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,December 31, 2023 |
or |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ___ to ___ |
Commission File Number: 001-36632
EMCORE Corporation
(Exact name of registrant as specified in its charter)
| | | | | | | | |
New Jersey | | 22-2746503 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
2015 W. Chestnut Street, Alhambra, California, 91803
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (626) 293-3400
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common stock, no par value | EMKR | The Nasdaq Stock Market LLC | (Nasdaq Global Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ 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,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ☐ Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☑ Smaller reporting company ☐ Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
As of August 7, 2023,February 2, 2024, the number of shares outstanding of no par value common stock totaled 54,160,478.77,320,280.
EMCORE CORPORATION
FORM 10-Q QUARTERLY REPORT
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 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 ability to continue as a going concern, the expected costs and benefits of our restructuring efforts, our ability to manage our liquidity, 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 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:
•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 shutdown of the Broadband business segment and the discontinuancesale of our cable TV, wireless, sensing and defense optoelectronics product line;
•lines, including without limitation (i) the failure to fully realize the anticipated benefits of such transaction, (ii) third party costs incurred by the Company related to any such transaction, (iii) risks associated with liabilities related to the transaction that were retained by the Company, and (iv) risks and uncertainties related to the closingtransfer to the buyer of theour manufacturing support and engineering center in China;
•risks related to the shutdown and any potential sale of our wafer fabrication facility and/or our remaining Broadband businesses,Chips business, including without limitation the failure to successfully negotiate or execute definitive transaction agreements, termination of any definitive agreement prior to closing, the failure to achieve any anticipated proceeds from any such sale or to fully realize the anticipated benefits of such a transaction, even if the potential transaction occurs, 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 that are retained by the Company in any sale transaction;
•our inability to remediate the material weakness in our internal control over financial reporting or our identification of any other material weaknesses in the future may adversely affect the accuracy and timing of our financial reporting;
•our inability to regain compliance with the minimum closing bid price requirement of the Nasdaq Stock Market within the applicable cure period;
•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;
•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 business of L3Harris Technologies, Inc. (“S&N”) business,, or the FOG and
Inertial Navigation Systems business (“EMCORE Chicago”) of KVH Industries, Inc. (“KVH”) may not meet our expectations, (b) the costs and cash expenditures for integration of the S&N business operations or EMCORE Chicago may be higher than expected, (c) there could be losses and liabilities arising from the acquisition of SDI, S&N, or EMCORE 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 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 EMCORE Chicago acquisition and will need to take additional steps, including making additional acquisitions, to achieve our growth objectives for this product line;
•risks and uncertainties related to manufacturing and production capacity; and
•
risks related to the conversion of order backlog into product revenue; 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, 2022,2023, 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,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, 2022.2023. 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 statementstatements 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 Statements (Unaudited)
EMCORE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | | | | |
(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 | |
| | | | | | | | | | | |
(in thousands) | December 31, 2023 | | September 30, 2023 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 20,679 | | | $ | 26,211 | |
Restricted cash | 495 | | | 495 | |
Accounts receivable, net of credit loss of $299 and $356, respectively | 16,922 | | | 15,575 | |
Contract assets | 7,293 | | | 8,402 | |
Inventory | 31,954 | | | 28,905 | |
Prepaid expenses | 4,088 | | | 4,612 | |
Other current assets | 513 | | | 922 | |
Assets held for sale | 3,871 | | | 7,264 | |
Total current assets | 85,815 | | | 92,386 | |
Property, plant, and equipment, net | 14,605 | | | 15,517 | |
Operating lease right-of-use assets | 20,857 | | | 21,564 | |
Other intangible assets, net | 11,751 | | | 12,245 | |
Other non-current assets | 2,159 | | | 2,201 | |
Total assets | $ | 135,187 | | | $ | 143,913 | |
LIABILITIES and SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 12,357 | | | $ | 9,683 | |
Accrued expenses and other current liabilities | 8,880 | | | 8,471 | |
Contract liabilities | 1,894 | | | 1,630 | |
Financing payable | 184 | | | 460 | |
Loan payable - current | 852 | | | 852 | |
Operating lease liabilities - current | 3,093 | | | 3,033 | |
Liabilities held for sale | 356 | | | 4,662 | |
Total current liabilities | 27,616 | | | 28,791 | |
Line of credit | 4,650 | | | 6,418 | |
Loan payable - non-current | 3,117 | | | 3,330 | |
Operating lease liabilities - non-current | 20,101 | | | 20,882 | |
Asset retirement obligations | 4,255 | | | 4,194 | |
Other long-term liabilities | 8 | | | 8 | |
Total liabilities | 59,747 | | | 63,623 | |
Commitments and contingencies (Note 12) | | | |
Shareholders’ equity: | | | |
Common stock, no par value, 100,000 shares authorized; 84,209 shares issued and 77,302 shares outstanding as of December 31, 2023; 84,014 shares issued and 77,108 shares outstanding as of September 30, 2023 | 825,948 | | | 825,119 | |
Treasury stock at cost; 6,906 shares as of December 31, 2023 and September 30, 2023 | (47,721) | | | (47,721) | |
Accumulated other comprehensive income | 350 | | | 350 | |
Accumulated deficit | (703,137) | | | (697,458) | |
Total shareholders’ equity | 75,440 | | | 80,290 | |
Total liabilities and shareholders’ equity | $ | 135,187 | | | $ | 143,913 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
EMCORE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| | | | | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in thousands, except per share data) | (in thousands, except per share data) | 2023 | | 2022 | | 2023 | | 2022 |
(in thousands, except per share data) | |
(in thousands, except per share data) | |
Revenue | |
Revenue | |
Revenue | Revenue | $ | 26,698 | | | $ | 23,675 | | | $ | 78,471 | | $ | 98,561 |
Cost of revenue | Cost of revenue | 23,198 | | | 19,777 | | | 68,201 | | 69,849 |
Cost of revenue | |
Cost of revenue | |
Gross profit | |
Gross profit | |
Gross profit | Gross profit | 3,500 | | | 3,898 | | | 10,270 | | 28,712 |
Operating expense: | Operating expense: | |
Operating expense: | |
Operating expense: | |
Selling, general, and administrative | |
Selling, general, and administrative | |
Selling, general, and administrative | Selling, general, and administrative | 6,452 | | | 7,800 | | | 26,347 | | 22,550 |
Research and development | Research and development | 5,171 | | | 4,513 | | | 16,319 | | 13,675 |
Research and development | |
Research and development | |
Severance | |
Severance | |
Severance | Severance | 1,838 | | | — | | | 2,296 | | | 1,318 | |
Gain on sale of assets | Gain on sale of assets | — | | | (1,318) | | | (1,147) | | (1,919) |
Gain on sale of assets | |
Gain on sale of assets | |
Total operating expense | |
Total operating expense | |
Total operating expense | Total operating expense | 13,461 | | | 10,995 | | | 43,815 | | 35,624 |
Operating loss | 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) | |
Operating loss | |
Operating loss | |
Other expense: | |
Other expense: | |
Other expense: | |
Interest expense, net | |
Interest expense, net | |
Interest expense, net | |
Other (expense) income | |
Other (expense) income | |
Other (expense) income | |
Total other expense | |
Total other expense | |
Total other expense | |
Loss from continuing operations before income tax expense | |
Loss from continuing operations before income tax expense | |
Loss from continuing operations before income tax expense | |
Income tax expense from continuing operations | |
Income tax expense from continuing operations | |
Income tax expense from continuing operations | |
Net loss from continuing operations | |
Net loss from continuing operations | |
Net loss from continuing operations | |
Loss from discontinued operations | |
Loss from discontinued operations | |
Loss from discontinued operations | |
Net loss | 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) |
Net loss | |
Net loss | |
Per share data: | 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 |
Per share data: | |
Per share data: | |
Net loss on continuing operations per share, basic and diluted | |
Net loss on continuing operations per share, basic and diluted | |
Net loss on continuing operations per share, basic and diluted | |
Net loss on discontinued operations per share, basic and diluted | |
Net loss on discontinued operations per share, basic and diluted | |
Net loss on discontinued operations per share, basic and diluted | |
Net loss per share, basic and diluted | |
Net loss per share, basic and diluted | |
Net loss per share, basic and diluted | |
Weighted-average number of share outstanding, basic and diluted | |
Weighted-average number of share outstanding, basic and diluted | |
Weighted-average number of share outstanding, basic and diluted | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
EMCORE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
| Three Months Ended December 31, | |
| Three Months Ended December 31, | |
| Three Months Ended December 31, | |
(in thousands) | |
(in thousands) | |
(in thousands) | (in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
Shares of common stock | Shares of common stock | | | | | | | |
Shares of common stock | |
Shares of common stock | |
Balance, beginning of period | |
Balance, beginning of period | |
Balance, beginning of period | Balance, beginning of period | 53,884 | | | 37,395 | | | 37,591 | | | 36,984 | |
Stock-based compensation | Stock-based compensation | 269 | | | 148 | | | 1,107 | | | 553 | |
Stock option exercises | — | | | — | | | — | | | 6 | |
Sale of common stock | — | | | — | | | 15,455 | | | — | |
Stock-based compensation | |
Stock-based compensation | |
Balance, end of period | |
Balance, end of period | |
Balance, end of period | Balance, end of period | 54,153 | | | 37,543 | | | 54,153 | | | 37,543 | |
Value of common stock | Value of common stock | | | | | | | |
Value of common stock | |
Value of common stock | |
Balance, beginning of period | |
Balance, beginning of period | |
Balance, beginning of period | Balance, beginning of period | $ | 806,100 | | | $ | 784,371 | | | $ | 787,347 | | | $ | 782,266 | |
Stock-based compensation | Stock-based compensation | 1,713 | | | 1,523 | | | 4,982 | | | 3,755 | |
Stock option exercises | — | | | — | | | — | | | 29 | |
Stock-based compensation | |
Stock-based compensation | |
Stock issuance costs | |
Stock issuance costs | |
Stock issuance costs | |
Tax withholding paid on behalf of employees for stock-based awards | Tax withholding paid on behalf of employees for stock-based awards | (17) | | | (151) | | | (161) | | | (307) | |
Sale of common stock | (191) | | | — | | | 15,437 | | | — | |
Tax withholding paid on behalf of employees for stock-based awards | |
Tax withholding paid on behalf of employees for stock-based awards | |
Balance, end of period | |
Balance, end of period | |
Balance, end of period | Balance, end of period | 807,605 | | | 785,743 | | | 807,605 | | | 785,743 | |
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 | | | | | | | |
Balance, beginning of period | 1,246 | | | 709 | | | 1,301 | | | 687 | |
Translation adjustment | 134 | | | 69 | | | 79 | | | 91 | |
Balance, end of period | 1,380 | | | 778 | | | 1,380 | | | 778 | |
Treasury stock, beginning and end of period | |
Treasury stock, beginning and end of period | |
Accumulated other comprehensive income, beginning and end of period | |
Accumulated other comprehensive income, beginning and end of period | |
Accumulated other comprehensive income, beginning and end of period | |
Accumulated deficit | |
Accumulated deficit | |
Accumulated deficit | Accumulated deficit | | | | | | | |
Balance, beginning of period | Balance, beginning of period | (646,020) | | | (597,577) | | | (622,099) | | | (597,766) | |
Balance, beginning of period | |
Balance, beginning of period | |
Net loss | |
Net loss | |
Net loss | Net loss | (9,857) | | | (7,649) | | | (33,778) | | | (7,460) | |
Balance, end of period | Balance, end of period | (655,877) | | | (605,226) | | | (655,877) | | | (605,226) | |
Balance, end of period | |
Balance, end of period | |
Total shareholders’ equity | Total shareholders’ equity | $ | 105,387 | | | $ | 133,574 | | | $ | 105,387 | | | $ | 133,574 | |
Total shareholders’ equity | |
Total shareholders’ equity | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
EMCORE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | | | | | |
| Nine Months Ended June 30, | | | | |
(in thousands) | 2023 | | 2022 | | | | |
Cash flows from operating activities: | | | | | | | |
Net loss | $ | (33,778) | | | $ | (7,460) | | | | | |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | | | | |
Depreciation and amortization expense | 6,496 | | | 3,292 | | | | | |
Stock-based compensation expense | 4,982 | | | 3,755 | | | | | |
Provision adjustments related to credit loss | 25 | | | 187 | | | | | |
Provision adjustments related to product warranty | (57) | | | 174 | | | | | |
Gain on disposal of property, plant, and equipment | (1,147) | | | (1,919) | | | | | |
Other | 124 | | | 299 | | | | | |
Total non-cash adjustments | 10,423 | | | 5,788 | | | | | |
Changes in operating assets and liabilities: | | | | | | | |
Accounts receivable and contract assets | (7) | | | 7,306 | | | | | |
Inventory | (2,158) | | | 3,380 | | | | | |
Other assets | (2,000) | | | (5,263) | | | | | |
Accounts payable | (1,230) | | | (4,706) | | | | | |
Contract liabilities | (3,941) | | | 2,650 | | | | | |
Operating lease liabilities - current | 527 | | | (487) | | | | | |
Accrued expenses and other liabilities | 5,729 | | | 6,941 | | | | | |
Total change in operating assets and liabilities | (3,080) | | | 9,821 | | | | | |
Net cash (used in) provided by operating activities | (26,435) | | | 8,149 | | | | | |
Cash flows from investing activities: | | | | | | | |
Purchase of equipment | (2,026) | | | (4,743) | | | | | |
Proceeds from disposal of property, plant, and equipment | 10,915 | | | 2,820 | | | | | |
Acquisition of business, net of cash acquired | 96 | | | (2,439) | | | | | |
Net cash provided by (used in) investing activities | 8,985 | | | (4,362) | | | | | |
Cash flows from financing activities: | | | | | | | |
Proceeds from borrowings from line of credit | 393 | | | — | | | | | |
Payments towards line of credit | (3,507) | | | — | | | | | |
Payments towards note payable | (639) | | | — | | | | | |
Proceeds from sale of common stock | 15,437 | | | — | | | | | |
Proceeds from employee stock purchase plans and exercise of equity awards | — | | | 29 | | | | | |
Taxes paid related to net share settlement of equity awards | (161) | | | (307) | | | | | |
Net cash provided by (used in) financing activities | 11,523 | | | (278) | | | | | |
Effect of exchange rate changes provided by foreign currency | (6) | | | (62) | | | | | |
Net (decrease) increase in cash, cash equivalents, and restricted cash | (5,933) | | | 3,447 | | | | | |
Cash, cash equivalents, and restricted cash at beginning of period | 26,145 | | | 71,682 | | | | | |
Cash, cash equivalents, and restricted cash at end of period | $ | 20,212 | | | $ | 75,129 | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | | | | |
Cash paid during the period for interest | $ | 932 | | | $ | 40 | | | | | |
Cash paid during the period for income taxes | $ | 120 | | | $ | 547 | | | | | |
NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | |
Changes in accounts payable related to purchases of equipment | $ | (373) | | | $ | (76) | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | |
(in thousands) | 2023 | | 2022 | | | | |
Cash flows from operating activities: | | | | | | | |
Net loss | $ | (5,679) | | | $ | (11,693) | | | | | |
Less: Loss from discontinued operations, net of tax | (1,316) | | | (3,521) | | | | | |
Loss from continuing operations, net of tax | (4,363) | | | (8,172) | | | | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | |
Depreciation and amortization expense | 1,457 | | | 2,034 | | | | | |
Stock-based compensation expense | 848 | | | 1,734 | | | | | |
Provision adjustment related to credit loss | — | | | 42 | | | | | |
Provision adjustment related to product warranty | (71) | | | 50 | | | | | |
Gain on sale of assets | (31) | | | (1,171) | | | | | |
Other | — | | | (133) | | | | | |
Total non-cash adjustments | 2,203 | | | 2,556 | | | | | |
Changes in operating assets and liabilities: | | | | | | | |
Accounts receivable and contract assets, net | (238) | | | (83) | | | | | |
Inventory | (3,049) | | | (4,141) | | | | | |
Other assets | 985 | | | (3,506) | | | | | |
Accounts payable | 2,887 | | | (355) | | | | | |
Contract liabilities | (735) | | | 2,566 | | | | | |
Operating lease liabilities - current | (14) | | | (1,175) | | | | | |
Accrued expenses and other liabilities | 479 | | | 120 | | | | | |
Total change in operating assets and liabilities | 315 | | | (6,574) | | | | | |
Net cash used in operating activities - continuing operations | (1,845) | | | (12,190) | | | | | |
Net cash (used in) provided by operating activities - discontinued operations | (2,229) | | | 3,557 | | | | | |
Net cash used in operating activities | (4,074) | | | (8,633) | | | | | |
Cash flows from investing activities: | | | | | | | |
Purchase of property, plant, and equipment | (214) | | | (818) | | | | | |
Proceeds from disposal of property, plant, and equipment | 32 | | | 10,900 | | | | | |
Proceeds from deposit on disposition of assets held for sale | 1,000 | | | — | | | | | |
Net cash provided by investing activities | 818 | | | 10,082 | | | | | |
Cash flows from financing activities: | | | | | | | |
Payments towards financing arrangement | (276) | | | — | | | | | |
Proceeds from borrowings from line of credit | — | | | 393 | | | | | |
Payments towards line of credit | (1,768) | | | (3,354) | | | | | |
Payments towards note payable | (213) | | | (213) | | | | | |
Payments of issuance costs related to sales of common stock | (18) | | | — | | | | | |
Taxes paid related to net share settlement of equity awards | (1) | | | (1) | | | | | |
Net cash used in financing activities | (2,276) | | | (3,175) | | | | | |
Effect of exchange rate changes provided by foreign currency | — | | | 58 | | | | | |
Net decrease in cash, cash equivalents, and restricted cash | (5,532) | | | (1,668) | | | | | |
Cash, cash equivalents, and restricted cash at beginning of period | 26,706 | | | 25,619 | | | | | |
Cash, cash equivalents, and restricted cash at end of period | $ | 21,174 | | | $ | 23,951 | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | | | | |
Cash paid during the period for interest | $ | 274 | | | $ | 359 | | | | | |
Cash paid during the period for income taxes | $ | — | | | $ | — | | | | | |
NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | |
Changes in accounts payable related to purchases of equipment | $ | (214) | | | $ | 122 | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Description of Business
EMCORE Corporation, (referred to herein, together with its subsidiaries (referred to herein as the “Company,” “we,” “our,” or “EMCORE”), is a leading provider of inertialsensors and navigation productssystems for the aerospace and defense markets. 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.market. Over the last fourfive years, we have expanded our scale and portfolio of inertial sensor products through the acquisitions of Systron Donner Inertial, Inc. (“SDI”) in June 2019, the Space and Navigation (“S&N”) business of L3Harris Technologies, Inc. (“L3H”S&N”) in April 2022, and the FOG and Inertial Navigation Systems business (“EMCORE Chicago”) of KVH Industries, Inc. (“KVH”EMCORE Chicago”) in August 2022. Our multi-year transition from a broadband company to an inertial navigation company has now been completed following the sale of our cable TV, wireless, sensing and defense optoelectronics business lines and the shutdown of our chips product line and indium phosphide wafer fabrication operations.
We have fully vertically-integrated manufacturing capability at our headquarters in Alhambra, CA, and at our facilities in Budd Lake, NJ, Concord, CA, and Tinley Park, IL (the “Tinley Park Facility”). These facilities support our manufacturing strategy for Fiber Optic Gyroscope (“FOG”), Ring Laser Gyro (“RLG”), Photonic Integrated Chip (“PIC”), and Quartz Micro Electro-Mechanical System (“QMEMS”) products for inertial navigation. Our manufacturing facilities maintain ISO 9001 quality management certification, and we are AS9100 aerospace quality certified at our headquartersfacilities in Alhambra, CA, Concord, CA, and at our facilities in Budd Lake, NJNJ. Our best-in-class components and Concord, CA. These facilitiessystems support a broad array of inertial navigation applications.
Our operations include wafer fabrication (lithium niobate and quartz), device design and production, fiber optic module and subsystem design and manufacture, and PIC-based and QMEMS-based component design and manufacture. Many of our vertically-integrated manufacturing strategy for quartz, FOG,operations are computer-monitored or controlled to enhance production output and Ring Laser Gyro products for navigation systems.statistical control. Our manufacturing processes involve extensive quality assurance systems and performance testing. We have one reporting segment, Inertial Navigation, whose product technology categories include: (a) FOG, (b) QMEMS, and (c) RLG, in each case which serves the aerospace and defense market.
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 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, 20222023 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, 2022.
We follow the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles-Goodwill and Other (“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.
Going Concern
These condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principlesGAAP assuming we will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, substantial doubt about our ability to continue as a going concern exists.
We have recently experienced significant losses from our operations and used a significant amount of cash, amounting to a net loss of $33.8$5.7 million and net cash outflows from operations of $26.4$1.8 million for the ninethree months ended June 30,December 31, 2023, and we expect to continue to incur losses and use cash in our operations as we continue to restructure our business.in the near term. As a result of our recent cash outflows, we have taken actions to manage our liquidity and will needplan to continue to manage our liquidity as we continue to restructure our operations to focus on our Aerospace & Defense business.do so. As of June 30,December 31, 2023, our cash and cash equivalents totaled $20.2$21.2 million, including restricted cash of $0.5 million and we had $10.6$7.2 million available under our Credit Agreement (as defined in Note 1110 - Credit Agreement in the Notes to Condensed Consolidated Financial Statements).
We are 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 thoseincluding further
made in connection with our restructuring program announced in April 2023) to further reduce our expensesexpense reductions and/or potentially raising capital through additional debt or equity issuances, or from the potential 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 result substantial doubt about our ability to 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 condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reported period. Such 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 from actual results, adjustments are made in subsequent periods to reflect more current information.
NOTE 3. Acquisitions
On 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 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. Following the closing, EMCORE Chicago results are included in our A&D reportable segment and in our consolidated financial statements beginning on the acquisition date. Revenue and net income of EMCORE Chicago of $9.3 million and $0.4 million, respectively, is included in our condensed consolidated statements of operations and comprehensive loss 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, 2023.
Final Purchase Price Allocation
The total purchase price for the EMCORE Chicago acquisition was allocated to the assets acquired and liabilities assumed based on the estimated fair values as of the acquisition date. Since the acquisition, the purchase price allocation for EMCORE Chicago changed by a $3.3 million reduction to inventory resulting in a corresponding increase to intangible assets and goodwill acquired. Goodwill is measured as the excess of the fair value of the purchase consideration transferred over the fair value of the identifiable net assets.
The table below represents the final purchase price allocation to the assets acquired and liabilities assumed of EMCORE 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 | $ | 4,977 | |
Inventory | 7,479 | |
Prepaid expenses and other current assets | 1,483 | |
Property, plant, and equipment | 14,442 | |
Intangible assets acquired | 13,470 | |
Goodwill | 15,867 | |
Liabilities assumed: | |
Accounts payable | (1,699) | |
Accrued expenses | (485) | |
Contract liabilities | (637) | |
Other long-term liabilities | (8) | |
Total purchase consideration | $ | 54,889 | |
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, 2023, the Company incurred transitional and transaction costs of approximately $0.3 million and $3.6 million, respectively, in connection with the S&N 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. 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 4.3. 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:
| (in thousands) | (in thousands) | June 30, 2023 | | September 30, 2022 | (in thousands) | December 31, 2023 | | September 30, 2023 |
Cash | Cash | $ | 13,936 | | | $ | 20,011 | |
Cash equivalents | Cash equivalents | 5,781 | | | 5,614 | |
Restricted cash | Restricted cash | 495 | | | 520 | |
Total cash, cash equivalents, and restricted cash | Total cash, cash equivalents, and restricted cash | $ | 20,212 | | | $ | 26,145 | |
NOTE 4. Assets and Liabilities Held for Sale and Discontinued Operations
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. During the quarter ended September 30, 2023, the Broadband business segment and defense optoelectronics product line were considered as held for sale based upon (i) the existence of an executed non-binding letter of intent to sell our Broadband business segment (other than our chips product line) and our defense optoelectronics product line and (ii) in consideration of ongoing negotiations for the sale of the chips product line business.
In October 2023, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”), by and among the Company, Photonics Foundries, Inc., a Delaware corporation (“PF”), and Ortel LLC, a Delaware limited liability company and wholly owned subsidiary of PF (the “Buyer”), pursuant to which (i) the Company agreed to transfer to the Buyer, and Buyer agreed to assume, substantially all of the assets and liabilities primarily related to the Company’s cable TV, wireless, sensing and defense optoelectronics business lines (the “Businesses”), including with respect to employees, contracts, intellectual property and inventory, and (ii) Buyer agreed to provide a limited license back to the Company of patents being sold to the Buyer (the “Transaction”). The Transaction excluded the Company’s chip business, indium phosphide wafer fabrication facilities and all assets not primarily related to the Businesses.
The signing and closing of the Transaction occurred simultaneously, except with respect to the assets of the Company located in China. In November 2023, the Company transferred to the Buyer, and the Buyer assumed, substantially all of the assets and liabilities of each of the Company’s subsidiaries in China.
In connection with the Transaction, the parties entered a transition services agreement pursuant to which the Company is providing certain migration and transition services to facilitate an orderly transaction of the operation of the Businesses to the Buyer in the 12-month period following consummation of the Transaction, and the Company and the Buyer entered into a sublease pursuant to which the Company is subleasing to the Buyer one of the Company’s buildings (occupying approximately
12,500 square feet) at its Alhambra, California facility for the 12-month period immediately following the closing of the Transaction without payment of rent. With respect to the Buyer’s assumption of our manufacturing agreement with our electronics manufacturing services (“EMS”) provider for our cable TV products, the Company (i) made a payment to the EMS provider in the amount of approximately $0.4 million immediately prior to the closing of the transaction and (ii) provided a guaranty of PF’s and the Buyer’s obligations with respect to payment of certain long-term liabilities that were originally agreed to and set forth in the manufacturing agreement and assigned to PF and the Buyer in the Transaction, in an aggregate amount expected to equal up to approximately $5.5 million, approximately $4.3 million of which will not become payable, if at all, until January 2026, provided that if such guaranty is exercised by the EMS provider, the Company will have the right to require the Buyer to reassign to the Company all intellectual property assigned to the Buyer in the Transaction and the Company will have the right to recover damages from PF and the Buyer.
In October 2023, the Company entered into a non-binding letter of intent with a buyer to sell substantially all of the assets and liabilities related to the Company’s chips business line, including assets related to the Company’s indium phosphide wafer fabrication operations and subsequently collected a $1.0 million deposit.
As of December 31, 2023, the chip business was disclosed as held for sale in the condensed consolidated balance sheet. As of September 30, 2023, the Broadband business segment and defense optoelectronics business lines were disclosed as held for sale in the consolidated balance sheet.
The following table presents key components of assets and liabilities that were classified as held for sale on the condensed consolidated balance sheets:
| | | | | | | | | | | |
(in thousands) | December 31, 2023 | | September 30, 2023 |
Cash | $ | — | | | $ | 81 | |
Accounts receivable, net of credit loss of $0 | — | | | 974 | |
Inventory, net | 2,528 | | | 10,063 | |
Other current assets | — | | | 1,154 | |
Property, plant, and equipment, net | 2,988 | | | 4,131 | |
Operating lease right-of-use assets | — | | | 56 | |
Total assets | 5,516 | | | 16,459 | |
Remeasurement of assets | 1,645 | | | 9,195 | |
Assets held for sale | 3,871 | | | 7,264 | |
Accounts payable | 195 | | | 1,854 | |
Accrued expenses and other current liabilities | 161 | | | 1,697 | |
Operating lease liabilities - current | — | | | 22 | |
Operating lease liabilities - non-current | — | | | 36 | |
Other comprehensive income | — | | | 1,053 | |
Total liabilities | $ | 356 | | | $ | 4,662 | |
For the three months ended December 31, 2023 and 2022, the results of the Chips business were disclosed as discontinued operations in the condensed consolidated statements of operations. For the three months ended December 31, 2022, the Broadband business segment and defense optoelectronics business lines were disclosed as discontinued operations.
As of the quarter ended December 31, 2023, the Company's expected loss on the remeasurement of assets of the discontinued business line to fair value was $1.6 million. The selling costs were approximately $0.2 million.
The following table presents key components of net loss that were classified as discontinued operations on the condensed consolidated statements of operations:
| | | | | | | | | | | |
| Three Months Ended December 31, |
(in thousands) | 2023 | | 2022 |
Revenue | $ | 216 | | | $ | 4,975 | |
Cost of Revenue | (1,282) | | | (6,294) | |
Gross Profit | (1,066) | | | (1,319) | |
Selling, general, and administrative | 250 | | | 655 | |
Research and development | — | | | 1,136 | |
Severance | — | | | 459 | |
Other income | — | | | (48) | |
Loss from discontinued operations | $ | (1,316) | | | $ | (3,521) | |
NOTE 5. Accounts Receivable, net
The components of accounts receivable, net consisted of the following:
| | | | | | | | | | | |
(in thousands) | June 30, 2023 | | September 30, 2022 |
Accounts receivable, gross | $ | 17,814 | | | $ | 18,410 | |
Allowance for credit loss | (363) | | | (337) | |
Accounts receivable, net | $ | 17,451 | | | $ | 18,073 | |
NOTE 6. Inventory
The components of inventory consisted of the following:
| (in thousands) | (in thousands) | June 30, 2023 | | September 30, 2022 | (in thousands) | December 31, 2023 | | September 30, 2023 |
Raw materials | Raw materials | $ | 21,714 | | | $ | 22,927 | |
Work in-process | Work in-process | 9,005 | | | 9,587 | Work in-process | 10,412 | | | 9,766 | | 9,766 |
Finished goods | Finished goods | 5,114 | | | 4,521 | Finished goods | 5,958 | | | 4,636 | | 4,636 |
Inventory | Inventory | $ | 35,833 | | | $ | 37,035 | |
NOTE 7.6. Property, Plant, and Equipment, net
The components of property, plant, and equipment, net consisted of the following:
| (in thousands) | (in thousands) | June 30, 2023 | | September 30, 2022 | (in thousands) | December 31, 2023 | | September 30, 2023 |
Land | $ | — | | | $ | 995 | |
Building | — | | | 8,805 | |
Equipment | Equipment | 47,711 | | | 42,330 | |
Furniture and fixtures | Furniture and fixtures | 1,571 | | | 1,394 | |
Computer hardware and software | Computer hardware and software | 3,377 | | | 3,378 | |
Leasehold improvements | Leasehold improvements | 9,794 | | | 7,180 | |
Construction in progress | Construction in progress | 3,278 | | | 9,886 | |
Property, plant, and equipment, gross | Property, plant, and equipment, gross | $ | 65,731 | | | $ | 73,968 | |
Accumulated depreciation | Accumulated depreciation | (41,343) | | | (36,101) | |
Property, plant, and equipment, net | Property, plant, and equipment, net | $ | 24,388 | | | $ | 37,867 | |
Depreciation expense totaled $2.4$0.9 million and $5.4$0.7 million during the three and nine months ended June 30,December 31, 2023 respectively and $1.2 million and $3.2 million during the three and nine months ended June 30, 2022, respectively. During the ninethree months ended June 30,December 31, 2023, we sold certain equipment and incurred a gain on sale of assets of $31 thousand. During the three months ended December 31, 2022, 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 incurred a gain on sale of assets of $1.3 million and $1.9 million, respectively.$1.2 million.
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 dateAs 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 30,31, 2023 and September 30, 2022, 95.4% and 95.4%, respectively,2023, all of our long-lived assets were located in the United States.
NOTE 8.7. 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.2022. 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 | |
| | | | | | | | | | | |
(in thousands) | December 31, 2023 | | September 30, 2023 |
Balance at beginning of period | $ | 12,245 | | | $ | 14,790 | |
Changes from acquisition | — | | | 1,470 |
Write off due to impairment | — | | | (2,125) | |
Amortization | (494) | | | (1,890) | |
Balance at end of period | $ | 11,751 | | | $ | 12,245 | |
The weighted average remaining useful lives by definite-lived intangible asset category are as follows:
| | June 30, 2023 |
| December 31, 2023 | | | December 31, 2023 |
(in thousands, except weighted average remaining life) | (in thousands, except weighted average remaining life) | Weighted Average Remaining Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | (in thousands, except weighted average remaining life) | Weighted Average Remaining Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Technology | Technology | 2.7 | | $ | 11,001 | | | $ | (8,750) | | | $ | 2,251 | |
Customer relationships | Customer relationships | 3.8 | | 4,690 | | | (527) | | | 4,163 | |
Definite-lived intangible assets total | Definite-lived intangible assets total | | $ | 15,691 | | | $ | (9,277) | | | $ | 6,414 | |
As of June 30,December 31, 2023, IPR&D andthe value of trademarks werewas approximately $6.7 million and $2.2 million, respectively.$0.9 million.
| | September 30, 2022 |
| September 30, 2023 | | | September 30, 2023 |
(in thousands, except weighted average remaining life) | (in thousands, except weighted average remaining life) | Weighted Average Remaining Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | (in thousands, except weighted average remaining life) | Weighted Average Remaining Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Technology | Technology | 5.4 | | $ | 10,991 | | | $ | (8,261) | | | $ | 2,730 | |
Customer relationships | Customer relationships | 4.6 | | 3,260 | | | (50) | | | 3,210 | |
Definite-lived intangible assets total | Definite-lived intangible assets total | | $ | 14,251 | | | $ | (8,311) | | | $ | 5,940 | |
As of September 30, 2022, IPR&D and2023, the value of trademarks werewas approximately $6.7 million and $2.2 million, respectively.$0.9 million.
Estimated future amortization expense for intangible assets recorded by the Company as of June 30,December 31, 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 | |
| | | | | |
(in thousands) | Amount |
2024 | $ | 1,462 | |
2025 | 1,930 | |
2026 | 1,527 | |
2027 | 1,504 | |
2028 | 1,491 | |
Thereafter | 2,982 | |
Total amortization expense | $ | 10,896 | |
NOTE 9.8. 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. On 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 maintain 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 three and nine months ended June 30,December 31, 2023 and do not anticipate making any contributions for the remainder of the fiscal year ending September 30, 2023.2024.
The components of net periodic pension cost are as follows:
| | | | | | | | | | | | | | | |
(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 | | | | | |
| | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended December 31, 2023 | | Three Months Ended December 31, 2022 | | | | |
Service cost | $ | 26 | | | $ | 26 | | | | | |
Interest cost | 92 | | | 93 | | | | | |
Expected return on plan assets | (76) | | | (84) | | | | | |
Net periodic pension cost | $ | 42 | | | $ | 35 | | | | | |
The service cost component of total pension expense is included as a component of cost of revenue on the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended June 30, 2023.December 31, 2023 and 2022. The interest cost and expected return on plan assetsassets’ components of total pension expense are included as components of other income (expense)expense on the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended June 30, 2023.December 31, 2023 and 2022.
Net pension asset is included as a component of other non-current assets on the condensed consolidated balance sheets as of JuneDecember 31, 2023 and September 30, 2023. As of June 30,December 31, 2023, the Pension Plan assets consist of cash and cash equivalents, and we manage a liability drivenliability-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. Our matching contribution in cash for the three and nine months ended June 30,December 31, 2023 and 2022, was
$0.4 $0.3 million and $1.0 million, respectively. Our matching contribution in cash for the three and nine months ended June 30, 2022, was $0.2 million and $0.8 million, respectively.
NOTE 10.9. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities consisted of the following:
| (in thousands) | (in thousands) | June 30, 2023 | | September 30, 2022 | (in thousands) | December 31, 2023 | | September 30, 2023 |
Compensation | Compensation | $ | 5,796 | | | $ | 4,213 | |
Warranty | Warranty | 1,478 | | | 1,504 | Warranty | 826 | | | 864 | | 864 |
Commissions | Commissions | 389 | | | 228 | Commissions | 308 | | | 468 | | 468 |
Legal expenses and Board of Director fees | | Legal expenses and Board of Director fees | 159 | | | 262 |
Auditor fees | |
Consulting | Consulting | 277 | | | 241 | Consulting | 72 | | | 68 | | 68 |
Legal expenses and other professional fees | 170 | | | 275 |
Auditor fees | 183 | | | 186 | |
Income and other taxes | 56 | | | — | |
Severance and restructuring accruals | 1,732 | | | 423 |
Litigation settlement | 72 | | | 341 |
Other | Other | 622 | | | 713 | Other | 646 | | | 666 | | 666 |
Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | $ | 10,775 | | | $ | 8,124 | |
The components of accrued severance and restructuringchanges in product warranty 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. | | | | | | | | | | | |
(in thousands) | December 31, 2023 | | September 30, 2023 |
Balance at beginning of period | $ | 864 | | | $ | 911 | |
Provision for product warranty expense | 33 | | | 120 |
Adjustments and utilization of warranty accrual | (71) | | (167) |
Balance at end of period | $ | 826 | | | $ | 864 | |
NOTE 11.10. 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 uponagreed-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,December 31, 2023, an aggregate principal amount of $6.5$4.7 million was outstanding pursuant to the revolving credit facility and an aggregate principal amount of $5.3$4.0 million was outstanding pursuant to the term loan facility.facility and we were in compliance with all covenants. As of September 30, 2022,2023, an aggregate principal amount of $9.6$6.4 million was outstanding pursuant to the revolving credit facility and an aggregate principal amount of $5.9$4.2 million was outstanding pursuant to the term loan facility. Also, as of June 30,December 31, 2023, the revolving credit facility had approximately $10.6$7.2 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,December 31, 2023 isare as follows:
| (in thousands) | (in thousands) | Amount | (in thousands) | Amount |
2023 | $ | 212 | |
2024 | 852 | |
Remainder of fiscal 2024 | |
2025 | 2025 | 852 | |
2026 | 2026 | 3,339 | |
Total loan payments | Total loan payments | $ | 5,255 | |
NOTE 12.11. Income and Other Taxes
During the three and nine months ended June 30,December 31, 2023 and 2022, the Company recorded an income tax expense of $29$28 thousand and $177$94 thousand, respectively, composed primarily of state tax expense and tax expense generated from the tax amortization on acquired indefinitely lived assets. For the three and nine months ended June 30,December 31, 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, the Company recorded an income tax expense of $27 thousand and $25 thousand, respectively, composed primarily of Texas gross margin taxes. For the three and nine months ended June 30, 2022, the effective tax rate on continuing operations was 0.4%0.6% and 0.3%0.8%, respectively.
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,December 31, 2023 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,December 31, 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-not criteria has been satisfied in determining whether there will be further adjustments to the valuation allowance.
As of June 30,December 31, 2023 and September 30, 2022,2023, 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,December 31, 2023 and 2022, there were no material increases or decreases in unrecognized tax benefits.
NOTE 13.12. 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 officersexecutive 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-year term. The Resilience complaint seeks, among other items, (a) a declaration that the Concord Property Sale included a non-cash component, (b) a decree requiring us and Resilience to follow the appraisal requirements set forth in that certain Purchase and Sale Agreement (the “SDI Purchase Agreement”), dated as of June 7, 2019, by and among the Company, The Resilience Fund IV, L.P., The Resilience Fund IV-A, L.P., Aerospace Newco Holdings, Inc. and Ember Acquisition Sub, Inc., (c) recovery of Resilience’s costs and expenses, and (d) pre- and post-judgment interest.
In April 2021, we filed with the Delaware Chancery Court our answer to the Resilience complaint and counterclaims against Resilience, in which we are seeking, among other items, (a) dismissal of the Resilience complaint and/or granting of judgment in favor of EMCORE with respect to the Resilience complaint, (b) entering final judgment against Resilience awarding damages to us for Resilience’s fraud and breaches of the SDI Purchase Agreement in an amount to be proven at trial and not less than $1,565,000, (c) a judicial determination of the respective rights and duties of us and Resilience under the SDI Purchase Agreement, (d) an award to us of costs and expenses, and (e) pre- and post-judgment interest.
OnIn April 24, 2023, the Company 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 the Company during the three months ended June 30, 2023, (ii) an appraisal of the Concord Real Property as of January 2, 2020, which could triggerresulted in a further future payment obligation by the Companyus in an amount equal to be determinedapproximately $1.3 million, which payment was made by said appraisal, and if triggered, is expected to be madeus during the three months ending September 30,December 31, 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.
OnIn 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 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.
NOTE 14.13. Equity
Equity Plans
We provide long-term incentives to eligible officers, directors, and employees in the form of equity-based awards. We maintain four equity incentive compensation plans, collectively described as our “Equity Plans”: (a) the 2010 Equity Incentive Plan (the “2010 Plan”), (b) the 2012 Equity Incentive Plan (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 December 2022,2023, our Board of Directors approved an amendment to the 2019 Plan, which, subject to shareholder approval at our 20232024 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 Plan by an additional 1.5497.89 million shares.
Stock-Based Compensation
The following table sets forth stock-based compensation expense by award type:
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
| Three Months Ended December 31, | | | Three Months Ended December 31, |
(in thousands) | (in thousands) | 2023 | | 2022 | | 2023 | | 2022 | (in thousands) | 2023 | | 2022 |
RSUs and RSAs | $ | 1,113 | | | $ | 692 | | | $ | 2,869 | | | $ | 1,795 | |
PSUs and PRSAs | 517 | | | 708 | | | 1,818 | | | 1,602 | |
RSUs | |
PSUs | |
Outside director equity awards and fees in common stock | Outside director equity awards and fees in common stock | 83 | | | 123 | | | 295 | | | 358 | |
Total stock-based compensation expense | 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:
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
| Three Months Ended December 31, | | | Three Months Ended December 31, |
(in thousands) | (in thousands) | 2023 | | 2022 | | 2023 | | 2022 | (in thousands) | 2023 | | 2022 |
Cost of revenue | Cost of revenue | $ | 436 | | | $ | 275 | | | $ | 1,154 | | | $ | 604 | |
Selling, general, and administrative | Selling, general, and administrative | 980 | | | 1,001 | | | 3,006 | | | 2,537 | |
Research and development | Research and development | 297 | | | 247 | | | 822 | | | 614 | |
Total stock-based compensation expense | Total stock-based compensation expense | $ | 1,713 | | | $ | 1,523 | | | $ | 4,982 | | | $ | 3,755 | |
Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
(in thousands, except per share data) | 2023 | | 2022 | | 2023 | | 2022 |
Numerator | | | | | | | |
Net loss | $ | (9,857) | | | $ | (7,649) | | | $ | (33,778) | | | $ | (7,460) | |
Denominator | | | | | | | |
Weighted average number of shares outstanding - basic | 53,926 | | | 37,425 | | | 45,546 | | | 37,197 | |
Effect of dilutive securities | | | | | | | |
Stock options | — | | | — | | | — | | | — | |
PSUs, RSUs, and restricted stock | — | | | — | | | — | | | — | |
Weighted average number of shares outstanding - diluted | 53,926 | | | 37,425 | | | 45,546 | | | 37,197 | |
Earnings per share - basic | $ | (0.18) | | | $ | (0.20) | | | $ | (0.74) | | | $ | (0.20) | |
Earnings per share - diluted | $ | (0.18) | | | $ | (0.20) | | | $ | (0.74) | | | $ | (0.20) | |
Weighted average antidilutive options, unvested RSUs and RSAs, and unvested PSUs excluded from the computation | 3,823 | | | 3,163 | | | 2,533 | | | 1,315 | |
| | | | | | | | | | | |
| Three Months Ended December 31, |
(in thousands, except per share data) | 2023 | | 2022 |
Numerator | | | |
Net loss from continuing operations | $ | (4,363) | | | $ | (8,172) | |
Loss from discontinued operations | $ | (1,316) | | | $ | (3,521) | |
Net loss | $ | (5,679) | | | $ | (11,693) | |
Denominator | | | |
Weighted average number of shares outstanding - basic | 88,987 | | | 37,557 | |
Effect of dilutive securities | | | |
Stock options | — | | | — | |
PSUs, RSUs, and restricted stock | — | | | — | |
Weighted average number of shares outstanding - diluted | 88,987 | | | 37,557 | |
Net loss from continuing operations per share, basic and diluted | $ | (0.05) | | | $ | (0.22) | |
Loss from discontinued operations per share, basic and diluted | $ | (0.01) | | | $ | (0.09) | |
Net loss per share, basic and diluted | $ | (0.06) | | | $ | (0.31) | |
Weighted average antidilutive options, unvested RSUs and RSAs, and unvested PSUs excluded from the computation | 3,745 | | | 2,807 | |
Basic earnings per share (“EPS”) is computed by dividing net (loss) income for the period by the weighted-average number of common stock outstanding during the period. The weighted-average number of common stock outstanding includes the 11,900,000 pre-funded warrants discussed below in “Public Offerings”. 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”) and restricted stock awards (“RSAs”), performance stock units (“PSUs”), and stock options 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,December 31, 2023 and 2022 due to the Company incurring a net loss for such period.
Public OfferingOfferings
On August 23, 2023, we closed our offering of 22,600,000 shares of our common stock at a price of $0.50 per share, and, to certain investors, pre-funded warrants (each, a “Pre-Funded Warrant”) to purchase 11,900,000 shares of our common stock at a price of $0.49999999 for each pre-funded warrant (which represents the per share public offering price for our common stock in such offering less the $0.00000001 per share exercise price for each such Pre-Funded Warrant), resulting in net proceeds to us from the offering, after deducting the placement agent commissions and other offering expenses, of approximately $15.6 million. The shares were sold by us pursuant to an Underwriting Agreement, dated as of August 17, 2023, between us and the Craig-Hallum Capital Group LLC as the sole managing underwriter.
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,December 31, 2023 was as follows:
| | | | | |
| Amount |
Exercise of outstanding stock options | 9,9817,704 | |
Unvested RSUs and RSAs | 4,491,7333,758,881 | |
Unvested PSUs and PRSAs (at 100% maximum payout) | 1,750,0681,574,668 | |
Issuance of stock-based awards under the Equity Plans | 599,585416,612 | |
Purchases under the officer and director share purchase plan | 88,741 | |
Total reserved | 6,940,1085,846,606 | |
NOTE 15.14. Reportable Segment and Revenue Information
Reportable SegmentsSegment
Reported below areConcurrent with the Company’s segmentsdiscontinuance of the Broadband business segment and defense optoelectronics product line during the quarter ended September 30, 2023, the Company only has one reportable segment, Inertial Navigation, 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 | |
Product Categories
Revenue is classified by major product category as presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
(in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
Aerospace and Defense | | | | | | | |
Inertial Navigation | $ | 26,718 | | | $ | 9,891 | | | $ | 70,947 | | | $ | 25,651 | |
Defense Optoelectronics | 283 | | | 3,525 | | | 2,932 | | | 6,671 | |
Broadband | | | | | | | |
CATV Optical Transmitters and Components | 323 | | | 7,006 | | | 2,270 | | | 56,449 | |
Data Center Chips | (312) | | | 1,353 | | | 885 | | | 3,534 | |
Optical Sensing | (314) | | | 1,900 | | | 1,437 | | | 6,256 | |
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, |
| Three Months Ended December 31, | |
| Three Months Ended December 31, | |
| Three Months Ended December 31, | |
(in thousands) | |
(in thousands) | |
(in thousands) | (in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
Trade revenue (recognized at a point in time) | Trade revenue (recognized at a point in time) | $ | 19,667 | | | $ | 18,207 | | | $ | 58,763 | | | $ | 91,056 | |
Trade revenue (recognized at a point in time) | |
Trade revenue (recognized at a point in time) | |
Contract revenue (recognized over time) | |
Contract revenue (recognized over time) | |
Contract revenue (recognized over time) | Contract revenue (recognized over time) | 7,031 | | | 5,468 | | | 19,708 | | | 7,505 | |
Total revenue | Total revenue | $ | 26,698 | | | $ | 23,675 | | | $ | 78,471 | | | $ | 98,561 | |
Total revenue | |
Total revenue | |
Geographical Concentration
Revenue is classified by geographic area based on our customers’ billing addressaddresses as presented below:
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
| Three Months Ended December 31, | |
| Three Months Ended December 31, | |
| Three Months Ended December 31, | |
(in thousands) | |
(in thousands) | |
(in thousands) | (in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
United States and Canada | United States and Canada | $ | 21,377 | | | $ | 19,043 | | | $ | 60,600 | | | $ | 86,751 | |
United States and Canada | |
United States and Canada | |
Asia | |
Asia | |
Asia | Asia | 1,856 | | | 1,684 | | | 4,235 | | | 6,498 | |
Europe | Europe | 1,657 | | | 2,243 | | | 8,592 | | | 3,999 | |
Europe | |
Europe | |
Other | |
Other | |
Other | Other | 1,808 | | | 705 | | | 5,044 | | | 1,313 | |
Total revenue | Total revenue | $ | 26,698 | | | $ | 23,675 | | | $ | 78,471 | | | $ | 98,561 | |
Total revenue | |
Total revenue | |
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 41%30% and 35% of our consolidated revenue for the three and nine months ended June 30,December 31, 2023 respectively, and revenue 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, respectively.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The 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. Actual 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 inertialsensors and navigation productssystems for the aerospace and defense markets.market. 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 threefive years, we have expanded our scope and portfolio of inertial sensor products through the acquisitions of Systron Donner Inertial, Inc. (“SDI”) in June 2019, the Space and Navigation (“S&N”) business of L3Harris Technologies, Inc. (“L3H”) in April 2022, and the FOG and Inertial Navigation Systems business (“EMCORE Chicago”) of KVH Industries, Inc. (“KVH”) in August 2022. Our multi-year transition from a broadband company to an inertial navigation company has now been completed following the sale of our cable TV, wireless, sensing and defense optoelectronics business lines and the shutdown of our chips product line and indium phosphide wafer fabrication operations.
We have fully vertically-integrated manufacturing capability at our headquarters in Alhambra, CA, and at our facilities in Budd Lake, NJ, Concord, CA, and Tinley Park, IL (the “Tinley Park Facility”). These facilities support our manufacturing strategy for Fiber Optic Gyroscope (“FOG”), Ring Laser Gyro (“RLG”), Photonic Integrated Chip (“PIC”), and Quartz Micro
Electro-Mechanical System (“QMEMS”) products for inertial navigation. Our manufacturing facilities maintain ISO 9001 quality management certification, and we are AS9100 aerospace quality certified at our headquartersfacilities in Alhambra, CA Concord, CA, and our facilities in Budd Lake, NJNJ. Our best-in-class components and Concord, CA. These facilitiessystems support our vertically-integrated manufacturing strategy for quartz, FOG, and Ring Laser Gyro products fora broad array of inertial navigation systems.applications.
Our operations include wafer fabrication (lithium niobate and quartz), device design and production, fiber optic module and subsystem design and manufacture, and PIC-based and QMEMS-based component design and manufacture. Many of our manufacturing operations are computer-monitored or controlled to enhance production output and statistical control. Our manufacturing processes involve extensive quality assurance systems and performance testing. We have one reporting segments are as follows: (a) Aerospace and Defense and (b) Broadband. Aerospace and Defense is comprised of two product lines: (i)segment, Inertial Navigation, whose product technology categories include: (a) FOG, (b) QMEMS, and (ii) Defense Optoelectronics. Broadband is comprised of three product lines: (i) CATV Optical Transmitters(c) RLG, in each case which serves the aerospace and Components, (ii) Data Center Chips, and (iii) Optical Sensing.defense market.
Recent Developments
Divestiture to Photonics Foundries
On October 11, 2023, we entered into an Asset Purchase Agreement (the “Purchase Agreement”), by and among us, Photonics Foundries, Inc., a Delaware corporation (“PF”), and Ortel LLC, a Delaware limited liability company and wholly-owned subsidiary of PF (the “Buyer”), pursuant to which (i) we agreed to transfer to the Buyer, and Buyer agreed to assume, substantially all of the assets and liabilities primarily related to our cable TV, wireless, sensing and defense optoelectronics business lines (the “Businesses”), including with respect to employees, contracts, intellectual property and inventory, and (ii) Buyer agreed to provide a limited license back to us of the patents being sold to the Buyer (the “Divestiture Transaction”). The Divestiture Transaction excludes our chip business, indium phosphide wafer fabrication facilities and all assets not primarily related to the Businesses. The signing and closing of the Divestiture Transaction occurred simultaneously, except with respect to our assets located in China. On November 30, 2023, we transferred to the Buyer, and the Buyer assumed, substantially all of the assets and liabilities of each of our subsidiaries in China.
In connection with the Divestiture Transaction, the parties entered into a transition services agreement pursuant to which we will provide certain migration and transition services to facilitate an orderly transaction of the operation of the Businesses to the Buyer in the 12-month period following consummation of the Divestiture Transaction, and we and the Buyer entered into a sublease pursuant to which we will sublease to the Buyer one of our buildings (occupying approximately 12,500 square feet) at our Alhambra, California facility for the 12-month period immediately following the closing of the Divestiture Transaction without payment of rent. With respect to the Buyer’s assumption of that certain Manufacturing Supply Agreement, dated August 9, 2021 (as amended, the “Fastrain Manufacturing Agreement”), by and among the Company, Shenzhen Fastrain Technology Co., Ltd., Hong Kong Fastrain Company Limited, and Fastrain Technology Malaysia SDN. BHD (collectively, “Fastrain”), we (i) made a payment to Fastrain in the amount of approximately $0.4 million immediately prior to the closing of the Divestiture Transaction and (ii) provided a guaranty of PF’s and the Buyer’s obligations with respect to payment of certain
long-term liabilities that were originally agreed to and set forth in the Fastrain Manufacturing Agreement and assigned to PF and the Buyer in the Divestiture Transaction, in an aggregate amount expected to equal up to approximately $5.5 million, approximately $4.2 million of which will not become payable, if at all, until January 2026, provided that if such guaranty is exercised by Fastrain, we will have the right to require the Buyer to reassign to us all intellectual property assigned to the Buyer in the Divestiture Transaction and we will have the right to recover damages from PF and the Buyer.
August 2023 Equity Offering
In August 2023, we closed our offering of 22,600,000 shares of our common stock at a price of $0.50 per share, and, to certain investors, pre-funded warrants (each, a “Pre-Funded Warrant”) to purchase 11,900,000 shares of our common stock at a price of $0.49999999 for each Pre-Funded Warrant (which represents the per share public offering price for our common stock in such offering less the $0.00000001 per share exercise price for each such Pre-Funded Warrant), resulting in net proceeds to us from the offering, after deducting the placement agent commissions and other offering expenses, of approximately $15.6 million. The shares were sold by us pursuant to an Underwriting Agreement, dated as of August 17, 2023, between us and the Craig-Hallum Capital Group LLC as the sole managing underwriter.
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 DefenseInertial Navigation 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. During the quarter ended September 30, 2023, the Broadband business segment and defense optoelectronics product line were considered as held for sale based upon the existence at such time of an executed non-binding letter of intent with respect to the Divestiture Transaction and in consideration of ongoing negotiations for the sale of the chips business. Given the then-prospective sale of the Broadband business segment and defense optoelectronics product line we identified these asset groups as discontinued operations during the quarter ended September 30, 2023. We expect to exit thediscontinued operations of these discontinued businesses byour chips business and indium phosphide wafer fabrication facility during the quarter ended September 30, 2023, and consummated the Divestiture Transaction during the three months ended December 31, 2023. As a result of this restructuring and the Divestiture Transaction, we (i) have eliminated or expect to eliminate approximately 7570 positions in the U.S. (primarily in Alhambra, California) and approximately 2530 positions in China, collectively representing approximately 22% of our total workforce, and(ii) 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 and relocate personnel in Concord, California to the operations area from the adjacent office building, and closing(iii) have transferred our manufacturing support and engineering center in China pursuant to the Divestiture Transaction, collectively representing an approximately 25% reduction in the aggregate square footage occupied by our facilities. We expect thisOne-time employee severance and termination costs related to the restructuring effort to result in annualized cost savings of approximately $12 million. As$2.3 million were incurred in, and are presented in the loss from discontinued operations for the fiscal year ended September 30, 2023. Additional one-time employee severance and termination costs related to the restructuring of approximately $0.2 million were incurred in, and are presented in the time ofloss from discontinued operations for, 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, wethree months ended December 31, 2023. We anticipate that material cash and non-cash charges will be incurred and recorded in future reporting periods. One-time employee severanceperiods 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. Wewe 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.
February 2023 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 ownedwholly-owned subsidiary of the Company, and KVH, pursuant to which we acquired substantially all of KVH'sKVH’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,December 31, 2023, an aggregate principal amount of $6.5$4.7 million was outstanding pursuant to the revolving credit facility and an aggregate principal amount of $5.3$4.0 million was outstanding pursuant to the term loan facility.
Acquisition of L3Harris Space and Navigation Business
On April 29, 2022, we completed the acquisition of S&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.
Economic Conditions
The increased 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.
Fastrain Transaction
As part of the effort to streamline operations and move to a variable cost model in our CATV Optical Transmitters and Components product line, 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 certain 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 P.R.C., for an aggregate price of $6.2 million, all of which has been paid to us as of the 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 Optical Transmitters and Components 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-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, 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 - Continuing Operations
The following table sets forth our results of operations as a percentage of revenue:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of revenue | 86.9 | | | 83.5 | | | 86.9 | | | 70.9 | |
Gross profit | 13.1 | | | 16.5 | | | 13.1 | | | 29.1 | |
Operating expense: | | | | | | | |
Selling, general, and administrative | 24.2 | | | 32.9 | | | 33.6 | | | 22.8 | |
Research and development | 19.4 | | | 19.1 | | | 20.8 | | | 13.9 | |
Severance | 6.9 | | | — | | | 2.9 | | | 1.3 | |
Gain on sale of assets | — | | | (5.6) | | | (1.5) | | | (1.9) | |
Total operating expense | 50.5 | | | 46.4 | | | 55.8 | | | 36.1 | |
Operating loss | (37.3) | % | | (30.0) | % | | (42.7) | % | | (7.0) | % |
Comparison of Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | |
| 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) | % |
| | Nine Months Ended June 30, | | |
| Three Months Ended December 31, | |
(in thousands, except percentages) | |
(in thousands, except percentages) | |
(in thousands, except percentages) | (in thousands, except percentages) | 2023 | | 2022 | | Change | 2023 | | 2022 | | Change |
Revenue | Revenue | $ | 78,471 | | | $ | 98,561 | | | $ | (20,090) | | | (20.4) | % | Revenue | $ | 24,123 | | | $ | | $ | 19,979 | | | $ | | $ | 4,144 | | | 20.7 | | 20.7 | % |
Cost of revenue | Cost of revenue | 68,201 | | | 69,849 | | | (1,648) | | | (2.4) | |
Gross profit | Gross profit | 10,270 | | | 28,712 | | | (18,442) | | | (64.2) | |
Operating expense: | Operating expense: | |
Selling, general, and administrative | Selling, general, and administrative | 26,347 | | | 22,550 | | | 3,797 | | | 16.8 | |
Selling, general, and administrative | |
Selling, general, and administrative | |
Research and development | Research and development | 16,319 | | | 13,675 | | | 2,644 | | | 19.3 | |
Severance | Severance | 2,296 | | | 1,318 | | | 978 | | | 74.2 | |
Gain on sale of assets | Gain on sale of assets | (1,147) | | | (1,919) | | | 772 | | | 40.2 | |
Total operating expense | Total operating expense | 43,815 | | | 35,624 | | | 8,191 | | | 23.0 | |
Operating loss | Operating loss | $ | (33,545) | | | $ | (6,912) | | | $ | (26,633) | | | (385.3) | % | Operating loss | $ | (4,310) | | | $ | | $ | (7,970) | | | $ | | $ | 3,660 | | | 45.9 | | 45.9 | % |
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,December 31, 2023, Aerospace and Defense revenue increased by $4.1 million or 20.7% compared to the same period in the prior year, primarily driven by higher Inertial Navigation revenue primarily due to the inclusionan increase of EMCORE Chicago$5.1 million of combined Fiber Optic Gyroscope and S&N revenue for the three and nine months ended June 30, 2023, as well as higher QMEMS revenue compared to the same period in the period in the prior year.
For the three and nine months ended June 30, 2023, Broadband revenue decreased compared to the same period in the prior year, dueoffset by $0.9 million of forecasted sales related to a substantial decline in sales of CATV Optical Transmitter and Components products. In April 2023, we initiated a restructuringFOG development program that includesfor which the strategic shutdown of our Broadband business segment (including our cable TV, wireless, sensing and chips product lines) which further causedcorresponding revenue to decrease and resulted in a $1.3 million revenue reversal inwas not recognized during the three months ended June 30, 2023 – See Management’s Discussion and Analysis of Financial Condition and Results of Operations Recent Developments under the heading “Restructuring” for additional information regarding the restructuring program.December 31, 2023.
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 is revenue less cost of revenue. Cost of revenue consists of raw materials, compensation expense, depreciation, amortization, accretion expense, and other manufacturing overhead costs, expenses associated with excess and obsolete inventories, and product warranty costs. Historically, gross profit as a percentage of revenue, which we refer to as gross margin, has fluctuated significantly due to revenue and production volumes over fixed manufacturing costs, product mix, manufacturing yields, sales volumes,and inventory charges (e.g., scrap factors, excess and specific product warranty charges, as well as the amount of our revenue relative to fixed manufacturing costs.obsolete, inventory valuation adjustments).
For the three and nine months ended June 30,December 31, 2023, Aerospace and Defense gross profit increased compared to the same period in the prior year primarily driven by the additional contribution from the acquisition of EMCORE Chicago. For the three$1.7 million or 39.0% and nine months ended June 30, 2023, Aerospace and Defense gross margin increased by 15% from 12%21.9% to 27% and by 9% from 14% to 23%, respectively,25.2% compared to the same period in the prior year, driven primarily by better product miximprovement on sales volume flow-through, reduction in the Inertial Navigation product line.
For the threedirect material inflation and nine months ended June 30, 2023, Broadband gross profit decreased compared to the same periodvariable costs, plus execution on production efficiencies and reduction in the prior year primarily due to the lower absorption of overhead costs in our wafer fabrication facility due to the substantial drop in product revenue.inventory adjustments, offset by unfavorable margin flow-through on increased sales volume and unfavorable commercial mix.
Selling, General and Administrative
Selling, general, and administrative (“SG&A”) consists primarily of personnel-related expenditures for sales and marketing, IT, finance, legal, and human resources support functions.
For the three months ended June 30, 2023, SG&A decreased compared to the same period in the prior year primarily due to $1.1 million of litigation-related insurance proceeds.
For the
ninethree months ended
June 30,December 31, 2023, SG&A
increaseddecreased by $2.7 million or 28.9% compared to the same period in the prior year primarily
due to the S&Ndriven by compensation expense reduction as a result of headcount reductions described above in “Recent Developments” as well as a significant cost reduction from a reduced usage of outsourced services and EMCORE Chicago acquisitions.professional and consulting fees.
Research and Development
Research and development (“R&D”) includes personnel-related expenditures, project costs, and facility-related expenses. We intend to continue to invest in R&D programs because they are essential to theour future growth of our Aerospace and Defense segment.growth.
For the three months ended June 30,December 31, 2023, and 2022, Aerospace and Defense R&D expense was $4.4decreased by $0.6 million and $3.8 million, respectively. 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 increasedor 14.4% compared to the same period in the prior year primarily duedriven by the headcount reductions described above in “Recent Developments” which delivered compensation cost savings supported by discretionary cost management savings and a modest increase in costs directly correlated to contract revenue transferred from R&D associated with the acquired EMCORE Chicago.
into Cost of Revenue.
For the three months ended June 30, 2023 and 2022, Broadband R&D expense was $0.7 million and $0.7 million, respectively. For the nine months ended June 30, 2023 and 2022, Broadband R&D expense was $2.3 million and $1.6 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,December 31, 2023, severance totaled approximately $1.8$0.2 million and $2.3 million due to a previously announced reduction in forceassociated with headcount reductions, primarily at our Alhambra, CA 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 nine months ended June 30, 2022, the Company sold certain assets and realized a gain on sale of assets of $1.3 million and $1.9 million, respectively.
Interest (Expense) Income, net
During the three and nine months ended June 30, 2023, interest expense, net totaled approximately $0.2 million and $0.7 million, respectively, primarily due to the debt outstanding from our Credit Agreement and having lower cash and cash equivalents balance earning interest income.
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 & DefenseInertial Navigation business. As a result of our recent cash shortage, 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 & DefenseInertial Navigation business. As of June 30,December 31, 2023, our cash and cash equivalents totaled $20.2$21.2 million, including restricted cash of $0.5 million, and net working capital, including assets and liabilities held for sale, totaled $57.6$58.2 million. Net working capital, including assets and liabilities held for sale, 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:obligations:
•In August 2023, we closed our offering of 22,600,000 shares of our common stock at a price of $0.50 per share, and, to certain investors, Pre-Funded Warrants to purchase 11,900,000 shares of our common stock at a price of $0.49999999 for each Pre-Funded Warrant (which represents the per share public offering price for our common stock in such offering less the $0.00000001 per share exercise price for each such Pre-Funded Warrant), resulting in net proceeds to us from the offering, after deducting the placement agent commissions and other offering expenses, of approximately $15.6 million. See Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments under the heading “August 2023 Equity Offering” for additional information regarding the equity offering. •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 businessInertial Navigation 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. During the quarter ended September 30, 2023, the Broadband business segment and defense optoelectronics product line were considered as held for sale based upon a non-binding letter of intent that had been executed in connection with the ultimate Divestiture Transaction and in consideration of ongoing negotiations for the sale of the chips business. We expect to exit thediscontinued operations of these discontinued businesses byour chips business and indium phosphide wafer fabrication facility during the quarter ended September 30, 2023 and consummated the Divestiture Transaction during the three months ended December 31, 2023. As a result of this restructuring and the Divestiture Transaction, we have eliminated or expect to eliminate approximately 7570 positions in the U.S. (primarily in Alhambra, California) and approximately 2530 positions in China, collectively representing approximately 22% of our total workforce, and expect to consolidatehave consolidated 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), relocatingplan to relocate personnel in Concord, California to the operations area from the adjacent office building, and closingsold 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 thisOne-time employee severance and termination costs related to the restructuring effort to result in annualized cost savings of approximately $12 million. As$2.3 million was recognized in the loss from discontinued operations in the fiscal year ended September 30, 2023 Additional one-time employee severance and termination costs
related to the timerestructuring of approximately $0.2 million were incurred in, and are presented in the filing of this Quarterly Report on Form 10-Q, we are unable in good faith to make a determination of an estimate ofloss from discontinued operations for, the total amount or range of amounts that we expect to incur in connection with this restructuring. However, wethree months ended December 31, 2023. We anticipate that material cash and non-cash charges will be incurred and recorded in future reporting periods. One-time employee severanceperiods 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. Wewe may incur additional expenses in connection with thisthe 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 December 2022, we consummated the sale 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 the terms of the Tinley Park Purchase Agreement.
•In August 2022, we entered into the Credit Agreement with 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,December 31, 2023, an aggregate principal amount of $6.5$4.7 million was outstanding pursuant to the revolving credit facility and an aggregate principal amount of $5.3$4.0 million was outstanding pursuant to the term loan facility, and an additional $10.6$7.2 million was available for borrowing. See Note 1110 - Credit Agreement in the Notes to Condensed Consolidated Financial Statements for additional information regarding the Credit Agreement.
Our existing balances of cash and cash equivalents, cash flows from operations, and amounts expected to be available under the Credit Agreement, together with additional actions we couldmay take to further reduce our expenses and/or additional funds we may receive if we elect to raise capital through additional debt or equity issuances or from our efforts to monetize certain assets, are anticipated to beprovide us with sufficient financial resources to meet our cash requirements for operations, working capital, and capital expenditures for at least the next twelve12 months from the issuance date of these condensed consolidated financial statements. As a result, these condensed consolidated financial statements have been prepared on a going concern basis. However, we may not be successful in executing on our plans to 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 a significant loss of value for our shareholders.
The 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,December 31, 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.
We continue to explore a range of options to further address our capitalization and liquidity. If we raise funds by issuing debt securities or incurring loans, this form of financing would have rights, preferences, and privileges senior to those of holders of our common stock. The availability and the terms under which we can borrow additional capital could be disadvantageous, and the terms of debt securities or borrowings could impose significant restrictions on our operations. Macroeconomic conditions and credit markets could also impact the availability and cost of potential future debt financing. If we raise capital through the issuance of additional equity, such sales and issuance would dilute the ownership interests of the existing holders of our
common 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.
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 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | |
(in thousands, except percentages) | 2023 | | 2022 | | Change |
Net cash used in operating activities - continuing operations | $ | (1,845) | | | $ | (12,190) | | | $ | 10,345 | | | 84.9 | % |
Net cash provided by investing activities | $ | 818 | | | $ | 10,082 | | | $ | (9,264) | | | (91.9) | % |
Net cash used in financing activities | $ | (2,276) | | | $ | (3,175) | | | $ | 899 | | | 28.3 | % |
For the ninethree months ended June 30,December 31, 2023, our operating activities used cash primarily due to our net loss and working capital.loss.
For the ninethree months ended June 30,December 31, 2023, our investing activities provided cash primarily from the sale of the Tinley Park Facility.a deposit on our assets held for sale.
For the ninethree months ended June 30,December 31, 2023, our financing activities providedused cash primarily from the sale of common stock offset by cash used for paymentpayments 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, 20222023 as reported in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.2023.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements other than operating leases as reported in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 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, 2022.2023. Please refer to Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 20222023 for a discussion of our critical accounting policies and estimates.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes to our quantitative and qualitative disclosures about market risks during the third quarter of fiscal 2023. Please refer to Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” included in our Annual Report on the Form 10-K for our fiscal year ended September 30, 2022 for a more complete discussion of the market risks we encounter.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management, with the participation of its Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), evaluated the effectiveness of the Company’sOur 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, are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of June 30, 2023. Based upon this evaluation, the SEC. We designed our disclosure controls and procedures to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer, concluded thatwith assistance from other members of our management, have reviewed the effectiveness of our disclosure controls and procedures were effective as of December 31, 2023 and, based upon this evaluation, has concluded that our disclosure controls and procedures contained a material weakness in internal control over financial reporting which was identified by the endCompany during our year-end internal control procedures. A material weakness is a deficiency or combination of deficiencies in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the period covered byannual or interim financial statements will not be prevented or detected on a timely basis. As of September 30, 2023, the Company determined that communications with regard to internal control objectives were not effective to require employees to report the existence of new or novel arrangements for technical accounting review, which resulted in the Company’s failure to design and implement effective controls over such transactions.
The control deficiency resulted in a material error associated with identification of the existence of certain insurance premium and supplier financing agreements, whereby (i) certain items on the Company’s consolidated balance sheet were underreported in “Other current assets” with a consistent dollar amount underreported for “Financing payable” within the Company’s consolidated balance sheet and (ii) certain items on the Company’s consolidated statements of cash flows were underreported in Payments to financing payables within “Cash flows from financing activities” and similar such underreporting of such items in other assets in “Cash flows from operating activities”. This error has been corrected in the consolidated financial statements as of and for the fiscal year ended September 30, 2023, and as a result, this report.material weakness did not result in a material misstatement to the annual or interim consolidated financial statements previously filed or included in this Annual Report on Form 10-K. We have identified and are implementing actions intended to improve the effectiveness of our internal control over financial reporting and disclosure controls and procedures and will continue to do so until such remediation is complete. Management intends to remediate the material weakness described above primarily through a combination of (i) revisiting and clarifying, as needed, Company policies with respect to required communications when entering binding arrangements, and (ii) communicating to employees the importance of elevating new and/or novel arrangements for technical accounting oversight in their respective internal control areas. Such communication, including compliance with existing or revised policy, is expected to be delivered through employee training.
Changes in Internal Control over Financial Reporting
There have beenwere 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,December 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Duereporting other than as related to the ongoing COVID-19 pandemic, a significant numberremediation of employees are now working from home. The designthe material weakness as described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023. See the description of processes, systems,the material weakness in internal controls over financial reporting outlined in “Evaluation of Disclosure Controls and controls allows for remote execution with accessibility to secure data.Procedures” above.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
See the disclosures under the caption “Legal Proceedings” in Note 1312 - Commitments and Contingencies in the Notes to Condensed 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, 2022,2023, 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, 2022.2023. 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.
ITEM 5. Other Information
For the nine months ended June 30, 2023Rule 10b5-1 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.Non-Rule 10b5-1 Trading Arrangements
We may not be ableDuring the three months ended December 31, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each is defined in Item 408 of Regulation S-K) related to obtain capital when desired on favorable terms, if at all, or without dilution to shareholders.securities of the Company.
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 | | |
2.32.2 | | |
2.42.3 | | |
2.52.4 | | |
2.62.5 | | |
2.72.6 | | |
2.7 | | |
3.1 | | |
10.1 | | |
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). |
_____________________________________** 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.
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| | | EMCORE CORPORATION |
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Date: | August 9, 2023February 12, 2024 | | By: | /s/ Jeffrey Rittichier |
| | | | Jeffrey Rittichier |
| | | | Chief Executive Officer (Principal Executive Officer) |
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Date: | August 9, 2023February 12, 2024 | | By: | /s/ Tom Minichiello |
| | | | Tom Minichiello |
| | | | Chief Financial Officer (Principal Financial and Accounting Officer) |