | 11,082 | | | | | |
| (Loss) income before income tax expense | $ | (7,622) | | | $ | 13,621 | | | $ | (7,435) | | | $ | 20,782 | | | | | |
Product Categories
Revenue is classified by major product category as presented below:
| | | For the Three Months Ended June 30, | | | Three Months Ended June 30, | | Nine Months Ended June 30, |
| (in thousands) | (in thousands) | 2022 | | % of
Revenue | | 2021 | | % of
Revenue | | (in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Aerospace and Defense | Aerospace and Defense | | | | | | | | | Aerospace and Defense | | | | | | | |
| Navigation and Inertial Sensing | $ | 9,891 | | | 42 | % | | $ | 9,280 | | | 22 | % | | |
| Inertial Navigation | | Inertial Navigation | $ | 26,718 | | | $ | 9,891 | | | $ | 70,947 | | | $ | 25,651 | |
| Defense Optoelectronics | Defense Optoelectronics | 3,525 | | | 15 | | | 3,047 | | | 7 | | | Defense Optoelectronics | 283 | | | 3,525 | | | 2,932 | | | 6,671 | |
| Broadband | Broadband | | | Broadband | |
| CATV Lasers and Transmitters | 7,006 | | | 29 | | | 27,364 | | | 64 | | | |
| Chip Devices | 1,353 | | | 6 | | | 819 | | | 2 | | | |
| Other Optical Products | 1,900 | | | 8 | | | 2,148 | | | 5 | | | |
| CATV Optical Transmitters and Components | | CATV Optical Transmitters and Components | 323 | | | 7,006 | | | 2,270 | | | 56,449 | |
| Data Center Chips | | Data Center Chips | (312) | | | 1,353 | | | 885 | | | 3,534 | |
| Optical Sensing | | Optical Sensing | (314) | | | 1,900 | | | 1,437 | | | 6,256 | |
| Total revenue | Total revenue | $ | 23,675 | | | 100 | % | | $ | 42,658 | | | 100 | % | | Total revenue | $ | 26,698 | | | $ | 23,675 | | | $ | 78,471 | | | $ | 98,561 | |
Timing of Revenue
Revenue is classified by timing of recognition as presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| (in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Trade revenue (recognized at a point in time) | $ | 19,667 | | | $ | 18,207 | | | $ | 58,763 | | | $ | 91,056 | |
| Contract revenue (recognized over time) | 7,031 | | | 5,468 | | | 19,708 | | | 7,505 | |
| Total revenue | $ | 26,698 | | | $ | 23,675 | | | $ | 78,471 | | | $ | 98,561 | |
Geographical Concentration
Revenue is classified by geographic area based on our customers’ billing address as presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended June 30, | | |
| (in thousands) | 2022 | | % of
Revenue | | 2021 | | % of
Revenue | | | | | | | | |
| Aerospace and Defense | | | | | | | | | | | | | | | |
| Navigation and Inertial Sensing | $ | 25,651 | | | 26 | % | | $ | 27,475 | | | 24 | % | | | | | | | | |
| Defense Optoelectronics | 6,671 | | | 7 | | | 11,622 | | | 10 | | | | | | | | | |
| Broadband | | | | | | | | | | | | | | | |
| CATV Lasers and Transmitters | 56,449 | | | 57 | | | 65,799 | | | 58 | | | | | | | | | |
| Chip Devices | 3,534 | | | 4 | | | 2,403 | | | 2 | | | | | | | | | |
| Other Optical Products | 6,256 | | | 6 | | | 7,191 | | | 6 | | | | | | | | | |
| Total revenue | $ | 98,561 | | | 100 | % | | $ | 114,490 | | | 100 | % | | | | | | | | |
Geographical Concentration
The following table sets forth revenue by geographic area based on our customers’ billing addresses:
| | | For the Three Months Ended June 30, | | For the Nine Months Ended June 30, | | | Three Months Ended June 30, | | Nine Months Ended June 30, |
| (in thousands) | (in thousands) | 2022 | | 2021 | | 2022 | | 2021 | | (in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| United States and Canada | United States and Canada | $ | 19,043 | | | $ | 37,705 | | | $ | 86,751 | | | $ | 100,157 | | | United States and Canada | $ | 21,377 | | | $ | 19,043 | | | $ | 60,600 | | | $ | 86,751 | |
| Asia | Asia | 1,684 | | | 2,305 | | | 6,498 | | | 9,475 | | | Asia | 1,856 | | | 1,684 | | | 4,235 | | | 6,498 | |
| Europe | Europe | 2,243 | | | 1,603 | | | 3,999 | | | 2,817 | | | Europe | 1,657 | | | 2,243 | | | 8,592 | | | 3,999 | |
| Other | Other | 705 | | | 1,045 | | | 1,313 | | | 2,041 | | | Other | 1,808 | | | 705 | | | 5,044 | | | 1,313 | |
| Total revenue | Total revenue | $ | 23,675 | | | $ | 42,658 | | | $ | 98,561 | | | $ | 114,490 | | | Total revenue | $ | 26,698 | | | $ | 23,675 | | | $ | 78,471 | | | $ | 98,561 | |
Customer Concentration
Portions of the Company’s sales are concentrated among a limited number of customers. Significant customers are defined as customers representing greater than 10% of consolidated revenue. Revenue from two significant customers represented an aggregate of 37%41% and 62%35% of our consolidated revenue for the three and nine months ended June 30, 20222023, respectively, and 2021, respectively. Revenuerevenue from two significant customers represented an aggregate of 37% and 54% of our consolidated revenue for the three and nine months ended June 30, 2022. Revenue from three significant customers represented an aggregate of 70% of our consolidated revenue for the nine months ended June 30, 2021. The percentage from significant customers decreased due to lower CATV revenue from our Broadband segment.
The duration, severity, and future impact of the COVID-19 pandemic is 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 decreases 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.2022, respectively.
NOTE 14. Subsequent Event
Purchase Agreement
On August 9, 2022, EMCORE Corporation (“EMCORE”)entered into an Asset Purchase Agreement (the “Purchase Agreement”), by and among EMCORE, Delta Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of EMCORE (“EMCORE Sub”), and KVH Industries, Inc., a Delaware corporation (“Seller”), pursuant to which Seller agreed to sell the assets (the “Purchased Assets”) primarily related to its Inertial Navigation segment (the “Business”), including Seller's property interests in its Tinley Park facility, to EMCORE (the “Transaction”). The signing and closing of the Transaction occurred simultaneously.
Under the terms of the Purchase Agreement, EMCORE paid approximately $55.0 million in cash for the Purchased Assets (the “Purchase Price”), subject to certain working capital adjustments. The Transaction also involved EMCORE’s assumption of specified liabilities, generally including the liabilities primarily related to the Business. At the closing, $1.0 million of the Purchase Price (the “Holdback Amount”) was held back by EMCORE as security for certain post-closing obligations of Seller. The Holdback Amount will be released over time, if at all, upon satisfaction by Seller of certain of its post-closing obligations. In connection with the Transaction, the parties entered into a transition services agreement pursuant to which Seller will provide
certain migration and transition services to facilitate an orderly transaction of the operation of the Business to EMCORE in the twelve month period following consummation of the Transaction.
The Purchase Agreement contains certain representations, warranties, covenants, and indemnification provisions, including for breaches of covenants and for losses resulting from Seller liabilities specifically excluded from the Transaction. In connection with its entry into the Purchase Agreement, EMCORE obtained a customary representations and warranties insurance policy as recourse for certain losses arising out of breaches of representations and warranties of Seller set forth in the Purchase Agreement. The representations and warranties insurance policy is subject to certain policy limits, exclusions, deductibles, and other terms and conditions.
Seller has agreed that, for the period commencing on the date of closing until the five-year anniversary thereof, neither Seller nor any of its affiliates will, directly or indirectly, compete with the business related to the development, engineering, manufacturing, marketing, distribution or sale of navigation sensors and systems or inertial sensors and systems for defense or commercial applications (including self-driving vehicles), as operated by Seller as of immediately prior to the closing, subject to certain limitations. Seller has also agreed that, for a period of 24 months after the closing, neither Seller nor any of its affiliates will, directly or indirectly, solicit to employ or employ any employee of EMCORE or any employee transferred to EMCORE as part of the Transaction.
In consideration of the recency of the completion of the purchase, we have not completed the initial accounting for the business combination and have not evaluated stand-alone acquiree revenue and earnings in the pre-acquisition period for supplemental pro-forma presentation and, accordingly have not included disclosure related to such items.
New ABL Credit Agreement
On August 9, 2022, EMCORE and EMCORE Space & Navigation Corporation (the “Borrowers”) entered into that certain Credit Agreement, dated as of August 9, 2022 (the “Credit Agreement”), among the Borrowers, the lenders party thereto and Wingspire Capital LLC, as administrative agent for the lenders (the “Agent”). The Credit Agreement provides for two credit facilities: (a) an asset-based revolving credit facility in an aggregate principal amount of up to $40.0 million, subject to a borrowing base consisting of eligible accounts receivable and eligible inventory (subject to certain reserves), and (b) a term loan facility in an aggregate principal amount of $6.0 million. The making of the loans under the Credit Agreement is subject to the satisfaction of certain conditions precedent, including, among other things, the execution and delivery of a pledge and security agreement, pursuant to which the obligations under the Credit Agreement will be secured on a senior secured basis (subject to permitted liens) by substantially all assets of the Borrowers and substantially all assets of any future guarantors. Although no subsidiaries of EMCORE are currently required to guarantee the Borrowers’ obligations under the Credit Agreement, EMCORE Sub may be required to become a borrower or a guarantor under the Credit Agreement under certain circumstances as determined by the Agent in its sole discretion, and domestic subsidiaries of EMCORE that are formed or acquired after the closing under the Credit Agreement will be required to become guarantors under the Credit Agreement.
The proceeds of the loans made on the closing date under the Credit Agreement may be used (a) to finance the Transaction and pay fees, costs and expenses in connection therewith, (b) to pay fees, costs and expenses in connection with the financing, and (c) for general corporate purposes.
Borrowings under the Credit Agreement will mature on August 8, 2025, and will bear interest, at a rate per annum equal to term SOFR plus a margin of 3.75% in the case of revolving loans and term SOFR plus a margin of 5.50% in the case of term loans. In addition, the Borrowers will be responsible for the Agent’s annual collateral monitoring fees as well as the lenders’ fees and expenses, including a closing fee of 1.0% of the aggregate principal amount of the commitments as of the closing with respect to revolving loans and 1.50% of the aggregate principal amount of the commitments as of the closing with respect to term loans. The Borrowers may also be required to pay an unused line fee of 0.50% in respect of the undrawn portion of the revolving commitments, which is generally based on average daily usage of the revolving facility during the immediately preceding month.
The Credit Agreement contains representations and warranties, reporting and other affirmative covenants, and negative covenants that are generally customary for credit facilities of this type. Among others, the Credit Agreement contains various covenants that, subject to agreed upon exceptions, limit the Borrowers’ and their respective subsidiaries’ ability to incur indebtedness, grant liens, enter into sale and leaseback transactions, enter into swap agreements, make loans, acquisitions and investments, change the nature of their business, acquire or sell assets or consolidate or merge with or into other persons or entities, declare or pay dividends or make other restricted payments, enter into transactions with affiliates, enter into burdensome agreements, change fiscal year, amend organizational documents, and use proceeds to fund any activities of or business with any person that is the subject of governmental sanctions. In addition, the Credit Agreement requires that, for any period commencing upon the occurrence of an event of default or excess availability under the Credit Agreement being less than the greater of $5.0 million and 15% of the revolving commitments until such time as no event of default shall be continuing and excess availability under the Credit Agreement shall be at least the greater of $5.0 million and 15% of the
revolving commitments for a period of 60 consecutive days, the Borrowers satisfy a consolidated fixed charge coverage ratio of not less than 1.10:1.00.
The Credit Agreement also includes customary events of default, the occurrence of which, following any applicable grace period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Borrowers under the Credit Agreement to be immediately due and payable, and exercise rights and remedies available to the lenders under the Credit Agreement or applicable law or equity.
At the closing under the Credit Agreement, the Borrowers borrowed revolving loans in an aggregate principal amount of $14.3 million and term loans in an aggregate principal amount equal to the entire term loan commitment.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You 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 under Item 1 within this Quarterly 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 Note Regarding Forward-Looking Statements preceding Item 1 of this Quarterly Report.
Business Overview
EMCORE Corporation is a leading provider of sensorsinertial navigation products for navigation in the aerospace and defense market as well as a manufacturermarkets. We leverage industry-leading Photonic Integrated Chip (PIC), Quartz MEMS, and Lithium Niobate chip-level technology to deliver state-of-the-art component and system-level products across our end-market applications. Over the last three years, we have expanded our scope and portfolio of lasersinertial sensor products through the acquisitions of Systron Donner Inertial, Inc. (“SDI”) in June 2019, the Space and optical subsystems for useNavigation (“S&N”) business of L3Harris Technologies, Inc. (“L3H”) in the CATV industry.
We pioneered the linear fiber optic transmission technology that enabled the world’s first delivery of CATV directly on fiber,April 2022, and today are a leading provider of advanced mixed-signal products serving the aerospace and defense and broadband communications markets. The mixed-signal technology at the heart of our broadband communications products is shared with our FOG and inertial sensors to provide the aerospace and defense markets with state-of-the-art navigation systems technology.Inertial Navigation Systems business (“EMCORE Chicago”) of KVH Industries, Inc. (“KVH”) in August 2022. We have fully vertically-integrated manufacturing capability at our manufacturing facilitiesheadquarters in Alhambra, CA, and at our facilities in Budd Lake, NJ, Concord, CA, and Tinley Park, IL (the “Tinley Park Facility”). Our manufacturing facilities maintain ISO 9001 quality management certification, and we are AS9100 aerospace quality certified at our headquarters in Alhambra, CA and our facilities in Budd Lake, NJ and Concord, CA. These facilities support our vertically-integrated manufacturing strategy for QMEMS,quartz, FOG, and RLGRing Laser Gyro products for navigation systems, and, with respect to our Alhambra, CA facility, for our chip, laser, transmitter, and receiver products for broadband applications.systems.
We have twoOur reporting segments:segments are as follows: (a) Aerospace and Defense and (b) Broadband. Aerospace and Defense is comprised of two product lines: (i) Navigation and Inertial Sensing,Navigation and (ii) Defense Optoelectronics. Broadband is comprised of three product lines: (i) CATV LasersOptical Transmitters and Transmitters,Components, (ii) Chip Devices,Data Center Chips, and (iii) Other Optical Products.Sensing.
Recent Developments
Restructuring
In April 2023, we initiated a restructuring program that includes the strategic shutdown of our Broadband business segment (including our cable TV, wireless, sensing and chips product lines) and the discontinuance of our defense optoelectronics product line. Our Board of Directors performed a thorough review of a number of factors including the competitive landscape, declining revenue and gross profit of these discontinued businesses, the current and expected profitability of these discontinued businesses, our cost structure, and our strategic focus on our Aerospace and Defense business segment, and concluded that these discontinued businesses are non-strategic, currently unsustainable, and cannot be restructured in a way that will allow us to achieve profitable growth and cash preservation. We expect to exit the operations of these discontinued businesses by December 31, 2023. As a result of this restructuring, we have eliminated or expect to eliminate approximately 75 positions in the U.S. (primarily in Alhambra, California) and approximately 25 positions in China, collectively representing approximately 22% of our total workforce, and expect to consolidate facility space by reducing the space used at our Alhambra campus from five to two buildings (including closure of our indium phosphide wafer fabrication facility in Alhambra), relocating personnel in Concord, California to the operations area from the adjacent office building, and closing our manufacturing support and engineering center in China, collectively representing an approximately 25% reduction in the aggregate square footage occupied by our facilities. We expect this restructuring effort to result in annualized cost savings of approximately $12 million. As of the time of the filing of this Quarterly Report on Form 10-Q, we are unable in good faith to make a determination of an estimate of the total amount or range of amounts that we expect to incur in connection with this restructuring. However, we anticipate that material cash and non-cash charges will be incurred and recorded in future reporting periods. One-time employee severance and termination costs related to the restructuring of approximately $2.1 million (of which approximately $0.5 million will be in non-cash, stock-based compensation expenditures relating to the acceleration of the vesting of outstanding equity awards) was recognized in the quarter ended June 30, 2023. We expect the restructuring implementation to be substantially complete by the quarter ending December 31, 2023. We may incur additional expenses in connection with this restructuring that are not currently contemplated. The charges that we expect to incur in connection with the restructuring are estimates and subject to a number of assumptions, and actual results may differ materially.
Equity Offering
On February 17, 2023, we closed our offering of 15,454,546 shares of our common stock at a price of $1.10 per share, resulting in net proceeds to us from the offering, after deducting the placement agent commissions and other offering expenses, of $15.4 million. The shares were sold by us pursuant to a Securities Purchase Agreement, dated as of February 17, 2023, between the
Company and each purchaser named in the signature pages thereto and a Placement Agency Agreement, dated as of February 15, 2023, by and between the Company and A.G.P./Alliance Global Partners.
Acquisition of KVH Industries, Inc. - FOG and Inertial Navigation Systems Business
On August 9, 2022, we completed the acquisition of EMCORE Chicago from KVH pursuant to that certain Asset Purchase Agreement entered into as of August 9, 2022 by and among the Company, Delta Acquisition Sub, Inc., a wholly owned subsidiary of the Company, and KVH, pursuant to which we acquired substantially all of KVH's assets and liabilities primarily related to its FOG and Inertial Navigation Systems business, including property interests in the Tinley Park Facility for aggregate consideration of approximately $55.0 million, exclusive of transaction costs and expenses and subject to certain post-closing working capital adjustments.
Tinley Park Sale and Leaseback Transaction
On December 13, 2022, EMCORE Chicago consummated the sale of its real property interest in the Tinley Park Facility to 8400 W 185TH STREET INVESTORS, LLC (the “Tinley Park Buyer”), resulting in net proceeds of approximately $10.3 million. The sale was made pursuant to the terms of that certain Purchase and Sale Agreement (the “Tinley Park Purchase Agreement”) dated as of November 1, 2022, by and between EMCORE Chicago and HSRE Fund VII Holding Company, LLC, an affiliate of the Tinley Park Buyer. In connection with the sale of the real property interests in the Tinley Park Facility, after considering multiple transaction structures, EMCORE Chicago entered into a long-term Single-Tenant Triple Net Lease (the “Lease Agreement”) with Buyer pursuant to which EMCORE Chicago leased back the Tinley Park Facility for a twelve (12) year term commencing on December 13, 2022, unless earlier terminated or extended in accordance with the terms of the Lease Agreement.
Wingspire Credit Agreement
On August 9, 2022, the Company and EMCORE Space & Navigation Corporation, our wholly-owned subsidiary (“S&N”), entered into that certain Credit Agreement, dated as of August 9, 2022, among the Company, S&N, the lenders party thereto and Wingspire Capital LLC, as administrative agent for the lenders (“Wingspire”), as amended pursuant to that First Amendment to Credit Agreement, dated as of October 25, 2022, among the Company, S&N, EMCORE Chicago Inertial Corporation, our wholly-owned subsidiary (together with the Company and S&N, the “Borrowers”), the lenders party thereto and Wingspire, to add EMCORE Chicago as a Borrower and include certain of its assets in the borrowing base (as amended, the “Credit Agreement”). The Credit Agreement provides for two credit facilities: (a) an asset-based revolving credit facility in an aggregate principal amount of up to $40.0 million, subject to a borrowing base consisting of eligible accounts receivable and eligible inventory (subject to certain reserves), and (b) a term loan facility in an aggregate principal amount of $5,965,000. The proceeds of the loans made under the Credit Agreement may be used for general corporate purposes. Borrowings under the Credit Agreement will mature on August 8, 2026, and bears interest at a rate per annum equal to term SOFR plus a margin of (i) 3.75% or 5.50% in the case of revolving loans, depending on the applicable assets corresponding to the borrowing base pursuant to which the applicable loans are made and (ii) 5.50% in the case of the term loan. In addition, the Borrowers are responsible for Wingspire’s annual collateral monitoring fees as well as the lenders’ fees and expenses. The Borrowers may also be required to pay an unused line fee of 0.50% in respect of the undrawn portion of the revolving commitments, which is generally based on average daily usage of the revolving facility during the immediately preceding month.
The Credit Agreement contains representations and warranties, affirmative and negative covenants that are generally customary for credit facilities of this type. Among others, the Credit Agreement contains various covenants that, subject to agreed-upon exceptions, limit the Borrowers’ and their respective subsidiaries’ ability to incur indebtedness, grant liens, enter into sale and leaseback transactions, enter into swap agreements, make loans, acquisitions and investments, change the nature of their business, acquire, or sell assets, or consolidate or merge with or into other persons or entities, declare or pay dividends or make other restricted payments, enter into transactions with affiliates, enter into burdensome agreements, change fiscal year, amend organizational documents, and use proceeds to fund any activities of or business with any person that is the subject of governmental sanctions. In addition, the Credit Agreement requires that, for any period commencing upon the occurrence of an event of default or excess availability under the Credit Agreement being less than the greater of $5.0 million and 15% of the revolving commitments until such time as no event of default is continuing and excess availability under the Credit Agreement is at least the greater of $5.0 million and 15% of the revolving commitments for a period of 60 consecutive days, the Borrowers satisfy a consolidated fixed charge coverage ratio of not less than 1.10:1.00. The Credit Agreement also includes customary events of default, the occurrence of which, following any applicable grace period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Borrowers under the Credit Agreement to be immediately due and payable, and exercise rights and remedies available to the lenders under the Credit Agreement or applicable law or equity.
In connection with the Credit Agreement, the Borrowers entered into a pledge and security agreement pursuant to which the obligations under the Credit Agreement are secured on a senior secured basis (subject to permitted liens) by substantially all assets of the Borrowers and substantially all assets of any future guarantors.
As of June 30, 2023, an aggregate principal amount of $6.5 million was outstanding pursuant to the revolving credit facility and an aggregate principal amount of $5.3 million was outstanding pursuant to the term loan facility.
Acquisition of L3Harris Space &and Navigation Business
On April 29, 2022, we completed the previously announced acquisition of the L3Harris Technologies, Inc. (“L3H”) Space and Navigation business (“S&N”)&N from L3H pursuant to that certain Sale Agreement, dated as of February 14, 2022 (as amended, the “Sale Agreement”), entered into by and among the Company, Ringo Acquisition Sub, Inc. and L3H, pursuant to which we acquired certain intellectual property, assets, and liabilities of S&N for aggregate consideration of approximately $5.0 million, exclusive of transaction costs and expenses and subject to certain post-closing working capital adjustments. Following the completion of the working capital adjustments, the final purchase price was approximately $4.9 million.
COVID-19and Economic Conditions
We are subject to ongoing risks and uncertainties as a result of the COVID-19 pandemic. The full extent of the COVID-19 impact on operational and financial performance is 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. For example, during the three months ended June 30, 2022, unexpected delays and cancellations of key component deliveries required us to source critical components from alternative sources on short schedules and at increased prices, and a COVID-19 outbreak at the Company's Concord facility resulted in production delays. These and other actions resulting from the effects of COVID-19 may continue in the future and cause additional challenges to and disruptions of our business, inventory levels, operating results, and cash flows. We continue to analyze on an ongoing basis how COVID-19 related actions could affect our product development efforts, future customer demand, timing of orders, recognized revenue, and cash flows.
In addition, the instability of global economic conditions and inflationary risks are adding to the uncertainty of our business. These adverse conditions could result in longer sales cycles, increased costs to manufacture our products, and increased price competition. Given the dynamic nature of these macroeconomic conditions, we cannot reasonably estimate their full impact on our ongoing business, results of operations, and overall financial performance.
Equity Offering
On February 16, 2021, we closed an 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 February 10, 2021.
Hytera and Fastrain TransactionsTransaction
As part of the effort to streamline operations and move to a variable cost model in our CATV LasersOptical Transmitters and TransmittersComponents product line, on October 25, 2019, we entered into an Asset Purchase Agreement (the “Hytera Asset Purchase Agreement”) with Hytera Communications (Hong Kong) Company Limited, a limited liability company incorporated in Hong Kong (“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, “Hytera”), pursuant to which Hytera agreed to purchase from us certain CATV module and transmitter manufacturing equipment (the “Equipment”) that we owned and that 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..
On August 9, 2021, we entered into an Asset Purchase Agreement (the “Fastrain Asset Purchase Agreement”) with each of Shenzhen Fastrain Technology Co., Ltd., a corporation formed under the laws of the P.R.C. (“Shenzhen Fastrain”), and Hong Kong Fastrain Company Limited, a limited liability company incorporated in Hong Kong (“HK Fastrain”, and together with Shenzhen Fastrain, collectively, “Fastrain”), pursuant to which, among other items, Fastrain agreed to purchase allcertain CATV module and transmitter manufacturing equipment (the “Equipment”) that had been located at the manufacturing facility of our wholly-owned subsidiary, EMCORE Optoelectronics (Beijing) Co., Ltd., a corporation formed under the laws of the Equipment subject to the Hytera Asset Purchase Agreement, along with certain other equipment owned by us,P.R.C., for an aggregate price of $6.2 million, all of which hadhas been paid to us as of Junethe fiscal year ended September 30, 2022.
Concurrently with the execution of the Fastrain Asset Purchase Agreement, we and Fastrain entered into a Manufacturing Supply Agreement, dated August 9, 2021 (as amended, the “Fastrain Manufacturing Agreement”), pursuant to which Fastrain agreed to manufacture for us, from a manufacturing facility or facilities located in Thailand or Malaysia and for an initial term ending on December 31, 2025, the CATV LaserOptical Transmitters and TransmitterComponents products set forth in the Fastrain Manufacturing Agreement. In the Fastrain Manufacturing Agreement, (a) we agreed to pay certain shortfall penalties in the event that orders for manufactured products are below certain thresholds beginning in calendar year 2021 and continuing through calendar year 2025, and (b) Fastrain agreed to pay certain surplus bonuses to us in the event that deliveries for manufactured products in either of the 24 month24-month periods beginning on January 1, 2021 and ending on December 31, 2022 or beginning on January 1, 2023 and ending on December 31, 2024 exceed certain thresholds. No such shortfall penalties or surplus bonuses had been accrued or earned or become payable or receivable as of the quarter ended June 30, 2022.2023. In addition, pursuant to the Fastrain Manufacturing Agreement, we may be liable to Fastrain for certain unused inventory. As of the quarter ended June 30, 2023, we had accrued $0.4 million pursuant to such inventory obligations in connection with our restructuring announced in April 2023 and estimate a potential range of total future additional liability pursuant to such inventory obligations of a minimum of $0 and a maximum of $3.2 million.
Results of Operations
The following table sets forth our results of operations as a percentage of revenue:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Nine Months Ended June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
| Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | | | |
| Cost of revenue | 83.5 | | | 59.6 | | | 70.9 | | | 61.2 | | | | | |
| Gross profit | 16.5 | | | 40.4 | | | 29.1 | | | 38.8 | | | | | |
| Operating expense: | | | | | | | | | | | |
| Selling, general, and administrative | 32.9 | | | 14.3 | | | 22.8 | | | 15.6 | | | | | |
| Research and development | 19.1 | | | 10.5 | | | 13.9 | | | 11.0 | | | | | |
| Severance | — | | | — | | | 1.3 | | | — | | | | | |
| (Gain) loss on sale of assets | (5.6) | | | 0.6 | | | (1.9) | | | 0.4 | | | | | |
| Total operating expense | 46.4 | | | 25.4 | | | 36.1 | | | 27.0 | | | | | |
| Operating (loss) income | (30.0) | % | | 15.0 | % | | (7.0) | % | | 11.8 | % | | | | |
Comparison of Results of Operations
| | | For the Three Months Ended June 30, | | | | Three Months Ended June 30, | | Nine Months Ended June 30, |
| (in thousands, except percentages) | 2022 | | 2021 | | Change | |
| | | 2023 | | 2022 | | 2023 | | 2022 |
| Revenue | Revenue | $ | 23,675 | | | $ | 42,658 | | | $ | (18,983) | | | (44.5) | % | Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of revenue | Cost of revenue | 19,777 | | | 25,433 | | | (5,656) | | | (22.2) | | Cost of revenue | 86.9 | | | 83.5 | | | 86.9 | | | 70.9 | |
| Gross profit | Gross profit | 3,898 | | | 17,225 | | | (13,327) | | | (77.4) | | Gross profit | 13.1 | | | 16.5 | | | 13.1 | | | 29.1 | |
| Operating expense: | Operating expense: | | Operating expense: | |
| Selling, general, and administrative | Selling, general, and administrative | 7,800 | | | 6,081 | | | 1,719 | | | 28.3 | | Selling, general, and administrative | 24.2 | | | 32.9 | | | 33.6 | | | 22.8 | |
| Research and development | Research and development | 4,513 | | | 4,500 | | | 13 | | | 0.3 | | Research and development | 19.4 | | | 19.1 | | | 20.8 | | | 13.9 | |
| (Gain) loss on sale of assets | (1,318) | | | 250 | | | (1,568) | | | (627.2) | | |
| Severance | | Severance | 6.9 | | | — | | | 2.9 | | | 1.3 | |
| Gain on sale of assets | | Gain on sale of assets | — | | | (5.6) | | | (1.5) | | | (1.9) | |
| Total operating expense | Total operating expense | 10,995 | | | 10,831 | | | 164 | | | 1.5 | | Total operating expense | 50.5 | | | 46.4 | | | 55.8 | | | 36.1 | |
| Operating (loss) income | $ | (7,097) | | | $ | 6,394 | | | $ | (13,491) | | | (211.0) | % | |
| Operating loss | | Operating loss | (37.3) | % | | (30.0) | % | | (42.7) | % | | (7.0) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended June 30, | | | | |
| (in thousands, except percentages) | 2022 | | 2021 | | Change |
| Revenue | $ | 98,561 | | | $ | 114,490 | | | $ | (15,929) | | | (13.9) | % |
| Cost of revenue | 69,849 | | | 70,059 | | | (210) | | | (0.3) | |
| Gross profit | 28,712 | | | 44,431 | | | (15,719) | | | (35.4) | |
| Operating expense: | | | | | | | |
| Selling, general, and administrative | 22,550 | | | 17,941 | | | 4,609 | | | 25.7 | |
| Research and development | 13,675 | | | 12,567 | | | 1,108 | | | 8.8 | |
| Severance | 1,318 | | | — | | | 1,318 | | | 100.0 | |
| (Gain) loss on sale of assets | (1,919) | | | 439 | | | (2,358) | | | (537.1) | |
| Total operating expense | 35,624 | | | 30,947 | | | 4,677 | | | 15.1 | |
| Operating income | $ | (6,912) | | | $ | 13,484 | | | $ | (20,396) | | | (151.3) | % |
Comparison of Results of Operations
Revenue
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | | | |
| (in thousands, except percentages) | 2022 | | 2021 | | Change |
| Aerospace and Defense | $ | 13,416 | | | $ | 12,327 | | | $ | 1,089 | | | 8.8 | % |
| Broadband | 10,259 | | | 30,331 | | | (20,072) | | | (66.2) | |
| Total revenue | $ | 23,675 | | | $ | 42,658 | | | $ | (18,983) | | | (44.5) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| (in thousands, except percentages) | 2023 | | 2022 | | Change |
| Revenue | $ | 26,698 | | | $ | 23,675 | | | $ | 3,023 | | | 12.8 | % |
| Cost of revenue | 23,198 | | | 19,777 | | | 3,421 | | | 17.3 | |
| Gross profit | 3,500 | | | 3,898 | | | (398) | | | (10.2) | |
| Operating expense: | | | | | | | |
| Selling, general, and administrative | 6,452 | | | 7,800 | | | (1,348) | | | (17.3) | |
| Research and development | 5,171 | | | 4,513 | | | 658 | | | 14.6 | |
| Severance | 1,838 | | | — | | | 1,838 | | | 100.0 | |
| Gain on sale of assets | — | | | (1,318) | | | 1,318 | | | 100.0 | |
| Total operating expense | 13,461 | | | 10,995 | | | 2,466 | | | 22.4 | |
| Operating loss | $ | (9,961) | | | $ | (7,097) | | | $ | (2,864) | | | (40.4) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended June 30, | | | | |
| (in thousands, except percentages) | 2022 | | 2021 | | Change |
| Aerospace and Defense | $ | 32,322 | | | $ | 39,097 | | | $ | (6,775) | | | (17.3) | % |
| Broadband | 66,239 | | | 75,393 | | | (9,154) | | | (12.1) | |
| Total revenue | $ | 98,561 | | | $ | 114,490 | | | $ | (15,929) | | | (13.9) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, | | | | |
| (in thousands, except percentages) | 2023 | | 2022 | | Change |
| Revenue | $ | 78,471 | | | $ | 98,561 | | | $ | (20,090) | | | (20.4) | % |
| Cost of revenue | 68,201 | | | 69,849 | | | (1,648) | | | (2.4) | |
| Gross profit | 10,270 | | | 28,712 | | | (18,442) | | | (64.2) | |
| Operating expense: | | | | | | | |
| Selling, general, and administrative | 26,347 | | | 22,550 | | | 3,797 | | | 16.8 | |
| Research and development | 16,319 | | | 13,675 | | | 2,644 | | | 19.3 | |
| Severance | 2,296 | | | 1,318 | | | 978 | | | 74.2 | |
| Gain on sale of assets | (1,147) | | | (1,919) | | | 772 | | | 40.2 | |
| Total operating expense | 43,815 | | | 35,624 | | | 8,191 | | | 23.0 | |
| Operating loss | $ | (33,545) | | | $ | (6,912) | | | $ | (26,633) | | | (385.3) | % |
Aerospace and Defense
Revenue
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| (in thousands, except percentages) | 2023 | | 2022 | | Change |
| Aerospace and Defense | $ | 27,001 | | | $ | 13,416 | | | $ | 13,585 | | | 101.3 | % |
| Broadband | (303) | | | 10,259 | | | (10,562) | | | (103.0) | |
| Total revenue | $ | 26,698 | | | $ | 23,675 | | | $ | 3,023 | | | 12.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, | | | | |
| (in thousands, except percentages) | 2023 | | 2022 | | Change |
| Aerospace and Defense | $ | 73,879 | | | $ | 32,322 | | | $ | 41,557 | | | 128.6 | % |
| Broadband | 4,592 | | | 66,239 | | | (61,647) | | | (93.1) | |
| Total revenue | $ | 78,471 | | | $ | 98,561 | | | $ | (20,090) | | | (20.4) | % |
For the three and nine months ended June 30, 2022, our2023, Aerospace and Defense revenue increased $1.1 million, or 8.8%, compared to the same period in the prior year, primarily driven by higher Inertial Navigation revenue primarily due to the additioninclusion of theEMCORE Chicago and S&N business acquired from L3Hrevenue for the three and an increase in Defense Optoelectronics revenue partially offset by a decrease in sales of QMEMS and FOG.
For the nine months ended June 30, 2022, our Aerospace2023, as well as higher QMEMS revenue compared to the same period in the period in the prior year.
For the three and Defensenine months ended June 30, 2023, Broadband revenue decreased $6.8 million, or 17.3%, compared to the same period in the prior year, primarily due to a $5.0substantial decline in sales of CATV Optical Transmitter and Components products. In April 2023, we initiated a restructuring program that includes the strategic shutdown of our Broadband business segment (including our cable TV, wireless, sensing and chips product lines) which further caused revenue to decrease and resulted in a $1.3 million decreaserevenue reversal in Defense Optoelectronics product line revenue primarily due to program delays and supply chain disruptions.
Broadband
For the three months ended June 30,
2022, our Broadband revenue decreased $20.1 million, or 66.2%, compared to2023 – See Management’s Discussion and Analysis of Financial Condition and Results of Operations Recent Developments under the same period inheading “Restructuring” for additional information regarding the prior year, primarily due to a $20.4 million decrease in CATV Lasers and Transmitters revenue due to decreased customer demand, resulting from inventory build up in the channel, an impact from the COVID-19 pandemic.restructuring program.
For the nine months ended June 30, 2022, our Broadband revenue decreased $9.2 million, or 12.1%, compared to the same period in the prior year, primarily driven by a $9.4 million decrease in CATV Lasers and Transmitters revenue due to decreased customer demand, resulting from inventory build up in the channel, an impact from the COVID-19 pandemic.
.Gross Profit
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| (in thousands, except percentages) | 2023 | | 2022 | | Change |
| Aerospace and Defense | $ | 7,163 | | | $ | 1,551 | | | $ | 5,612 | | | 361.8 | % |
| Broadband | (3,663) | | | 2,347 | | | (6,010) | | | (256.1) | |
| Total gross profit | $ | 3,500 | | | $ | 3,898 | | | $ | (398) | | | (10.2) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, | | | | |
| (in thousands, except percentages) | 2023 | | 2022 | | Change |
| Aerospace and Defense | $ | 16,786 | | | $ | 4,468 | | | $ | 12,318 | | | 275.7 | % |
| Broadband | (6,516) | | | 24,244 | | | (30,760) | | | (126.9) | |
| Total gross profit | $ | 10,270 | | | $ | 28,712 | | | $ | (18,442) | | | (64.2) | % |
Gross Profit
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | | | |
| (in thousands, except percentages) | 2022 | | 2021 | | Change |
| Aerospace and Defense | $ | 1,551 | | | $ | 3,872 | | | $ | (2,321) | | | (59.9) | % |
| Broadband | 2,347 | | | 13,353 | | | (11,006) | | | (82.4) | |
| Total gross profit | $ | 3,898 | | | $ | 17,225 | | | $ | (13,327) | | | (77.4) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended June 30, | | | | |
| (in thousands, except percentages) | 2022 | | 2021 | | Change |
| Aerospace and Defense | $ | 4,468 | | | $ | 11,747 | | | $ | (7,279) | | | (62.0) | % |
| Broadband | 24,244 | | | 32,684 | | | (8,440) | | | (25.8) | |
| Total gross profit | $ | 28,712 | | | $ | 44,431 | | | $ | (15,719) | | | (35.4) | % |
Ourprofit is revenue less cost of revenue. Cost of revenue consists of raw materials, compensation expense, including non-cash stock-based compensation expense, depreciation, expenseamortization, accretion, and other manufacturing overhead costs, expenses associated with excess and obsolete inventory expense,inventories, and product warranty costs. Historically, our cost of revenuegross profit as a percentage of revenue, which we refer to as our gross margin, has fluctuated significantly due to product mix, manufacturing yields, sales volumes, inventory, and specific product warranty charges, as well as the amount of our revenue relative to fixed manufacturing costs.
For the three months ended June 30, 2022 and 2021, consolidated gross margins were 16.5% and 40.4%, respectively. For the three months ended June 30, 2022 and 2021, stock-based compensation expense within cost of revenue totaled $0.3 million and $0.2 million, respectively.
For the nine months ended June 30, 2022 and 2021, consolidated gross margins were 29.1% and 38.8%, respectively. For each of the nine months ended June 30, 2022 and 2021, stock-based compensation expense within cost of revenue totaled $0.6 million.
Aerospace and Defense
For the three months ended June 30, 2022,2023, Aerospace and Defense gross profit decreased $2.3 million, or 59.9%,increased compared to the same period in the prior year.year primarily driven by the additional contribution from the acquisition of EMCORE Chicago. For the three and nine months ended June 30, 2022 and 2021,2023, Aerospace and Defense gross margin was 11.6%increased by 15% from 12% to 27% and 31.4%by 9% from 14% to 23%, respectively. Gross profit and margin decreased primarily due to lower QMEMS revenue and lower absorption of fixed overhead.
For the nine months ended June 30, 2022, Aerospace and Defense gross profit decreased $7.3 million, or 62.0%,respectively, compared to the same period in the prior year. Foryear, driven primarily by better product mix in the nine months ended June 30, 2022 and 2021, Aerospace and Defense gross margin was 13.8% and 30.0%, respectively. Gross profit and margin decreased primarily due to lower QMEMS, Defense Optoelectronics, and FOG revenue and under-absorption of related fixed overhead.
BroadbandInertial Navigation product line.
For the three and nine months ended June 30, 2022,2023, Broadband gross profit decreased $11.0 million, or 82.4%, compared to the same period in the prior year. For the three months ended June 30, 2022 and 2021, Broadband gross margin was 22.9% and 44.0%,
respectively. Gross profit and margin decreasedyear primarily due to the lower revenueabsorption of $20.1 million, higher materialoverhead costs and under-absorption of fixed overhead atin our Chinese manufacturingwafer fabrication facility and at our Alhambra wafer facility.
For the nine months ended June 30, 2022, Broadband gross profit decreased $8.4 million, or 25.8%, compareddue to the same periodsubstantial drop in the prior year. For the nine months ended June 30, 2022 and 2021, Broadband gross margin was 36.6% and 43.4%, respectively. Gross profit and margin decreased due to lower revenue, higher material costs and under-absorption of fixed overhead costs.product revenue.
Selling, General and Administrative
Selling, general, and administrative ("(“SG&A"&A”) consists primarily of compensation expense including non-cash stock-based compensation expense related to executive,personnel-related expenditures for sales and marketing, IT, finance, legal and human resources personnel, as well as sales and marketing expenses, professional fees, legal and patent-related costs, and other corporate-related expenses.support functions.
For the three months ended June 30, 2022,2023, SG&A expense increased by $1.7 milliondecreased compared to the same period in the prior year primarily driven by higher compensation, professional fees including acquisition related expenses, and travel expenses. For the three months ended June 30, 2022 and 2021, SG&A expenses were 32.9% and 14.3% as a percentagedue to $1.1 million of revenue, respectively. For the three months ended June 30, 2022 and 2021, stock-based compensation expense within SG&A totaled $1.0 million and $0.8 million, respectively.litigation-related insurance proceeds.
For the nine months ended June 30, 2022,2023, SG&A expense increased by $4.6 million compared to the same period in the prior year primarily driven by higher compensation, professional fees including acquisition related expenses,due to the S&N and travel expenses. For the nine months ended June 30, 2022 and 2021, SG&A expenses were 22.8% and 15.6% as a percentage of revenue, respectively. For the nine months ended June 30, 2022 and 2021, stock-based compensation expense within SG&A totaled $2.5 million and $1.8 million, respectively.EMCORE Chicago acquisitions.
Research and Development
Research and development ("(“R&D"&D”) consists primarily of compensation expense including non-cash stock-based compensation expense, as well as engineeringincludes personnel-related expenditures, project costs, and prototype costs, depreciation expense and other overhead expenses, asfacility-related expenses. We intend to continue to invest in R&D programs because they relateare essential to the design, development, and testingfuture growth of our products. 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 featuresAerospace and enhancements and in maintaining customer satisfaction worldwide.Defense segment.
For the three months ended June 30, 2023 and 2022, Aerospace and Defense R&D expense stayed flat compared to the same period in the prior year. For the three months ended June 30, 2022was $4.4 million and 2021, R&D expenses were 19.1% and 10.5% as a percentage of revenue,$3.8 million, respectively. For each of the three months ended June 30, 2022 and 2021, stock-based compensation expense within R&D totaled $0.2 million.
For the nine months ended June 30, 2023 and 2022, Aerospace and Defense R&D expense was $14.1 million and $12.0 million, respectively. R&D increased by $1.1 million compared to the same period in the prior year primarily driven by increased compensation and allocated facility costs. Fordue to R&D associated with the nine months ended June 30, 2022 and 2021, R&D expenses were 13.9% and 11.0% as a percentage of revenue, respectively. For each of the nine months ended June 30, 2022 and 2021, stock-based compensation expense within R&D totaled $0.6 million.acquired EMCORE Chicago.
For the three months ended June 30, 20222023 and 2021, Aerospace and Defense R&D expense was $3.8 million and $3.6 million, respectively. For the three months ended June 30, 2022, and 2021, Broadband R&D expense was $0.7 million and $0.9 million, respectively.
For the nine months ended June 30, 2022 and 2021, Aerospace and Defense R&D expense was $12.0 million and $10.4$0.7 million, respectively. For the nine months ended June 30, 20222023 and 2021,2022, Broadband R&D expense was $2.3 million and $1.6 million, and $2.1 million, respectively. R&D increased compared to the same period in the prior year primarily due to higher spend on the Chip product line.
Severance
For the three and nine months ended June 30, 2022, we incurred a2023, severance charge of $1.3 million, respectively. The majority of the $1.3 million is associated with the planned shutdown of manufacturing operations in Beijing, China.
(Gain) Loss on Sale of Assets
During the three months ended June 30, 2022 and 2021, we sold certain equipment and incurred a (gain) loss on sale of assets of $(1.3)totaled approximately $1.8 million and $0.3$2.3 million respectively. During the nine months ended June 30, 2022 and 2021, we sold certain equipment and incurreddue to a (gain) loss on sale of assets of $(1.9) million and $0.4 million, respectively. We have agreements to sell additional equipment and these assets are classified as assets held for sale. The remaining balance as of June 30, 2022 totaled $0.5 million.
Operating (Loss) Income
Operating (loss) income represents revenue less the cost of revenue and direct operating expenses incurred. Operating (loss) income is a measure that executive management uses to assess performance and make decisions. For the three months ended June 30, 2022 and 2021, operating (loss) income was (30.0)% and 15.0% as a percentage of revenue, respectively.previously announced reduction in force at our Alhambra facility. For the nine months ended June 30, 2022, severance totaled approximately $1.3 million associated with the shutdown of manufacturing operations at our Beijing, China facility.
Gain on Sale of Assets
During the nine months ended June 30, 2023, we consummated the sale of the real property interests in the Tinley Park Facility to the Tinley Park Buyer, resulting in a gain on sale of assets of $1.2 million. During the three and 2021, operating (loss) income was (7.0)%nine months ended June 30, 2022, the Company sold certain assets and 11.8% asrealized a percentagegain on sale of revenue,assets of $1.3 million and $1.9 million, respectively.
Gain on Extinguishment of Debt
Interest (Expense) Income, net
During the three and nine months ended June 30, 2021, we recorded a gain on extinguishment of debt of $6.62023, interest expense, net totaled approximately $0.2 million relatedand $0.7 million, respectively, primarily due to the forgiveness in full ofdebt outstanding from our PPP Loan, including accrued interest.Credit Agreement and having lower cash and cash equivalents balance earning interest income.
Interest Income (Expense), net
During the nine months ended June 30, 2021, interest income (expense), net totaled $0.5 million primarily driven by $0.6 million of reversed interest expense related to the release of the uncertain tax reserves.
Pension Expense
During the three and nine months ended June 30, 2022, pension expense totaled $0.3 million related to the change in value of the pension benefit plan assets during the period.
Order Backlog
Our 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. Historically, for our CATV Lasers and Transmitters product line, 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. In addition, demand for our CATV Lasers and Transmitters products has historically been cyclical and therefore future revenue trends for this product line are difficult to determine. With respect to our Aerospace and Defense product lines, revenue growth is dependent, to a significant extent, on customer program schedules.
Liquidity and Capital Resources
We have recently experienced significant losses from our operations and used a significant amount of cash in connection with strategic acquisitions to further our strategy of focusing on our Aerospace & Defense business. As a result of our recent cash shortage, we have taken actions to manage our liquidity and will need to continue to experience an accumulated deficit, but have managedmanage our liquidity position through the sale of assets and cost reduction initiatives.as we continue to restructure our operations to focus on our Aerospace & Defense business. As of June 30, 2022,2023, our cash and cash equivalents totaled $75.1$20.2 million and net working capital totaled $106.8$57.6 million. Net working capital, calculated as current assets (including inventory) minus current liabilities, is a financial metric we use which represents available operating liquidity.
We have taken a number of actions to continue to support our operations and meet our obligations, including:
•OnIn April 2023, we initiated a restructuring program that includes the strategic shutdown of our Broadband business segment (including our cable TV, wireless, sensing, and chips product lines) and the discontinuance of our defense optoelectronics product line. Our Board of Directors performed a thorough review of a number of factors including the competitive landscape, declining revenue and gross profit of these discontinued businesses, the current and expected profitability of these discontinued businesses, our cost structure, and our strategic focus on our Aerospace and Defense business segment, and concluded that these discontinued businesses are non-strategic, currently unsustainable, and cannot be restructured in a way that will allow us to achieve profitable growth and cash preservation. We expect to exit the operations of these discontinued businesses by December 31, 2023. As a result of this restructuring, we have eliminated or expect to eliminate approximately 75 positions in the U.S. (primarily in Alhambra, California) and approximately 25 positions in China, collectively representing approximately 22% of our total workforce, and expect to consolidate facility space by reducing the space used at our Alhambra campus from five to two buildings (including
closure of our indium phosphide wafer fabrication facility in Alhambra), relocating personnel in Concord, California to the operations area from the adjacent office building, and closing our manufacturing support and engineering center in China, collectively representing an approximately 25% reduction in the aggregate square footage occupied by our facilities. We expect this restructuring effort to result in annualized cost savings of approximately $12 million. As of the time of the filing of this Quarterly Report on Form 10-Q, we are unable in good faith to make a determination of an estimate of the total amount or range of amounts that we expect to incur in connection with this restructuring. However, we anticipate that material cash and non-cash charges will be incurred and recorded in future reporting periods. One-time employee severance and termination costs related to the restructuring of approximately $2.1 million (of which approximately $0.5 million will be in non-cash, stock-based compensation expenditures relating to the acceleration of the vesting of outstanding equity awards) was recognized in the quarter ended June 30, 2023. We expect that the restructuring implementation is anticipated to be substantially complete by the quarter ending December 31, 2023. We may incur additional expenses in connection with this restructuring that are not currently contemplated. The charges that we expect to incur in connection with the restructuring are estimates and subject to a number of assumptions, and actual results may differ materially.
•In October 2019,December 2022, we entered intoconsummated the Hytera Asset Purchase Agreementsale of the real property interests in the Tinley Park Facility to the Tinley Park Buyer, resulting in net proceeds of approximately $10.3 million, pursuant to which we agreed to sell certainthe terms of our CATV Lasers and Transmitters manufacturing equipment for purposes of outsourcing manufacturing of our CATV Lasers and Transmitters product lines to Hytera. In August 2021, we entered into the Fastrain AssetTinley Park Purchase Agreement, pursuant to which, among other items, Fastrain agreed to purchase the same equipment subject to the Hytera Asset Purchase Agreement, along with additional equipment, for aggregate consideration of $6.2 million. See Agreement.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments under the heading "Hytera and Fastrain Transactions" for additional information regarding the transactions with Hytera and Fastrain.
•OnIn August 9, 2022, the Companywe entered into the Credit Agreement with Wingspire.Wingspire that provides us with (a) an asset-based revolving credit facility in an aggregate principal amount of up to $40.0 million, subject to a borrowing base consisting of eligible accounts receivable and eligible inventory (subject to certain reserves), and (b) a term loan facility in an aggregate principal amount of $5,965,000. As of June 30, 2023, an aggregate principal amount of $6.5 million was outstanding pursuant to the revolving credit facility and an aggregate principal amount of $5.3 million was outstanding pursuant to the term loan facility, and an additional $10.6 million was available for borrowing. See caption "New ABLNote 11 - Credit Agreement" under AgreementNote 14 - Subsequent Events. in the Notes to Condensed Consolidated Financial Statements for additional information regarding the Credit Agreement.
We believe that ourOur existing balances of cash and cash equivalents, and cash flows from operations, will provide usand amounts expected to be available under the Credit Agreement, together with additional actions we could take to further reduce our expenses and/or additional funds we receive if we elect to raise capital through additional debt or equity issuances, or from our efforts to monetize certain assets, are anticipated to be sufficient financial resources to meet our cash requirements for operations, working capital, and capital expenditures for at least the next twelve months from the issuance date of these financial statements.
Should As a result, these financial statements have been prepared on a going concern basis. However, we require more capital than what is generated by our operations, we could engage in additional sales or other monetization of certain fixed assets, additional cost reductions, or elect to raise capital in the U.S. through debt or additional equity issuances. These alternatives may not be availablesuccessful in executing on our plans to us on reasonable terms, or at all,manage our liquidity, including recognizing the expected benefits from our restructuring described above, and our ability to continue to operate as a going concern could be impaired, which could in turn cause a significant decline in our stock price and could result in higher effective tax rates, increased interest expense, and/or dilutiona significant loss of earnings.value for our shareholders.
Cash FlowThe Credit Agreement subjects us to various financial and other affirmative and negative covenants with which we must comply on an ongoing or periodic basis. These include financial covenants pertaining to a minimum fixed charge coverage ratio and covenants requiring the mandatory prepayment of amounts outstanding under the revolver under specified circumstances. The agreements also subject us to various restrictions on our ability to engage in certain activities, such as raising capital or acquiring businesses. These restrictions may limit or restrict our cash flow and our ability to pursue business opportunities or strategies that we would otherwise consider to be in our best interests. In addition, the Credit Agreement contains a cash dominion provision, requiring us to maintain a minimum amount of liquidity. As of June 30, 2023, this minimum amount of liquidity that we needed to maintain was $12.5 million. If we fall below this minimum amount of liquidity for a period of three consecutive days, or if there occurs an event of default under the Credit Agreement, then our lender can exercise certain rights, including taking control of our bank accounts and cash resources. In addition, if an event of default occurs under the Credit Agreement, our lenders can accelerate the maturity of our indebtedness under that agreement to make it due and payable immediately. If we trigger the cash dominion provision or if an event of default occurs under the Credit Agreement and if in either case our lenders elect to exercise their rights, we may not be able to pay our debts and other monetary obligations as they come due, and our ability to continue to operate as a going concern could be impaired, which could in turn cause a significant decline in our stock price and could result in a significant loss of value for our shareholders.
Operating Activities
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended June 30, | | | | |
| (in thousands, except percentages) | 2022 | | 2021 | | Change |
| Net cash provided by operating activities | $ | 8,149 | | | $ | 6,729 | | | $ | 1,420 | | | 21.1 | % |
For the nine months ended June 30, 2022,We continue to explore a range of options to further address our operating activities provided cashcapitalization and liquidity. If we raise funds by issuing debt securities or incurring loans, this form of $8.1 million. Improvements in our working capital components were partly offset by our net loss.
For the nine months ended June 30, 2021, our operating activities provided cashfinancing would have rights, preferences, and privileges senior to those of $6.7 million, driven by our net income of $20.6 million, and positive adjustments for non-cash charges of $6.4 million offset by changes in our working capital components of $20.2 million. Non-cash charges primarily consisted of depreciation and amortization expense of $3.1 million and stock-based compensation expense of $3.0 million.
Working Capital Components
Accounts Receivable We generally expect the level of accounts receivable at any given quarter end to reflect the level of sales in that quarter. Accounts receivable balances have fluctuated historically due to the timing of account collections, timing of product shipments, and/or change in customer credit terms.
Inventory We generally expect the level of inventory at any given quarter end to reflect the change in our expectations of forecasted sales during the quarter. Inventory balances have fluctuated historically due to the timing of customer orders and product shipments, changes in internal forecasts related to customer demand, as well as adjustments related to excess and obsolete inventory.
Accounts Payable The fluctuationholders of our accounts payable balances is primarily driven by changes in inventory purchases as well as changes related tocommon stock. The availability and the timingterms under which we can borrow additional capital could be disadvantageous, and the terms of actual payments to vendors.
Accrued Expenses Our largest accrued expense typically relates to compensation. Historically, fluctuationsdebt securities or borrowings could impose significant restrictions on our operations. Macroeconomic conditions and credit markets could also impact the availability and cost of accrued expense accounts have primarily related to changes inpotential future debt financing. If we raise capital through the timingissuance of actual compensation payments, receipt or applicationadditional equity, such sales and issuance would dilute the ownership interests of advanced payments, adjustments to warranty accrual, and accruals related to professional fees.
Investing Activities
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended June 30, | | | | |
| (in thousands, except percentages) | 2022 | | 2021 | | Change |
| Net cash used in investing activities | $ | (4,362) | | | $ | (2,422) | | | $ | (1,940) | | | (80.1) | % |
For the nine months ended June 30, 2022,existing holders of our investing activities used cash of $4.4 million due to $1.9 million in capital-related expenditures, net and $2.4 million used in acquiring the S&N business.
For the nine months ended June 30, 2021, our investing activities used cash of $2.4 million due to capital-related expenditures.
Financing Activitiescommon stock. There can be no assurances that any additional debt or equity financing would be available to us or if available, that such financing would be on favorable terms to us. In addition, if adequate funds are not available to fund our future operations or meet our Credit Agreement obligations, we may need to curb our business plans, which could have a material adverse impact on our business prospects and results of operations.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended June 30, | | | | |
| (in thousands, except percentages) | 2022 | | 2021 | | Change |
| Net cash (used in) provided by financing activities | $ | (278) | | | $ | 33,397 | | | $ | (33,675) | | | (100.8) | % |
Cash Flow
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, | | | | |
| (in thousands, except percentages) | 2023 | | 2022 | | Change |
| Net cash (used in) provided by operating activities | $ | (26,435) | | | $ | 8,149 | | | $ | (34,584) | | | (424.4) | % |
| Net cash provided by (used in) investing activities | $ | 8,985 | | | $ | (4,362) | | | $ | 13,347 | | | 306.0 | % |
| Net cash provided by (used in) financing activities | $ | 11,523 | | | $ | (278) | | | $ | 11,801 | | | 4,245.0 | % |
For the nine months ended June 30, 2022,2023, our financingoperating activities used cash for tax withholding paid on behalf of employees for stock-based awards offset by proceeds from the exercise of equity awards.primarily due to our net loss and working capital.
For the nine months ended June 30, 2021,2023, our investing activities provided cash primarily from the sale of the Tinley Park Facility.
For the nine months ended June 30, 2023, our financing activities provided cash of $33.4 million due to proceedsprimarily from issuancethe sale of common stock net of issuance costs of $33.1 million and proceeds from employee stock purchase plan and equity awards of $0.5 million, offset by tax withholding paid on behalf of employeescash used for stock-based awards of $0.2 million.payment to our borrowing facility.
Contractual Obligations and Commitments
As of the date of this report, there were no material changes to our contractual obligations and commitments outside the ordinary course of business since September 30, 20212022 as reported in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.2022.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our condensed consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. If these estimates differ significantly from actual results, the impact to the condensed consolidated financial statements may be material. There have been no material changes in our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.2022. Please refer to Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 20212022 for a discussion of our critical accounting policies and estimates.
ITEM 3. Quantitative and Qualitative Disclosures About Market RisksRisk
There were no material changes to our quantitative and qualitative disclosures about market risks during the third quarter of fiscal 2022.2023. Please refer to Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risks”Risk” included in our Annual Report on the Form 10-K for our fiscal year ended September 30, 20212022 for a more complete discussion of the market risks we encounter.
ITEM 4. Controls and Procedures
a.Evaluation of Disclosure Controls and Procedures
Our 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”)) as of June 30, 2022.2023. Based upon this evaluation, ourthe Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
b.Changes in Internal Control over Financial Reporting
As a result of the acquisition of S&N on April 29, 2022, our management is in the process of reviewing and evaluating the design and operating effectiveness of its internal control over financial reporting relating to S&N. Certain changes have been made and will continue to be made to our internal controls until management has completed its evaluation and integrated S&N’s information and accounting systems and processes. In reliance on interpretive guidance issued by the SEC staff permitting a company to exclude an acquired business from management’s assessment of the effectiveness of internal control over financial reporting for one year following the date that the acquisition is completed, we have elected to exclude disclosure of changes in internal control over financial reporting related to S&N from this Quarterly Report on Form 10-Q.
There have been no other 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 June 30, 20222023 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 employees are now working from home. The design of processes, systems, and controls allows for remote execution with accessibility to secure data.
PART II. Other InformationOTHER INFORMATION
ITEM 1. Legal Proceedings
See the disclosures under the caption “Legal Proceedings” in Note 1113 - Commitments and Contingencies in the notesNotes to condensed consolidated financial statementsCondensed Consolidated Financial Statements for disclosures related to our legal proceedings, which disclosures are incorporated herein by reference.
ITEM 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10‑K for the fiscal year ended September 30, 2021,2022, which could materially affect our business, financial condition, or future results. We do not believe that there have been any material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.2022. The risks described in our Annual Report on Form 10‑K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition, operating results and/or cash flows.
We have incurred losses from continuing operations and our future profitability is not certain.
For the nine months ended June 30, 2023 and fiscal year ended September 30, 2022, we incurred net losses of $33.8 million and $24.3 million, respectively, and as of June 30, 2023, have an accumulated deficit of approximately $655.9 million. Our operating results for future periods are subject to numerous uncertainties and we cannot be certain that we will be profitable or that we will not experience substantial losses in the future. If we are not able to increase revenue and reduce our costs, we may not be able to achieve profitability in future periods and our business, financial condition, results of operations and cash flows may be materially and adversely affected.
We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to shareholders.
We operate in industries that makes our prospects difficult to evaluate and predict. It is possible that we may not generate sufficient 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 to execute on our current or future business strategies, including to:
•invest in research and development efforts, including by hiring additional technical and other personnel;
•maintain and expand operating or manufacturing infrastructure;
•acquire complementary businesses, products, services or technologies; or
•otherwise pursue strategic plans and respond to competitive pressures.
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. The terms of debt securities or borrowings, if available, could impose significant restrictions on our operations.
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, we may be required to adopt one or more alternatives, including, but not limited to, selling additional assets, exiting additional business lines,further reductions of our capital expenditures, delaying, reducing the scope of or eliminating one or more research and development programs, selling and marketing initiatives, and restructuring our existing debt obligations on new terms that may be less favorable than the existing terms, if available at all. If we are unable to manage discretionary spending, raise additional capital, or implement any of the above activities, as needed, we may need to further curtail planned activities to reduce costs, which could include additional reductions in workforce, additional eliminations of business activities and services, and further reductions in other operating expenses. Doing so could potentially have a material and adverse effect on our business, financial condition, results of operations, cash flows, and future prospects.
Our secured credit facility contains financial and restrictive covenants that we may not satisfy, and that, if not satisfied, could result in the acceleration of any outstanding indebtedness and limit our ability to borrow additional funds. The credit facility also imposes restrictions that may limit our ability to pursue business opportunities.
Our Credit Agreement, dated as of August 9, 2022 (the “Credit Agreement”), among the Company, S&N, the lenders party thereto and Wingspire Capital LLC (“Wingspire”), as administrative agent for the lenders, subjects us to various financial and other affirmative and negative covenants with which we must comply on an ongoing or periodic basis. These include financial covenants pertaining to a minimum fixed charge coverage ratio and covenants requiring the mandatory prepayment of amounts outstanding under the revolver under specified circumstances. The agreements also subject us to various restrictions on our ability to engage in certain activities, such as raising capital or acquiring businesses. These restrictions may limit or restrict our cash flow and our ability to pursue business opportunities or strategies that we would otherwise consider to be in our best interests. In addition, the Credit Agreement contains a cash dominion provision, requiring us to maintain a minimum amount of liquidity. As of September 30, 2022, this minimum amount of liquidity that we needed to maintain was $12.5 million. If we fall below this minimum amount of liquidity for a period of three consecutive days, or if there occurs an event of default under the Credit Agreement, then our lender can exercise certain rights, including taking control of our bank accounts and cash resources. In addition, if an event of default occurs under the Credit Agreement, our lenders can accelerate the maturity of our indebtedness under that agreement to make it due and payable immediately. If we trigger the cash dominion provision or if an event of default occurs under the Credit Agreement and if in either case our lenders elect to exercise their rights, we may not be able to pay our debts and other monetary obligations as they come due, and our ability to continue to operate as a going concern could be impaired, which could in turn cause a significant decline in our stock price and could result in a significant loss of value for our shareholders.
We may be unable to realize the level of the anticipated benefits that we expect from exiting businesses and restructuring our operations, which may adversely impact our business and results of operations.
From time to time, we may decide to exit certain businesses or otherwise undertake restructuring, reorganization, or other strategic initiatives to realign our resources with our growth strategies, operate more efficiently and reduce costs. The successful implementation of our restructuring activities may from time to time require us to effect business and asset dispositions, workforce reductions, facility consolidations and closures, restructurings, management changes, reductions in investments, shut-downs or discontinuance of businesses, and other actions, each of which may depend on a number of factors that may not be within our control. For example, as described in more detail elsewhere in this Quarterly Report on Form 10-Q, on April 21, 2023, we announced the shutdown of our Broadband business segment and the discontinuance of our defense optoelectronics product line.
Any such effort to restructure or streamline our organization may result in restructuring or other costs, such as severance and termination costs, contract and lease termination costs, asset impairment charges, and other costs. In particular, we expect that material cash and non-cash charges will be incurred and recorded in our future reporting periods as a result of the shutdown of our Broadband business segment and the discontinuance of our defense optoelectronics product line. Further, as a result of restructuring initiatives, we may experience a loss of continuity, loss of accumulated knowledge and proficiency, deterioration of customer or vendor relationships, potential legal proceedings, adverse effects on employee morale, loss of key employees and other retention issues. Reorganization and restructuring can impact a significant amount of management and other employees’ time and resources, which may divert attention from operating and growing our business. The occurrence of one or more of these risks could potentially delay the timing of the completion of the restructuring. Further, upon completion of any restructuring initiatives, our business may not be more efficient or effective than prior to the implementation of the plan and we may be unable to achieve anticipated benefits, including cost savings, which would adversely affect our business, competitive position, operating results and financial condition.
If we fail to satisfy all applicable Nasdaq continued listing requirements, including the $1.00 minimum closing bid price requirement, our common stock may be delisted from Nasdaq, which could have an adverse impact on the liquidity and market price of our common stock.
Our common stock is currently listed on The Nasdaq Stock Market, which has qualitative and quantitative continued listing requirements, including corporate governance requirements, public float requirements, and a $1.00 minimum closing bid price requirement. Our common stock price is currently and may in the future be below the minimum bid price for continued listing on Nasdaq, and on June 23, 2023, we received a letter (the “Notification Letter”) from The Nasdaq Stock Market LLC stating that we were not in compliance with the minimum bid price requirements set forth in Nasdaq Listing Rule 5450(a)(1) because our common stock failed to maintain a minimum closing bid price of $1.00 per share for 30 consecutive business days. To regain compliance, the closing bid price of our common stock must be at least $1.00 per share for a minimum of 10 consecutive business days at any time prior to December 20, 2023. While the Notification Letter has no immediate effect on the listing or trading of our common stock on Nasdaq (and we may be eligible for additional time to reach compliance with the minimum bid price requirement), and while we intend to actively monitor the bid price for our common stock between now and December 20, 2023 (or any extension thereof) and will consider available options to resolve the deficiency and regain compliance with the minimum bid price requirement, such a delisting, if it were to occur, would likely have an adverse effect on the liquidity of our common stock, decrease the market price of our common stock, result in the potential loss of confidence by investors, suppliers, customers, and employees, and fewer business development opportunities, and adversely affect our ability to obtain financing for our continuing operations.
ITEM 6. Exhibits
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| 2.1 | | | |
2.2 | | | Purchase and Sale Agreement, dated as of June 7, 2019 by and among EMCORE Corporation, The Resilience Fund IV, L.P., The Resilience Fund IV-A, L.P., Aerospace Newco Holdings, Inc. and Ember Acquisition Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on June 10, 2019). |
2.3 | | | |
2.4 | | | |
2.5 | | |
2.62.2 | | |
2.72.3 | | |
2.82.4 | | |
2.92.5 | | |
10.1†2.6 | | |
| 2.7 | | |
| 31.1** | | |
| 31.2** | | |
| 32.1*** | | |
| 32.2*** | | |
| 101.INS** | | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH** | | XBRL Taxonomy Extension Schema Document. |
| 101.CAL** | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.LAB** | | XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE** | | XBRL Taxonomy Extension Presentation Linkbase Document. |
| 101.DEF** | | XBRL Taxonomy Extension Definition Linkbase Document. |
| 104** | | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). |
† Management contract or compensatory plan_____________________________________
** Filed herewith
*** Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | | | | |
| | | EMCORE CORPORATION |
| | | | |
| Date: | August 9, 20222023 | | By: | /s/ Jeffrey Rittichier |
| | | | Jeffrey Rittichier |
| | | | Chief Executive Officer
(Principal Executive Officer) |
| | | | |
| | | | |
| Date: | August 9, 20222023 | | By: | /s/ Tom Minichiello |
| | | | Tom Minichiello |
| | | | Chief Financial Officer
(Principal Financial and Accounting Officer) |
