TO OUR SHAREHOLDERS
Fiscal year 2016 was a successful and transformative year for EMCORE. Throughout the year, we saw steadily improving results
from continuing operations and finished the year strongly, with significant income generation in the fourth quarter. Some key
highlights from fiscal 2016 include:
EMCORE received a favorable ruling in the Sumitomo Arbitration, where the International Court of Arbitration tribunal
found in favor of EMCORE and awarded legal fees of over $2.6 million and returned $1.9M of funds held in escrow.
EMCORE issued a special dividend of $1.50 per share, returning approximately $85M of cash to its shareholders since June
2015. This represents approximately 51% of the cash received from the solar and telecom operations sold in Fiscal 2015.
EMCORE enhanced our Mixed-Signal Optics strategy to better position the company to compete in growth markets. Mixed
signal devices bridge the physical “analog” world with digital computing and communications.
EMCORE saved $2.5M from the first year of its Six Sigma programs and expects greater savings in 2017.
Our competitive position in our target markets remains strong as we enter fiscal 2017. Despite continued cable industry
consolidation, which slowed demand early in the year, growth in sales of our DOCSIS 3.1 product suite led to increased revenue
in our Cable TV business during fiscal 2016. With our DOCSIS 3.1 “fiber deep” technology, service providers such as Comcast,
Cox and Liberty Global are bringing near fiber speeds to consumers around the world. Looking forward, we anticipate contin-
ued and expanded revenue opportunities in these markets during 2017.
Our chip business was relatively flat during fiscal 2016 as we transitioned away from the 2.5 GPON market, but demand for
other products, including 10G devices, are developing nicely. EMCORE fully intends to become a broad level merchant supplier
of chip level products to the entire telecom industry, taking advantage of outsourcing trends and “white box” manufacturing
development.
In our emerging Fiber Optic Gyro (FOG) market, we received significant design wins and contract awards this year, as we
competed against larger competitors in the defense industry. EMCORE sees important growth opportunities in 2017 and is
making substantial investments in the design and manufacturing of FOGs and Inertial Measurement Units (IMUs) at our
headquarters in Alhambra. Some of these investments include upgrades to the automation technology originally designed for
our commercial operations to meet the needs of FOG manufacturing.
On behalf of EMCORE’s management team and board of directors, I would like to thank our shareholders, customers, suppliers
and employees for their continued support, and I look forward to updating you on our progress in 2017. We believe it will be a
very exciting year.
Respectfully,
Jeffrey Rittichier
President & Chief Executive Officer
Please refer to our Company’s forward-looking statements
disclosure under “Cautionary Statements Regarding Forward-
Looking Statements” in our Form 10-K included herein.
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2016
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
(State or other jurisdiction of incorporation or organization)
22-2746503
(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
Name of Each Exchange on Which Registered
Common stock, no par value
Rights to Purchase Series A Junior Participating
Preferred Stock
The NASDAQ Stock Market LLC (NASDAQ
Global Market)
The NASDAQ Stock Market LLC (NASDAQ
Global Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. ¨ Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No
The aggregate market value of our common stock held by non-affiliates as of March 31, 2016 (the last business day of our most recently
completed second fiscal quarter) was approximately $129.3 million, based on the closing sale price of $5.00 per share of common stock
as reported on the NASDAQ Global Market. For purposes of this disclosure, shares of common stock held by officers and directors and
by each person known by us to own 5% or more of our outstanding common stock have been excluded.
As of November 30, 2016, the number of shares outstanding of our no par value common stock totaled 26,245,113.
DOCUMENTS INCORPORATED BY REFERENCE
In accordance with General Instruction G(3) of Form 10-K, certain information required by Part III hereof will either be
incorporated into this Form 10-K by reference to our Definitive Proxy Statement for our Annual Meeting of Shareholders filed within
120 days of September 30, 2016 or will be included in an amendment to this Form 10-K filed within 120 days of September 30, 2016.
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are based on our current expectations and projections about future events and financial
trends affecting the financial condition of our business. Such forward-looking statements include, in particular, projections about our
future results included in our Exchange Act reports and statements about our plans, strategies, business prospects, changes and trends
in our business and the markets in which we operate. These forward-looking statements may be identified by the use of terms and
phrases such as “anticipates,” “believes,” “can,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,”
“should,” “targets,” “will,” “would,” and similar expressions or variations of these terms and similar phrases. Additionally, statements
concerning future matters such as our expected liquidity, development of new products, enhancements or technologies, sales levels,
expense levels, expectations regarding the outcome of legal proceedings and other statements regarding matters that are not historical are
forward-looking statements. Management cautions that these forward-looking statements relate to future events or our future financial
performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual
results, levels of activity, performance, or achievements of our business or our industry to be materially different from those expressed
or implied by any forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes
include without limitation the following: (a) the rapidly evolving markets for the Company’s products and uncertainty regarding the
development of these markets; (b) the Company’s historical dependence on sales to a limited number of customers and fluctuations in
the mix of products and customers in any period; (c) delays and other difficulties in commercializing new products; (d) the failure of
new products: (i) to perform as expected without material defects, (ii) to be manufactured at acceptable volumes, yields, and cost, (iii) to
be qualified and accepted by our customers, and (iv) to successfully compete with products offered by our competitors; (e) uncertainties
concerning the availability and cost of commodity materials and specialized product components that we do not make internally; (f)
actions by competitors; and (g) other risks and uncertainties discussed in Part I, Item 1A, Risk Factors in this Annual Report as well as
those discussed elsewhere in this Annual Report. These cautionary statements apply to all forward-looking statements wherever they
appear in this Annual Report.
Forward-looking statements are based on certain assumptions and analysis made in light of our experience and perception of
historical trends, current conditions and expected future developments as well as other factors that we believe are appropriate under
the circumstances. While these statements represent our judgment on what the future may hold, and we believe these judgments are
reasonable, these statements are not guarantees of any events or financial results. All forward-looking statements in this Annual 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 Annual Report. Certain information included in this Annual Report may supersede or supplement forward-looking statements in our
other reports filed with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statement to
conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.
EMCORE CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2016
TABLE OF CONTENTS
Part I.
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Consolidated Statements of Operations and Comprehensive Income for the fiscal years ended September 30,
2016, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of September 30, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for the fiscal years ended September 30, 2016, 2015 and 2014 . . . .
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2016, 2015 and 2014 . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm - KPMG LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part III.
Item 10. Directors, Executive Officers, and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships, Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part IV.
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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ITEM 1. BUSINESS
Company Overview
PART I.
EMCORE Corporation together with its subsidiaries (referred to herein as the “Company,” “we,” “our,” or “EMCORE”),
established in 1984 as a New Jersey corporation, designs and manufactures Indium Phosphide (InP) optical chips, components,
subsystems and systems for the broadband and specialty fiber optics market. EMCORE was the pioneer in linear fiber optic transmission
technology, and today, is a leading provider of optical components, as well as a provider of complete end-to-end solutions for high-
speed communications network infrastructures, enabling systems and service providers to meet growing demand for bandwidth and
connectivity. EMCORE’s advanced optical technologies are designed for cable television (CATV) and fiber-to-the-premise (FTTP)
networks, telecommunications and data centers, satellite communications, aerospace and defense, wireless networks, and broadcast
and professional audio/video systems. With its world-class InP semiconductor wafer fabrication facility, EMCORE has fully vertically-
integrated manufacturing capability and also provides contract design, foundry and component packaging services.
We currently have one reporting segment: Fiber Optics. Until the first quarter of 2015, we operated as two segments: Fiber
Optics and Photovoltaics. EMCORE’s Solar Photovoltaics business, which was sold in December 2014, provided products for space
power applications including high-efficiency multi-junction solar cells, Covered Interconnect Cells and complete satellite solar panels. In
addition, as further discussed below, EMCORE sold certain assets, and transferred certain liabilities, of the Company’s telecommunications
business, including the ITLA, micro-ITLA, T-TOSA and T-XFP product lines within the Company’s telecommunications business, in
January 2015.
Our headquarters and principal executive offices are located at 2015 W. Chestnut Avenue, Alhambra, California, 91803 and
our main telephone number is (626) 293-3400. For specific information about us, our products or the markets we serve, please visit our
website at http://www.emcore.com. The information contained in or linked to our website is not a part of, nor incorporated by reference
into, this Annual Report on Form 10-K or a part of any other report or filing with the Securities and Exchange Commission ( the “SEC”).
We are subject to the information requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). We file periodic
reports, current reports, proxy statements, and other information with the SEC. The SEC maintains a website at http://www.sec.gov that
contains all of our information that has been filed or furnished electronically with the SEC. We make available free of charge on our
website a link to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable, after such
material is electronically filed with, or furnished to, the SEC.
Overview of Our Industry and Markets We Serve
Compound semiconductor-based products provide the foundation of components, subsystems, and systems used in a broad
range of technology markets. Compound semiconductor materials are capable of providing electrical or electro-optical functions, such
as emitting optical communications signals and detecting optical communications signals.
Collectively, our products serve the telecommunications, CATV, FTTP, defense and homeland security, satellite communications
and broadcast and professional audio/video markets.
Fiber Optics Products
Our fiber optics products enable information that is modulated on light signals to be transmitted, routed (switched) and received
in communication systems and networks. EMCORE primarily offers the following product lines:
4
•
•
•
Laser, Receiver and Photodetector Component Products - We believe that we are a leading provider of optical components
including lasers, photodetectors, and various forms of packaged subassemblies. Our products include bare die (or chip),
distributed feedback (DFB) lasers, positive-intrinsic-negative (PIN) and avalanche photodiode (APD) components for
40 Gb/s Ethernet, InfiniBand, FTTP, and telecom applications. We provide component products to the global fiber optics
industry, and we also leverage the benefits of our vertically-integrated infrastructure through low-cost manufacturing and
early access to newly developed internally-produced components.
Cable Television (CATV) Products - We believe that we are a market leader in providing radio frequency (RF) over fiber
products for the CATV industry. Our products are used in hybrid fiber coaxial (HFC) networks that enable cable service
operators to offer multiple advanced services to meet the expanding demand for high-speed Internet, on-demand and
interactive video, and other advanced services, such as high-definition television (HDTV) and voice over IP (VoIP). Our
CATV products include forward and return-path analog and digital lasers, photodetectors and subassembly components,
broadcast analog and digital fiber-optic transmitters, and quadrature amplitude modulation (QAM) transmitters and
receivers. Our products provide our customers with increased data transmission distance, speed and bandwidth, lower
noise video reception, and lower power consumption.
Fiber-To-The-Premises (FTTP) Products - Telecommunications companies are extending their optical infrastructure
to their business enterprise and residential customers because of higher bandwidth requirements. We have developed
customer qualified FTTP components and subsystem products to support plans by telecommunications companies to
offer voice, video, and data services through the deployment of new fiber optics-based access networks. Our FTTP
products include passive optical network (PON) transceivers, RF over glass (RFoG) optical transceivers, analog fiber
optic transmitters for video overlay and high-power erbium-doped fiber amplifiers (EDFA), analog and digital lasers,
photodetectors and subassembly components, analog video receivers, and multi-dwelling unit (MDU) video receivers.
Our products provide our customers with higher performance analog and digital designs, and support exceptional network
performance capabilities for service providers.
5
•
Satellite/Microwave Communications Products - We believe that we are a leading provider of optical components and
systems for use in equipment that provides high-performance optical data links for the terrestrial portion of satellite
communications networks. Our products include transmitters, receivers, subsystems, and systems that transport wideband
RF and microwave signals between satellite hub equipment and antenna dishes. Our products provide our customers with
increased bandwidth and lower power consumption.
•
Broadcast & A/V Video Transport Products - Our video transport product line focuses on developing targeted solutions
that meet the evolving technology needs of our customers in broadcasting, government, transportation, IP television, and
security and surveillance applications over private and public networks. Our video, audio, data, and RF transmission
systems serve both analog and digital requirements, providing cost-effective, flexible solutions geared for infrastructure
upgrades and expansion.
•
Defense and Homeland Security Products - Leveraging our expertise in RF module design and high-speed parallel
optics, we provide a suite of ruggedized products that meet the reliability and durability requirements of the U.S.
government and defense markets. Our specialty defense products include fiber optic gyro components used in commercial
and military applications, high-frequency RF fiber optic link components for towed decoy systems, optical delay lines for
radar systems, erbium-doped fiber amplifiers, pulse lasers for light detection and ranging spectroscopy systems and other
products. Our products provide our customers with high frequency and dynamic range, compact form-factor, and extreme
temperature, shock and vibration tolerance.
6
Customers include: Arris Technology Inc., BUPT-GuoAn Broadband and Cisco Systems Inc. Significant customers are defined
as customers representing greater than 10% of our consolidated revenue. Revenue from three of our significant customers represented
61% of our consolidated revenue for the fiscal year ended September 30, 2016. Revenue from four of our significant customers
represented 61% of our consolidated revenue for the fiscal year ended September 30, 2015. Revenue from three of our signficant
customers represented 41% of our consolidated revenue for the fiscal year ended September 30, 2014. See Note 14 - Geographical
Information in the notes to our consolidated financial statements for additional information about our significant customers.
Geographical Information
See Note 14 - Geographical Information in the notes to our consolidated financial statements for disclosures related to geographic
revenue and long-lived assets.
Strategic Plan
Strategy and Alternatives Committee of the Board of Directors
In addition to organic growth and development of our existing Fiber Optics business, we intend to pursue other strategies to
enhance shareholder value. The Strategy and Alternatives Committee of the Company’s Board of Directors (the “Strategy Committee”),
which was established in December 2013, is charged with overseeing the Company’s strategic plan and evaluating strategic opportunities
and alternatives available to the Company, including potential mergers, acquisitions, divestitures and other key strategic transactions
outside the ordinary course of the Company’s business. Accordingly, the Strategy Committee may from time to time consider strategic
opportunities to enhance shareholder value, which may include acquisitions, investments in joint ventures, partnerships, and other
strategic alternatives, such as dispositions, reorganizations, recapitalizations or other similar transactions, the repurchase of shares
of our outstanding common stock or payment of dividends to our shareholders. The Strategy Committee may engage financial and
other advisors to assist it in doing so. Accordingly, the Strategy Committee and our management may from time to time be engaged in
evaluating potential strategic opportunities and may enter into definitive agreements with respect to such transactions or other strategic
alternatives. However, there is no assurance that the Strategy Committee will identify further strategic opportunities that the Company
will determine to pursue, or that the consideration of any such opportunity would result in the completion of a strategic transaction.
Sale of Photovoltaics and Digital Products Businesses
On September 17, 2014, EMCORE entered into an Asset Purchase Agreement (the “Photovoltaics Agreement”) with SolAero
Acquisition Corporation (“SolAero”), a Delaware corporation and an affiliate of private equity firm Veritas Capital, pursuant to which
SolAero agreed to acquire substantially all of the assets, and assume substantially all of the liabilities, primarily related to or used in
connection with the Company’s photovoltaics business, including EMCORE’s subsidiaries EMCORE Solar Power, Inc. and EMCORE
IRB Company, LLC (collectively, the “Photovoltaics Business” and, the sale of the Photovoltaics Business, the “Photovoltaics Asset
Sale”) for $150.0 million in cash, prior to a $0.1 million working capital adjustment pursuant to the Photovoltaics Agreement finalized
and paid by EMCORE during the fiscal year ended September 30, 2015. On December 10, 2014, EMCORE completed the Photovoltaics
Asset Sale .
On October 22, 2014, EMCORE entered into an Asset Purchase Agreement (the “Digital Products Agreement”) with
NeoPhotonics Corporation, a Delaware corporation (“NeoPhotonics”) pursuant to which the Company agreed to sell certain assets, and
transfer certain liabilities of the Company’s telecommunications business (collectively, the “Digital Products Business” and, the sale of
the Digital Products Business, the “Digital Products Assets Sale”) to NeoPhotonics for an aggregate purchase price of $17.5 million,
subject to certain purchase price adjustments, consisting of $1.5 million in cash at closing and a promissory note in the principal amount
of $16.0 million (the “Promissory Note”). The Promissory Note provided that it would bear interest of 5.0% per annum for the first
year and 13.0% per annum for the second year, payable semi-annually in cash, and would mature two years from the closing of the
transaction. In addition, the Promissory Note was subject to prepayments under certain circumstances, and was secured by certain of the
assets sold to NeoPhotonics in the transaction.
On January 2, 2015, EMCORE and NeoPhotonics entered into Amendment No. 1 (the “APA Amendment”) to the Digital
Products Agreement. Among other things, the APA Amendment revised the nature and timing of the financial deliverable requirements
of the Company to NeoPhotonics under the original Digital Products Agreement. The assets sold pursuant to the Digital Products
Agreement included certain fixed assets, inventory, accounts receivable and intellectual property for the ITLA, micro-ITLA, T-TOSA
and T-XFP product lines within the Company’s telecommunications business. On January 2, 2015, EMCORE completed the sale of the
Digital Products Business. On April 16, 2015, EMCORE and NeoPhotonics entered into an agreement to adjust the purchase price for the
Digital Products Business, resulting in an adjusted balance of the Promissory Note of $15.5 million. On April 17, 2015, NeoPhotonics
paid in full the balance outstanding of the Promissory Note of $15.5 million, plus accrued interest of $0.2 million.
We used a portion of the proceeds from the Photovoltaics Asset Sale and the Digital Products Assets Sale (collectively, the
“Asset Sales”) to pay for transaction costs associated with the Asset Sales, make payments required pursuant to existing retention award
agreements, repay certain indebtedness, and for general working capital purposes. In June 2015, we also used a portion of the proceeds
7
from the Asset Sales to repurchase 6.9 million shares of our common stock for an aggregate cost of $45.0 million (excluding fees and
expenses) pursuant to a modified “Dutch auction” tender offer we commenced in May 2015. In addition, in July 2016, we used a portion
of the proceeds from the Asset Sales to pay a special cash dividend to our shareholders of $1.50 per share, or a total of $39.2 million.
The dividend was paid on July 29, 2016 to shareholders of record as of July 18, 2016. See Note 13 - Equity for additional information.
Sources of Raw Materials
We depend on a limited number of suppliers for certain raw materials, components, and equipment used in our products. We
continually review our supplier relationships to mitigate risks and lower costs, especially where we depend on one or two suppliers for
critical components or raw materials. While maintaining inventories that we believe are sufficient to meet our near-term needs, we strive
not to carry significant inventories of raw materials. Accordingly, we maintain ongoing communications with our suppliers in order to
prevent any interruptions in supply, and have implemented a supply-chain management program to maintain quality and lower purchase
prices through standardized purchasing efficiencies and design requirements. To date, we generally have been able to obtain sufficient
quantities of critical supplies in a timely manner.
We are subject to rules promulgated by the SEC pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act
regarding the use of “conflict minerals”. These rules have imposed and will continue to impose additional costs and may introduce new
risks related to our ability to verify the origin of any “conflict minerals” used in our products.
Manufacturing
We utilize MOCVD (metal-organic chemical vapor deposition) systems that are capable of processing virtually all compound
semiconductor-based materials. Our operations include wafer fabrication, device design and production and fiber optic module, subsystem
and system design and manufacture. Many of our manufacturing operations are computer monitored or controlled to enhance production
output and statistical control. We employ a strategy of minimizing ongoing capital investments, while maximizing the variable nature of
our cost structure. We maintain supply agreements with key suppliers. Where we can gain cost advantages while maintaining quality and
intellectual property control, we outsource the production of certain products, subsystems, components, and subassemblies to contract
manufacturers located overseas. Our contract manufacturers maintain comprehensive quality assurance and delivery systems, and we
continuously monitor them for compliance.
Our various manufacturing processes involve extensive quality assurance systems and performance testing. Our facilities have
acquired and maintain certification status for their quality management systems. Our manufacturing facilities located in Alhambra,
California; Ivyland, Pennsylvania; Beijing, China; and Langfang, China are registered to ISO 9001 standards.
Sales and Marketing
We sell our products worldwide through our direct sales force, application engineers, third party sales representatives and
distributors. Our sales force communicates with our customers’ engineering, manufacturing, and purchasing personnel to provide
optimized customer solutions through product design, qualifications, performance, and price. Our strategy is to use our direct sales force
to sell to original equipment manufacturers and key accounts and to expand our use of distribution partners for increased coverage in
both international markets and certain domestic segments.
Throughout our sales cycle, we work closely with our customers to qualify our products into their product lines and platforms.
As a result, we develop strategic and long-lasting customer relationships with products and services that are tailored to our customers’
requirements. We focus our marketing communication efforts on increasing brand awareness, communicating our technologies’
advantages, and generating leads for our sales force. We use a variety of marketing methods, including our website, participation at trade
shows, and selective advertising to achieve these goals.
Externally, our marketing group works with customers to define requirements, characterize market trends, define new product
development activities, identify cost reduction initiatives, and manage new product introductions. Internally, our marketing group
communicates and manages customer requirements with the goal of ensuring that our product development activities are aligned with
our customers’ needs. These product development activities allow our marketing group to manage new product introductions and market
trends. See Note 14 - Geographical Information in the notes to the consolidated financial statements for disclosures related to geographic
revenue, and significant customers.
Research and Development
Our research and development efforts have been focused on maintaining our technological competitive edge by working
to improve the quality and features of our product lines. We are also making investments to expand our existing technology and
infrastructure in an effort to develop new products and production technology that we can use to expand into new markets. Our industry
is characterized by rapid changes in process technologies with increasing levels of functional integration. Our efforts are focused on
designing new proprietary processes and products, on improving the performance of our existing materials, components, and subsystems,
and on reducing costs in the product manufacturing process.
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As part of the ongoing effort to cut costs, many of our projects have focused on developing lower cost versions of our
existing products. In view of the high cost of development, we solicit research contracts that provide opportunities to enhance our core
technology base and promote the commercialization of targeted products. Generally, internal research and development funding is used
for the development of products that will be released within twelve months and external funding is used for long-term research and
development efforts.
We believe that in order to remain competitive, we must invest significant financial resources in developing new product
features and enhancements and in maintaining customer satisfaction worldwide. Research and development expense was $9.9 million,
$9.1 million and $9.3 million for the fiscal years ended September 30, 2016, 2015 and 2014, respectively. As a percentage of revenue,
research and development expenses were 10.8%, 11.2% and 16.8% for the fiscal years ended September 30, 2016, 2015 and 2014,
respectively. Our research and development expense consists primarily of compensation expense including non-cash stock-based
compensation expense, as well as engineering and prototype costs, depreciation expense, and other overhead expenses, as they relate to
the design, development, and testing of our products. These costs are expensed as incurred.
Intellectual Property and Licensing
We 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 advantage enjoyed by our product lines
depends heavily on our ability to obtain intellectual property protection for our proprietary technologies. We also acquire, through license
grants or assignments, rights to patents on inventions originally developed by others. As of September 30, 2016, we held approximately
70 U.S. patents and approximately 35 foreign patents and had over 20 additional patent applications pending. The issued patents cover
various products in the major markets we serve. Our U.S. patents will expire on varying dates between 2017 and 2031. These patents
and patent applications claim protection for various aspects of current or planned commercial versions of our materials, components,
subsystems, and systems.
We also have entered into license agreements with the other organizations, under which we have obtained exclusive or
non-exclusive rights to practice inventions claimed in various patents and applications issued or pending in the U.S. or other foreign
jurisdictions. We do not believe our financial obligations under any of these agreements adversely affects our business, financial
condition, or results of operations.
We rely on trade secrets to protect our intellectual property when we believe that publishing patents would make it easier for
others to reverse engineer our proprietary processes. We also rely on other intellectual property rights such as trademarks and copyrights
where appropriate.
Environmental Regulations
We are subject to U.S. federal, state, and local laws and regulations concerning the use, storage, handling, generation, treatment,
emission, release, discharge, and disposal of certain materials used in our research and development and production operations, as well
as laws and regulations concerning environmental remediation, homeland security, and employee health and safety. The production
of wafers and devices involves the use of certain hazardous raw materials, including, but not limited to, ammonia, phosphine, and
arsine. We have in-house professionals to address compliance with applicable environmental, homeland security, and health and safety
laws and regulations. We believe that we are currently in compliance with all applicable federal, state, and local environmental protection
laws and regulations.
Competition
The markets for our products are extremely competitive and are characterized by rapid technological change, frequent
introduction of new products, short product life cycles, and significant price erosion. We face actual and potential competition from
numerous domestic and international companies. Many of these companies have significant engineering, manufacturing, marketing, and
financial resources.
Partial lists of our competitors in the markets in which we participate include:
CATV Networks. Our primary competitors include Applied Optoelectronics and Finisar at the subsystem level and Applied
Optoelectronics and Sumitomo Electric Device Innovations at the component product level.
Satellite Communications Networks. Our primary competitors include Foxcom and MITEQ, Inc.
Video Transport Products. Our primary competitors include Evertz and Telecast.
In addition to the companies listed above, we compete with many research institutions and universities for research funding.
We also sell our products to current competitors and companies with the capability of becoming competitors. As the markets for our
products grow, new competitors are likely to emerge and current competitors may increase their market share. In the European Union
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(“EU”), political and legal arrangements encourage the purchase of EU-produced goods, which places us at a disadvantage against
European competitors.
There are substantial barriers to entry by new competitors across our product lines. These barriers include the large number
of existing patents, the time and costs required to develop products, the technical difficulty in manufacturing semiconductor-based
products, the lengthy sales and qualification cycles, and the difficulties in hiring and retaining skilled employees with the required
scientific and technical backgrounds. We believe that the primary competitive factors within our current markets are product cost, yield,
throughput, performance and reliability, breadth of product line, product heritage, customer satisfaction, and customer commitment to
competing technologies. Competitors may develop enhancements to or future generations of competitive products that offer superior
price and performance characteristics. We believe that in order to remain competitive, we must invest significant financial resources in
developing new product features and enhancements and in maintaining customer satisfaction worldwide.
Order Backlog
EMCORE’s product sales are made pursuant to purchase orders, often with short lead times. These orders are subject to
revision or cancellation and often are made without deposits. Products typically ship within the same quarter in which a purchase order
is received; therefore, our order backlog at any particular date is not necessarily indicative of actual revenue or the level of orders for
any succeeding period.
Employees
As of September 30, 2016, we had approximately 589 employees, including approximately 330 international employees that
are located primarily in China. This represents an increase of 46 employees when compared to September 30, 2015, primarily as a result
of an increase in international employees. None of our employees are covered by a collective bargaining agreement. We have never
experienced any labor-related work stoppage and believe that our employee relations are good.
Competition is intense in the recruiting of personnel in the semiconductor industry. Our ability to attract and retain qualified
personnel is essential to our continued success. We are focused on retaining key contributors, developing our staff, and cultivating their
commitment to our Company.
ITEM 1A. RISK FACTORS
We are a small company and dependent on a few products for our success.
We are a small company with a narrow, focused portfolio of products. Our small size could cause our cash flow and growth
prospects to be more volatile and makes us more vulnerable to focused competition. As a small company, we will be subject to greater
revenue fluctuations if our older product lines sales were to decline faster than we anticipate. In addition, we may not be able to
appropriately restructure our supporting functions to fit the needs of a small company.
We have incurred losses from continuing operations and our future profitability is not assured.
For the fiscal years ended September 30, 2016, and 2014, income from continuing operations was $2.6 million and $4.1 million,
respectively, and we had loss from continuing operations of $2.3 million for the fiscal year ended September 30, 2015. Our operating
results for future periods are subject to numerous uncertainties and we cannot assure you 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 cash flow and financial condition may be adversely affected.
Our future revenue is inherently unpredictable. As a result, our operating results are likely to fluctuate from period to period, and
we may fail to meet the expectations of our analysts and/or investors, which may cause volatility in our stock price and may cause
our stock price to decline.
Our quarterly and annual operating results have fluctuated substantially in the past and are likely to fluctuate significantly in the
future due to a variety of factors, some of which are outside of our control. Factors that could cause our quarterly or annual operating
results to fluctuate include:
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a downturn in the markets for our customers’ products;
discontinuation by our vendors of, or unavailability of, components or services used in our products;
disruptions or delays in our manufacturing processes or in our supply of raw materials or product components;
a failure to anticipate changing customer product requirements;
• market acceptance of our products;
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cancellations or postponements of previously placed orders;
increased financing costs or any inability to obtain necessary financing;
the impact on our business of current or future cost reduction measures;
a loss of key personnel or the shortage of available skilled workers;
economic conditions in various geographic areas where we or our customers do business;
the impact of political uncertainties, such as government sequestration and uncertainties surrounding the federal budget,
customer spending and demand for our products;
significant warranty claims, including those not covered by our suppliers;
product liability claims;
other conditions affecting the timing of customer orders;
reductions in prices for our products or increases in the costs of our raw materials;
effects of competitive pricing pressures, including decreases in average selling prices of our products;
fluctuations in manufacturing yields;
obsolescence of products;
research and development expenses incurred associated with new product introductions;
natural disasters, such as hurricanes, earthquakes, fires, and floods;
the emergence of new industry standards;
the loss or gain of significant customers;
the introduction of new products and manufacturing processes;
changes in technology;
intellectual property disputes;
customs, import/export, and other regulations of the countries in which we do business;
the occurrence of M&A activities;
and acts of terrorism or violence and international conflicts or crises.
In addition, the limited lead times with which several of our customers order our products restrict our ability to forecast
revenue. We may also experience a delay in generating or recognizing revenue for a number of reasons. For example, orders at the
beginning of each quarter typically represent a small percentage of expected revenue for that quarter and are generally cancelable at any
time. We depend on obtaining orders during each quarter for shipment in that quarter to achieve our revenue objectives. Failure to ship
these products by the end of a quarter may adversely affect our results of operations and cash flows.
As a result of the foregoing factors, we believe that period-to-period comparisons of our results of operations should not be
solely relied upon as indicators of future performance.
The market price for our common stock has experienced significant price and volume volatility and is likely to continue to experience
significant volatility in the future. This volatility may impair our ability to finance strategic transactions with our stock and otherwise
harm our business.
Our stock price has experienced significant price and volume volatility for the past several years, and our stock price is likely to
experience significant volatility in the future. The trading price of our common stock may be influenced by factors beyond our control,
such as the volatility of the financial markets and uncertainty surrounding domestic and foreign economies. The historical market prices
of our common stock may not be indicative of future market prices and we may be unable to sustain or increase the value of our common
stock. We have historically used equity incentive compensation as part of our overall compensation arrangements. The effectiveness
of equity incentive compensation in retaining key employees may be adversely impacted by volatility in our stock price. Significant
declines in our stock price may also interfere with our ability, if needed, to raise additional funds through equity financing or to finance
strategic transactions with our stock. In addition, there may be increased risk of securities litigation following periods of fluctuations in
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our stock price. Securities class action lawsuits are often brought against companies after periods of volatility in the market price of their
securities. These and other consequences of volatility in our stock price which could be exacerbated by macroeconomic conditions that
affect the market generally, or our industry in particular, could have the effect of diverting management’s attention and could materially
harm our business.
We may not pay additional dividends on our common stock and, consequently, your only opportunity to achieve a return on your
investment may be an increase in the price of our common stock.
Although we paid a special dividend in 2016, we cannot guarantee that that we will pay additional dividends in the future. In
addition, the terms of our loan and security agreement with our financial institution restrict our ability to pay dividends. Consequently,
your only opportunity to achieve a return on any shares of our common stock may be for you to sell your shares at a profit. There is no
guarantee that the price of our common stock in the market will increase or ever exceed the price that you paid for the shares.
We may undergo an “ownership change” within the meaning of Section 382 of the Code, which could affect our ability to offset U.S.
federal income tax against our net operating losses and certain of our tax credit carryovers.
Section 382 of the Internal Revenue Code, as amended (the “Code”) contains rules that limit the ability of a company that
undergoes an ownership change to utilize its net operating losses and tax credits (the “Tax Benefits”) existing as of the date of such
ownership change. Under the rules, such an ownership change is generally any change in ownership of more than 50% of a company’s
stock within a rolling three-year period. The rules generally operate by focusing on changes in ownership among shareholders considered
by the rules as owning, directly or indirectly, 5% or more of the stock of a company and any change in ownership arising from new
issuances of stock by the company.
If we were to undergo one or more “ownership changes” within the meaning of Section 382 of the Code, our net operating
losses and certain of our tax credits existing as of the date of each ownership change may be unavailable, in whole or in part, to offset
U.S. federal income tax resulting from our operations or any gains from the disposition of any of our assets and/or business, which could
result in increased U.S. federal income tax liability.
On September 17, 2014, our Board of Directors adopted a Tax Benefits Preservation Plan (the “Rights Plan”) to help preserve
the value of our Tax Benefits by reducing the risk of limitation of our Tax Benefits. The Rights Plan was approved by our shareholders
on March 10, 2015. The Rights Plan is intended to reduce the likelihood that we will experience an ownership change by discouraging
any person or group from becoming a “5% shareholder” or increasing their ownership of our common stock if they are already a “5%
shareholder.” Although the Rights Plan is intended to reduce the likelihood of an “ownership change” that could adversely affect us,
there is no assurance that the Rights Plan will prevent all transfers of our common stock that could result in such an “ownership change”.
Our business and results of operations may continue to be negatively impacted by general economic and financial market
conditions and market conditions in the industries in which we operate, and such conditions may increase the other risks that
affect our business.
In recent years, the world’s financial markets have experienced significant turmoil, resulting in reductions in available credit,
increased costs of credit, extreme volatility in security prices, potential changes to existing credit terms, and rating downgrades of
investments. These conditions materially and adversely affected the market conditions in the industries in which we operate and caused
many of our customers to reduce their spending plans, leading them to draw down their existing inventory and reduce orders for our
products, which, in turn, had a material adverse impact on our revenues. We cannot predict the timing, strength or duration of any
economic slowdown or subsequent economic recovery, worldwide or within our industry. It is possible that economic conditions could
result in further setbacks, and that these customers, or others, could as a result significantly reduce their capital expenditures, draw down
their inventories, reduce production levels of existing products, defer introduction of new products or place orders and accept delivery
for products for which they do not pay us due to their economic difficulties or other reasons. If any of these events occur, our business,
financial condition, cash flows and results of operations may be adversely affected.
If spending for CATV and optical communications networks declines, our business may suffer.
Our future success depends on continued capital investment in CATV and global communications networks infrastructure and
on continued demand for high-bandwidth, high-speed communications networks and the ability of original equipment manufacturers
to meet this demand. Spending on CATV and communications networks is limited by several factors, including limited investment
resources, uncertainty regarding the long-term evolution and sustainability of service provider business models, and a changing
regulatory environment. We cannot be certain that demand for bandwidth-intensive content will continue to grow at the same pace in
the future or that communications service providers will continue to increase spending to meet such demand. If expectations for growth
of CATV and communications networks and bandwidth consumption are not realized and investment in CATV and communications
networks does not grow as anticipated, our business, results of operations, and gross margins could be harmed.
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We expect to consider from time to time further strategic opportunities that may involve acquisitions, dispositions, investments in
joint ventures, partnerships, and other strategic alternatives that may enhance shareholder value, any of which may result in the
use of a significant amount of our management resources or significant costs, and we may not be able to fully realize the potential
benefit of such transactions.
We expect to continue to consider acquisitions, dispositions, investments in joint ventures, partnerships, and other strategic
alternatives that may enhance shareholder value. The Strategy and Alternatives Committee of the Board and our management may
from time to time be engaged in evaluating potential transactions and other strategic alternatives. In addition, from time to time, we
may engage financial advisors, enter into non-disclosure agreements, conduct discussions, and undertake other actions that may result
in one or more transactions. Although there would be uncertainty that any of these activities or discussions would result in definitive
agreements or the completion of any transaction, we may devote a significant amount of our management resources to analyzing and
pursuing such a transaction, which could negatively impact our operations. In addition, we may incur significant costs in connection
with seeking such transactions or other strategic alternatives regardless of whether the transaction is completed. In the event that we
consummate an acquisition, dispositions, partnerships, or other or strategic alternatives in the future, we cannot assure you that we
would fully realize the potential benefit of such a transaction and cannot predict the impact that such strategic transaction might have on
our operations or stock price. We do not undertake to provide updates or make further comments regarding the evaluation of strategic
alternatives, unless otherwise required by law.
Acquisitions of other companies or investments in joint ventures with other companies could adversely affect our operating results,
dilute our shareholders’ equity, or cause us to incur additional debt or assume contingent liabilities.
To increase our business, maintain our competitive position or for other business or strategic reasons, we may acquire other
companies or engage in joint ventures or similar transactions in the future. Acquisitions, joint ventures and similar transactions involve a
number of risks that could harm our business and result in the acquired business or joint venture not performing as expected, including:
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insufficient experience with technologies and markets in which the acquired business is involved, which may be necessary
to successfully operate and integrate the business;
problems integrating the acquired operations, personnel, technologies, or products with the existing business and products;
diversion of management’s time and attention from our core business to the acquired business or joint venture;
potential failure to retain key technical, management, sales, and other personnel of the acquired business or joint venture;
difficulties in retaining relationships with suppliers and customers of the acquired business, particularly where such
customers or suppliers compete with us;
reliance upon joint ventures which we do not control;
subsequent impairment of goodwill and acquired long-lived assets, including intangible assets; and
assumption of liabilities including, but not limited to, lawsuits, tax examinations, warranty issues, etc.
We may decide that it is in our best interests to enter into acquisitions, joint ventures or similar transactions that are dilutive to
earnings per share or that adversely impact margins as a whole. In addition, acquisitions or joint ventures could require investment of
significant financial resources and require us to obtain additional equity financing, which may dilute our shareholders’ equity, or require
us to incur indebtedness.
We are subject to the cyclical nature of the markets in which we compete and any future downturn may reduce demand for our
products and revenue.
In the past, the markets in which we compete have experienced significant downturns, often connected with, or in anticipation
of, the maturation of product cycles, for both manufacturers’ and their customers’ products, and declining general economic conditions.
These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels, and accelerated
erosion of average selling prices. These markets are impacted by the aggregate capital expenditures of service providers and enterprises
as they build out and upgrade their network infrastructure. These markets are highly cyclical and characterized by constant and rapid
technological change, pricing pressures, evolving standards, and wide fluctuations in product supply and demand.
We may experience substantial period-to-period fluctuations in future results of operations. Any future downturn in the markets
in which we compete, or changes in demand for our products from our customers, could result in a significant reduction in our revenue.
It may also increase the volatility of the price of our common stock.
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In addition, the communication networks industry from time to time has experienced and may again experience a pronounced
downturn. To respond to a downturn, many service providers and enterprises may slow their capital expenditures, cancel or delay new
developments, reduce their workforces and inventories, and take a cautious approach to acquiring new equipment and technologies, any
of which could cause our results of operations to fluctuate from period to period and harm our business.
If we fail to remediate deficiencies in our current system of internal controls, we may not be able to accurately report our financial
results or prevent fraud. As a result, our business could be harmed and current and potential investors could lose confidence in our
financial reporting, which could have a material adverse effect on the trading price of our equity securities.
We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002. These provisions
provide for the identification of material weaknesses in internal control over financial reporting, which is a process to provide reasonable
assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”). If we cannot provide reliable and timely financial reports, our brand, operating
results, and the market value of our equity securities could be harmed. We have in the past discovered, and may in the future discover,
areas of our internal controls that need improvement.
We have devoted significant resources to remediate and improve our internal controls. We have also been monitoring the
effectiveness of these remediated measures. We cannot be certain that these measures will ensure adequate controls over our financial
processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to fail to meet our reporting obligations.
Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could
have an adverse effect on the trading price of our equity securities. Further, the impact of these events could also make it more difficult
for us to attract and retain qualified persons to serve on our Board of Directors (the “Board”) or as executive officers, which could harm
our business.
We may have difficulty establishing and maintaining adequate management and financial controls over our China operations.
Businesses in China have historically not adopted a western style of management and financial reporting concepts and practices,
which includes strong corporate governance, internal controls and computer, financial and other control systems. Moreover, familiarity
with U.S. GAAP principles and reporting procedures is less common in China. As a consequence and due to our significant operations
in China, we may have difficulty finding accounting personnel experienced with U.S. GAAP, and we may have difficulty training and
integrating our China-based accounting staff with our U.S.-based finance organization. As a result of these factors, we may experience
difficulty in establishing management and financial controls over our China operations. These difficulties include collecting financial
data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. public-
company reporting requirements. We may, in turn, experience difficulties in implementing and maintaining adequate internal controls as
required under Section 404 of the Sarbanes-Oxley Act. If we cannot provide reliable and timely financial reports, our brand, operating
results, and the market value of our equity securities could be harmed.
Compliance with regulations related to conflict minerals could increase costs and affect the manufacturing and sale of our products.
Public companies are required to disclose the use of tin, tantalum, tungsten and gold (collectively, “conflict minerals”) mined
from the Democratic Republic of the Congo and adjoining countries (the “covered countries”) if a conflict mineral(s) is necessary to the
functionality of a product manufactured, or contracted to be manufactured, by the company. We may determine, as part of our compliance
efforts, that certain products or components we obtain from our suppliers contain conflict minerals. If we are unable to conclude that
all our products are free from conflict minerals originating from covered countries, this could have a negative impact on our business,
reputation and/or results of operations. We may also encounter challenges to satisfy customers who require that our products be certified
as conflict free, which could place us at a competitive disadvantage if we are unable to substantiate such a claim. Compliance with these
rules could also affect the sourcing and availability of some of the minerals used in the manufacture of products or components we obtain
from our suppliers, including our ability to obtain products or components in sufficient quantities and/or at competitive prices. Certain of
our customers are requiring additional information from us regarding the origin of our raw materials, and complying with these customer
requirements may cause us to incur additional costs, such as costs related to determining the origin of any minerals used in our products.
Our supply chain is complex and we may be unable to verify the origins for all metals used in our products.
We could be required to record an impairment charge as a result of changes to assumptions used in our impairment testing.
We have substantial long-lived assets recorded on our balance sheet. We will continue to evaluate the recoverability of the
carrying amount of our property, plant and equipment on an ongoing basis, and we may incur substantial impairment charges, which
would adversely affect our financial results. There can be no assurance that the outcome of such reviews in the future will not result in
substantial impairment charges. Impairment assessment inherently involves judgment as to assumptions about expected future cash flows
and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions
as to prices, costs, holding periods, or other factors that may result in changes in our estimates of future cash flows. Although we believe
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the assumptions we used in testing for impairment are reasonable, significant changes in any one of our assumptions could produce a
significantly different result. In any period where our stock price, as determined by our market capitalization, is less than our book value,
this too could indicate a potential impairment and we may be required to record an impairment charge in that period.
Our ability to achieve operational and material cost reductions and to realize production efficiencies for our operations is critical to
our ability to achieve long-term profitability.
We have implemented a number of operational and material cost reductions and productivity improvement initiatives, which
are intended to reduce our expense structure at both the cost of revenue and the operating expense levels. Cost reduction initiatives
often involve the re-design of our products, which requires our customers to accept and qualify the new designs, potentially creating
a competitive disadvantage for our products. These initiatives can be time-consuming, disruptive to our operations, and costly in the
short-term. Successfully implementing these and other cost-reduction initiatives throughout our operations is critical to our future
competitiveness and ability to achieve long-term profitability. However, there can be no assurance that these initiatives will be successful
in creating profit margins sufficient to sustain our current operating structure and business.
We are substantially dependent on a small number of customers and the loss of any one of these customers could adversely affect our
business, financial condition, results of operations, and cash flows.
A small number of customers account for a significant portion of our revenue and our dependence on orders from a relatively
small number of customers makes our relationship with each customer critically important to our business. If there is consolidation
among our customer base, our customers may be able to command increased leverage in negotiating prices and other terms of sale,
which could adversely affect our profitability. If we are required to reduce our pricing, our revenue and gross margins would be adversely
impacted. Consolidation among our customer base may also lead to reduced demand for our products, replacement of our products
by the combined entity with those of our competitors and cancellations of orders, each of which could adversely affect our business,
financial condition, results of operations, and cash flows.
Customer demand is difficult to forecast and, as a result, we may be unable to optimally match production with customer demand.
We make planning and spending decisions, including determining the levels of business that we will seek and accept, production
schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimates of customer
demand. The majority of our products are purchased pursuant to individual purchase orders. While our customers generally provide us
with their demand forecasts, they are typically not contractually committed to buy any quantity of products beyond firm purchase orders.
The short-term nature of our customer commitments and the possibility of unexpected changes in demand for their products limit our
ability to accurately predict future customer demand. On occasion, customers have required rapid increases in production, which has
strained our resources. We may not have sufficient capacity at any given time to meet the volume demands of our customers, or one
or more of our suppliers may not have sufficient capacity at any given time to meet our volume demands. Conversely, a downturn in
the markets in which our customers compete can cause, and in the past has caused, our customers to significantly reduce the amount
of products ordered from us or to cancel existing orders, leading to lower utilization of our facilities. Because many of our costs and
operating expenses are relatively fixed, reduction in customer demand would have an adverse effect on our gross margin, income (loss)
from operations, and cash flow. During an industry downturn, there is also a higher risk that a larger portion of our trade receivables
would be uncollectible.
Our operating results could be harmed if we are unable to obtain timely deliveries of sufficient components of acceptable quality
from sole or limited sources of materials, components, or services, or if the prices of components for which we do not have alternative
sources increase.
We currently obtain some materials, components, and services used in our products from limited or sole sources. We generally
do not carry significant inventories of any raw materials. Because we often do not account for a significant part of our suppliers’
businesses, we may not have access to sufficient capacity from these suppliers in periods of high demand. In addition, since we generally
do not have guaranteed supply arrangements with our suppliers, we risk serious disruption to our operations if an important supplier
terminates product lines, changes business focus, or goes out of business. Because some of these suppliers are located overseas, we may
be faced with higher costs of purchasing these materials if the U.S. dollar weakens against other currencies. If we were to change any
of our limited or sole source suppliers, we would be required to re-qualify each new supplier. Re-qualification could prevent or delay
product shipments that could adversely affect our results of operations and cash flows. In addition, our reliance on these suppliers may
adversely affect our production if the components vary in quality or quantity. If we are unable to obtain timely deliveries of sufficient
components of acceptable quality or if the prices of components for which we do not have alternative sources increase, our business,
financial condition, results of operations, and cash flows could be materially adversely affected.
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If our contract manufacturers fail to deliver qualified quality products at reasonable prices and on a timely basis, our business,
financial condition, results of operations, and cash flows could be adversely affected.
We primarily use contract manufacturers located outside of the U.S. as a less-expensive alternative to our performing
manufacturing of certain products. Contract manufacturers in Asia currently manufacture a significant portion of our high-volume fiber
optics products. We supply inventory to our contract manufacturers, and we bear the risk of loss, theft, or damage to our inventory while
it is held in their facilities.
If these contract manufacturers do not fulfill their obligations to us, or if we do not properly manage these relationships and
the transition of production to these contract manufacturers, our existing customer relationships may suffer. In addition, by undertaking
these activities, we run the risk that the reputation and competitiveness of our products and services may deteriorate as a result of the
reduction of our ability to oversee and control the assembly process, quality and delivery schedules. If we fail to manage our relationship
with our contract manufacturers, or if any of the contract manufacturers experience financial difficulty, delays, disruptions, capacity
constraints or quality control problems in their operations, our ability to ship products to our customers could be impaired and our
competitive position and reputation could be harmed.
The use of contract manufacturers located outside of the U.S. also subjects us to the following additional risks that could significantly
impair our ability to source our contract manufacturing requirements internationally, including:
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unexpected changes in regulatory requirements;
legal uncertainties regarding liability, tariffs, and other trade barriers;
inadequate protection of intellectual property in some countries;
greater incidence of shipping delays;
greater difficulty in overseeing manufacturing operations;
greater difficulty in hiring talent needed to oversee manufacturing operations;
potential political and economic instability and natural disasters;
potential adverse actions by the U.S. government pursuant to its stated intention to reduce the loss of U.S. jobs;
natural disasters;
trade and travel restrictions; and
the outbreak of infectious diseases which could result in travel restrictions or the closure of the facilities of our
contract manufacturers.
Any of these factors could significantly impair our ability to source our contract manufacturing requirements internationally.
Prior to our customers accepting products manufactured at our contract manufacturers, they must qualify the product and manufacturing
processes. The qualification process can be lengthy and expensive, with no guarantee that any particular product qualification process
will lead to profitable product sales. The qualification process determines whether the product manufactured at our contract manufacturer
achieves our customers’ quality, performance, and reliability standards. Our expectations as to the time periods required to qualify a
product line and ship products in volumes to our customers may be erroneous. Delays in qualification can impair our expected timing of
the transfer of a product line to our contract manufacturer and may impair our expected amount of sales of the affected products. Any of
these uncertainties could materially adversely affect our operating results and customer relationships.
In addition, our contract manufacturers may terminate our agreements with them upon prior notice to us or immediately for
reasons such as if we become insolvent, or if we fail to perform a material obligation under the agreements. If we are required to change
contract manufacturers or assume internal manufacturing operations for any reason, including the termination of one of our contracts,
we will likely suffer manufacturing and shipping delays, lost revenue, increased costs and damage to our customer relationships, any of
which could harm our business, financial condition and results of operations.
If we do not keep pace with rapid technological change, our products may not be competitive.
We compete in markets that are characterized by rapid technological change, frequent new product introductions, changes in
customer requirements, evolving industry standards, continuous improvement in products and the use of our existing products in new
applications. We may not be able to develop the underlying core technologies necessary to create new products and enhancements to our
existing products at the same rate as or faster than our competitors, or to license the technology from third parties that is necessary for
our products. Product development delays may result from numerous factors, including:
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changing product specifications and customer requirements;
unanticipated engineering complexities;
expense reduction measures we have implemented and others we may implement;
difficulties in hiring and retaining necessary technical personnel; and
difficulties in allocating engineering resources and overcoming resource limitations.
We cannot assure you that we will be able to identify, develop, manufacture, market, or support new or enhanced products
successfully, if at all, or on a timely, cost effective, or repeatable basis. Our future performance will depend on our successful development
and introduction of, as well as market acceptance of, new and enhanced products that address market changes, as well as current and
potential customer requirements and our ability to respond effectively to product announcements by competitors, technological changes,
or emerging industry standards. Because it is generally not possible to predict the amount of time required and the costs involved
in achieving certain research, development and engineering objectives, actual development costs may exceed budgeted amounts and
estimated product development schedules may be extended. If we are unable to develop, manufacture, market, or support new or
enhanced products successfully, or incur budget overruns or delays in our research and development efforts, our business, financial
condition, results of operations, and cash flows may be materially adversely affected.
Spending to develop and improve our technology may adversely impact our financial results.
We may need to increase our research and development and/or capital expenditures and expenses above our historical run-rate
model in order to attempt to improve our existing technology and develop new technology. Increasing our investments in research and
development of technology could cause our cost structure to fall out of alignment with demand for our products, which would have a
negative impact on our financial results. If we are unable to obtain financing or implement cost reduction measures necessary to fund
these types of expenditures, we may be unable to improve our technology or develop new technologies, which could have a material
adverse effect on our business, financial condition and results of operations. Further, our research and development programs may not
produce successful results, and our new products and services may not achieve market acceptance, create additional revenue or become
profitable, which could materially harm our business, prospects, financial results and liquidity.
The competitive and rapidly evolving nature of our industries and pressure from competitors with greater resources has in the past
resulted in and is likely in the future to result in reductions in our product prices and periods of reduced demand for our products.
We face substantial competition from a number of companies, many of which have greater financial, marketing, manufacturing,
and technical resources than we do. Larger-sized competitors often spend more on research and development, which could give those
competitors an advantage in meeting customer demands and introducing technologically innovative products before we do. We expect
that existing and new competitors will continue to improve the design of their existing products and will introduce new products with
enhanced performance characteristics.
The introduction of new products and more efficient production of existing products by our competitors have resulted and
are likely in the future to result in price reductions, increases in expenses, and reduced demand for our products. In addition, some of
our competitors may be willing to provide their products at lower prices, accept a lower profit margin, or spend more capital in order
to obtain or retain business. Competitive pressures have required us to reduce the prices of some of our products. These competitive
forces could diminish our market share and gross margins, resulting in an adverse effect on our business, financial condition, results of
operations, and cash flows.
New competitors may also enter our markets, including some of our current and potential customers who may attempt to
integrate their operations by producing their own components and subsystems or acquiring one of our competitors, thereby reducing
demand for our products. In addition, rapid product development cycles, increasing price competition due to maturation of technologies,
the emergence of new competitors in Asia with lower cost structures, and industry consolidation resulting in competitors with greater
financial, marketing, and technical resources could result in lower prices or reduced demand for our products, which could have an
adverse effect on our business, financial condition, results of operations, and cash flows.
Expected and actual introductions of new and enhanced products may cause our customers to defer or cancel orders for
existing products and may cause our products to become obsolete. A slowdown in demand for existing products ahead of a new product
introduction could result in a write-down in the value of inventory on hand related to existing products. We have in the past experienced
a slowdown in demand for existing products and delays in new product development and such delays may occur in the future. To the
extent customers defer or cancel orders for existing products due to a slowdown in demand or in anticipation of a new product release,
or if there is any delay in development or introduction of our new products or enhancements of our products, our business, financial
condition, results of operations, and cash flows could be materially adversely affected.
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Our products are difficult to manufacture. Our production could be disrupted and our results of operations and cash flows could
suffer if our production yields are low as a result of manufacturing difficulties.
We manufacture many of our wafers and products in our own production facilities. Difficulties in the production process,
such as contamination, raw material quality issues, human error, or equipment failure, could cause a substantial percentage of wafers
and devices to be nonfunctional. These problems may be difficult to detect at an early stage of the manufacturing process and often are
time-consuming and expensive to correct. Lower-than-expected production yields may delay shipments or result in unexpected levels
of warranty claims, either of which could adversely affect our results of operations and cash flows. We have experienced difficulties in
achieving planned yields in the past, particularly in pre-production and upon initial commencement of full production volumes, which
have adversely affected our gross margins. Because the majority of our manufacturing costs are fixed, achieving planned production
yields is critical to our results of operations and cash flows. Changes in manufacturing processes required as a result of changes in
product specifications, changing customer needs and the introduction of new product lines could significantly reduce our manufacturing
yields, resulting in low or negative margins on those products.
Also, we have substantial risk of interruption in manufacturing resulting from fire, natural disaster, equipment failures, or
similar events, because we manufacture most of our products using a few facilities, and do not have back-up facilities available for
manufacturing these products. We could also incur significant costs to repair and/or replace products that are defective and in some cases
costly product redesigns and/or rework may be required to correct a defect. Additionally, any defect could adversely affect our reputation
and result in the loss of future orders.
Some of the capital equipment used in the manufacture of our products have been developed and made specifically for us, is not
readily available from multiple vendors, and would be difficult to repair or replace if it were to become damaged or stop working. If any
of these suppliers were to experience financial difficulties or go out of business, or if there were any damage to, or a breakdown of our
manufacturing equipment at a time when we are manufacturing commercial quantities of our products, our business, financial condition,
results of operations, and cash flows could be materially adversely affected.
It could be discovered that our products contain defects that may cause us to incur significant costs, divert management’s attention,
result in a loss of customers, and result in product liability claims.
Our products are complex and undergo quality testing and formal qualification by our customers and us. However, defects
may occur from time to time. Our customers’ testing procedures involve evaluating our products under likely and foreseeable failure
scenarios and over varying amounts of time. For various reasons, such as the occurrence of performance problems that are unforeseeable
in testing or that are detected only when products age or are operated under peak stress conditions, our products may fail to perform
as expected long after customer acceptance. Failures could result from faulty components or design, problems in manufacturing, or
other unforeseen reasons. For the majority of our products, we provide a product warranty of one year or less from date of shipment.
For select customers, we provide extended warranties beyond our normal product warranty period for specified failures on a case-by-
case basis. As a result, we could incur significant costs to repair or replace defective products under warranty, particularly when such
failures occur in installed systems. We have experienced failures in the past and will continue to face this risk going forward, as our
products are widely deployed throughout the world in multiple demanding environments and applications. In addition, we may in
certain circumstances honor warranty claims after the warranty has expired or for problems not covered by warranty in order to maintain
customer relationships. Any significant product failure could result in product recalls, product liability claims, lost future sales of the
affected product and other products, as well as customer relations problems, litigation, and damage to our reputation.
In addition, our products are typically embedded in, or deployed in conjunction with, our customers’ products, which incorporate
a variety of components, modules and subsystems and may be expected to interpolate with modules and subsystems produced by third
parties. As a result, not all defects are immediately detectable and when problems occur, it may be difficult to identify the source of the
problem. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering
personnel from our product development efforts, and cause significant customer relations problems or loss of customers, all of which
would harm our business. The occurrence of any defects in our products could also give rise to liability for damages caused by such
defects. Although we carry product liability insurance to mitigate this risk, insurance may not adequately cover costs that may arise
from defects in our products or otherwise, nor will it protect us from reputational harm that may result from such defects. Costs incurred
in connection with product recalls or warranty or product liability claims could materially adversely affect our business, financial
condition, results of operations, and cash flows.
We face lengthy sales and qualification cycles for our new products and, in many cases, must invest a substantial amount of time
and money before we receive orders.
Most of our products are tested by current and potential customers to determine whether they meet customer or industry
specifications. The length of the qualification process, which can span a year or more, varies substantially by product and customer and,
thus, can cause our results of operations and cash flows to be unpredictable. During a given qualification period, we invest significant
resources and allocate substantial production capacity to manufacture these new products prior to any commitment to purchase by
customers. In addition, it is difficult to obtain new customers during the qualification period as customers are reluctant to expend the
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resources necessary to qualify a new supplier if they have one or more existing qualified sources. If we are unable to meet applicable
specifications or do not receive sufficient orders to profitably use our allocated production capacity, our business, financial condition,
results of operations, and cash flows could be materially adversely affected.
Our historical and future budgets for operating expenses, capital expenditures, operating leases, and service contracts are
based upon our assumptions as to the future market acceptance of our products. Because of the lengthy lead times required for product
development and the changes in technology that typically occur while a product is being developed, it is difficult to accurately estimate
customer demand for any given product. If our products do not achieve an adequate level of customer demand, our business, financial
condition, results of operations, and cash flows could be materially adversely affected.
Shifts in industry-wide demands and inventories could result in significant inventory write-downs.
The life cycles of some of our products depend heavily upon the life cycles of the end products into which our products are
designed. Products with short life cycles require us to manage production and inventory levels closely. We evaluate our ending inventories
on a quarterly basis for excess quantities, impairment of value, and obsolescence. This evaluation includes analysis of sales levels by
product and projections of future demand based upon input received from our customers, sales team, and management. If inventories on
hand are in excess of demand, or if they are generally greater than 12-months old, appropriate write-downs may be recorded. In addition,
we write off inventories that are considered obsolete based upon changes in customer demand, manufacturing process changes that result
in existing inventory obsolescence, or new product introductions, which eliminate demand for existing products. Remaining inventory
balances are adjusted to approximate the lower of our manufacturing cost or market value.
If future demand or market conditions are less favorable than our estimates, inventory write-downs may be required. We cannot
assure investors that obsolete or excess inventories, which may result from unanticipated changes in the estimated total demand for
our products and/or the estimated life cycles of the end products into which our products are designed, will not affect us beyond the
inventory charges that we have already taken.
The types of sales contracts we use in the markets we serve subject us to unique risks in each of those markets.
We generally do not have long-term supply contracts with our customers, and we typically sell our products pursuant to
purchase orders with short lead times, and even where we do have supply contracts, our customers are not obligated to purchase any
minimum amount of our products. As a result, our customers could stop purchasing our products at any time, and we must fulfill orders
in a timely manner to keep our customers.
Risks associated with the absence of long-term purchase commitments with our customers include the following:
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our customers can stop purchasing our products at any time without penalty;
our customers may purchase products from our competitors; and
our customers are not required to make minimum purchases.
These risks are increased by the fact that our customers in this market are large sophisticated companies which have considerable
purchasing power and control over their suppliers. If we are unable to fulfill these orders in a timely manner, it is likely that we will lose
sales and customers.
Cancellations or rescheduling of customer orders could result in the delay or loss of anticipated sales without allowing us
sufficient time to reduce, or delay the incurrence of, our corresponding inventory and operating expenses. In addition, changes in
forecasts or the timing of orders expose us to the risks of inventory shortages or excess inventory.
Fixed-price development work inherently has more uncertainty than production contracts and therefore, entails more variability
in estimates of the cost to complete the work. Many of these development programs have very complex designs. As technical or quality
issues arise, we may experience schedule delays and adverse cost impacts, which could increase our estimated cost to perform the work,
either of which could adversely affect our results of operations. Some fixed-price development contracts include initial production units
in their scope of work. Successful performance of these contracts depends on our ability to meet production specifications and delivery
rates. If we are unable to perform and deliver to contract requirements, our contract price could be reduced through the incorporation
of liquidated damages, termination of the contract for default, or other financially significant consequences. Management uses its best
judgment to estimate the cost to perform the work and the price we will eventually be paid on fixed-price development programs. While
we believe the cost and price estimates incorporated in the financial statements are appropriate, future events could result in either
favorable or unfavorable adjustments to those estimates.
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We have significant international sales, which expose us to additional risks and uncertainties.
For the fiscal years ended September 30, 2016, 2015 and 2014, sales to customers located outside the U.S. accounted for
approximately 28%, 32% and 33%, respectively, of our annual consolidated revenue, with revenue assigned to geographic regions
based on our customers’ billing address. Sales to customers in Asia represent the majority of our international sales. We believe that
international sales will continue to account for a significant percentage of our revenue as we seek international expansion opportunities.
Because of this, the following international commercial risks may adversely affect our revenue:
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political and economic instability or changes in U.S. government policy with respect to these foreign countries may inhibit
export of our products and limit potential customers’ access to U.S. dollars in a country or region in which those potential
customers are located;
we may experience difficulties in enforcing our legal contracts or the collecting of foreign accounts receivable in a timely
manner and we may be forced to write off these receivables;
tariffs and other barriers may make our products less cost competitive;
the laws of certain foreign countries may not adequately protect our trade secrets and intellectual property or may be
burdensome to comply with;
potentially adverse tax consequences to our customers may damage our cost competitiveness;
customs, import/export, and other regulations of the countries in which we do business may adversely affect our business;
currency fluctuations may make our products less cost competitive, affecting overseas demand for our products or
otherwise adversely affecting our business; and
language and other cultural barriers may require us to expend additional resources competing in foreign markets or hinder
our ability to effectively compete.
In addition, we may be exposed to legal risks under the laws of the countries outside the U.S. in which we do business, as well as
the laws of the U.S. governing our business activities in those other countries, such as the U. S. Foreign Corrupt Practices Act (“FCPA”).
We have substantial operations in China, which exposes us to risks inherent in doing business in China.
In an effort to keep manufacturing costs down, we operate two manufacturing facilities in China. Our China-based activities
are subject to greater political, legal, and economic risks than those faced by our other operations. In particular, the political, legal, and
economic climate in China (both at the national and regional levels) is extremely volatile and unpredictable. Our ability to operate in
China may be adversely affected by changes in, or our failure to comply with, Chinese laws and regulations, such as those relating to
taxation, import and export tariffs, environmental regulations, land use rights, intellectual property, labor and employment laws and
other matters, which laws and regulations remain highly underdeveloped and subject to change for political or other reasons, with little
or no prior notice. Moreover, the enforceability of applicable existing Chinese laws and regulations is uncertain. For example, since
Chinese administrative and court authorities have significant discretion in interpreting and implementing statutory and contract terms, it
may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we would receive
compared to more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into
with our distributors, business partners, customers and suppliers.
Also, if we are found to be, or to have been, in violation of Chinese laws or regulations governing technology import and export,
the relevant regulatory authorities have broad discretion in dealing with such violations, including, but not limited to, issuing a warning,
levying fines, restricting us from benefiting from these technologies inside or outside of China, confiscating our earnings generated from
the import or export of such technology or even restricting our future import and export of any technology.
In addition, we may not obtain the requisite legal permits to continue to operate in China and costs or operational limitations
may be imposed in connection with obtaining and complying with such permits. Our business could be adversely harmed by any changes
in the political, legal, or economic climate in China, our failure to comply with applicable laws and regulations or our inability to enforce
applicable Chinese laws and regulations.
We intend to export the majority of the products manufactured at our facilities in China. Accordingly, upon application to and
approval by the relevant governmental authorities, we will not be subject to certain Chinese taxes and are exempt from customs duty
assessment on imported components or materials when the finished products are exported from China. We are, however, required to pay
income taxes in China, subject to certain tax relief. We may become subject to other forms of taxation and duty assessments in China or
may be required to pay for export license fees in the future. In the event that we become subject to any increased taxes or new forms of
taxation imposed by authorities in China, our results of operations and cash flows could be adversely affected.
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Our failure to successfully manage the opening of our new manufacturing facility in Beijing or the transition of certain of our
manufacturing operations from our Langfang facility to our new Beijing location could harm our business, financial condition and
results of operations.
In February 2016, we leased a new manufacturing facility in Beijing, China. We plan to relocate the manufacture of certain
of our existing product lines and sub-assemblies to our new facility. The opening of this new facility has and may continue to cause
us to incur costs associated with some duplication of facilities, equipment and personnel, the amount of which could vary materially
from our projections. Transferring our product lines to our new manufacturing location will also require us to install and/or transplant
complex manufacturing equipment and processes and to hire and train a new workforce. In addition, certain of our customers may
require the re-qualification of products supplied to them in connection with the opening of our new manufacturing operations. If we
are unable to manage this transfer and training smoothly and comprehensively, or if we are unable to complete the re-qualification of
products in a timely manner, we could suffer delays in recognizing efficiencies, manufacturing and supply chain delays, adverse impacts
on our product quality and delivery schedules, harm to our reputation with our customers, and loss of customers. If we are unable to
successfully manage the relocation or initiation of the manufacture of these products, our business, financial condition and results of
operations could be harmed.
For a small portion of our business, we are subject to extensive government regulation, and our failure to comply with applicable
regulations could subject us to penalties that may restrict our ability to conduct our business.
As a contractor to the U.S. government, we are subject to and must comply with various government regulations that impact
our revenue, operating costs, profit margins and the internal organization and operation of our business. The most significant regulations
and regulatory authorities affecting our business include the following:
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the Federal Acquisition Regulations, Defense Federal Acquisition Regulation Supplement and other supplemental
agency regulations, which comprehensively regulate the formation and administration of, and performance under, U.S.
government contracts;
the Truth in Negotiations Act, which requires certification and disclosure of all factual cost and pricing data in connection
with contract negotiations;
the False Claims Act and the False Statements Act, which impose penalties for payments made on the basis of false facts
provided to the government and on the basis of false statements made to the government, respectively;
the Foreign Corrupt Practices Act, which prohibits U.S. companies from providing anything of value to a foreign official
to help obtain, retain or direct business, or obtain any unfair advantage; and
the International Traffic in Arms Regulations, which regulate the export of controlled technical data, defense articles and
defense services and restrict from which countries we may purchase materials and services used in the production of
certain of our products.
Our failure to comply with applicable regulations, rules and approvals or misconduct by any of our employees could result in
the imposition of fines and penalties, the loss of our government contracts or our suspension or debarment from contracting with the U.S.
government generally, any of which could harm our business, financial condition and results of operations. We are also subject to certain
regulations of comparable government agencies in other countries, and our failure to comply with these non-U.S. regulations could also
harm our business, financial condition or results of operations.
Our failure to obtain or maintain the right to use certain intellectual property may materially adversely affect our business, financial
condition, results of operations, and cash flows.
Our industries are characterized by frequent litigation regarding patent and other intellectual property rights. From time to time
we have received, and may receive in the future, notice of claims of infringement of other parties’ proprietary rights and licensing offers
to commercialize third party patent rights. There can be no assurance that:
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infringement claims (or claims for indemnification resulting from infringement claims) will not be asserted against us or
that such claims will not be successful;
future assertions will not result in an injunction against the sale of infringing products, which could adversely affect our
business, results of operations, and cash flows;
any patent owned or licensed by us will not be invalidated, circumvented, or challenged; or
we will not be required to obtain licenses, the expense of which may adversely affect our results of operations, and
cash flows.
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In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign jurisdictions.
Litigation, which could result in substantial cost and diversion of our resources, may be necessary to defend our rights or defend us
against claimed infringement of the rights of others. In certain circumstances, our intellectual property rights associated with government
contracts may be limited.
Protection of the intellectual property owned or licensed to us may require us to initiate litigation, which can be an extremely
expensive protracted procedure with an uncertain outcome. The availability of financial resources may limit our ability to commence or
defend such litigation.
If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business and
results of operations could be materially harmed.
Our success depends to a significant degree on our ability to protect our intellectual property and other proprietary rights. We
rely on a combination of patent, trademark, trade secret and unfair competition laws, as well as license agreements and other contractual
provisions, to establish and protect our intellectual property and other proprietary rights. We have applied for patent registrations
in the United States and selected international jurisdictions, most of which have been issued. We cannot guarantee that our pending
applications will be approved by the applicable governmental authorities. Moreover, our existing and future patents and trademarks
may not be sufficiently broad to protect our proprietary rights or may be held invalid or unenforceable in court. Failure to obtain patent
registrations or a successful challenge to our registrations in the United States or other foreign countries may limit our ability to protect
the intellectual property rights that these applications and registrations are intended to cover.
We also attempt to protect our intellectual property, including our trade secrets and know-how, through the use of trade secret
and other intellectual property laws, and contractual provisions. We enter into confidentiality and invention assignment agreements with
our employees and independent consultants. We also use non-disclosure agreements with other third parties who may have access to
our proprietary technologies and information. Such measures, however, provide only limited protection, and there can be no assurance
that our confidentiality and non-disclosure agreements will not be breached, especially after our employees or those of our third-party
contract manufacturers end their employment or engagement, and that our trade secrets will not otherwise become known by competitors
or that we will have adequate remedies in the event of unauthorized use or disclosure of proprietary information. Unauthorized third
parties may try to copy or reverse engineer our products or portions of our products, otherwise obtain and use our intellectual property,
or may independently develop similar or equivalent trade secrets or know-how. If we fail to protect our intellectual property and other
proprietary rights, or if such intellectual property and proprietary rights are infringed or misappropriated, we could lose our competitive
advantage and our business, results of operations or financial condition could be materially harmed.
Policing unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent the
misappropriation, unauthorized use, or other infringement of our intellectual property rights. Further, we may not be able to effectively
protect our intellectual property rights from misappropriation or other infringement in foreign countries where we have not applied for
patent protections, and where effective patent, trademark, trade secret, and other intellectual property laws may be unavailable, or may
not protect our proprietary rights as fully as U.S. law.
In the future, we may need to take legal actions to prevent third parties from infringing upon or misappropriating our intellectual
property or from otherwise gaining access to our technology. Protecting and enforcing our intellectual property rights and determining
their validity and scope could result in significant litigation costs and require significant time and attention from our technical and
management personnel, which could significantly harm our business. In addition, we may not prevail in such proceedings. An adverse
outcome of such proceedings may reduce our competitive advantage or otherwise harm our financial condition and our business.
We may be obligated to indemnify our customers and vendors for claims that our intellectual property infringes the rights of others,
which may result in substantial expenses to us.
We may be required to indemnify our customers or vendors for intellectual property claims made against them for products
incorporating our technology. As such, claims against our customers and vendors may require us to incur substantial expenses, such as
legal expenses, damages for past infringement or royalties for future use. Future indemnity claims could adversely affect our business
relationships and result in substantial costs to us.
We face certain litigation risks that could harm our business.
We are and may become subject to various legal proceedings and claims that arise in or outside the ordinary course of business.
The results of complex legal proceedings are difficult to predict. Moreover, many of the complaints filed against us do not specify the
amount of damages that plaintiffs seek, and we therefore are unable to estimate the possible range of damages that might be incurred
should these lawsuits be resolved against us. However, certain of these lawsuits assert types of claims that, if resolved against us, could
give rise to substantial damages. Thus, an unfavorable outcome or settlement of one or more of these lawsuits could have a material
adverse effect on our financial condition, liquidity, and results of operations. Even if these lawsuits are not resolved against us, the
uncertainty and expense associated with unresolved lawsuits could seriously harm our business, financial condition, and reputation.
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Litigation is costly, time-consuming and disruptive to normal business operations. The costs of defending these lawsuits, particularly
the securities class actions and stockholder derivative actions, have been significant, will continue to be costly, and may not be covered
by our insurance policies. The defense of these lawsuits could also result in continued diversion of our management’s time and attention
away from business operations, which could harm our business. For additional discussion regarding litigation in which we are involved,
see Note 12 - Commitments and Contingencies in the notes to our consolidated financial statements.
The costs of compliance with state, federal and international legal and regulatory requirements, such as environmental, labor, trade
and tax regulations, and customers’ standards of corporate citizenship could cause an increase in our operating costs.
We are subject to environmental and health and safety laws and regulations and must obtain certain permits and licenses relating
to the use of hazardous materials. Our production activities involve the use of certain hazardous raw materials, including, but not limited
to, ammonia, gallium, phosphine, and arsine. If our control systems are unsuccessful in preventing a release of these materials into the
environment or other adverse environmental conditions or human exposure occurs, we could experience interruptions in our operations
and incur substantial remediation and other costs or liabilities. In addition, certain foreign laws and regulations place restrictions on
the concentration of certain hazardous materials, including, but not limited to, lead, mercury, and cadmium, in our products. Failure
to comply with such laws and regulations could subject us to future liabilities or result in the limitation or suspension of the sale or
production of our products. These regulations include the European Union’s (EU) Restrictions on Hazardous Substances and Directive
on Waste Electrical and Electronic Equipment. Failure to comply with environmental and health and safety laws and regulations may
limit our ability to export products to the EU and could adversely affect our business, financial condition, results of operations, and cash
flows. In addition, the Department of Homeland Security has commenced a program to evaluate the security of certain chemicals which
may be of interest to terrorists, including chemicals utilized by us. This evaluation may lead to regulations or restrictions affecting our
ability to utilize these chemicals or the costs of doing so.
In connection with our compliance with such environmental laws and regulations, as well as our compliance with industry
environmental initiatives, the standards of business conduct required by some of our customers, and our commitment to sound corporate
citizenship in all aspects of our business, we could incur substantial compliance and operating costs and be subject to disruptions to our
operations. In addition, in the last few years, there has been increased media scrutiny and associated reports focusing on a potential link
between working in semiconductor manufacturing clean room environments and certain illnesses, primarily different types of cancers.
Regulatory agencies and industry associations have begun to study the issue to see if any actual correlation exists. Because we utilize
clean rooms, we may become subject to liability claims. These reports may also affect our ability to recruit and retain employees. If we
were found to be in violation of environmental and safety regulations laws or noncompliance with industry initiatives or standards of
conduct, we could be subject to government fines or liabilities owed to our customers, which could have a material adverse effect on our
business, financial condition, results of operations, and cash flows.
In addition, climate change is a significant topic of discussion and potential regulatory activity and has generated and may
continue to generate federal or other regulatory responses in the near future. If we or our component suppliers fail to timely comply with
applicable legislation, our customers may refuse to purchase our products or we may face increased operating costs as a result of taxes,
fines or penalties, which would have a materially adverse effect on our business, financial condition and operating results.
In connection with our compliance with such environmental laws and regulations, as well as our compliance with industry
environmental initiatives, the standards of business conduct required by some of our customers, and our commitment to sound corporate
citizenship in all aspects of our business, we could incur substantial compliance and operating costs and be subject to disruptions to our
operations and logistics. In addition, if we were found to be in violation of these laws or noncompliant with these initiatives or standards
of conduct, we could be subject to governmental fines, liability to our customers and damage to our reputation and corporate brand which
could cause our financial condition or operating results to suffer.
We are subject to anti-corruption laws in the jurisdictions in which we operate, including the FCPA. Our failure to comply with
these laws could result in penalties which could harm our reputation and have a material adverse effect on our business, results of
operations and financial condition.
We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments
to foreign officials for the purpose of obtaining or keeping business and/or other benefits, along with various other anticorruption laws.
Although we have implemented policies and procedures designed to ensure that we, our employees and other intermediaries comply
with the FCPA and other anticorruption laws to which we are subject, there is no assurance that such policies or procedures will work
effectively all of the time or protect us against liability under the FCPA or other laws for actions taken by our employees and other
intermediaries with respect to our business or any businesses that we may acquire.
We have manufacturing operations in China and other jurisdictions, many of which pose elevated risks of anti-corruption
violations, and we export our products for sale internationally. This puts us in frequent contact with persons who may be considered
“foreign officials” under the FCPA, resulting in an elevated risk of potential FCPA violations. If we are not in compliance with the FCPA
and other laws governing the conduct of business with government entities (including local laws), we may be subject to criminal and civil
penalties and other remedial measures, which could have an adverse impact on our business, financial condition, results of operations
23
and liquidity. Any investigation of any potential violations of the FCPA or other anticorruption laws by U.S. or foreign authorities could
harm our reputation and have an adverse impact on our business, financial condition and results of operations.
A failure to attract and retain managerial, technical, and other key personnel could reduce our revenue and our operational effectiveness.
Our future success depends, in part, on our ability to attract and retain certain key personnel, including scientific, operational,
financial, and managerial personnel. In addition, our technical personnel represent a significant asset and serve as the source of our
technological and product innovations. The competition for attracting and retaining key employees (especially scientists, technical
personnel, and senior managers and executives) is intense. Because of this competition for skilled employees, we may be unable to
retain our existing personnel or attract additional qualified employees in the future to keep up with our business demands and changes,
and our business, financial condition, results of operations, and cash flows could be materially adversely affected. The risks involved in
recruiting and retaining these key personnel may be increased by our historical lack of profitability, the volatility of our stock price, and
the perceived effect of previously implemented reductions in force and other cost reduction efforts.
We are subject to risks associated with the availability and coverage of insurance.
For certain risks, we do not maintain insurance coverage because of cost or availability. Because we retain some portion of
our insurable risks, and in some cases self-insure completely, unforeseen or catastrophic losses in excess of insured limits may have a
material adverse effect on our business, financial position, results of operations, and cash flows.
Our business and operations could be adversely impacted in the event of a failure or security breach of our information
technology infrastructure.
We rely upon the capacity, reliability, and security of our information technology hardware and software infrastructure and
our ability to expand and update this infrastructure in response to our changing needs. We are constantly updating our information
technology infrastructure. Although we have a disaster recovery plan, any failure to manage, expand, and update our information
technology infrastructure or any failure in the operation of this infrastructure could harm our business.
Despite our implementation of security measures, our systems are vulnerable to damages from computer viruses, natural
disasters, unauthorized access, and other similar disruptions. Our business is also subject to break-ins, sabotage, and intentional acts
of vandalism by third parties as well as employees. Any system failure, accident, or security breach could result in disruptions to our
operations. To the extent that any disruption or security breach results in a loss or damage to our data, or inappropriate disclosure of
confidential information, it could harm our business. In addition, we may be required to incur significant costs to protect against damage
caused by these disruptions or security breaches in the future.
Certain provisions of New Jersey law, our charter and our agreements may make a takeover of our Company difficult even if such
takeover could be beneficial to some of our shareholders.
New Jersey law and our certificate of incorporation, as amended, contain certain provisions that could delay or prevent a
takeover attempt that our shareholders may consider to be in their best interests. Our Board of Directors is divided into three classes.
Directors are elected to serve staggered three-year terms and are not subject to removal except for cause by the vote of the holders
of at least 80% of our capital stock. In addition, approval by the holders of 80% of our voting stock is required for certain business
combinations unless these transactions meet certain fair price criteria and procedural requirements or are approved by two-thirds of our
continuing directors. We may in the future adopt other measures that may have the effect of delaying or discouraging an unsolicited
takeover, even if the takeover were at a premium price or favored by a majority of unaffiliated shareholders. Certain of these measures
may be adopted without any further vote or action by our shareholders and this could depress the price of our common stock.
On September 17, 2014, our Board of Directors adopted the Rights Plan to help preserve the value of our Tax Benefits by
reducing the risk of limitation of our Tax Benefits. The Rights Plan is intended to reduce the likelihood that we will experience an
ownership change by discouraging any person or group from becoming a “5% shareholder” or increasing their ownership of our common
stock if they are already a “5% shareholder.” The Rights Plan could make it more difficult for a third party to acquire, or could discourage
a third party from acquiring, the Company or a large block of our common stock. A third party that acquires 5% or more of our common
stock could suffer substantial dilution of its ownership interest under the terms of the Rights Plan through the issuance of common stock
or common stock equivalents to all stockholders other than such acquiring person.
Natural disasters or other catastrophic events could have a material adverse effect on our business.
Natural disasters, such as hurricanes, earthquakes, fires, and floods, could materially adversely affect our operations and
financial performance. Such events could result in physical damage to one or more of our facilities, the temporary closure of one or more
of our facilities or those of our suppliers, a temporary lack of an adequate work force in a market, a temporary or long-term disruption
in the supply of products from some local and overseas suppliers, a temporary disruption in the transport of goods from overseas, and
delays in the delivery of goods. Public health issues, whether occurring in the United States or abroad, could disrupt our operations,
24
disrupt the operations of suppliers or customers, or have an adverse impact on customer demand. As a result of any of these events,
we may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business,
financial condition, results of operations, and cash flows. These events could also reduce demand for our products or make it difficult
or impossible to receive products from suppliers. Although we maintain business interruption insurance and other insurance intended to
cover some or all of these risks, such insurance may be inadequate, whether because of coverage amount, policy limitations, the financial
viability of the insurance companies issuing such policies, or other reasons.
We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders.
We believe that our existing cash and cash equivalents, and cash flows from our operating activities and funds available under
our credit facilities, will be sufficient to meet our anticipated cash needs for at least the next 12 months. We operate in an industry,
however, that makes our prospects difficult to evaluate. 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 execute on our current or future business strategies, including to:
•
invest in our research and development efforts, including by hiring additional technical and other personnel;
• maintain and expand our operating or manufacturing infrastructure;
•
•
acquire complementary businesses, products, services or technologies; or
otherwise pursue our 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
stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those
of existing stockholders. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate
funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, take advantage
of unanticipated opportunities, develop or enhance our products, or otherwise respond to competitive pressures could be significantly
limited. Furthermore, in the event adequate capital is not available to us as required, or is not available on favorable terms, our business,
financial condition, results of operations, and cash flows may be materially and adversely affected.
We may be subject to theft, loss, or misuse of personal data about our employees, customers, or other third parties, which could
increase our expenses, damage our reputation, or result in legal or regulatory proceedings.
The theft, loss, or misuse of personal data collected, used, stored, or transferred by us to run our business could result in
significantly increased security costs or costs related to defending legal claims. Global privacy legislation, enforcement, and policy
activity in this area are rapidly expanding and creating a complex compliance regulatory environment. Costs to comply with and
implement these privacy-related and data protection measures could be significant. In addition, our even inadvertent failure to comply
with federal, state, or international privacy-related or data protection laws and regulations could result in proceedings against us by
governmental entities or others.
The risks above are not the only risks we face. If any of the events described in our risk factors actually occur, or if additional
risks and uncertainties not presently known to us or that we currently deem immaterial, materialize, then our business, financial
condition, results of operations, and cash flows could be materially affected.
***
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
25
ITEM 2. PROPERTIES
The following chart contains certain information regarding each of our principal facilities.
Location
Alhambra, California
Function
Corporate Headquarters
Manufacturing and research and
development facilities
Langfang, China
Beijing, China
Ivyland, Pennsylvania
Manufacturing facility
Manufacturing facility
Manufacturing and research and
development facility
Approximate
Square Footage
75,000
Term
(in calendar year)
Leases covering two of six buildings
expired in 2011; another lease covering
four of six buildings expires in 2017
52,000
23,200
9,000
Multiple leases, which expire in 2017 (1)
Lease expires in 2021 (1)
Lease expires in 2019 (1)
(1) Leases have the option to be renewed by us, subject to inflation and other adjustments.
(2) Certain facility leases in Alhambra, California which have expired are being maintained on a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
See the disclosures under the caption “Legal Proceedings” in Note 12 - Commitments and Contingencies in the notes to our
consolidated financial statements for disclosures related to our legal proceedings, which disclosures are incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
26
PART II. OTHER INFORMATION
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NASDAQ Global Market and is quoted under the symbol “EMKR”. As of November 30,
2016, we had approximately 95 shareholders of record. Many of our shares of common stock are held by brokers and other institutions
on behalf of shareholders, and we are unable to estimate the number of these shareholders.
Price Range of Common Stock
The price ranges presented below represent the highest and lowest sales prices for our common stock on the NASDAQ Global
Market during each quarter over the two most recent fiscal years.
High and Low Sales Price Ranges of EMCORE Corporation’s
Common Stock
Fiscal 2016
Fiscal 2015
First Quarter
$5.81 - $8.52
$5.00 - $5.80
Second Quarter
$4.96 - $6.15
$5.10 - $5.60
Third Quarter
$4.95 - $6.25
$5.37 - $6.59
Fourth Quarter
$4.90 - $6.71*
$5.71 - $7.49
*
As described below, on July 29, 2016 we paid a special cash dividend of $1.50 per share of the Company’s common stock. The sales prices for our common stock
reflect the payment of this special dividend as of August 1, 2016, the ex-dividend date for the special dividend.
Dividend Policy
On July 5, 2016, we declared a special cash dividend of $1.50 per share of the Company’s common stock, or a total of $39.2
million. The dividend was paid on July 29, 2016 to shareholders of record as of the close of business on July 18, 2016. Under the terms of
our credit facility with Wells Fargo Bank, N. A., we are restricted from paying dividends that result in the liquidity of the Company being
less than $25.0 million after paying the dividend if any amounts are outstanding under our credit facility. The payment of dividends, if
any, in the future is at the discretion of the Board of Directors.
Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
Performance Graph
The following table and graph compares the yearly percentage change in the cumulative total shareholders’ return on our
common stock for the five-year period from October 1, 2011 through September 30, 2016 with the cumulative total return on the
NASDAQ Composite Index and the NASDAQ Telecommunications Stock Index. The comparison assumes $100 was invested at the
market close on September 30, 2011 in our common stock, the NASDAQ Composite Index and the NASDAQ Telecommunications
Stock Index and that any dividends were reinvested. The stock price performance on the following graph is not necessarily indicative of
future stock price performance.
The following stock performance graph does not constitute soliciting material, and should not be deemed filed or incorporated
by reference into any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we
specifically incorporate this stock performance graph by reference therein.
27
Data Table
As of September 30,
EMCORE Corporation . . . . . . . . . . . . . . . .
NASDAQ Composite . . . . . . . . . . . . . . . . . . .
NASDAQ Telecommunications . . . . . . . . . . .
$
$
$
2011
100.00
100.00
100.00
$
$
$
2012
142.68
131.89
116.82
$
$
$
2013
113.13
163.47
149.75
$
$
$
2014
143.69
195.96
161.24
$
$
$
2015
171.72
202.60
157.52
$
$
$
2016
186.27
234.66
176.13
ITEM 6. SELECTED FINANCIAL DATA
In the tables below, we have provided you with consolidated financial data. We derived the statement of operations data for the
fiscal years ended September 30, 2016, 2015, and 2014 and the balance sheet data as of September 30, 2016 and 2015 from our audited
consolidated financial statements included in Financial Statements and Supplementary Data under Item 8 within this Annual Report,
after giving effect to the discontinued operations of the Photovoltaics and Digital Products Businesses.
We derived the statement of operations data for the years ended September 30, 2013 and 2012 and the selected balance sheet
data as of September 30, 2014, 2013, and 2012 from audited consolidated financial statements that are not included in this Annual Report
after giving effect to the discontinued operations of the Photovoltaics and Digital Products Businesses. You should read this financial
data together with our Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 and
Financial Statements and Supplementary Data under Item 8 within this Annual Report. Our historic results are not necessarily indicative
of the results that may be expected in the future.
28
Selected Financial Data
Statements of Operations Data
(in thousands, except loss per share)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per basic share
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per basic share . . . . . . . . . . . . . . . . . . . .
Net income (loss) per diluted share
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per diluted share . . . . . . . . . . . . . . . . . .
Balance Sheet Data
(in thousands)
Cash, cash equivalents and restricted cash . . . . . . . . . . . . .
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
For the Fiscal Years Ended September 30,
2014
2015
2013
2016
91,998
30,954
2,939
2,619
5,647
8,266
0.10
0.22
0.32
0.10
0.21
0.31
$
$
$
$
$
$
81,685
28,691
(4,522)
(2,272)
65,372
63,100
(0.08)
2.18
2.10
(0.08)
2.18
2.10
$
$
$
$
$
$
55,514
12,114
(20,331)
4,082
770
4,852
0.13
0.03
0.16
0.13
0.03
0.16
2016
64,870
92,957
127,211
1,635
107,317
2015
$ 112,260
127,994
160,907
1,774
135,442
$
As of September 30,
2014
22,169
30,914
191,342
6,018
112,347
$
$
$
$
$
$
$
60,971
12,266
(8,945)
(5,554)
10,542
4,988
(0.21)
0.40
0.19
(0.21)
0.40
0.19
2013
16,919
37,196
173,714
9,434
101,179
$
$
$
$
$
$
$
2012
61,592
7,924
(20,437)
(21,202)
(17,969)
(39,171)
(0.90)
(0.76)
(1.66)
(0.90)
(0.76)
(1.66)
2012
9,129
3,971
169,866
9,408
69,023
Working capital, calculated as current assets minus current liabilities, is a financial metric we use that represents available
operating liquidity.
Significant Transactions
Significant transactions that affect the comparability of our operating results and financial condition include:
Fiscal 2016
Continuing Operations:
•
•
•
•
On July 5, 2016, the Company declared a special cash dividend of $1.50 per share of the Company’s common stock, or
a total of $39.2 million. The dividend was paid on July 29, 2016 to shareholders of record as of the close of business on
July 18, 2016. See Note 13 - Equity for additional information.
On September 23, 2014, Sumitomo Electric Industries, Ltd. (“SEI”) filed for arbitration against EMCORE, in accordance
with the terms of the Master Purchase Agreement between the parties. SEI was seeking $47.5 million from EMCORE,
relating to numerous claims. On April 12, 2016, the International Court of Arbitration tribunal rejected SEI’s claims. The
panel ruled that EMCORE owes SEI none of the amounts SEI sought in the arbitration and that the Company was entitled
to collect the $1.9 million held in escrow, which was received in June 2016 and is included in cash at September 30, 2016.
The Company was also entitled to recover $2.6 million in legal fees and costs from SEI, which was received in June
2016 and has been recorded by EMCORE within operating income. See Note 12 - Commitments and Contingencies for
additional information.
In September 2016, the Company paid $2.9 million previously accrued related to a termination fee for terminating a prior
joint venture agreement. See Note 12 - Commitments and Contingencies for additional information.
During fiscal year 2016, the company paid $6.1 million for the purchase of long-term inventory as a result of the vendor
announcing they would cease manufacturing a part.
29
Discontinued Operations:
•
As a result of the SEI Arbitration tribunal ruling above, during the fiscal year ended September 30, 2016, we recognized a
gain associated with the release of $3.4 million of previously deferred gain associated with the sale of assets and reversal
of other liabilities of $0.4 million, resulting in a credit of $3.8 million to recognition of previously deferred gain on sale of
assets within discontinued operations of the Digital Products Business. See Note 4 - Discontinued Operations and Note 12
- Commitments and Contingencies for additional information.
Fiscal 2015
Continuing Operations:
•
•
Common Stock Repurchase: In April 2015, EMCORE’s Board of Directors authorized the Company to repurchase $45.0
million of shares of its common stock. On May 15, 2015, we announced the commencement of a modified “Dutch auction”
tender offer to purchase for cash shares of our common stock (the “Tender Offer”). On June 15, 2015, we completed
the Tender Offer and purchased 6.9 million shares of our common stock at a purchase price of $6.55 per share, for an
aggregate cost of $45.0 million excluding fees and expenses. Repurchased common stock was recorded to treasury stock.
The Company incurred costs of $0.7 million in connection with the Tender Offer, which were recorded to treasury stock.
Asset Retirement Obligations (“AROs” or “ARO”): As a result of the revision in the estimated amount and timing of cash
flows for asset retirement obligations during the fiscal year ended September 30, 2015, the Company reduced ARO liability
by $2.9 million with an offsetting reduction to property, plant, and equipment, net of $2.1 million, and recorded a gain
from change in estimate on ARO obligation of $0.8 million. The Company first reduced the net leasehold improvement
asset to the extent of the carrying amount of the related asset initially recorded when the ARO was established. The
amount of the remaining reduction to the ARO liability was recorded as a reduction to operating expenses. See Note 12 -
Commitments and Contingencies in the notes to the consolidated financial statements for additional information.
Discontinued Operations:
•
Photovoltaic and Digital Products Asset Sales: On December 10, 2014, we sold our Photovoltaics Business to SolAero
for $150.0 million in cash. On January 2, 2015, we sold our Digital Products Business to NeoPhotonics for $17.0 million
in cash and notes receivable that were paid in April 2015. These Asset Sales are reported as discontinued operations,
which require retrospective restatement of prior periods to classify the results of operations for the businesses sold as
discontinued operations. No assets or liabilities that were sold from either the Photovoltaic Business or Digital Products
Business remain on the consolidated balance sheet as of September 30, 2016 and 2015. See Note 4 - Discontinued
Operations in the notes to the consolidated financial statements for additional information.
Fiscal 2014
Continuing Operations:
• We recorded a net deferred tax valuation allowance release of $24.1 million as an income tax benefit during fiscal year
2014. All of the $24.1 million in deferred tax assets were used in fiscal year 2015 when income tax expense was recorded
as a result of the sale of the Photovoltaics Business, thus no cash was received for the deferred tax assets.
Fiscal 2013
Continuing Operations:
•
•
Stock Sales: During August 2012, we filed a shelf registration statement on Form S-3 with the SEC pursuant to which
we could, from time to time, sell up to an aggregate of $50.0 million of our common or preferred stock, warrants or debt
securities. On August 23, 2012, the registration statement was declared effective by the SEC, which allowed us to access
the capital markets for the three year period following this effective date as long as we continued to meet the eligibility
requirements for the use of Form S-3. On October 3, 2012 we sold 1,832,410 shares of common stock for net proceeds
of $9.5 million. In addition, on September 18, 2013, we sold 2,875,000 shares of common stock for net proceeds of
$11.7 million.
Impact from Thailand Flood: During the fiscal year ended September 30, 2013, we recorded flood-related insurance
proceeds of $7.8 million in the form of forgiveness of $0.2 million of outstanding capital lease obligations, $1.0 million
of outstanding payables and $6.6 million in the form of a receivable, which was paid in cash. No additional flood-related
insurance proceeds associated with this event are anticipated.
30
Discontinued Operations:
•
•
Impact from Thailand Flood: During the fiscal year ended September 30, 2013, we recorded flood-related insurance
proceeds of $11.2 million in the form of forgiveness of $5.4 million of outstanding capital lease obligations, $4.2 million
of outstanding payables and $1.6 million in the form of a receivable, which was paid in cash. In addition, we capitalized
$1.2 million of new manufacturing lines and recorded a corresponding amount to capital lease obligation.
Joint Venture: In March 2013, we sold certain solar assets and our ownership interest in Emcore Solar New Mexico to
Suncore Photovoltaic Technology Co., Ltd. (“Suncore”) for $1.5 million. In June 2013, we entered into an agreement to
transfer our 40% registered ownership interest in Suncore to San’an Optoelectronics Co., Ltd. (“San’an”) for a purchase
price of $4.8 million. The carrying value of our registered ownership interest in Suncore was $0 as of June 30, 2013. Upon
completion of the share transfer, the Company recognized $3.3 million of deferred revenue from Suncore as well as the
resulting gain of $4.8 million on our registered ownership interest which was recorded within discontinued operations.
Fiscal 2012
Continuing Operations:
•
Impact from Thailand Flood: In October 2011, we announced that flood waters had severely impacted the inventory and
production operations of our primary contract manufacturer in Thailand. The impacted areas included certain product
lines for the Digital Products Business and CATV business.
During the fiscal year ended September 30, 2012, we recorded flood-related losses associated with damaged inventory
and equipment of approximately $3.2 million. We capitalized the cost of our new manufacturing lines of approximately
$0.2 million and recorded an equipment capital lease obligation of $0.2 million, net of equipment deposits. In addition, we
recorded $1.0 million to cost of revenue for losses related to damaged inventory on order related to manufacturing product
lines that were destroyed and received insurance related proceeds payment of $4.2 million.
Discontinued Operations:
•
•
•
•
Impact from Thailand Flood: During the fiscal year ended September 30, 2012, we recorded flood-related losses associated
with damaged inventory and equipment of approximately $2.3 million. We capitalized the cost of our new manufacturing
lines of approximately $5.0 million and recorded an equipment capital lease obligation of $4.2 million, net of equipment
deposits. In addition, we recorded $0.6 million to cost of revenue for losses related to damaged inventory on order related
to manufacturing product lines that were destroyed and received insurance related proceeds payment of $4.8 million.
Sale of Fiber Optics-related Assets: On May 7, 2012, we completed the sale of certain assets associated with our Fiber
Optics business to a subsidiary of Sumitomo Electric Industries, LTD and recorded a gain of approximately $2.8 million.
We initially deferred approximately $4.9 million of the gain on sale until the indemnification obligation and purchase price
adjustment contingencies were resolved. See Note 12 - Commitments and Contingencies in the notes to the consolidated
financial statements for additional disclosures related to the recognition of the deferred gain on sale.
Impairment Charge: As of June 30, 2012, we performed an evaluation of an asset group within our Photovoltaics Business
for impairment of long-lived assets. The impairment test was triggered by a determination that it was more likely than not
those assets would be sold or otherwise disposed of before the end of their previously estimated useful lives. As a result
of the evaluation, we determined that impairment existed and a charge of $1.4 million was recorded to write down the
long-lived assets to an estimated fair value within discontinued operations. Of the total impairment charge, $1.1 million
related to equipment and $0.3 million related to intangible assets.
Joint Venture: During the fiscal year ended September 30, 2012, Suncore increased its registered capital by recording a
deemed capital distribution of $37.0 million which was distributed and reinvested in proportion to each entity’s registered
capital, of which San’an was allocated $22.2 million and EMCORE was allocated $14.8 million. During this same period,
Suncore also recorded a cash dividend of approximately $4.1 million in proportion to each entity’s registered capital of
which San’an received $2.5 million and EMCORE received $1.6 million. We recorded the cash dividend as a reduction
of our investment in Suncore. We incurred foreign income tax of approximately $1.6 million associated with these
capital distributions. EMCORE’s cash dividend was equal to the foreign income tax expense incurred on these capital
distributions. During fiscal 2012, we held a 40% registered ownership in Suncore and we recorded a $1.2 million loss
from this equity method investment within discontinued operations. As of September 30, 2012, our investment balance in
Suncore was zero and we stopped recording our proportionate share of Suncore’s loss since we had no obligation or intent
to fund the deficit balance.
•
Litigation Settlement: In May 2012, we reached a confidential settlement regarding certain outstanding litigation in
exchange for a release of related claims. The settlement resulted in a charge of $1.0 million in our statement of operations
and comprehensive loss.
31
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the financial
statements and the notes thereto included in Financial Statements under Item 1 within this Quarterly Report. The following discussion
contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. See Cautionary Statement Regarding Forward-Looking Statements.
Business Overview
EMCORE Corporation together with its subsidiaries (referred to herein as the “Company,” “we,” “our,” or “EMCORE”)
designs and manufactures Indium Phosphide (InP) optical chips, components, subsystems and systems for the broadband and specialty
fiber optics market. EMCORE was the pioneer in linear fiber optic transmission technology, and today is a leading provider of optical
components, as well as a provider of complete end-to-end solutions for high-speed communications network infrastructures, enabling
systems and service providers to meet growing demand for bandwidth and connectivity. EMCORE’s advanced optical technologies
are designed for cable television (CATV) and fiber-to-the-premise (FTTP) networks, telecommunications and data centers, satellite
communications, aerospace and defense, wireless networks, and broadcast and professional audio/video systems. With its world-class
InP semiconductor wafer fabrication facility, EMCORE has fully vertically-integrated manufacturing capability and also provides
contract design, foundry and component packaging services.
Sumitomo Electric Industries Ltd. (“SEI”)
In March 2012, we entered into a Master Purchase Agreement with SEI, pursuant to which we agreed to sell certain assets and
transfer certain obligations. Under the terms of the Master Purchase Agreement, we agreed to indemnify SEI for up to $3.4 million of
potential claims and expenses for the two-year period following the sale and we recorded this amount as a deferred gain on our balance
sheet as a result of these contingencies.
On September 23, 2014, SEI filed for arbitration against EMCORE, as required under the Master Purchase Agreement between
the parties. SEI was seeking $47.5 million from EMCORE, relating to numerous claims. On April 12, 2016, the International Court of
Arbitration tribunal rejected SEI’s claims. The panel ruled that EMCORE owes SEI none of the amounts SEI sought in the arbitration
and that the Company is entitled to collect the $1.9 million held in escrow, which was received in June 2016 and is included in cash at
June 30, 2016. The Company was also entitled to recover $2.6 million in fees and costs from SEI, which was received in June 2016.
During the fiscal year ended September 30, 2016, we recognized a gain associated with the release of $3.4 million of previously deferred
gain associated with the sale of assets and reversal of other liabilities of $0.4 million, resulting in a credit of $3.8 million to recognition of
previously deferred gain on sale of assets within discontinued operations of the Digital Products Business. During the fiscal year ended
September 30, 2016, we recognized the $2.6 million recovery of fees and costs incurred by EMCORE within operating income as such
represented the recovery of previously incurred legal expenses. See Note 4 - Discontinued Operations in the notes to the consolidated
financial statements for more information.
Sale of Photovoltaics and Digital Products Businesses
On September 17, 2014, EMCORE entered into an Asset Purchase Agreement (the “Photovoltaics Agreement”) with SolAero
Technologies Corporation (“SolAero”) (formerly known as Photon Acquisition Corporation) pursuant to which SolAero acquired
substantially all of the assets, and assumed substantially all of the liabilities, primarily related to or used in connection with the Company’s
photovoltaics business, including EMCORE’s subsidiaries EMCORE Solar Power, Inc. and EMCORE IRB Company, LLC (collectively,
the “Photovoltaics Business” and, the sale of the Photovoltaics Business, the “Photovoltaics Asset Sale”) for $150.0 million in cash,
prior to a $0.1 million working capital adjustment pursuant to the Photovoltaics Agreement finalized and paid by EMCORE during the
fiscal year ended September 30, 2014. On December 10, 2014, EMCORE completed the Photovoltaics Asset Sale.
On October 22, 2014, EMCORE entered into an Asset Purchase Agreement (the “Digital Products Agreement”) with
NeoPhotonics Corporation, a Delaware corporation (“NeoPhotonics”), pursuant to which the Company sold certain assets, and transferred
certain liabilities, of the Company’s telecommunications business (the “Digital Products Business”) to NeoPhotonics for an aggregate
purchase price of $17.5 million, subject to certain adjustments.
On January 2, 2015, EMCORE completed the sale of the Digital Products Business for $1.5 million in cash and an adjusted
Promissory Note balance of $15.5 million. On April 17, 2015, NeoPhotonics paid in full the outstanding balance of the Promissory Note
of $15.5 million, plus accrued interest of $0.2 million.
The Photovoltaics Asset Sale and Digital Products Asset Sale are reported as discontinued operations. See Note 4 - Discontinued
Operations in the notes to the consolidated financial statements for additional disclosures.
32
Strategic Plan
In addition to organic growth and development of our existing fiber optics business, we intend to pursue other strategies to
enhance shareholder value. The Strategy and Alternatives Committee of the Company’s Board of Directors (the “Strategy Committee”),
which was established in December 2013, is charged with overseeing the Company’s strategic plan and evaluating strategic opportunities
and alternatives available to the Company, including potential mergers, acquisitions, divestitures and other key strategic transactions
outside the ordinary course of the Company’s business. Accordingly, the Strategy Committee may from time to time consider strategic
opportunities to enhance shareholder value, which may include acquisitions, investments in joint ventures, partnerships, and other
strategic alternatives such as dispositions, reorganizations, recapitalizations or other similar transactions, the repurchase of shares of
our outstanding common stock or payment of dividends to our shareholders, and may engage financial and other advisors to assist it in
these efforts. Accordingly, the Strategy Committee of the Board of Directors and our management may from time to time be engaged in
evaluating potential strategic opportunities and we may enter into definitive agreements with respect to such transactions or other strategic
alternatives. However, there is no assurance that the Strategy Committee will identify further strategic opportunities that the Company
will determine to pursue, or that the consideration of any such opportunity would result in the completion of a strategic transaction.
Critical Accounting Policies
The preparation of 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. The accounting estimates that
require our most significant, difficult, and/or subjective judgments include:
•
•
•
•
•
the valuation of inventory, warrants and stock-based compensation;
the useful lives of assets and assessment of recovery of long-lived assets;
asset retirement obligations and contingencies including litigation and indemnification;
the allowance for doubtful accounts and warranty accruals; and,
the valuation allowance for deferred tax assets.
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. A listing and description of our critical accounting policies includes the following:
Prior Period Reclassifications
On December 10, 2014, we sold our Photovoltaics business to SolAero. On January 2, 2015, we sold our Digital Products
Business to NeoPhotonics. The Photovoltaics Asset Sale and Digital Asset Sale are reported as discontinued operations, which require
retrospective restatement of prior periods to classify the results of operations as discontinued operations. No Photovoltaics or Digital
Products assets or liabilities that were sold remain on the consolidated balance sheets as of September 30, 2016 and September 30, 2015.
The financial results of the Photovoltaics Business and the Digital Products Business are presented as “discontinued operations” on the
consolidated statements of operations and comprehensive income for the fiscal years ended September 30, 2016, 2015 and 2014. See
Note 4 - Discontinued Operations in our notes to the consolidated financial statements for additional information.
Reclassification of prior period amounts related to discontinued operations as a result of the sale of the Photovoltaics and
Digital Products Businesses have been made to conform to the current period financial statement presentation. There were no other
reclassifications except for amounts related to discontinued operations.
Accounts Receivable
We regularly evaluate the collectability of our accounts receivable and maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to meet their financial obligations to us. The allowance is based on the age of
receivables and a specific identification of receivables considered at risk of collection. We classify charges associated with the allowance
for doubtful accounts as sales, general, and administrative expense. If the financial condition of our customers were to deteriorate,
impacting their ability to pay us, additional allowances may be required. See Note 6 - Accounts Receivable in the notes to the consolidated
financial statements for additional information related to our receivables.
33
Inventory
Inventory is stated at the lower of cost or market, with cost being determined using the standard cost method that includes
material, labor, and manufacturing overhead costs, which approximates weighted average cost. Inventory that is expected to be used
within the next 12 months is classified as current inventory. We write-down inventory once it has been determined that conditions exist
that may not allow the inventory to be sold for its intended purpose or the inventory is determined to be excess or obsolete based on our
forecasted future revenue. The charge related to inventory write-downs is recorded as a cost of revenue. The majority of the inventory
write-downs are related to estimated allowances for inventory whose carrying value is in excess of net realizable value and on excess
raw material components resulting from finished product obsolescence. In most cases where we sell previously written down inventory,
it is typically sold as a component part of a finished product. The finished product is sold at market price at the time resulting in higher
average gross margin on such revenue. We do not track the selling price of individual raw material components that have been previously
written down or written off, since such raw material components usually are only a portion of the finished products and related sales
price. We evaluate inventory levels at least quarterly against sales forecasts on a significant part-by-part basis, in addition to determining
its overall inventory risk. We have incurred, and may in the future incur charges to write-down our inventory. See Note 7 - Inventory in
the notes to the consolidated financial statements for additional information related to our inventory.
Valuation of Long-lived Assets
Long-lived assets consist primarily of property, plant, and equipment, net. Because most of our long-lived assets are subject to
amortization, we review these assets for impairment in accordance with the provisions of Accounting Standards Codification (“ASC”)
360, Property, Plant, and Equipment. We review long-lived assets for impairment whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable. Our impairment testing of long-lived assets consists of determining whether the
carrying amount of the long-lived asset (asset group) is recoverable, in other words, whether the sum of the future undiscounted cash
flows expected to result from the use and eventual disposition of the asset (asset group) exceeds its carrying amount. The determination
of the existence of impairment involves judgments that are subjective in nature and may require the use of estimates in forecasting future
results and cash flows related to an asset or group of assets. In making this determination, we use certain assumptions, including estimates
of future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, the
length of service that assets will be used in our operations, and estimated salvage values. See Note 8 - Property, Plant, and Equipment,
net in the notes to the consolidated financial statements for additional disclosures related to our long-lived assets.
Income Taxes
In accordance with the authoritative guidance on accounting for income taxes, we recognize income taxes using an asset and
liability approach. This approach requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities
and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns.
The measurement of current and deferred taxes is based on provisions of the enacted tax law and the effects of future changes in tax laws
or rates are not anticipated.
The authoritative guidance provides for recognition of deferred tax assets if the realization of such deferred tax assets is more
likely than not to occur based on an evaluation of all available evidence, both positive and negative, and the relative weight of the
evidence. With the exception of the gains resulting from the completed Photovoltaics Asset Sale, we have determined that at this time it
is more likely than not that deferred tax assets attributable to all other items will not be realized, primarily due to uncertainties related to
our ability to utilize our net operating loss carryforwards before they expire. Accordingly, we have established a valuation allowance for
such deferred tax assets which we do not expect to realize. If there is a change in our ability to realize our deferred tax assets for which
a valuation allowance has been established, then our tax valuation allowance may decrease in the period in which we determine that
realization is more likely than not. Likewise, if we determine that it is not more likely than not that deferred tax assets will be realized,
then a valuation allowance may be established for such deferred tax assets and our tax provision may increase in the period in which
we make the determination. See Note 11 - Income and other Taxes in the notes to the consolidated financial statements for additional
information related to our income taxes.
Revenue Recognition
Revenue is recognized upon shipment, provided persuasive evidence of a contract exists, the price is fixed, the product meets
our customer’s specifications, title and ownership have transferred to the customer, and there is reasonable assurance of collection of
the sales proceeds. The majority of our products have shipping terms that are free on board or free carrier alongside (FCA) shipping
point, which means that we fulfill our delivery obligation when the goods are handed over to the freight carrier at our shipping dock.
This means the customer typically bears all costs and risks of loss or damage to the goods from that point. In certain cases, we ship our
products cost insurance and freight. Under this arrangement, revenue is recognized under FCA shipping point terms, but we pay (and
invoice the customer) for the cost of shipping and insurance to the customer’s designated location. We account for shipping and related
transportation costs by recording the charges that are invoiced to customers as revenue, with the corresponding cost recorded as cost
of revenue. In those instances where inventory is maintained at a consigned location, revenue is recognized only when our customer
34
pulls product for use and after title and ownership has transferred to the customer. Any warranty cost and remaining obligations that are
inconsequential or perfunctory are accrued when the corresponding revenue is recognized.
Distributors. We use a number of distributors around the world and recognize revenue upon shipment of product to these
distributors. Title and risk of loss pass to the distributors upon shipment, and our distributors are contractually obligated to pay
us on standard commercial terms, just like our other direct customers. We do not sell to our distributors on consignment and,
except in the event of product discontinuance, do not give distributors a right of return.
Contract Manufacturers. Prior to certain customers accepting product that is manufactured at one of our contract manufacturers,
these customers require that they first qualify the product and manufacturing processes at our contract manufacturer. The
customers’ qualification process determines whether the product manufactured at our contract manufacturer achieves their
quality, performance, and reliability standards. After a customer completes the initial qualification process, we receive approval
to ship qualified product to that customer. As part of the manufacturing process at our contract manufacturers, the finished
product is tested prior to shipment to the customer using the same criteria that our customer uses to test product it receives.
Revenue is recognized upon shipment of customer-qualified product, provided persuasive evidence of a contract exists, the
price is fixed, the product meets our customer’s specifications, title and ownership have transferred to the customer, and there
is reasonable assurance of collection of the sales proceeds.
Product Warranty Reserves
We provide our customers with limited rights of return for non-conforming shipments and warranty claims for certain products.
Pursuant to ASC 450, Contingencies, we make estimates of product warranty expense using historical experience rates as a percentage
of revenue and accrue estimated warranty expense as a cost of revenue. We estimate the costs of our warranty obligations based on
historical experience of known product failure rates and anticipated rates of warranty claims, use of materials to repair or replace
defective products, and service delivery costs incurred in correcting product issues. In addition, from time to time, specific warranty
accruals may be made if unforeseen technical problems arise. Should our actual experience relative to these factors differ from our
estimates, we may be required to record additional warranty reserves. Alternatively, if we provide more reserves than needed, we may
reverse a portion of such provisions in future periods. See Note 9 - Accrued Expenses and Other Current Liabilities in the notes to the
consolidated financial statements for additional disclosures related to our product warranty reserves.
Stock-Based Compensation
Stock-based compensation expense is measured at the stock option grant date, based on the fair value of the award, and is recorded
to cost of revenue; sales, general, and administrative; and research and development expense based on an employee’s responsibility and
function over the requisite service period. We use the Black-Scholes option-pricing model and the straight-line attribution approach to
determine the fair value of stock-based awards in accordance with ASC 718, Compensation. This option-pricing model requires the input
of subjective assumptions, including the option’s expected life, the price volatility of the underlying stock, risk-free interest rate and
expected forfeitures. Expected term represents the period that stock-based awards are expected to be outstanding and is determined based
on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules
and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards. The expected stock price
volatility is based on our historical stock prices. We are required to estimate forfeitures at the time of grant and revise those estimates in
subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and
record stock-based compensation expense only for those awards that are expected to vest. If we use different assumptions for estimating
stock-based compensation expense in future periods or if actual forfeitures differ materially from our estimated forfeitures, the change
in our non-cash stock-based compensation expense could adversely affect our results of operations. See Note 13 - Equity in the notes to
the consolidated financial statements for additional disclosures related to our stock-based compensation.
Litigation Contingencies
We are subject to various legal proceedings, claims, and litigation, either asserted or unasserted, that arise in the ordinary course
of business. While the outcome of these matters is currently not determinable, we do not expect the resolution of these matters will have
a material adverse effect on our business, financial position, results of operations, or cash flows. However, 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. See Note 12 - Commitments and Contingencies in the notes to our consolidated financial statements for
disclosures related to our legal proceedings.
35
Asset Retirement Obligations
Pursuant to ASC 410, Asset Retirement and Environmental Obligations, an ARO is recorded when there is a legal obligation
associated with the retirement of a tangible long-lived asset and the fair value of the liability can reasonably be estimated. Upon initial
recognition of an asset retirement obligation, a company increases the carrying amount of the long-lived asset by the same amount as
the liability. Over time, the liabilities are accreted for the change in their present value through charges to operations costs. The initial
capitalized costs are depleted over the useful lives of the related assets through charges to depreciation, depletion, and/or amortization. If
the fair value of the estimated ARO changes, an adjustment is recorded to both the ARO liability and the asset retirement cost. Revisions
in estimated liabilities can result from revisions of estimated inflation rates, escalating retirement costs, and changes in the estimated
timing of settling asset retirement obligations.
We have known conditional asset retirement conditions, such as certain asset decommissioning and restoration of rented
facilities to be performed in the future. See Note 12 - Commitments and Contingencies in the notes to the consolidated financial
statements for additional disclosures related to our AROs.
***
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, U.S. GAAP
specifically dictates the accounting treatment of a particular transaction. There are also areas in which management’s judgment in
selecting any available alternative would not produce a materially different result. For a complete discussion of our accounting policies,
recently adopted accounting pronouncements, and other required U.S. GAAP disclosures, we refer you to the accompanying footnotes
to our consolidated financial statements in this Annual Report.
Results of Operations
The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expense (income):
Selling, general, and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recovery of previously incurred litigation related fees and expenses
from arbitration award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from change in estimate on ARO obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other (expense) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations before income tax (expense) benefit . . . . . . . . .
Income tax (expense) benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Fiscal Years Ended
September 30,
2016
100.0%
66.4
33.6
2015
100.0%
64.9
35.1
2014
100.0%
78.2
21.8
22.5
10.8
(2.8)
—
(0.1)
30.4
3.2
0.1
(0.4)
—
—
—
(0.3)
2.9
—
2.9
6.1
9.0%
30.2
11.2
—
(1.0)
0.3
40.7
(5.6)
0.1
(0.1)
—
0.1
—
0.1
(5.5)
2.7
(2.8)
80.0
77.2%
41.9
16.8
—
—
(0.1)
58.6
(36.8)
(0.9)
—
0.6
0.1
0.1
(0.1)
(36.9)
44.2
7.3
1.4
8.7%
36
Comparison of Financial Results for the Fiscal Years Ended September 30, 2016 and 2015
(in thousands,except percentages)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expense (income):
Selling, general, and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recovery of previously incurred litigation related fees and
expenses from arbitration award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from change in estimate on ARO obligation . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of financial instruments . . . . . . . . . . . . . . . . . . . . . . . . .
Total other (expense) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations before
For the Fiscal Years Ended September 30,
2016
$91,998
61,044
30,954
2015
$81,685
52,994
28,691
$ Change
$ 10,313
8,050
2,263
% Change
12.6%
15.2%
7.9%
20,734
9,921
24,711
9,119
(2,599)
—
(41)
28,015
2,939
88
(394)
—
(306)
—
(845)
228
33,213
(4,522)
75
(138)
122
59
(3,977)
802
(2,599)
845
(269)
(5,198)
7,461
13
(256)
(122)
(365)
(16.1)%
8.8%
N/A
100.0%
(118.0)%
(15.7)%
165.0%
17.3%
(185.5)%
(100.0)%
(618.6)%
159.0%
(100.6)%
215.3%
(91.4)%
(86.9)%
income tax (expense) benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (expense) benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations, net of tax . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,633
(14)
2,619
5,647
$ 8,266
(4,463)
2,191
(2,272)
65,372
$63,100
7,096
(2,205)
4,891
(59,725)
$(54,834)
Revenue
For the fiscal year ended September 30, 2016, revenue increased 12.6% compared to the prior year driven by significantly
higher sales of our CATV products primarily to U.S. customers.
Gross Profit
Our cost of revenue consists of raw materials, compensation expense including non-cash stock-based compensation expense,
depreciation expense and other manufacturing overhead costs, expenses associated with excess and obsolete inventories, and product
warranty costs. Historically, our cost of revenue as a percentage of revenue, which we refer to as our gross margin, has fluctuated
significantly due to product mix, manufacturing yields and sales volumes, and inventory and specific product warranty charges.
Consolidated gross margins were 33.6% and 35.1% for the years ended September 30, 2016 and 2015, respectively.
Stock-based compensation expense within cost of revenue totaled approximately $0.3 million during the fiscal years ended
September 30, 2016 and 2015.
For the fiscal year ended September 30, 2016, gross margins decreased when compared to the prior year. The decrease in gross
margins for the fiscal year ended September 30, 2016 was primarily due to lower absorption of manufacturing overhead costs.
Selling, General and Administrative (SG&A)
SG&A consists primarily of compensation expense including non-cash stock-based compensation expense related to executive,
finance, and human resources personnel, as well as sales and marketing expenses, professional fees, legal and patent-related costs, and
other corporate-related expenses.
Stock-based compensation expense within SG&A totaled approximately $1.4 million and $2.8 million during the fiscal years
ended September 30, 2016 and 2015, respectively.
SG&A expense for the fiscal year ended September 30, 2016 was lower than the amount reported in the prior year primarily
due to higher stock-based compensation, severance and compensation expense associated with the sale of the Photovoltaics and Digital
Products Businesses in the prior year.
37
As a percentage of revenue, SG&A expenses were 22.5% and 30.2% for the fiscal years ended September 30, 2016 and
2015, respectively.
Research and Development (R&D)
R&D consists primarily of compensation expense including non-cash stock-based compensation expense, as well as engineering
and prototype costs, depreciation expense, and other overhead expenses, as they related to the design, development, and testing of our
products. Our R&D costs are expensed as incurred. We believe that in order to remain competitive, we must invest significant financial
resources in developing new product features and enhancements and in maintaining customer satisfaction worldwide.
Stock-based compensation expense within R&D totaled approximately $0.4 million during the fiscal years ended
September 30, 2016 and 2015.
R&D expense for the fiscal year ended September 30, 2016 was higher than the amounts reported in the prior year primarily
due to higher compensation costs and increased project spending.
As a percentage of revenue, R&D expenses were 10.8% and 11.2% for the fiscal years ended September 30, 2016 and
2015, respectively.
Recovery of previously incurred litigation related fees and expenses from arbitration award
Recovery of previously incurred litigation related fees and expenses from arbitration award consists of the fees awarded to the
Company as a result of the SEI arbitration award in April 2016. As a percentage of revenue, the recovery of previously incurred litigation
related fees and expenses from arbitration award was 2.8% for the fiscal year ended September 30, 2016.
Gain from Change in Estimate on ARO
As a result of the revision in the estimated amount and timing of cash flows for ARO during the fiscal year ended September 30,
2015, the Company reduced the ARO liability by $2.9 million with an offsetting reduction to property, plant, and equipment, net of $2.1
million, and recorded a gain from change in estimate on ARO liability of $0.8 million. The Company first reduced the net leasehold
improvement asset to the extent of the carrying amount of the related asset initially recorded when the ARO was established. The
amount of the remaining reduction to the ARO was recorded as a reduction to operating expenses. See Note 12 - Commitments and
Contingencies in the notes to the consolidated financial statements for additional information.
Operating Income (Loss)
Operating income (loss) represents revenue less the cost of revenue and direct operating expenses incurred. Operating income
(loss) is a measure of profit and loss that executive management uses to assess performance and make decisions. As a percentage of
revenue, our operating income (loss) was 3.2% and (5.6)% for the fiscal years ended September 30, 2016 and 2015, respectively.
Other Income (Expense)
Interest Income, net
During the fiscal year ended September 30, 2016, we recorded $0.2 million of interest income earned on cash and cash equivalents
balances. During the fiscal year ended September 30, 2015, we recorded $0.2 million of interest income earned on the Promissory Note
from NeoPhotonics which was primarily offset by an equivalent amount of interest expense incurred on our outstanding Credit Facility.
See Note 4 - Discontinued Operations in the notes to the consolidated financial statements for additional information.
Foreign Exchange
Losses from foreign currency transactions denominated in currencies other than the U.S. dollar, both realized and unrealized,
are recorded as foreign exchange loss on our consolidated statements of operations and comprehensive income. The losses recorded
relate to the change in value of the Yuan Renminbi relative to the U.S. dollar.
Change in Fair Value of Financial Instruments
Warrants representing the right to purchase 400,001 shares of our common stock expired on April 1, 2015.
Income Tax (Expense) Benefit
For the fiscal year ended September 30, 2016, the Company recorded income tax expense from continuing operations of
approximately $14,000, and $24,000 of income tax benefit within income from discontinued operations.
38
For the fiscal year ended September 30, 2015, the Company recorded $2.2 million of income tax benefit from continuing
operations losses and $26.5 million of income tax expense within income from discontinued operations.
During the fiscal year ended September 30, 2015, the Company utilized the $24.1 million of deferred tax assets. As a result, a
net deferred tax valuation allowance release of $24.1 million was recorded as an income tax benefit during fiscal year 2014 following
the Company’s determination that it was more likely than not that certain deferred tax assets would be realized upon the sale of the
Photovoltaics Business in fiscal year 2015. See Note 11 - Income and other Taxes in the notes to the consolidated financial statements
for more information .
Our Board of Directors has adopted a Tax Benefits Preservation Plan (the “Rights Plan”) to help preserve the value of our net
operating losses and other favorable tax attribute carryovers by reducing the risk of limitation of these deferred tax assets. The Rights
Plan was approved by our shareholders on March 10, 2015. The Rights Plan is intended to reduce the likelihood that we will experience
an ownership change for purposes of Internal Revenue Code Section 382 by discouraging any person or group from becoming a “5%
shareholder” or increasing their ownership of our common stock if they are already a “5% shareholder.” Although the Rights Plan is
intended to reduce the likelihood of an “ownership change” that could adversely affect us, there is no assurance that the Rights Plan will
prevent all transfers of our common stock that could result in such an “ownership change”.
Income from Discontinued Operations, Net of Tax
(in thousands, except percentages)
For the Fiscal Years Ended September 30,
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognition of previously deferred gain on sale of assets . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations before income tax benefit (expense) . . .
Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . .
2016
2015
$ — $ 24,558
17,352
7,206
5,040
—
779
88,952
91,897
(26,525)
$ 65,372
(659)
659
(1,160)
3,804
—
—
5,623
24
$ 5,647
$ Change
$ (24,558)
(18,011)
(6,547)
6,200
3,804
(779)
(88,952)
(86,274)
26,549
$ (59,725)
%
Change
(100.0)%
(103.8)%
(90.9)%
123.0%
NA
(100.0)%
(100.0)%
(93.9)%
100.1%
(91.4)%
During the fiscal year ended September 30, 2016, we recorded income from discontinued operations from the Photovoltaics
Business and Digital Products Business of $1.0 million and $4.6 million, net of tax, respectively.
Included in cost of revenue for the fiscal year ended September 30, 2016 is $0.4 million due to a reduction in expected product
warranty liabilities from a settlement agreement associated with the Digital Products Business and a gain of $0.3 million on the lease
termination associated with the Digital Products Business.
During the fiscal year ended September 30, 2016, we recognized a gain associated with the release of the $3.4 million of
deferred gain and reversal of other liabilities of $0.4 million, which had been recorded as of September 30, 2015, resulting in a credit
of $3.8 million to recognition of previously deferred gain on sale of assets within discontinued operations of the Digital Products
Business as the result of the favorable ruling from the SEI arbitration. See Note 12 - Commitments and Contingencies in the notes to the
consolidated financial statements for additional information.
During the fiscal year ended September 30, 2015, we recognized a gain of $87.0 million and $2.0 million on the sales of the
Photovoltaics Business and Digital Products Business, respectively, which was recorded within income from discontinued operations
under the caption “gain on sale of discontinued operations”. During the fiscal year ended September 30, 2015, we recorded income
from discontinued operations from the Photovoltaics Business and Digital Products Business of $61.2 million and $4.2 million, net of
tax, respectively.
39
Comparison of Financial Results for the Fiscal Years Ended September 30, 2015 and 2014
(in thousands, except percentages)
For the Fiscal Years Ended September 30,
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expense (income):
Selling, general, and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from change in estimate on ARO obligation . . . . . . . . . . . . . . . . . . .
Loss (gain) on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of financial instruments . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from continuing operations before income tax benefit . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from continuing operations . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations, net of tax . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue
2015
$ 81,685
52,994
28,691
2014
$ 55,514
43,400
12,114
$ Change
$ 26,171
9,594
16,577
24,711
9,119
(845)
228
33,213
(4,522)
75
(138)
—
122
—
59
(4,463)
2,191
(2,272)
65,372
$ 63,100
23,239
9,306
—
(100)
32,445
(20,331)
(522)
(7)
307
34
51
(137)
(20,468)
24,550
4,082
770
$ 4,852
1,472
(187)
(845)
328
768
15,809
597
(131)
(307)
88
(51)
196
16,005
(22,359)
(6,354)
64,602
$ 58,248
% Change
47.1%
22.1%
136.8%
6.3%
(2.0)%
N/A
328.0%
2.4%
77.8%
114.4%
(1,871.4)%
(100.0)%
258.8%
(100.0)%
143.1%
78.2%
(91.1)%
(155.7)%
8,389.9%
1,200.5%
For the fiscal year ended September 30, 2015, revenue increased 47.1% compared to the prior year driven by significantly
higher sales of our CATV products primarily to U.S. customers and our chip level devices. Sales of our CATV products, which include
our quadrature amplitude modulation transmitters and receivers, represented the largest percentage of our total revenue during fiscal
2015. Sales of our chip level device products, which include our avalanche photodiodes and gain chips, increased as EMCORE expanded
its sales to customers, primarily in Asia.
Gross Profit
Our cost of revenue consists of raw materials, compensation expense including non-cash stock-based compensation expense,
depreciation expense and other manufacturing overhead costs, expenses associated with excess and obsolete inventories, and product
warranty costs. Historically, our cost of revenue as a percentage of revenue, which we refer to as our gross margin, has fluctuated
significantly due to product mix, manufacturing yields and sales volumes, and inventory and specific product warranty charges.
Consolidated gross margins were 35.1% and 21.8% for the fiscal years ended September 30, 2015 and 2014, respectively.
Stock-based compensation expense within cost of revenue totaled approximately $0.3 million and $0.5 million during the fiscal
years ended September 30, 2015 and 2014, respectively.
For the fiscal year ended September 30, 2015, gross margins increased when compared to the prior year. The increase in gross
margins for the fiscal year ended September 30, 2015 compared to 2014 was primarily due to higher sales volume and higher utilization
of the manufacturing facility as we significantly increased production output resulting in higher levels of absorption. In addition, gross
margins also increased from an improvement in product mix.
Selling, General and Administrative (SG&A)
SG&A consists primarily of compensation expense including non-cash stock-based compensation expense related to executive,
finance, and human resources personnel, as well as sales and marketing expenses, professional fees, amortization expense on intangible
assets, legal and patent-related costs, and other corporate-related expenses.
40
Stock-based compensation expense within SG&A totaled approximately $2.8 million and $1.9 million during the fiscal years
ended September 30, 2015 and 2014, respectively.
SG&A expense for the fiscal year ended September 30, 2015 was higher than the amount reported in the prior year primarily
due to higher stock-based compensation and severance and compensation expense associated with the sales of the Photovoltaics and
Digital Products Businesses.
As a percentage of revenue, SG&A expenses were 30.2% and 41.9% for the fiscal years ended September 30, 2015 and
2014, respectively.
Research and Development (R&D)
R&D consists primarily of compensation expense including non-cash stock-based compensation expense, as well as engineering
and prototype costs, depreciation expense, and other overhead expenses, as they related to the design, development, and testing of our
products. Our R&D costs are expensed as incurred. We believe that in order to remain competitive, we must invest significant financial
resources in developing new product features and enhancements and in maintaining customer satisfaction worldwide.
Stock-based compensation expense within R&D totaled approximately $0.4 million and $0.6 million during the fiscal years
ended September 30, 2015 and 2014, respectively.
R&D expense for the fiscal year ended September 30, 2015 was slightly lower than the amounts reported in the prior year
primarily due to lower compensation costs attributed to lower headcount and lower material spending.
As a percentage of revenue, R&D expenses were 11.2% and 16.8% for the fiscal years ended September 30, 2015 and
2014, respectively.
Gain from Change in Estimate on ARO Obligation
As a result of the revision in the estimated amount and timing of cash flows for ARO during the fiscal year ended September 30,
2015, the Company reduced the ARO liability by $2.9 million with an offsetting reduction to property, plant, and equipment, net of $2.1
million, and recorded a gain from change in estimate on ARO obligation of $0.8 million. The Company first reduced the net leasehold
improvement asset to the extent of the carrying amount of the related asset initially recorded when the ARO was established. The
amount of the remaining reduction to the ARO was recorded as a reduction to operating expenses. See Note 12 - Commitments and
Contingencies in the notes to the consolidated financial statements for additional information.
Operating Loss
Operating loss represents revenue less the cost of revenue and direct operating expenses incurred. Operating loss is a measure
of profit and loss that executive management uses to assess performance and make decisions. As a percentage of revenue, our operating
loss was (5.6)%, and (36.8)% for the fiscal years ended September 30, 2015 and 2014, respectively.
Other Income (Expense)
Interest income (expense), net
During the fiscal year ended September 30, 2015, we recorded $0.2 million of interest income earned on the Promissory Note
from NeoPhotonics which was primarily offset by an equivalent amount of interest expense incurred on borrowings outstanding under
our credit facility during the period. Interest expense for fiscal year ended September 30, 2015 was lower than the amounts reported in
the prior year due to higher borrowings outstanding under our credit facility during the fiscal year ended September 30, 2014.
Foreign Exchange
Gains and losses from foreign currency transactions denominated in currencies other than the U.S. dollar, both realized and
unrealized, are recorded as foreign exchange gain (loss) on our consolidated statements of operations and comprehensive income. A
majority of the gains or losses recorded relate to the change in value of the Yuan Renminbi relative to the U.S. dollar. The assets and
liabilities of our foreign operations are translated from their respective functional currencies into U.S. dollars at the rates in effect at the
consolidated balance sheet dates, and the revenue and expense amounts are translated at the average rate during the applicable periods
reflected on the consolidated statements of operations and comprehensive income. Foreign currency translation adjustments are recorded
as accumulated other comprehensive income.
Gain on Sale of Investment
During the fiscal year ended September 30, 2014, we sold our investment in a company that had a net book value of $0 at
September 30, 2013, for $0.3 million.
41
Change in Fair Value of Financial Instruments
As of September 30, 2014, warrants representing the right to purchase 400,001 shares, of our common stock were outstanding.
Since the warrants expired on April 1, 2015, no warrants were outstanding as of September 30, 2015.
Income Tax Benefit
At September 30, 2014, the Company determined that it was more likely than not that certain deferred tax assets would be
realized upon the sale of the Photovoltaic Business in fiscal year 2015. As a result, a net deferred tax valuation allowance release of $24.1
million was recorded as an income tax benefit during fiscal year 2014. The sale of the Photovoltaics Business closed on December 10,
2014 and the Company realized a gain on the transaction.
During the fiscal year ended September 30, 2015, the Company utilized the $24.1 million of deferred tax assets. The Company
made a payment for alternative minimum taxes and the remaining income tax expense was offset mainly through utilization of $24.1
million of deferred tax assets and utilization of net operating loss carry forwards.
For the fiscal years ended September 30, 2015 and 2014, the Company recorded income tax benefit from continuing operations
losses of approximately $2.2 million and $24.6 million, respectively. For the fiscal years ended September 30, 2015, and 2014, the
Company recorded income tax expense within discontinued operations of approximately $26.5 million and $0.5 million, respectively.
The income tax expense within discontinued operations includes estimated alternative minimum tax and other adjustments prescribed
by ASC 740 in allocating expected annual income tax expense (benefit) between continuing operations and discontinued operations.
For fiscal years ended September 30, 2015 and 2014, the effective tax rate on continuing operations was 49.1%, and 119.9%
and, respectively. The lower tax rate for fiscal year 2015 was primarily due to permanent differences, state tax benefits, foreign tax
rate differentials, and release of state taxes associated with uncertain tax positions. The higher tax rate for fiscal year 2014 was mainly
attributable to the partial release of the valuation allowance. 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. The Company believes its
forecast of losses from continuing operations is a reasonable estimate. Actual results from continuing operations may differ significantly
from the estimates previously forecasted, resulting in significant changes from one period to the next in the tax expense or benefit from
continuing operations being recognized. Also see Note 11 - Income and other Taxes in the notes to the consolidated financial statements
for more information .
Income from Discontinued Operations, Net of Tax
(in thousands, except percentages)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations before income tax expense . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . .
For the Fiscal Years Ended September 30,
2015
$ 24,558
17,352
7,206
5,040
779
88,952
91,897
(26,525)
$ 65,372
2014
$ 119,264
98,704
20,560
19,337
17
—
1,240
(470)
770
$
$ Change
$ (94,706)
(81,352)
(13,354)
(14,297)
762
88,952
90,657
(26,055)
$ 64,602
% Change
(79.4)%
(82.4)%
(65.0)%
(73.9)%
4,482.4%
N/A
7,311.0%
(5,543.6)%
8,389.9%
During the fiscal year ended September 30, 2015, we recognized a gain of $87.0 million and $2.0 million on the sales of the
Photovoltaics Business and Digital Products Business, respectively, which is recorded within income from discontinued operations
under the caption “gain on sale of discontinued operations”. During the fiscal year ended September 30, 2015, we recorded income from
discontinued operations from the Photovoltaics Business and Digital Products Business of $61.2 million and $4.2 million, respectively.
During the fiscal year ended September 30, 2014, we recorded income (loss) from discontinued operations from the Photovoltaics
Business and Digital Products Business of $8.9 million and $(8.1) million, respectively.
Order Backlog
EMCORE’S product sales are made pursuant to purchase orders, often with short lead times. These orders are subject to
revision or cancellation and often are made without deposits. Products typically ship within the same quarter in which a purchase order
is received; therefore, our order backlog at any particular date is not necessarily indicative of actual revenue or the level of orders for
any succeeding period.
42
Liquidity and Capital Resources
Historically, we have consumed cash from operations and, until recently, in most periods we have incurred operating losses
from continuing operations. We have managed our liquidity position through the sale of assets, and cost reduction initiatives, as well as,
from time to time in prior periods, borrowings from our Credit Facility (defined below) and capital markets transactions.
On December 10, 2014, we completed the sale of our Photovoltaics Business for $150.0 million in cash, prior to working
capital adjustments of $0.1 million.
On January 2, 2015, we completed the sale of our Digital Products Business for $1.5 million in cash and an adjusted Promissory
Note balance of $15.5 million. On April 17, 2015, NeoPhotonics paid in full the outstanding balance of the Promissory Note of $15.5
million plus accrued interest of $0.2 million.
On June 15, 2015, we completed the modified “Dutch auction” tender offer (the “Tender Offer”) and purchased 6.9 million
shares of our common stock at a purchase price of $6.55 per share, for an aggregate cost of $45.0 million excluding fees and expenses.
Repurchased common stock was recorded to treasury stock. We incurred costs of $0.7 million in connection with the Tender Offer, which
were recorded to treasury stock.
On July 5, 2016, the Company declared a special cash dividend of $1.50 per share, or a total of $39.2 million. The dividend was
paid on July 29, 2016 to shareholders of record as of July 18, 2016. See Note 13 - Equity for additional information.
As of September 30, 2016, cash and cash equivalents totaled $63.9 million and net working capital totaled approximately $93.0
million. Net working capital, calculated as current assets minus current liabilities, is a financial metric we use which represents available
operating liquidity. For the fiscal year ended September 30, 2016, we earned net income of $8.3 million.
With respect to measures related to liquidity:
We believe that our existing balances of cash and cash equivalents, cash flows from operations and amounts expected to be
available under our Credit Facility will provide us with sufficient financial resources to meet our cash requirements for operations,
working capital, and capital expenditures for at least the next twelve months, and thereafter for the foreseeable future. At the discretion
of our Board, we may use our existing balances of cash and cash equivalents to provide liquidity to our shareholders through one or
more additional special dividends or the repurchase of additional shares of our outstanding common stock, make investments in our
other businesses, pursue other strategic opportunities or a combination thereof. In addition, should we require more capital than what
is generated by our operations, for example to fund significant discretionary activities, such as business acquisitions, we could elect to
raise capital in the U.S. through debt or equity issuances. These alternatives could result in higher effective tax rates, increased interest
expense, and/or dilution of our earnings. We have borrowed funds in the past and continue to believe we have the ability to do so at
reasonable interest rates.
For the fiscal year ended September 30, 2016, the following changes to our liquidity occurred:
•
•
•
Dividend Payment: On July 5, 2016, the Company declared a special cash dividend of $1.50 per share, or a total of $39.2
million. The dividend was paid on July 29, 2016 to shareholders of record as of July 18, 2016. See Note 13 - Equity for
additional information.
Resolution of Outstanding Litigation: In June 2016 we collected $2.6 million in fees and costs from Sumitomo Electric
Industries, Ltd. (“SEI”) and $1.9 million held in escrow as the result of the favorable ruling from the SEI arbitration. See
Note 12 - Commitments and Contingencies.
Credit Facility: On November 11, 2010, we entered into a Credit and Security Agreement (Credit Facility) with Wells Fargo
Bank, National Association (“Wells Fargo”). The Credit Facility, as it has been amended through its seventh amendment
on November 10, 2015, currently provides us with a revolving credit of up to $15.0 million through November 2018
that can be used for working capital requirements, letters of credit, and other general corporate purposes. The Credit
Facility is secured by the Company’s assets and is subject to a borrowing base formula based on the Company’s eligible
accounts receivable, inventory, and machinery and equipment accounts. See Note 10 - Credit Facilities in the notes to the
consolidated financial statements for additional disclosures.
Cash Flow
The Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2016, 2015 and 2014, respectively,
reflects cash flows from both the continuing and discontinued operations of the Company.
43
Net Cash Used In Operating Activities
Operating Activities
(in thousands, except percentages)
Net cash (used in) provided by operating
For the Fiscal Years Ended
September 30,
2015
2014
2016
Fiscal 2016 vs Fiscal
2015
$ Change
% Change
Fiscal 2015 vs Fiscal
2014
$ Change % Change
activities . . . . . . . . . . . . . . . . . . . . . . . .
$(5,552)
$(3,917)
$1,001
$ (1,635)
(41.7)% $ (4,918)
(491.3)%
Fiscal 2016:
For the fiscal year ended September 30, 2016, our operating activities used cash of $5.6 million primarily due to decreases
in our operating assets and liabilities (or working capital components, which includes non-current inventory) of $13.5 million, the
recognition of the previously deferred gain on sale of assets from discontinued operations of $3.8 million, the gain on transfer of solar
power assets and obligations of $0.7 million, the gain on reduction of product warranty of discontinued operations of $0.4 million and
the payment and gain on settlement of Newark restructuring lease of $0.3 million partially offset by depreciation, amortization and
accretion expense of $2.5 million, stock-based compensation expense of $2.1 million, warranty provision of $0.4 million, and our net
income of $8.3 million. The change in our operating assets and liabilities was primarily the result of an increase in accounts receivable
of $1.2 million and inventory of $10.9 million, and a decrease in accrued expenses and other liabilities of $4.8 million partially offset by
a decrease in other assets of $0.1 million and an increase in accounts payable of approximately $3.2 million.
Fiscal 2015:
Our operating activities consumed cash of $3.9 million primarily due to the effect of adjustments for non-cash charges,
including the gain on sale of the Photovoltaics Business of $87.0 million, including the gain on sale of the Digital Products Business
of $2.0 million, and the gain from change in estimate on ARO obligation of $0.8 million, foreign currency translation adjustment of
$0.7 million as well as the changes in our operating assets and liabilities of $8.6 million, partially offset by deferred income taxes of
$24.1 million, stock-based compensation expense of $4.6 million, warranty provision of $0.8 million, depreciation, amortization and
accretion expense of $3.0 million, allowance for doubtful accounts of $0.6 million, and our net income of $63.1 million. The change in
our operating assets and liabilities was primarily the result of an increase in inventory of $3.4 million, a decrease in accounts payable of
$3.2 million, a decrease in accrued expenses and other liabilities of $5.8 million, partially offset by a decrease in accounts receivable of
$3.5 million and other assets of $0.4 million,
Fiscal 2014:
Our operating activities provided cash of $1.0 million primarily due to our net income of $4.9 million, changes in our operating
assets and liabilities (or working capital components) of $5.0 million, depreciation, amortization and accretion expense of $8.5 million,
stock-based compensation expense of $4.4 million, warranty provision of $2.1 million, losses on inventory purchase commitments of
$0.3 million and allowance for doubtful accounts of $0.2 million, partially offset by deferred income taxes of $24.1 million and the gain
on sale of investment of $0.3 million. The change in our operating assets and liabilities was primarily the result of a decrease in inventory
of $5.5 million, other assets of $2.9 million and an increase in accounts payable of $3.1 million, partially offset by a decrease in accrued
expenses and other liabilities of $3.1 million and an increase in accounts receivable of $3.3 million.
Working Capital Components:
Accounts Receivable: We generally expect the level of accounts receivable at any given quarter to reflect the level of sales in
that quarter. Our accounts receivable balances have fluctuated historically due to the timing of account collections, timing of product
shipments, and/or change in customer credit terms.
Inventory: We generally expect the level of inventory at any given quarter to reflect the change in our expectations of forecasted
sales. Our inventory balances have fluctuated historically due to the timing of customer orders and product shipments, changes in our
internal forecasts related to customer demand, as well as adjustments related to excess and obsolete inventory and the purchase of non-
current inventory.
Accounts Payable: The fluctuation of our accounts payable balances is primarily driven by changes in inventory purchases as
well as changes related to the timing of actual payments to vendors.
Accrued Expenses: Our largest accrued expense typically relates to compensation. Historically, fluctuations of our accrued
expense accounts have primarily related to changes in the timing of actual compensation payments, receipt or application of advanced
payments, adjustments to our warranty accrual, and accruals related to professional fees.
44
Net Cash (Used In) Provided By Investing Activities
Investing Activities
(in thousands, except percentages)
Net cash (used in) provided by investing
For the Fiscal Years Ended
September 30,
2015
2014
2016
Fiscal 2016 vs Fiscal
2015
$ Change
% Change
Fiscal 2015 vs Fiscal
2014
$ Change % Change
activities . . . . . . . . . . . . . . . . . . . . . . . .
$ (4,416)
$ 165,276
$ (3,261)
$ (169,692)
(102.7)% $ 168,537
5,168.3%
Fiscal 2016:
For the fiscal year ended September 30, 2016, our investing activities used $4.4 million of cash primarily from capital
expenditures of $5.8 million and an increase in restricted cash of $0.6 million partially offset by the receipt of escrow funds
from sale of assets of $1.9 million.
Fiscal 2015:
Our investing activities provided $165.3 million of cash primarily from proceeds from sale of the Photovoltaics Business of
$149.9 million, proceeds from sale of the Digital Products Business of $17.0 million, and a decrease in restricted cash of $1.1
million partially offset by capital related expenditures of $2.8 million.
Fiscal 2014:
Our investing activities consumed $3.3 million of cash primarily from capital related expenditures of $3.0 million, the funding
of restricted cash of $0.7 million, partially offset by cash proceeds of $0.3 million from the sale of an investment.
Net Cash Provided By (Used In) Financing Activities
Financing Activities
(in thousands, except percentages)
Net cash (used in) provided by financing
For the Fiscal Years Ended
September 30,
2015
2016
2014
Fiscal 2016 vs Fiscal
2015
Fiscal 2015 vs Fiscal
2014
$ Change
% Change
$ Change
% Change
activities . . . . . . . . . . . . . . . . . . . . . . . .
$ (38,254)
$ (70,266)
$ 6,576
$ 32,012
45.6% $ (76,842)
(1,168.5)%
Fiscal 2016:
For the fiscal year ended September 30, 2016, our financing activities used cash of $38.3 million due to the payment of a special
dividend of $39.2 million partially offset by proceeds from stock plan transactions of $1.0 million.
Fiscal 2015:
Our financing activities consumed cash of $70.3 million primarily due to the net payment of $26.5 million on our bank credit
facility, purchase of treasury stock of $45.7 million partially offset by $1.9 million in proceeds from stock plan transactions.
Fiscal 2014:
Our financing activities provided cash of $6.6 million primarily from $4.8 million of proceeds related to borrowings under our
credit facility, and $1.8 million in proceeds from stock plan transactions.
Contractual Obligations and Commitments
Our contractual obligations and commitments for the remainder of fiscal 2016 and over the next five fiscal years are summarized
in the table below:
(in thousands)
Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset retirement obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total contractual obligations and commitments . . . . . . . . . . . . . . .
For the Fiscal Years Ended September 30,
Total
$ 20,755
1,824
1,640
$ 24,219
2017
$ 20,381
45
753
$ 21,179
2018 to
2019
2020 to
2021
2022 and
later
$
$
374
—
595
969
$
— $
1,720
292
$ 2,012
$
—
59
—
59
Interest payments are not included in the contractual obligations and commitments table above since they are insignificant to
our consolidated results of operations.
45
The contractual obligations and commitments table above also excludes unrecognized tax benefits because we are unable to
reasonably estimate the period during which this obligation may be incurred, if at all. As of September 30, 2016, we had unrecognized
tax benefits of $0.3 million.
Purchase Obligations
Our purchase obligations represent agreements to purchase goods or services that are enforceable and legally binding, that
specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and
the approximate timing of the transactions.
Asset Retirement Obligations (“ARO”)
We have known conditional ARO conditions, such as certain asset decommissioning and restoration of rented facilities to be
performed in the future. Our ARO’s include assumptions related to renewal option periods where we expect to extend facility lease
terms. Revisions in estimated liabilities can result from revisions of estimated inflation rates, escalating retirement costs, and changes
in the estimated timing of settling ARO’s. See Note 12 - Commitments and Contingencies in the notes to the consolidated financial
statements for additional information related to our ARO’s.
Operating Leases
Operating leases include non-cancelable terms and exclude renewal option periods, property taxes, insurance and maintenance
expenses on leased properties. See Note 12 - Commitments and Contingencies in the notes to the consolidated financial statements for
additional information related to our operating lease obligations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements other than our operating leases described above that have or are reasonably
likely to have a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital
expenditures or capital resources.
Geographical Information
See Note 14 - Geographical Information in the notes to the consolidated financial statements for disclosures related to geographic
revenue and significant customers.
Recent Accounting Pronouncements
See Note 3 - Recent Accounting Pronouncements in the notes to the consolidated financial statements for disclosures related
to recent accounting pronouncements.
Restructuring Accruals
See Note 9 - Accrued Expenses and Other Current Liabilities in the notes to the consolidated financial statements for disclosures
related to our severance and restructuring-related accrual accounts.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to financial market risks, including changes in currency exchange rates and interest rates. We do not use
derivative financial instruments for speculative purposes.
Foreign Currency Exchange Risks
The United States dollar is the reporting currency for our consolidated financial statements. The functional currency for our
China subsidiary is the Yuan Renminbi.
We recognize translation adjustments due to the effect of changes in the value of the Yuan Renminbi relative to the U.S. dollar
associated with our operations in China. The assets and liabilities of our foreign operations are translated from their respective functional
currencies into U.S. dollars at the rates in effect at the consolidated balance sheet dates, and the revenue and expense amounts are
translated at the average rate during the applicable periods reflected on the consolidated statements of operations and comprehensive
income. Foreign currency translation adjustments are recorded as accumulated other comprehensive income.
Gains and losses from foreign currency transactions denominated in currencies other than the U.S. dollar, both realized and
unrealized, are recorded as foreign exchange gain (loss) on our consolidated statements of operations and comprehensive income.
46
During the normal course of business, we are exposed to market risks associated with fluctuations in foreign currency exchange
rates due to the Yuan Renminbi. To reduce the impact of these risks on our earnings and to increase the predictability of cash flows, we
use natural offsets in receipts and disbursements within the applicable currency as the primary means of reducing the risk.
Some of our foreign suppliers may adjust their prices (in US dollars) from time to time to reflect currency exchange fluctuations,
and such price changes could impact our future financial condition or results of operations. We do not currently hedge our foreign
currency exposure.
Interest Rate Risks
On November 11, 2010, we entered into a credit facility with Wells Fargo Bank. As of September 30, 2016, we had no borrowings
outstanding under our credit facility. As of September 30, 2016, the credit facility had $0.5 million reserved for one outstanding stand-by
letter of credit, leaving a remaining $10.9 million borrowing availability balance under this credit facility. As of November 30, 2016,
there was no outstanding balance under the credit facility.
The credit facility, as it has been amended through its seventh amendment currently provides us with a revolving credit of
up to $15.0 million through November 2018 that can be used for working capital requirements, letters of credit, and other general
corporate purposes. The credit facility is secured by the Company’s assets and is subject to a borrowing base formula based on the
Company’s eligible accounts receivable, inventory, and machinery and equipment accounts. See Note 10 - Credit Facilities for additional
information related to our bank credit facility.
We monitor our interest rate risk on cash balances primarily through cash flow forecasting. Cash that is surplus to immediate
requirements is invested in short-term deposits with banks accessible with short notice and invested in money market accounts. We
believe our current interest rate risk is immaterial.
Inflation Risks
Inflationary factors, such as increases in material costs and operating expenses, may adversely affect our results of operations
and cash flows. Although we do not believe that inflation has had a material impact on our financial position or results of operations to
date, an increase in the rate of inflation in the future may have an adverse effect on the levels of gross profit and operating expenses as a
percentage of revenue if the sales prices for our products do not proportionately increase with these increases in expenses.
Credit Market Conditions
Recently, the U.S. and global capital markets have been experiencing turbulent conditions, particularly in the credit markets,
as evidenced by tightening of lending standards, reduced availability of credit, and reductions in certain asset values. This could impact
our ability to obtain additional funding through financing or asset sales.
47
ITEM 8. FINANCIAL STATEMENTS
EMCORE CORPORATION
Consolidated Statements of Operations and Comprehensive Income
For the Fiscal Years Ended September 30, 2016, 2015 and 2014
(in thousands, except net income (loss) per share)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expense (income):
Selling, general, and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recovery of previously incurred litigation related fees and expenses from arbitration
award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from change in estimate on ARO obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other (expense) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations before income tax (expense) benefit . . . . . . . .
Income tax (expense) benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per share data:
Net income (loss) per basic share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per basic share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per diluted share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average number of basic shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average number of diluted shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Fiscal Years Ended September 30,
2016
$ 91,998
61,044
30,954
2015
$ 81,685
52,994
28,691
2014
$ 55,514
43,400
12,114
20,734
9,921
(2,599)
—
(41)
28,015
2,939
88
(394)
—
—
—
(306)
2,633
(14)
2,619
5,647
$ 8,266
(268)
$ 7,998
$
$
$
$
0.10
0.22
0.32
0.10
0.21
0.31
25,979
26,518
24,711
9,119
—
(845)
228
33,213
(4,522)
75
(138)
—
122
—
59
(4,463)
2,191
(2,272)
65,372
$ 63,100
(990)
$ 62,110
$
$
$
$
(0.08)
2.18
2.10
(0.08)
2.18
2.10
30,012
30,012
23,239
9,306
—
—
(100)
32,445
(20,331)
(522)
(7)
307
34
51
(137)
(20,468)
24,550
4,082
770
4,852
214
5,066
0.13
0.03
0.16
0.13
0.03
0.16
30,453
30,777
$
$
$
$
$
$
48
The accompanying notes are an integral part of these consolidated financial statements. EMCORE CORPORATION
Consolidated Balance Sheets
As of September 30, 2016 and 2015
(in thousands, except per share data)
As of
September 30,
2016
As of
September 30,
2015
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance of $36 and $462, respectively . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant, and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets, net of allowance of $0 and $3,561, respectively . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
63,905
965
18,432
24,150
3,764
111,216
12,213
3,531
251
127,211
LIABILITIES and SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred gain associated with sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset retirement obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,575
—
7,684
18,259
1,573
62
19,894
$
$
$
111,885
375
17,319
17,130
4,976
151,685
8,925
—
297
160,907
7,189
3,400
13,102
23,691
1,774
—
25,465
Commitments and contingencies (Note 12)
Shareholders’ equity:
Preferred stock, $0.0001 par value, 5,882 shares authorized; none issued or outstanding . . . . . . . . . . .
Common stock, no par value, 50,000 shares authorized; 33,154 shares issued and 26,244 shares
outstanding as of September 30, 2016; 32,586 shares issued and 25,676 shares outstanding as of
September 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock at cost; 6,910 shares at September 30, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
725,880
(47,721)
579
(571,421)
107,317
127,211
762,003
(47,721)
847
(579,687)
135,442
160,907
$
49
The accompanying notes are an integral part of these consolidated financial statements.
EMCORE CORPORATION
Consolidated Statements of Shareholders’ Equity
For the Fiscal Years Ended September 30, 2016, 2015, and 2014
(in thousands)
Balance as of September 30, 2013 . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . .
Stock option exercises . . . . . . . . . . . . . . . . .
Issuance of common stock - ESPP . . . . . . .
Issuance of common stock - ODPP . . . . . . .
Issuance of common stock - Board of
Directors . . . . . . . . . . . . . . . . . . . . . . .
Balance as of September 30, 2014 . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . .
Stock option exercises . . . . . . . . . . . . . . . . .
Issuance of common stock - ESPP . . . . . . .
Issuance of common stock - Board of
Directors . . . . . . . . . . . . . . . . . . . . . . .
Balance as of September 30, 2015 . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . .
Special dividend paid . . . . . . . . . . . . . . . . .
Stock option exercises . . . . . . . . . . . . . . . . .
Issuance of common stock - ESPP . . . . . . .
Issuance of common stock - Board of
Directors . . . . . . . . . . . . . . . . . . . . . . .
Balance as of September 30, 2016 . . . . . .
Shares of
Common
Stock
29,982
633
120
341
2
31
31,109
948
(6,870)
290
121
78
25,676
284
—
45
193
$
Value of
Common
Stock
$ 749,266
—
—
4,074
573
1,182
8
265
755,368
—
—
4,320
—
1,409
493
413
762,003
—
—
1,868
(39,214)
225
735
Accumulated
Other
Comprehensive
Income
Treasury
Stock
$
(2,071)
—
—
—
—
—
—
(2,071)
—
—
—
(45,650)
—
—
—
(47,721)
—
—
—
—
—
—
1,623
—
214
—
—
—
—
1,837
—
(990)
—
—
—
—
—
847
—
(268)
—
—
—
—
Accumulated
Deficit
(647,639)
4,852
—
—
—
—
—
Total
Shareholders’
Equity
$ 101,179
4,852
214
4,074
573
1,182
8
(642,787)
63,100
—
—
—
—
—
—
(579,687)
8,266
—
—
—
—
—
265
112,347
63,100
(990)
4,320
(45,650)
1,409
493
413
135,442
8,266
(268)
1,868
(39,214)
225
735
46
26,244
263
$ 725,880
—
$ (47,721)
$
—
579
—
$ (571,421)
263
$ 107,317
50
The accompanying notes are an integral part of these consolidated financial statements. EMCORE CORPORATION
Consolidated Statements of Cash Flows
For the Fiscal Years Ended September 30, 2016, 2015, and 2014
(in thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation, amortization and accretion expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of Photovoltaics Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of Digital Products Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of an investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision adjustments related to doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision adjustments related to product warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for losses on inventory purchase commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from change in estimate on ARO obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognition of previously deferred gain on sale of assets from discontinued operations . . . . . . . . . .
Gain on reduction of product warranty of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on settlement of solar power assets and obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on settlement of Newark lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (gain) loss on disposal of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement of customer related warranty claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expiration of specific historical sales allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments of unrecognized gross tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-cash adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total change in operating assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Proceeds from sale of Photovoltaics Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of Digital Products Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash proceeds from sale of investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receipt of escrow funds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Net (payments) proceeds from borrowings of credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of special dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid during the period for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NON-CASH INVESTING AND FINANCING ACTIVITIES
Changes in accounts payable related to purchases of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock to Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
51
For the Fiscal Years Ended September 30,
2015
2016
2014
$
8,266
$
63,100
$
4,852
2,506
2,086
—
—
—
—
23
376
—
—
—
—
(3,804)
(423)
(689)
(310)
(41)
—
—
—
(276)
(1,171)
(10,904)
148
3,179
(4,794)
(13,542)
(5,552)
—
—
—
(5,779)
(590)
1,853
100
(4,416)
—
—
(39,214)
960
(38,254)
242
(47,980)
111,885
63,905
2,952
4,586
24,080
(86,958)
(1,994)
—
556
838
—
(122)
(845)
(744)
—
—
—
—
237
(442)
(345)
(207)
(58,408)
3,526
(3,440)
359
(3,231)
(5,823)
(8,609)
(3,917)
149,936
16,982
—
(2,799)
1,107
—
50
165,276
(26,518)
(45,650)
—
1,902
(70,266)
105
91,198
20,687
$ 111,885
88
124
282
263
$
$
$
$
194
938
514
413
8,518
4,439
(24,080)
—
—
(307)
245
2,114
306
(34)
—
—
(100)
—
—
—
(8,899)
(3,290)
5,481
2,879
3,113
(3,135)
5,048
1,001
—
—
307
(3,001)
(667)
—
100
(3,261)
4,813
—
—
1,763
6,576
267
4,583
16,104
20,687
429
—
—
265
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements. EMCORE Corporation
Notes to our Consolidated Financial Statements
NOTE 1. DESCRIPTION OF BUSINESS
Business Overview
EMCORE Corporation together with its subsidiaries (referred to herein as the “Company”, “we”, “our”, or “EMCORE”),
established in 1984 as a New Jersey corporation, designs and manufactures Indium Phosphide (InP) optical chips, components,
subsystems and systems for the broadband and specialty fiber optics market. EMCORE is a provider of optical components, as well as
complete end-to-end solutions for high-speed communications network infrastructures enabling systems and service providers to meet
growing demand for bandwidth and connectivity. EMCORE’s advanced optical technologies are designed for Cable Television (CATV),
Fiber-To-The-Premises (FTTP) networks, telecommunications and data centers, satellite communications, aerospace and defense,
wireless networks, and broadcast and professional audio/video systems. With its InP semiconductor wafer fabrication facility, EMCORE
has fully vertically-integrated manufacturing capability and also provides contract design, foundry and component packaging services.
We currently have one reporting segment: Fiber Optics. Until the first quarter of fiscal year 2015, we operated as two segments:
Fiber Optics and Photovoltaics. EMCORE’s Solar Photovoltaics business, which was sold in December 2014, provided products for
space power applications including high-efficiency multi-junction solar cells, Covered Interconnect Cells and complete satellite solar
panels. In addition, EMCORE sold certain assets, and transferred certain liabilities, of the Company’s telecommunications business,
including the ITLA, micro-ITLA, T-TOSA and T-XFP product lines within the Company’s telecommunications business in January
2015. In addition to organic growth and development of our existing Fiber Optics market, we intend to pursue other strategies to enhance
shareholder value, which may include acquisitions, investments in joint ventures, partnerships, and other strategic alternatives, such as
dispositions, reorganizations, recapitalizations or other similar transactions, the repurchase of shares of our outstanding common stock
or payment of dividends to our shareholders, and we may engage financial and other advisors to assist in these efforts. Accordingly, the
Strategy and Alternatives Committee of the Board of Directors and our management may from time to time be engaged in evaluating
potential strategic opportunities and may enter into definitive agreements with respect to such transactions or other strategic alternatives.
Sale of Photovoltaics and Digital Products Businesses
On September 17, 2014, EMCORE entered into an Asset Purchase Agreement (the “Photovoltaics Agreement”) with SolAero
Technologies Corporation (“SolAero”) (formerly known as Photon Acquisition Corporation) pursuant to which SolAero acquired
substantially all of the assets, and assumed substantially all of the liabilities, primarily related to or used in connection with the Company’s
photovoltaics business, including EMCORE’s subsidiaries EMCORE Solar Power, Inc. and EMCORE IRB Company, LLC (collectively,
the “Photovoltaics Business” and, the sale of the Photovoltaics Business, the “Photovoltaics Asset Sale”) for $150.0 million in cash,
prior to a $0.1 million working capital adjustment pursuant to the Photovoltaics Agreement finalized and paid by EMCORE during the
fiscal year ended September 30, 2015. On December 10, 2014, EMCORE completed the Photovoltaics Asset Sale.
On October 22, 2014, EMCORE entered into an Asset Purchase Agreement (the “Digital Products Agreement”) with
NeoPhotonics Corporation, a Delaware corporation (“NeoPhotonics”), pursuant to which the Company sold certain assets, and transferred
certain liabilities, of the Company’s telecommunications business (the “Digital Products Business”) to NeoPhotonics for an aggregate
purchase price of $17.5 million, subject to certain adjustments. On January 2, 2015, EMCORE completed the sale of the Digital Products
Business for $1.5 million in cash and an adjusted Promissory Note balance of $15.5 million. On April 17, 2015, NeoPhotonics paid in
full the outstanding balance of the Promissory Note of $15.5 million, plus accrued interest of $0.2 million.
No Photovoltaics Business or Digital Products Business assets or liabilities that were sold remain on the consolidated balance
sheet as of September 30, 2016 or September 30, 2015. The financial results of the Photovoltaics Business and the Digital Products
Business are presented as “discontinued operations” on the consolidated statements of operations and comprehensive income for the
fiscal years ended September 30, 2016, 2015 and 2014. See Note 4 - Discontinued Operations for additional information. The notes to
our consolidated financial statements relate to our continuing operations only, unless otherwise indicated.
Liquidity and Capital Resources
Historically, we have consumed cash from operations and until recently, in most periods we have incurred operating losses from
continuing operations. We have managed our liquidity position through the sale of assets, and cost reduction initiatives, as well as from
time to time in prior periods, borrowings from our Credit Facility and capital markets transactions.
On December 10, 2014, we completed the sale of our Photovoltaics Business for $150.0 million in cash prior to working capital
adjustments of $0.1 million.
On January 2, 2015, we completed the sale of our Digital Products Business for $1.5 million in cash and an adjusted Promissory
Note balance of $15.5 million. On April 17, 2015, NeoPhotonics paid in full the outstanding balance of the Promissory Note of $15.5
million, plus accrued interest of $0.2 million.
52
On June 15, 2015, we completed the modified “Dutch auction” tender offer (the “Tender Offer”) and purchased 6.9 million
shares of our common stock at a purchase price of $6.55 per share, for an aggregate cost of $45.0 million excluding fees and expenses.
Repurchased common stock was recorded to treasury stock. The Company incurred costs of $0.7 million in connection with the Tender
Offer, which were recorded to treasury stock.
As of September 30, 2016, cash and cash equivalents totaled $63.9 million and net working capital totaled approximately $93.0
million. Net working capital, calculated as current assets minus current liabilities, is a financial metric we use which represents available
operating liquidity. For the fiscal year ended September 30, 2016, we earned net income of $8.3 million.
With respect to measures related to liquidity:
We believe that our existing balances of cash and cash equivalents, cash flows from operations and amounts expected to be
available under our Credit Facility (defined below) will provide us with sufficient financial resources to meet our cash requirements for
operations, working capital, and capital expenditures for at least the next twelve months, and thereafter for the foreseeable future. At the
discretion of our Board, we may use our existing balances of cash and cash equivalents to provide liquidity to our shareholders through
one or more additional special dividends or the repurchase of additional shares of our outstanding common stock, make investments
in our other businesses, pursue other strategic opportunities or a combination thereof. In addition, should we require more capital than
what is generated by our operations, for example to fund significant discretionary activities, such as business acquisitions, we could
elect to raise capital in the U.S. through debt or equity issuances. These alternatives could result in higher effective tax rates, increased
interest expense, and/or dilution of our earnings. We have borrowed funds in the past and continue to believe we have the ability to do
so at reasonable interest rates.
For the fiscal year ended September 30, 2016, the following changes to our liquidity occurred:
•
•
•
Dividend Payment: On July 5, 2016, the Company declared a special cash dividend of $1.50 per share, or a total of $39.2
million. The dividend was paid on July 29, 2016 to shareholders of record as of July 18, 2016. See Note 13 - Equity for
additional information.
Resolution of Outstanding Litigation: In June 2016 we collected $2.6 million in fees and costs from Sumitomo Electric
Industries, Ltd. (“SEI”) and $1.9 million held in escrow as the result of the favorable ruling from the SEI arbitration. See
Note 12 - Commitments and Contingencies.
Credit Facility: On November 11, 2010, we entered into a Credit and Security Agreement (the “Credit Facility”) with
Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Facility, as it has been amended through its seventh
amendment on November 10, 2015, currently provides us with a revolving credit line of up to $15.0 million through
November 2018 that can be used for working capital requirements, letters of credit, and other general corporate purposes.
The Credit Facility is secured by the Company’s assets and is subject to a borrowing base formula based on the Company’s
eligible accounts receivable, inventory, and machinery and equipment accounts. See Note 10 - Credit Facilities for
additional information.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: Our consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP) and include the assets, liabilities, shareholders’ equity, and operating
results of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated
in consolidation. We are not the primary beneficiary of, nor do we hold a significant variable interest in, any variable interest entity.
Prior Period Reclassifications: On December 10, 2014, we sold our Photovoltaics business to SolAero. On January 2, 2015, we sold
our Digital Products Business to NeoPhotonics. The Photovoltaics Asset Sale and Digital Asset Sale are reported as discontinued
operations, which require retrospective restatement of prior periods to classify the results of operations as discontinued operations. No
Photovoltaics or Digital Products assets or liabilities that were sold remain on the consolidated balance sheet as of September 30, 2015.
The financial results of the Photovoltaics Business and the Digital Products Business are presented as “discontinued operations” on the
consolidated statements of operations and comprehensive income for the fiscal years ended September 30, 2016, 2015 and 2014. See
Note 4 - Discontinued Operations for additional information. The notes to our consolidated financial statements relate to our continuing
operations only, unless otherwise indicated.
Reclassification of prior period amounts related to discontinued operations as a result of the sale of the Photovoltaics and
Digital Products Businesses have been made to conform to the current period financial statement presentation. There were no other
reclassifications except for amounts related to discontinued operations.
Use of Estimates: The preparation of 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. The accounting estimates that
require our most significant, difficult, and/or subjective judgments include:
53
•
•
•
•
•
the valuation of inventory, warrants and stock-based compensation;
the useful lives of assets and assessment of recovery of long-lived assets;
asset retirement obligations and contingencies, including litigation and indemnification-related;
the allowance for doubtful accounts and warranty accruals; and,
the valuation allowance for deferred tax assets.
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.
Concentration of Credit Risk: Financial instruments that may subject us to concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. Our cash and cash equivalents are held in safekeeping primarily with Wells Fargo. When necessary,
we perform credit evaluations on our customers’ financial condition and occasionally we request deposits in advance of shipping product
to our customers. These financial evaluations require significant judgment and are based on a variety of factors including, but not limited
to, current economic trends, historical payment patterns, bad debt write-off experience, and financial review of the particular customer.
Cash and Cash Equivalents: Cash and cash equivalents consists primarily of bank deposits and highly liquid short-term investments with
a maturity of three months or less at the time of purchase.
Restricted Cash: Restricted cash represents recently deposited cash that is temporarily restricted by our bank in accordance with the
terms of the outstanding credit facility.
Accounts Receivable: We regularly evaluate the collectability of our accounts receivable and maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to meet their financial obligations to us. The allowance is based on the
age of receivables and a specific identification of receivables considered at risk of collection. We classify charges associated with the
allowance for doubtful accounts as selling, general, and administrative expense.
Inventory: Inventory is stated at the lower of cost or market, with cost being determined using the standard cost method that includes
material, labor, and manufacturing overhead costs, which approximates weighted average cost. We write-down inventory once it has
been determined that conditions exist that may not allow the inventory to be sold for its intended purpose or the inventory is determined
to be excess or obsolete based on our forecasted future sales. The charge related to inventory write-downs is recorded as a cost of
revenue. The majority of the inventory write-downs are related to inventory whose carrying value is in excess of net realizable value
and on excess raw material components resulting from finished product obsolescence. We do not track the selling price of individual
raw material components that have been previously written down or written off, since such raw material components usually are only
a portion of the finished products and related sales price, and the timing of the consumption of impaired inventory and the sale of the
related finished goods is relatively short. We evaluate inventory levels at least quarterly against sales forecasts on a significant part-by-
part basis, in addition to determining its overall inventory risk. We have incurred, and may in the future incur charges to write-down
our inventory.
Property, Plant, and Equipment: Our property, plant, and equipment are recorded at cost. Plant and equipment are depreciated on a
straight-line basis over the following estimated useful lives of the assets:
Estimated Useful Life
Equipment
Furniture and fixtures
Computer hardware and software
Leasehold improvements
—
—
—
—
three to ten years
five years
five to seven years
three to six years
Leasehold improvements are amortized over the lesser of the asset life or the lease term. Expenditures for repairs and maintenance
are charged to expense as incurred. The costs for major renewals and improvements are capitalized and depreciated over their estimated
useful lives of the related asset. The cost and related accumulated depreciation of the assets are removed from the accounts upon
disposition and any resulting gain or loss is reflected in the consolidated statement of operations and comprehensive income.
Valuation of Long-lived Assets: Long-lived assets consist primarily of property, plant, and equipment, net. Since our long-lived assets are
subject to amortization, we review these assets for impairment in accordance with the provisions of Accounting Standards Codification
(“ASC”) 360, Property, Plant, and Equipment. We review long-lived assets for impairment whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. Our impairment testing of long-lived assets consists of determining whether
54
the carrying amount of the long-lived asset (asset group) is recoverable, in other words, whether the sum of the future undiscounted cash
flows expected to result from the use and eventual disposition of the asset (asset group) exceeds its carrying amount. The determination
of the existence of impairment involves judgments that are subjective in nature and may require the use of estimates in forecasting
future results and cash flows related to an asset or group of assets. In making this determination, we use certain assumptions, including
estimates of future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset
utilization, the length of service that assets will be used in our operations, and estimated salvage values.
Asset Retirement and Environmental Obligations: Pursuant to ASC 410, Asset Retirement and Environmental Obligations, an asset
retirement obligation (“ARO” or “AROs”) is recorded when there is a legal obligation associated with the retirement of a tangible long-
lived asset and the fair value of the liability can reasonably be estimated. Upon initial recognition of an asset retirement obligation, a
company increases the carrying amount of the long-lived asset by the same amount as the liability. Over time, the liabilities are accreted
for the change in their present value through charges to operations costs. The initial capitalized costs are depleted over the useful lives of
the related assets through charges to depreciation, and/or amortization. If the fair value of the estimated ARO changes, an adjustment is
recorded to both the ARO and the asset retirement cost. Revisions in estimated liabilities can result from revisions of estimated inflation
rates, escalating retirement costs, and changes in the estimated timing of settling ARO liabilities.
We have known asset retirement conditions, such as certain asset decommissioning and restoration of rented facilities to be
performed in the future. We previously completed a review of our asset retirement and environmental obligations and we recorded an
asset retirement obligation with an offset to fixed assets totaling $1.8 million as of September 30, 2015. See Note 12 - Commitments and
Contingencies for additional information.
Fair Value of Financial Instruments: We determine the fair value of our financial instruments in accordance with ASC 820, Fair Value
Measurements and Disclosures.
Revenue Recognition: Revenue is recognized upon shipment, provided persuasive evidence of a contract exists, the price is fixed, the
product meets our customer’s specifications, title and ownership have transferred to the customer, and there is reasonable assurance of
collection of the sales proceeds. The majority of our products have shipping terms that are free on board or free carrier alongside (FCA)
shipping point, which means that we fulfill our delivery obligation when the goods are handed over to the freight carrier at our shipping
dock. This means the customer bears all costs and risks of loss or damage to the goods from that point. In certain cases, we pay for the
cost of shipping and insurance to the customer’s designated location but we invoice those costs to the customer. Under this arrangement,
revenue is recognized under FCA shipping point terms. We account for shipping and related transportation costs by recording the charges
that are invoiced to customers as revenue, with the corresponding cost recorded as cost of revenue. In those instances where inventory
is maintained at a consigned location, revenue is recognized only when our customer pulls product for use and after title and ownership
has transferred to the customer. Any warranty cost and remaining obligations that are inconsequential or perfunctory are accrued when
the corresponding revenue is recognized.
Distributors: We use a number of distributors around the world and recognize revenue upon shipment of product to these
distributors. Title and risk of loss pass to the distributors upon shipment, and our distributors are contractually obligated to pay
us on standard commercial terms, just like direct customers. We do not sell to our distributors on consignment and, except in
the event of product discontinuance, do not give distributors a right of return.
Contract Manufacturers: Prior to certain customers accepting product that is manufactured at one of our contract manufacturers,
these customers require that they first qualify the product and manufacturing processes at our contract manufacturer. The
customers’ qualification process determines whether the product manufactured at our contract manufacturer achieves their
quality, performance, and reliability standards. After a customer completes the initial qualification process, we receive approval
to ship qualified product to that customer. As part of the manufacturing process at our contract manufacturers, the finished
product is tested prior to shipment to the customer using the same criteria that our customer uses to test product it receives.
Revenue is recognized upon shipment of customer-qualified product, provided persuasive evidence of a contract exists, the
price is fixed, the product meets our customer’s specifications, title and ownership have transferred to the customer, and there
is reasonable assurance of collection of the sales proceeds.
Product Warranty Reserves: We provide our customers with limited rights of return for non-conforming shipments and warranty claims
for certain products. Pursuant to ASC 450, Contingencies, we make estimates of product warranty expense using historical experience
rates as a percentage of revenue and accrue estimated warranty expense as a cost of revenue. We estimate the costs of our warranty
obligations based on historical experience of known product failure rates and anticipated rates of warranty claims, use of materials to
repair or replace defective products, and service delivery costs incurred in correcting product issues. In addition, from time to time,
specific warranty accruals may be made if unforeseen technical problems arise. Should our actual experience relative to these factors
differ from our estimates, we may be required to record additional warranty reserves. Alternatively, if we provide more reserves than
needed, we may reverse a portion of such provisions in future periods.
Litigation Contingencies: We are subject to various legal proceedings, claims, and litigation, either asserted or unasserted that arise in
the ordinary course of business. 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
55
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.
Research and Development: Research and development costs are charged as an expense when incurred.
Stock-Based Compensation: Stock-based compensation expense is measured at the stock option grant date, based on the fair value
of the award, and is recorded to cost of revenue, sales, general, and administrative, and research and development expense based on
an employee’s responsibility and function over the requisite service period. We use the Black-Scholes option-pricing model and the
straight-line attribution approach to determine the fair value of stock-based awards in accordance with ASC 718, Compensation. This
option-pricing model requires the input of highly subjective assumptions, including the option’s expected life, the price volatility and
risk-free interest rate of the underlying stock, and expected forfeitures.
Foreign Exchange: We recognize gains and losses due to the effect of exchange rate changes on foreign currency primarily due to our
operations in China. The assets and liabilities of our foreign operations are translated from their respective functional currencies into
U.S. dollars at the rates in effect at the consolidated balance sheet dates, and the revenue and expense amounts are translated at the
average rate during the applicable periods reflected on the consolidated statements of operations and comprehensive income. Foreign
currency translation adjustments are recorded as other comprehensive income. Gains and losses from foreign currency transactions
denominated in currencies other than the U.S. dollar, both realized and unrealized, are recorded as foreign exchange (loss) gain on our
consolidated statements of operations and comprehensive income.
Income Taxes: In accordance with ASC 740, Income Taxes, deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. We record valuation
allowances against all deferred tax assets for amounts which are not considered more likely to be realized.
Comprehensive Income: ASC 220, Comprehensive Income, establishes standards for reporting and display of comprehensive income
and its components in financial statements. It requires that all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in the financial statement that is displayed with the same prominence as other
financial statements. Our comprehensive income consists of both net income and foreign currency translation adjustments and it is
presented in the accompanying consolidated statements of operations and comprehensive income.
Income (Loss) Per Share: We are required, in periods in which we have net income, to calculate basic and diluted income per share
using the two-class method. The two-class method is required because our unvested restricted stock awards are considered participating
securities as these securities have the right to receive dividends or dividend equivalents should we declare dividends on our common
stock. Under the two-class method, during periods of net income, net income is first reduced for distributions declared on all classes
of securities to arrive at undistributed earnings. The undistributed earnings are then allocated on a pro-rata basis between the common
shareholders and participating securities holders. The weighted-average number of common shares and participating securities
outstanding during the period is then used to calculate basic and diluted income per share.
In periods in which we have a net loss, basic loss per share is calculated by dividing the loss attributable to common shareholders
by the weighted-average number of common shares outstanding during the period.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
There have been no recent accounting pronouncements or changes in accounting pronouncements that are of significance, or of
potential significance, to us other than those discussed below:
•
•
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-
09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU
2016-09 introduces targeted amendments intended to simplify the accounting for stock compensation. Specifically, the
ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment
awards) to be recognized as income tax expense or benefit in the consolidated statement of operations and comprehensive
income. The new guidance is effective for annual periods beginning after December 15, 2016, and interim periods
within those annual periods. The new standard will be effective for our fiscal year beginning October 1, 2017 and early
adoption is permitted. We are currently evaluating the impact of this accounting standard update on our Consolidated
Financial Statements .
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 introduces a lessee model that
requires recognition of assets and liabilities arising from qualified leases on the consolidated balance sheets and disclosure
of qualitative and quantitative information about lease transactions. This guidance is effective for fiscal years beginning
after December 15, 2018 and interim periods within those years. The new standard will be effective for our fiscal year
beginning October 1, 2019 and early adoption is permitted. We are currently evaluating the impact of this accounting
standard update on our Consolidated Financial Statements.
56
•
•
•
•
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments, which clarifies how companies present and classify certain cash receipts and cash payments
in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017. The new
standard will be effective for our fiscal year beginning October 1, 2018 and earlier adoption is permitted. We are currently
evaluating the impact of this accounting standard update on our Consolidated Financial Statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes. Under this guidance, organizations that present a classified balance sheet are required to classify all deferred
taxes as non-current assets or non-current liabilities. The guidance is effective for fiscal years beginning after December
15, 2017 and interim periods within those fiscal years, and early adoption is permitted. The Company early adopted
the new standard in fiscal year 2016 and the accounting standard update did not have an impact on our Consolidated
Financial Statements .
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This
standard requires inventory to be measured at the lower of cost and net realizable value. The guidance clarifies that net
realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of
completion, disposal and transportation. This guidance is effective for fiscal years beginning after December 15, 2016
and interim periods within those fiscal years. The new standard will be effective for our fiscal year beginning October 1,
2017 and early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our
Consolidated Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers which will supersede most
current U.S. GAAP guidance on this topic. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts
with Customers (Topic 606): Identifying Performance Obligations and Licensing to clarify two aspects of the guidance
within ASU No. 2014-09 on identifying performance obligations and the licensing implementation guidance. Under the
new standards, recognition of revenue occurs when the seller satisfies a performance obligation by transferring to the
customer promised goods or services in an amount that reflects the consideration the entity expects to receive for those
goods or services. The new standard, as amended in August 2015, will be effective for our fiscal year beginning October
1, 2018 and early adoption is permitted as of October 1, 2017. The standard permits the use of either the retrospective
or cumulative effect transition method. We anticipate this standard will not have a material impact on our Consolidated
Financial Statements .
NOTE 4. DISCONTINUED OPERATIONS
Sale of Photovoltaics Business
On September 17, 2014, EMCORE entered into the Photovoltaics Agreement with SolAero pursuant to which the Company
agreed to sell the Photovoltaics Business for $150.0 million in cash, prior to a working capital adjustment of $0.1 million. On December 10,
2014, EMCORE completed the Photovoltaics Asset Sale.
In connection with this transaction, we sold net assets of $60.3 million to SolAero and incurred transaction costs of $2.7 million.
During the fiscal year ended September 30, 2015, we recognized a gain of $56.8 million, net of tax on the sale of the Photovoltaics
Business which was recorded within discontinued operations in the consolidated statements of operations and comprehensive income.
On December 22, 2015, we settled all of the outstanding rights and obligations of a solar power venture in Spain, including
outstanding non-current receivables, for a payment of $0.7 million. The outstanding non-current receivables had a net book value of $0
at the time of settlement as they were fully allowed for previously. The resulting gain was recorded in the discontinued operations of the
Photovoltaics Business for the fiscal year ended September 30, 2016.
No assets and liabilities of the Photovoltaics Business that were sold remain on the consolidated balance sheet as of September 30,
2016 and 2015. The financial results of the Photovoltaics Business are reported as discontinued operations for the fiscal years ended
September 30, 2016, 2015 and 2014.
57
The following table presents the statements of operations for the discontinued operations of the Photovoltaics Business:
(in thousands)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations before income tax benefit (expense) . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Fiscal Years Ended September 30,
2016
2015
— $ 12,614
8,245
4,369
2,240
779
86,958
89,866
(28,700)
$ 61,166
(159)
159
(868)
—
—
1,027
20
1,047
$
$
2014
$ 73,226
52,317
20,909
6,654
17
—
14,272
(5,412)
8,860
$
Included in discontinued operations during the fiscal year ended September 30, 2016 were $0.4 million of New Mexico incentive
tax credits received which were allocated to expense captions based on how the tax credits were earned. The credits received resulted in
cash refunds. There were no incentive tax credits received during the fiscal years ended September 30, 2015 and 2014.
Sale of Digital Products Business
On October 22, 2014, EMCORE entered into an Asset Purchase Agreement with NeoPhotonics, pursuant to which the Company
sold certain assets, and transferred certain liabilities, of the Company’s Digital Products Business to NeoPhotonics for an aggregate
purchase price of $17.5 million, subject to certain adjustments. On January 2, 2015, EMCORE completed the sale of the Digital Products
Business for $1.5 million in cash and an adjusted Promissory Note balance of $15.5 million. On April 17, 2015, NeoPhotonics paid in
full the outstanding balance of the Promissory Note of $15.5 million, plus accrued interest of $0.2 million.
During the fiscal year ended September 30, 2015, we recognized a gain of $2.0 million on the sale of the Digital Products
Business which was recorded within discontinued operations in the consolidated statements of operations and comprehensive income.
In December 2015, we entered into an agreement to terminate our lease and related obligations associated with a facility in
Newark, California which we abandoned effective February 2016 following the sale of the Digital Products Business for a payment of
$0.2 million. As a result of this agreement, we recorded a gain of $0.3 million on the lease termination in the discontinued operations of the
Digital Products Business during the fiscal year ended September 30, 2016. See Note 9 - Accrued Expenses and Other Current Liabilities.
Included in cost of revenue for the fiscal year ended September 30, 2016 is $0.4 million due to a reduction in expected product
warranty liabilities from a settlement agreement associated with the Digital Products Business.
During the fiscal year ended September 30, 2016, we recognized the deferred gain of $3.4 million and reversal of other
liabilities of $0.4 million, that had been recorded as of September 30, 2015, resulting in a credit of $3.8 million to deferred gain on sale
of assets within discontinued operations of the Digital Products Business as the result of the favorable ruling from the SEI arbitration.
See Note 12 - Commitments and Contingencies.
No assets or liabilities from the Digital Products Business remain on the consolidated balance sheet as of September 30, 2016
and 2015. The financial results of the Digital Products Business are reported as discontinued operations for the fiscal years ended
September 30, 2016, 2015 and 2014.
The following table presents the statements of operations for the discontinued operations of the Digital Products Business:
For the Fiscal Years Ended September 30,
(in thousands)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognition of previously deferred gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations before income tax benefit . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2016
2015
— $ 11,944
9,107
2,837
2,800
—
1,994
2,031
2,175
4,206
(500)
500
(292)
3,804
—
4,596
4
4,600
$
2014
$ 46,038
46,387
(349)
12,683
—
—
(13,032)
4,942
(8,090)
$
There were no incentive tax credits received during the fiscal years ended September 30, 2016, 2015 and 2014.
58
NOTE 5. FAIR VALUE ACCOUNTING
ASC 820, Fair Value Measurements, establishes a valuation hierarchy for disclosure of the inputs to valuation techniques used
to measure fair value. This standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value:
•
•
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for
the assets or liabilities, either directly or indirectly, through market corroboration, for substantially the full term of the
financial instrument.
•
Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets or liabilities at fair value.
Classification of an asset or liability within this hierarchy is determined based on the lowest level input that is significant to the
fair value measurement.
Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the
use of unobservable inputs.
Cash consists primarily of bank deposits or, highly liquid short-term investments with a maturity of three months or less
at the time of purchase. Restricted cash represents temporarily restricted deposits held as compensating balances against short-term
borrowing arrangements.
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, other current assets, and accounts
payable approximate fair value because of the short maturity of these instruments.
NOTE 6. ACCOUNTS RECEIVABLE
The components of accounts receivable consisted of the following:
(in thousands)
Accounts receivable, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of
September 30,
2016
As of
September 30,
2015
$
$
18,468
(36)
18,432
$
$
17,781
(462)
17,319
The allowance for doubtful accounts is based on the age of receivables and a specific identification of receivables considered
at risk of collection.
The following table summarizes changes in the allowance for doubtful accounts for the fiscal years ended September 30, 2016,
2015 and 2014.
Allowance for Doubtful Accounts
(in thousands)
For the Fiscal Years Ended September 30,
2015
2014
2016
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision adjustment - expense, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-offs and other adjustments - additions (deductions) to receivable balances . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
462
23
(449)
36
$
$
116
556
(210)
462
$
$
22
54
40
116
59
NOTE 7. INVENTORY
The components of inventory consisted of the following:
(in thousands)
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Work in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
As of
September 30,
2016
As of
September 30,
2015
16,095
5,687
5,899
27,681
24,150
3,531
27,681
$
$
$
$
9,261
3,207
4,662
17,130
17,130
—
17,130
The non-current inventory balance of $3.5 million as of September 30, 2016 is comprised entirely of raw materials which we
acquired as part of a last time purchase as a result of the vendor announcing they would cease manufacturing a part.
NOTE 8. PROPERTY, PLANT, AND EQUIPMENT, NET
The components of property, plant, and equipment, net consisted of the following:
(in thousands)
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer hardware and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant, and equipment, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant, and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of
September 30,
2016
As of
September 30,
2015
$
$
28,247
1,109
2,860
1,896
1,779
35,891
(23,678)
12,213
$
$
24,913
1,109
2,177
1,480
875
30,554
(21,629)
8,925
Depreciation expense totaled $2.4 million, $2.1 million and $2.5 million during the fiscal years ended September 30, 2016,
2015 and 2014, respectively.
Impairment Testing
The impairment tests for our long-lived assets involve comparing fair value to the carrying amount. If the carrying value of
the long-lived assets (asset group) exceeds the estimated undiscounted cash flows expected to be generated by the assets, impairment
may exist. We derive fair value using both a guideline public company valuation method, a market based approach, and on a lesser
extent, the discounted cash flow valuation method, an income based approach. A guideline public company valuation method entails a
comparison to publicly traded companies within similar industry, product lines, market, growth, margins and risk and is generally based
on published data regarding the public companies’ stock price, revenue, and earnings. The discounted cash flow valuation method is
based on discounted cash flow models using assumptions about revenue growth rates, appropriate discount rates relative to risk, and
estimates of terminal value.
As of September 30, 2016, we determined no impairment triggers were present, and therefore, an impairment test was
not performed.
As of September 30, 2015, we performed an impairment test on long-lived assets. The impairment test was triggered by
continued losses from operations realized in fiscal year 2015. The impairment testing indicated that no impairment existed and that
future undiscounted cash flows exceeded the carrying value.
As of September 30, 2014, we performed an impairment test on long-lived assets. The impairment test was triggered by a
change in long-term financial and cash flow forecasts. The impairment testing indicated that no impairment existed and that future
undiscounted cash flows exceeded the carrying value.
The Company will assess its long-lived assets for impairment whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable.
60
NOTE 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The components of accrued expenses and other current liabilities consisted of the following:
(in thousands)
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Termination fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Self insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income and other taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Severance and restructuring accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation: Compensation is primarily comprised of accrued employee salaries, taxes and benefits.
As of
September 30,
2016
As of
September 30,
2015
$
$
3,628
871
—
761
38
—
25
944
642
775
7,684
$
$
3,036
1,664
2,775
1,147
133
65
606
1,038
1,448
1,190
13,102
Termination fee: The termination fee relates to the contractual amount owed to a third party for terminating a prior joint venture
agreement related to our Broadband and Digital Products lines of business. In July 2016, the Company and the third party agreed in
principle to a final settlement amount of $2.9 million related to the termination fee, for which the Company recorded an increase in the
accrued termination fee of $150,000. Of this amount, $72,000 was recorded in continuing operations and $78,000 was recorded within
discontinued operations in the Digital Products Business. In September 2016, the Company paid the $2.9 million accrual related to the
termination fee .
Self-insurance: Prior to December 31, 2015, the Company provided health benefits to its employees under a self-insured (stop-loss) plan
whereby the Company was responsible for substantially all amounts incurred by the provider related to the benefits provided to members
of the plan. Effective January 1, 2016, the Company provides health benefits to its employees through a premium policy based plan and
is only responsible for the premium payments for each employee insured under the plan. The balance as of September 30, 2016 relates
to the amounts the Company is liable for prior to discontinuing the self-insurance plan.
Income and other taxes: For the fiscal year ended September 30, 2016, the Company recorded income tax expense from continuing
operations of approximately $14,000, and $24,000 of income tax benefit within income from discontinued operations. For the fiscal
year ended September 30, 2015, the Company reported $2.2 million of income tax benefit from continuing operations losses and $26.5
million of income tax expense within income from discontinued operations. For the fiscal year ended September 30, 2014, the Company
reported $24.6 million of income tax benefit from continuing operations losses and $0.5 million of income tax expense within income
from discontinued operations. The income tax expense within discontinued operations includes estimated alternative minimum tax and
other adjustments prescribed by ASC 740 in allocating expected annual income tax expense (benefit) between continuing operations and
discontinued operations.
During the fiscal year ended September 30, 2015, the Company utilized $24.1 million of deferred tax assets. The Company
made a payment for alternative minimum taxes and the remaining income tax expense was offset mainly through utilization of $24.1
million of deferred tax assets and net operating loss carry forwards. Also see Note 11 - Income and other Taxes.
Severance and restructuring accruals: In the fourth quarter of fiscal year 2014, the Company’s former CEO announced his resignation
which became effective in the second quarter of fiscal year 2015. The Company entered into a separation agreement with the individual
that provided for among other things, the continuation of his base salary for up to 86 weeks, benefits for 18 months, outplacement
services for a period of not more than one year and with a value not in excess of $15,000 and immediate vesting of all his outstanding
non-vested equity awards. These payments were not contingent upon any future service by the individual. The Company recorded a
charge of approximately $0.8 million in the fiscal year ended September 30, 2014 related to this separation agreement.
In the first quarter of fiscal year 2015, the Company’s former Chief Administrative Officer, and General Counsel and Secretary
announced their resignations which became effective in the second quarter of fiscal year 2015, respectively. The Company entered into
separation agreements with each individual that provided for among other things, the continuation of their base salary (74 weeks for the
Chief Administrative Officer and 68 weeks for the General Counsel and Secretary), benefits for 18 months, outplacement services for
a period of not more than one year and with a value not in excess of $15,000 and immediate vesting of all their outstanding non-vested
equity awards. These payments were not contingent upon any future service by either individual. The Company recorded charges of
approximately $1.1 million in the fiscal year ended September 30, 2015 related to these separation agreements.
61
In connection with the abandonment of our Newark, California facility following the closing of the sale of the Digital Products
Business, we accrued for the remaining lease costs through the lease termination in May 2016. In December 2015, we entered into an
agreement to terminate this lease and related obligations, including AROs, as of February 2016 for a payment of $0.2 million. As a result
of the agreement, we recorded a gain of $0.3 million on the lease termination. The resulting gain has been recorded in the discontinued
operations of the Digital Products Business for the fiscal year ended September 30, 2016. See Note 4 - Discontinued Operations.
On June 7, 2016, Mark Weinswig notified the Company that he would resign as the Company’s Chief Financial Officer,
effective as of June 20, 2016 (the “Separation Date”). The Company and Mr. Weinswig entered into a separation agreement and general
release, dated June 7, 2016 (the “Separation Agreement”), which includes mutual releases by Mr. Weinswig and the Company of all
claims related to Mr. Weinswig’s employment and service relationship with, and termination of employment and service from, the
Company. The Separation Agreement provides for, among other things, the continuation of his base salary for 64 weeks, benefits for 16
months, outplacement services for a period of not more than 1 year and with a value not in excess of $15,000 and immediate vesting
of all his outstanding non-vested equity awards, other than his most recent equity award. These payments are not contingent upon any
future service by Mr. Weinswig. The Company recorded a charge of approximately $0.4 million in the fiscal year ended September 30,
2016 related to Mr. Weinswig’s Separation Agreement.
In an effort to better align our current and future business operations, in May 2016 the Company announced a reduction in its
workforce by approximately 30 individuals and recorded a charge for severance for the affected employees in the amount of $0.3 million
in the fiscal year ended September 30, 2016.
Our severance and restructuring-related accruals specifically relate to the separation agreements and reduction in force discussed
above and non-cancelable obligations associated with an abandoned leased facility. Expense related to severance and restructuring
accruals is included in selling, general, and administrative expense on our statement of operations and comprehensive income. The
following table summarizes the changes in the severance and restructuring-related accrual accounts:
(in thousands)
Balance as of September 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense - charged to accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments and accrual adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of September 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense - charged to accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments and accrual adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Severance-
related
accruals
1,317
1,216
(1,423)
1,110
728
(1,196)
642
$
$
$
Restructuring-
related
accruals
Total
$
$
$
— $ 1,317
1,953
737
(1,822)
(399)
$ 1,448
338
—
728
(1,534)
(338)
642
— $
Warranty: We generally provide product and other warranties on our components, power systems, and fiber optic products. Certain
parts and labor warranties from our vendors can be assigned to our customers. Our reported financial position or results of operations
may be materially different under changed conditions or when using different estimates and assumptions. In the event that estimates or
assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information.
The following table summarizes the changes in our product warranty accrual accounts:
Product Warranty Accruals
(in thousands)
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for product warranty - expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments and utilization of warranty accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Fiscal Years Ended September 30,
2016
2015
2014
$
$
1,664
376
(1,169)
871
$
$
2,816
838
(1,990)
1,664
$
$
3,881
1,308
(2,373)
2,816
The decrease in adjustments and utilization of the warranty accrual for the fiscal year ended September 30, 2016 compared to
the same period in 2015 is the result of claims processed for one specific customer in continuing operations and the adjustment of two
customer claims associated with our discontinued operations in the fiscal year ended September 30, 2015.
NOTE 10. CREDIT FACILITIES
On November 11, 2010, we entered into a Credit and Security Agreement (the “Credit Facility”) with Wells Fargo Bank,
National Association (“Wells Fargo”). The Credit Facility is secured by the Company’s assets and is subject to a borrowing base formula
based on the Company’s eligible accounts receivable, inventory, and machinery and equipment accounts.
62
On November 10, 2015, we entered into a Seventh Amendment of the Credit Facility, which extended the maturity date of the
facility to November 2018 and adjusted the interest rate to LIBOR plus 2.5%. The Credit Facility currently provides us with a revolving
credit line of up to $15.0 million that can be used for working capital requirements, letters of credit, and other general corporate purposes.
As of September 30, 2016, there were no amounts outstanding under this Credit Facility and the Company was in compliance
with all financial covenants. Also, as of September 30, 2016, the Credit Facility had approximately $0.5 million reserved for one stand-
by letter of credit and $10.9 million available for borrowing. As of November 30, 2016, there was no outstanding balance under this
Credit Facility.
NOTE 11. INCOME AND OTHER TAXES
The Company’s income (loss) from continuing operations before income taxes consisted of the following:
Income (loss) from continuing operations before income taxes
(in thousands)
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . .
The Company’s income tax (benefit) expense consisted of the following:
Income tax expense (benefit)
(in thousands)
Federal:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
Total income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
For the Fiscal Years Ended September 30,
2016
1,735
898
2,633
2015
$ (5,713)
1,250
$ (4,463)
2014
$ (19,792)
(676)
$ (20,468)
For the Fiscal Years Ended September 30,
2014
2015
2016
—
—
—
(117)
—
(117)
131
—
131
14
$
—
(1,835)
(1,835)
$
—
(21,285)
(21,285)
—
(356)
(356)
—
(2,454)
(2,454)
—
—
—
$ (2,191)
—
(811)
(811)
$ (24,550)
EMCORE Corporation is incorporated in the state of New Jersey. A reconciliation of the provision for income taxes, with the
amount computed by applying the statutory U.S. federal and state income tax rates to continuing operations income before provision for
income taxes is as follows:
Provision for Income Taxes
(in thousands)
Income tax benefit computed at U.S. federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . .
State tax expense benefit, net of U.S. federal effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax rate differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect due to change in tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Release of valuation allowance-domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State net operating loss carryforward adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Fiscal Years Ended September 30,
$
$
2016
896
(41)
(94)
626
—
(57)
685
(2,001)
14
0.5%
2015
$ (1,518)
(356)
(269)
—
—
108
—
(156)
$ (2,191)
49.1%
2014
$ (6,959)
(776)
1,041
—
(17,856)
—
—
—
$ (24,550)
119.9%
63
Significant components of our deferred tax assets are as follows:
Deferred Tax Assets
(in thousands)
Deferred tax assets:
Federal net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued warranty reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets and intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of
September 30,
2016
As of
September 30,
2015
$
147,449
51
3,062
2,614
14
328
7,009
3,334
896
124
728
165,609
$
147,704
66
3,033
2,283
149
587
9,527
2,837
1,080
1,646
1,388
170,300
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(165,609)
(170,300)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
—
At September 30, 2014, the Company determined that it was more likely than not that certain deferred tax assets would be
realized upon the sale of the Photovoltaic Business in fiscal year 2015. As a result, a net deferred tax valuation allowance release of $24.6
million was recorded as an income tax benefit during fiscal year 2014. The sale of the Photovoltaic Business closed on December 10,
2014 and the Company realized a gain on the transaction.
During the fiscal year ended September 30, 2015, the Company utilized the $24.6 million of deferred tax assets. The Company
paid alternative minimum taxes of $0.6 million during the fiscal year ended September 30, 2015 and the remaining income tax expense
will be offset mainly through utilization of $24.1 million of capital loss and utilization of net operating loss carry forwards.
For the fiscal years ended September 30, 2016, 2015 and 2014, the Company recorded income tax (expense) benefit from
continuing operations of approximately $(14,000), $2.2 million, and $24.6 million, respectively. For the fiscal years ended September 30,
2016, 2015 and 2014, the Company recorded income tax benefit (expense) from discontinued operations of approximately $24,000,
$(26.5) million and $(0.5) million, respectively, within income from discontinued operations. Income tax expense is comprised of
estimated alternative minimum tax allocated between continuing operations and discontinued operations as prescribed by ASC 740 and
foreign tax expense included within continuing operations.
For the fiscal years ended September 30, 2016, 2015 and 2014, the effective tax rate on continuing operations was 0.5%, 49.1%
and 119.9%, respectively. The lower tax rate for the fiscal year ended September 30, 2016 was primarily due to permanent differences,
state tax benefits, foreign tax rate differentials and changes in the Company’s estimated results in the current year as compared to the prior
year. The lower tax rate for fiscal year 2015 was primarily due to permanent differences, state tax benefits, foreign tax rate differentials,
and release of state taxes associated with uncertain tax positions. The higher tax rate for fiscal year 2014 was mainly attributable to the
partial release of the valuation allowance. 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 U.S. federal and state income taxes on non-U.S. subsidiaries’ undistributed earnings as of September 30,
2016 because we plan to indefinitely reinvest the unremitted earnings of our non-U.S. subsidiaries.
All deferred tax assets have a full valuation allowance at September 30, 2016. However, on a quarterly basis, the Company will
evaluate the positive and negative evidence to assess whether the more likely than not criteria, mandated by ASC 740, has been satisfied
in determining whether there will be further adjustments to the valuation allowance.
During the fiscal years ended September 30, 2016 and 2015, we decreased previously recorded unrecognized tax benefits by
$0.1 million and $0.2 million, respectively. Of the fiscal year 2016 amount of unrecognized tax benefits, $112,800 was recognized in
income tax expense from continuing operations and $12,000 was recognized in income tax expense from discontinued operations.
Of the fiscal year 2015 amount, $0.1 million was recognized in income tax benefit from continuing operations and $0.1 million was
recognized in income tax expense from discontinued operations. During the fiscal year ended September 30, 2014, there were no
material increases or decreases in unrecognized tax benefits. As of September 30, 2016 and September 30, 2015, we had approximately
$0.3 million of interest and penalties accrued as tax liabilities on our balance sheet.
64
As of September 30, 2016, the Company had net operating loss carryforwards for U.S. federal income tax purposes of
approximately $433.7 million which begin to expire in 2021. As of September 30, 2016, the Company had foreign net operating loss
carryforwards of $0.2 million which begin to expire in 2021, as well as state net operating loss carryforwards of approximately $139.3
million which began to expire in 2015. As of September 30, 2016, the Company also had tax credits (primarily foreign income and U.S.
research and development tax credits) of approximately $3.0 million. The research credits will begin to expire in 2018. Utilization of
net operating loss and tax credit carryforwards are subject to a substantial annual limitation due to the ownership change limitations set
forth in Internal Revenue Code Section 382 and similar state provisions. The Company prepared an Internal Revenue Code 382 analysis
to determine the annual limitations on the Company’s consolidated net operating loss carryforwards. As a result of the $433.7 million
of U.S. net operating loss carryforwards, approximately $226.5 million is subject to an annual limitation and $207.2 million of the net
operating losses are not subject to an annual limitation. Such annual limitations could result in the expiration of the net operating loss
and tax credit carryforwards before utilization.
The Company’s Board of Directors has adopted a Tax Benefits Preservation Plan (the “Rights Plan”) to help preserve the value
of our net operating losses and tax credit carryforwards by reducing the risk of limitation of these deferred tax assets. The Rights Plan
was approved by the Company’s shareholders on March 10, 2015. The Rights Plan is intended to reduce the likelihood that the Company
will experience an ownership change for purposes of Internal Revenue Code Section 382 by discouraging any person or group from
becoming a “5% shareholder” or increasing their ownership of the Company’s common stock if they are already a “5% shareholder.”
A reconciliation of the beginning and ending amount of unrecognized gross tax benefits is as follows:
Unrecognized Gross Tax Benefit
(in thousands)
Balance as of September 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments based on tax positions related to the current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments based on tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of September 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments based on tax positions related to the current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments based on tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
620
—
(207)
413
—
(125)
288
We believe that it is reasonably possible that all of the uncertain tax position will be paid or settled within the next 12 months.
We file income tax returns in the U.S. federal, state, and local jurisdictions. In April 2015 the IRS completed its exam of the September
30, 2012 tax return and the Company was notified there were no changes to the originally filed return. There are no state income tax
returns under examination. The following tax years remain open to assessment for each of the more significant jurisdictions where we
are subject to income taxes: after fiscal year 2013 for the U.S. federal, after fiscal year 2012 for the State of New Mexico, and after fiscal
year 2012 for the state of California.
Included in discontinued operations during the fiscal years ended September 30, 2016, 2015 and 2014 were $0.4 million, $0.2
million and $0.8 million, respectively, of New Mexico incentive tax credits received. The amount received was allocated to cost of goods
sold, selling, general and administrative and research and development expense primarily based on the number of employees allocated
to the related departments. These credits resulted in cash refunds and a reduction of future payroll and compensation taxes.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Leases: Estimated future minimum lease payments under non-cancelable operating leases with an initial or remaining term of
one year or more are $0.8 million, $0.3 million, $0.3 million, $0.2 million, and $0.1 million for the fiscal years ended September 30,
2017, 2018, 2019, 2020 and 2021, respectively.
Operating Lease Obligations: We lease certain facilities and equipment under non-cancelable operating leases. Operating lease
amounts exclude renewal option periods, property taxes, insurance, and maintenance expenses on leased properties. Our facility leases
typically provide for rental adjustments for increases in base rent (up to specific limits), property taxes, insurance, and general property
maintenance that would be recorded as rent expense. Rent expense was approximately $1.4 million, $1.3 million and $1.7 million for
the fiscal years ended September 30, 2016, 2015 and 2014, respectively. There are no off-balance sheet arrangements other than our
operating leases .
Asset Retirement Obligation: We have known conditional AROs, such as certain asset decommissioning and restoration of
rented facilities to be performed in the future. Our ARO’s include assumptions related to renewal option periods for those facilities where
we expect to extend lease terms. The Company recognizes its estimate of the fair value of its ARO’s in the period incurred in long-term
liabilities. The fair value of the ARO is also capitalized as property, plant and equipment.
65
In future periods, the ARO is accreted for the change in its present value and capitalized costs are depreciated over the useful
life of the related assets. If the fair value of the estimated ARO changes, an adjustment will be recorded to both the ARO and the asset
retirement capitalized cost. Revisions in estimated liabilities can result from revisions of estimated inflation rates, changes in estimated
retirement costs, and changes in the estimated timing of settling ARO’s. The fair value of our ARO’s were estimated by discounting
projected cash flows over the estimated life of the related assets using credit adjusted risk-free rates which ranged from 1.20% to
4.20%. There were no ARO’s settled during the fiscal years ended September 30, 2015 and 2014. See discussion below regarding ARO
settlements during the fiscal year ended September 30, 2016. Accretion expense of $0.1 million, $0.1 million and $0.2 million was
recorded during the fiscal years ended September 30, 2016, 2015, and 2014, respectively.
EMCORE leases a major facility in Alhambra, California covering six buildings where manufacturing, research and development,
and general and administrative work is performed. Several leases related to these facilities expired in 2011, and were being maintained
on a month-to-month basis. In November 2014, a new lease for four of the six buildings was signed, which was retroactively effective on
October 1, 2014. The new lease extended the terms of the lease for three years plus a three year option to extend the lease and clarified
the obligations and restoration work necessary to restore the buildings back to the requirements in the lease.
The Company’s ARO consists of legal requirements to return the existing leased facilities to their original state and certain
environmental work to be performed due to the presence of a manufacturing fabrication operation and significant changes to the facilities
over the past thirty years.
During the fiscal year ended September 30, 2015, the Company completed an analysis of the new Alhambra lease and revised
its estimated future cash flows of its ARO’s. The analysis required estimating the probability that the Company will be required to
remove certain infrastructure and restore the leased properties as set forth in the new lease, and the timing and amount of those future
costs. The analysis resulted in the downward revision of the Company’s ARO liability. This change in the estimated cash flows resulted
in a reduction in the ARO liability by $2.9 million with an offsetting reduction to property, plant, and equipment, net of $2.1 million,
and a gain from change in estimate of ARO liability of $0.8 million. The Company first reduced the net leasehold improvement asset to
the extent of the carrying amount of the related asset initially recorded when the ARO’s were established. The amount of the remaining
reduction to the ARO’s was recorded as a reduction to operating expenses.
In May 2016, which was retroactively effective on February 1, 2016, the Company entered into a five year lease agreement for
facilities in Beijing, China where some manufacturing work is to be performed. In connection with the lease agreement, the Company
has recorded an ARO asset and liability in the amount of $48,000 at September 30, 2016.
During the fiscal year ended September 30, 2016, the Company entered into an agreement to terminate the lease and related
obligations, including ARO, in Newark, California for a one-time settlement payment of $0.2 million. As a result of this agreement
and payment, the Company reduced its ARO associated with the Newark facility by $0.3 million. The following table summarizes
ARO activity:
Asset Retirement Obligations
(in thousands)
Balance at September 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions in current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments and revision in estimated cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
September 30,
2016
1,774
66
48
(270)
1,618
Indemnifications: We have agreed to indemnify certain customers against claims of infringement of the intellectual property
rights of others in our sales contracts with these customers. Historically, we have not paid any claims under these indemnification
obligations. On September 19, 2013, we received written notice from a customer of our broadband products requesting indemnification
relating to a lawsuit brought against them alleging patent infringement of a system incorporating our product. As of September 30, 2016,
there has been no resolution to this claim.
In March 2012, we entered into a Master Purchase Agreement with SEI, pursuant to which we agreed to sell certain assets and
transfer certain obligations. Under the terms of the Master Purchase Agreement, we agreed to indemnify SEI for up to $3.4 million of
potential claims and expenses for the two-year period following the sale and we recorded this amount as a deferred gain on our balance
sheet as a result of these contingencies.
On September 23, 2014, SEI filed for arbitration against EMCORE, in accordance with the terms of the Master Purchase
Agreement between the parties. SEI was seeking $47.5 million from EMCORE, relating to numerous claims. On April 12, 2016, the
International Court of Arbitration tribunal rejected SEI’s claims. The panel ruled that EMCORE owes SEI none of the amounts SEI
sought in the arbitration and that the Company was entitled to collect the $1.9 million held in escrow, which was received in June
2016. The Company was also entitled to recover $2.6 million in fees and costs from SEI, which was received in June 2016. During
the fiscal year ended September 30, 2016, we recognized a gain associated with the release of $3.4 million of previously recorded gain
66
associated with the sale of assets and reversal of other liabilities of $0.4 million, resulting in a credit of $3.8 million to recognition of
previously deferred gain on sale of assets within discontinued operations of the Digital Products Business. During the fiscal year ended
September 30, 2016, we recognized the $2.6 million recovery of previously incurred litigation fees and costs incurred by EMCORE
within operating income as such represented the recovery of previously incurred legal expenses. See Note 4 - Discontinued Operations.
Legal Proceedings: We are subject to various legal proceedings, claims, and litigation, either asserted or unasserted that arise
in the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect the resolution
of these matters to have a material adverse effect on our business, financial position, results of operations, or cash flows. However, the
results of these matters cannot be predicted with certainty. Professional legal fees are expensed when incurred. We accrue for contingent
losses when such losses are probable and reasonably estimable. In the event that estimates or assumptions prove to differ from actual
results, adjustments are made in subsequent periods to reflect more current information. Should we fail to prevail in any legal matter or
should several legal matters be resolved against the Company in the same reporting period, then the financial results of that particular
reporting period could be materially affected.
a) Intellectual Property Lawsuits
We protect our proprietary technology by applying for patents where appropriate and, in other cases, by preserving the
technology, related know-how and information as trade secrets. The success and competitive position of our product lines are impacted
by our ability to obtain intellectual property protection for our research and development efforts. We have, from time to time, exchanged
correspondence with third parties regarding the assertion of patent or other intellectual property rights in connection with certain of our
products and processes.
b) Mirasol Class Action
On December 15, 2015, Plaintiff Christina Mirasol (“Mirasol”), on her own behalf and on behalf of a putative class of similarly
situated individuals composed of current and former non-exempt employees of the Company working in California since December
15, 2011, filed a complaint against the Company in the Superior Court of California, Los Angeles County. The complaint alleges seven
causes of action related to: (1) failure to pay overtime; (2) failure to provide meal periods; (3) failure to pay minimum wages; (4) failure
to timely pay wages upon termination; (5) failure to provide compliant wage statements; (6) unfair competition under the California
Business and Professions Code § 17200 et seq.; and (7) penalties under the Private Attorneys General Act. The claims are premised
primarily on the allegation that Mirasol and the putative class members were not provided with their legally required meal periods.
Mirasol seeks recovery on her own behalf and on behalf of the putative class in an unspecified amount for compensatory and liquidated
damages as well as for declaratory relief, injunctive relief, statutory penalties, pre-judgment interest, costs and attorneys’ fees.
In exchange for a one-time cash payment offered by the Company, certain current and former employees have agreed to release
the Company from all potential claims related to the matters alleged in the Mirasol lawsuit. The Company has recorded an accrual for
these amounts at September 30, 2016 that is not material to the Company’s results of operations, financial condition or cash flows, which
has been recorded within Operating Expenses for the fiscal year ended September 30, 2016. The Company intends to defend itself
vigorously against the claims asserted in the lawsuit. While the Company believes that it has valid and meritorious defenses with respect
to the allegations, the ultimate liability to the Company, including penalties and fines associated with the remaining claims, is subject to
many uncertainties and may range from $39,000 to $2.6 million.
c) Mirasol Wrongful Termination Lawsuit
In August 2016, EMCORE was served with a second lawsuit by its former employee, Christina Mirsaol, in the Superior Court
of Los Angeles alleging that the Company violated California’s employment laws in terminating her employment in November 2015. By
her unverified Complaint, Mirasol asserts five causes of action: (1) wrongful termination in violation of public policy; (2) discrimination
on the basis of disability and/or medical condition; (3) failure to accommodate; (4) failure to engage in the interactive process; and (5)
intentional infliction of emotional distress. On September 26, 2016, Mirasol dismissed the fifth cause of action for intentional infliction
of emotional distress. Mirasol alleges that EMCORE wrongfully terminated her at the conclusion of a Family and Medical Act leave,
without engaging in the interactive process of offering to provide her with reasonable accommodations. The plaintiff is seeking general,
special, and punitive damages. The Company intends to defend itself vigorously against the claims asserted in the lawsuit.
NOTE 13. EQUITY
Dividend Payment
On July 5, 2016, the Company declared a special cash dividend of $1.50 per share, or a total of $39.2 million. The dividend
was paid on July 29, 2016 to shareholders of record as of July 18, 2016. The dividend has been reflected as a reduction of common stock
during the fiscal year ended September 30, 2016 in the Consolidated Statements of Shareholders’ Equity. Under the terms of our credit
facility with Wells Fargo Bank, N. A., we are restricted from paying dividends that result in the liquidity of the Company being less than
$25.0 million after paying the dividend if any amounts are outstanding under our credit facility.
67
Common Stock Repurchase
In April 2015, EMCORE’s Board of Directors authorized the Company to repurchase $45.0 million of shares of its common
stock. On May 15, 2015, we announced the commencement of a modified “Dutch auction” tender offer to purchase for cash shares of
our common stock (the “Tender Offer”). On June 15, 2015, we completed the Tender Offer and purchased 6.9 million shares of our
common stock at a purchase price of $6.55 per share, for an aggregate cost of $45.0 million excluding fees and expenses. Repurchased
common stock was recorded to treasury stock. The Company incurred costs of $0.7 million in connection with the Tender Offer, which
were recorded to treasury stock.
Equity Plans
We provide long-term incentives to eligible officers, directors, and employees in the form of equity-based awards. We maintain
three equity incentive compensation plans, collectively described below as our “Equity Plans”:
•
•
•
the 2000 Stock Option Plan,
the 2010 Equity Incentive Plan (“2010 Plan”), and
the 2012 Equity Incentive Plan (“2012 Plan”).
We issue new shares of common stock to satisfy awards issued under our Equity Plans.
The Board of Directors (the “Board”) and stockholders of the Company previously approved, amendments to the 2012 Plan
that among other changes, (1) increased the limit on the aggregate number of shares of common stock that may be delivered pursuant to
awards granted under the 2012 Plan by 500,000 shares to a new aggregate share limit of 2,500,000 shares; (2) made shares exchanged
or withheld by the Company to satisfy any purchase price and tax withholding obligations related to options or “full value awards”
(such as restricted stock or stock unit awards), and the total number of shares subject to stock appreciation rights (whether or not issued)
count against the 2012 Plan’s share limit and no longer available for new grants under the 2012 Plan; (3) implemented a maximum
grant date fair value limit for awards granted to non-employee directors under the 2012 Plan during any one calendar year of $250,000
(or $350,000 in the case of awards to a non-employee director serving as Chairman of the Board or Lead Independent Director at the time
of grant, or to a newly elected or appointed non-employee director during the first calendar year of service), (4) expressly allowed the
administrator to permit or require participants to defer awards granted under the 2012 Plan, (5) extended the term of the 2012 Plan until
March 11, 2026; and (6) extended the performance-based award feature of the 2012 Plan through the first annual meeting of stockholders
that occurs in 2021. As a result of the March 2016 approval of the amendments to the 2012 Plan by the Company’s stockholders, no
more shares may be granted under the 2007 Directors’ Stock Award Plan. As of September 30, 2016, there were 921,527 shares available
for issuance under the 2012 Plan after equitably and proportionately adjusting such share limit to preserve the intended effect of the
overall share limit following the special cash dividend declared by the Board and paid to shareholders in July 2016.
Stock Options
Most of our stock options vest and become exercisable over a four to five year period and have a contractual life of 10 years.
Certain stock options awarded are intended to qualify as incentive stock options pursuant to Section 422A of the Internal Revenue Code.
The following table summarizes stock option activity under the Equity Plans for the fiscal year ended September 30, 2016:
Outstanding as of September 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share adjustment for special dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercisable as of September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested and expected to vest as of September 30, 2016 . . . . . . . . . . . . . . . . . .
Weighted
Average
Exercise
Price
22.47
6.01
17.09
4.97
5.49
27.72
16.84
17.06
18.08
$
$
$
$
$
$
$
$
$
Number of
Shares
696,459
27,900
185,726
(45,340)
(9,353)
(105,054)
750,338
680,859
736,937
Weighted Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic
Value (*) (in
thousands)
$
$
$
$
2.31
1.64
2.19
87
479
406
466
(*) Intrinsic value for stock options represents the “in-the-money” portion or the positive variance between a stock option’s exercise price and the underlying stock price.
For the fiscal years ended September 30, 2015 and 2014, the intrinsic value of options exercised was $0.3 million and $0.1 million, respectively.
68
As of September 30, 2016, there was approximately $0.2 million of unrecognized stock-based compensation expense, net of
estimated forfeitures, related to non-vested stock options granted under the Equity Plans which is expected to be recognized over an
estimated weighted average life of 3.7 years.
On December 10, 2014, in connection with the sale of the Photovoltaics Business, which constituted a change in control, the
terms of approximately 56,000 stock options for approximately 80 employees were modified to include accelerated vesting effective
as of that date. The total incremental benefit resulting from the modifications was approximately $0.2 million and is included in the
Company’s income from discontinued operations, net of tax, for the fiscal year ended September 30, 2015.
With the dividend of $1.50 per share declared on July 5, 2016, payable to shareholders of record as of the close of business on
July 18, 2016 and paid by the Company on July 29, 2016, the number of shares subject to all outstanding options as of that dividend
payable date and the exercise price of each such options were equitably and proportionately adjusted to preserve the intrinsic value of the
outstanding awards in accordance with the original terms of the options. The impact of the dividend adjustment to outstanding options
as of the dividend payable date has increased the exercisable, vested and expected to vest shares in the above table.
Valuation Assumptions
The fair value of each stock option grant, excluding the adjustment for the special dividend, was estimated on the date of grant
using the Black-Scholes option valuation model, adhering to the straight-line attribution approach using the following weighted-average
assumptions, of which the expected term and stock price volatility rate are highly subjective:
Black-Scholes weighted average assumptions:
Expected dividend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Fiscal Years Ended September 30,
2016
2015
2014
—%
60.9%
1.6%
6.0
—%
66.1%
1.8%
6.0
—%
92.8%
1.9%
6.0
Weighted average grant date fair value per share of stock options granted:
$
3.40
$
3.73
$
3.53
Expected Dividend Yield: The Black-Scholes valuation model calls for a single expected dividend rate as an input. Although we
have paid a special dividend in July 2016, no dividend rate is assumed in the valuation.
Expected Stock Price Volatility Rate: The fair values of stock-based payments were valued using the Black-Scholes valuation
method with a volatility factor based on our historical common stock prices.
Risk-Free Interest Rate: The risk-free interest rate used in the Black-Scholes valuation method was based on the implied
yield that was currently available on U.S. Treasury zero-coupon notes with an equivalent remaining term. Where the expected terms of
stock-based awards do not correspond with the terms for which interest rates are quoted, we performed a straight-line interpolation to
determine the rate from the available maturities.
Expected Term: Expected term represents the period that our stock-based awards are expected to be outstanding and was
determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards,
vesting schedules and expectations of future employee behavior as influenced by changes to the terms of stock-based awards.
Estimated Pre-vesting Forfeitures: We are required to estimate forfeitures at the time of grant and revise those estimates in
subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and
record stock-based compensation expense only for those awards that are expected to vest. If we use different assumptions for estimating
stock-based compensation expense in future periods or if actual forfeitures differ materially from our estimated forfeitures, the change
in our non-cash stock-based compensation expense could adversely affect our results of operations.
Restricted Stock
Restricted stock units (RSUs) granted to employees under the 2010 Plan and 2012 Plan typically vest over 3 years and are
subject to forfeiture if employment terminates prior to the lapse of the restrictions. RSUs are not considered issued or outstanding
common stock until they vest.
69
The following table summarizes the activity related to RSUs for the fiscal year ended September 30, 2016:
Restricted Stock Activity
Non-vested as of September 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share adjustment for special dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested as of September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted Stock Units
Number of
Shares
570,231
449,250
200,061
(283,553)
(57,573)
878,416
Weighted
Average Grant
Date Fair Value
5.26
$
5.53
$
0.00
$
5.17
$
5.04
$
4.25
$
As of September 30, 2016, there was approximately $2.6 million of remaining unamortized stock-based compensation expense,
net of estimated forfeitures, associated with RSUs, which will be expensed over a weighted average remaining service period of
approximately 2.4 years. The 0.9 million outstanding non-vested RSUs have an aggregate intrinsic value of approximately $5.0 million
and a weighted average remaining contractual term of 1.4 years. For the fiscal years ended September 30, 2016, 2015 and 2014, the
intrinsic value of RSUs vested was approximately $1.6 million, $4.6 million and $2.4 million, respectively. Of the 0.9 million outstanding
non-vested RSUs at September 30, 2016, approximately 0.8 million are expected to vest and have an aggregate intrinsic value of
approximately $4.7 million and a weighted average remaining contractual term of 1.4 years. For the fiscal years ended September 30,
2015 and 2014, the weighted average grant date fair value of RSUs granted was $5.38 and $4.89, respectively.
In connection with the appointment of Mr. Jikun Kim as the Company’s Chief Financial Officer on June 20, 2016, he was
granted a time based equity award of 150,000 RSUs that are scheduled to vest in five equal annual installments on each of the first five
anniversaries of his hiring date.
On October 18, 2016, the Company granted 70,000 RSUs with a grant date fair value of $0.4 million to its CEO, Jeff Rittichier,
that will vest in 4 equal annual installments beginning on October 18, 2017. Also on that date the Company granted Mr. Rittichier
100,000 target Performance Based Restricted Stock Units (PSUs) with a grant date fair value of $0.7 million and Mr. Kim 195,180 target
PSUs with a grant date fair value of $1.4 million.
The PSUs to be issued are based on the total shareholder return of EMCORE’S stock compared to the Russell Microcap Index.
The total number of shares to be issued to each individual may range from zero (0) to 200% of the target PSUs granted. Between zero
(0) and 200% of one third of the target PSUs will vest, if at all, on each of October 17, 2017, 2018 and 2019.
With the dividend of $1.50 per share declared on July 5, 2016, payable to shareholders of record as of the close of business
on July 18, 2016 and paid by the Company on July 29, 2016, the number of shares subject to all outstanding RSUs as of the dividend
payable date was equitably and proportionately adjusted to preserve the intrinsic value of the outstanding awards in accordance with the
original terms of the awards. The impact of the dividend adjustment to outstanding RSUs as of the dividend payable date has increased
the non-vested RSUs outstanding and the expected to vest RSUs as disclosed in the above table.
On December 10, 2014, in connection with the sale of the Photovoltaics Business, which constituted a change in control, the
terms of approximately 147,000 RSUs for approximately 80 employees were modified to include accelerated vesting effective as of
that date. The total incremental expense resulting from the modifications was approximately $49,000 and is included in the Company’s
income from discontinued operations, net of tax, for the fiscal year ended September 30, 2015. In total, approximately 0.3 million RSU’s
vested due to change in control provisions.
On June 24, 2016, in connection with the resignation of the Company’s former Chief Financial Officer, Mark Weinswig,
approximately $0.3 million of stock compensation expense was recorded for acceleration of some and cancellation of other restricted
stock units. See Note 9 - Accrued Expenses and Other Current Liabilities.
70
Stock-based compensation
The effect of recording stock-based compensation expense was as follows:
Stock-based Compensation Expense - by award type
(in thousands)
Employee stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock awards and units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
401(k) match in common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outside director fees in common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based Compensation Expense - by expense type
(in thousands)
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general, and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Fiscal Years Ended September 30,
2016
2015
2014
38
1,683
223
—
218
2,162
$
$
194
2,658
143
284
341
3,620
$
$
135
1,683
289
513
367
2,987
For the Fiscal Years Ended September 30,
2016
2015
2014
345
1,445
372
2,162
$
$
341
2,847
432
3,620
$
$
466
1,912
609
2,987
$
$
$
$
For the fiscal year ended September 30, 2016, total stock-based compensation expense did not agree with the amount listed on
our statements of shareholders’ equity primarily due to the timing difference between the expense accrued and the issuance of common
stock for the payment of outside directors fees and due to reclassification of stock-based compensation expense related to discontinued
operations. For the fiscal years ended September 30, 2015 and 2014, total stock-based compensation expense did not agree with the
amount listed on our statements of shareholders’ equity primarily due to the timing difference between the expense accrued and the
issuance of common stock for the payment of outside directors fees and our 401(k) company match and due to reclassification of stock-
based compensation expense related to discontinued operations.
The stock based compensation expense above relates to continuing operations. Included within stock based-compensation for
selling, general and administrative expense for the fiscal year ended September 30, 2016 was approximately $0.3 million associated
with the acceleration of some and cancellation of other restricted stock units associated with the resignation of the Company’s former
Chief Financial Officer, Mark Weinswig. Stock based-compensation within selling, general and administrative expense was higher
for fiscal year ended September 30, 2015 due to stock-based compensation expense associated with the sale of the Photovoltaics and
Digital Products Businesses. Included within discontinued operations is $(0.1) million, $1.0 million and $1.5 million of stock based
compensation expense for the fiscal years ended September 30, 2016, 2015 and 2014, respectively.
Capital Stock
Our authorized capital stock consists of 50 million shares of common stock, no par value, and 5,882,000 shares of preferred
stock, $0.0001 par value. As of September 30, 2016, we had 33.2 million and 26.2 million shares of common stock issued and outstanding,
respectively. There were no shares of preferred stock issued or outstanding as of September 30, 2016.
Warrants
As of September 30, 2014, warrants representing the right to purchase 400,001 shares, of our common stock were outstanding.
Since the warrants expired on April 1, 2015, no warrants were outstanding as of September 30, 2015. See Note 5 - Fair Value Accounting
for additional information related to the valuation of our warrants.
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. All employer contributions were made in common stock through June 30, 2015 and since then have been made in
cash. Our matching contribution in cash for the fiscal years ended September 30, 2016 and 2015 was approximately $0.4 million and
$0.2 million, respectively. For the fiscal years ended September 30, 2015 and 2014, we contributed approximately $0.3 million and $0.5
million, respectively, in common stock to the savings plan. All participant accounts had their holdings in company stock liquidated as
of December 3, 2015.
71
Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income (loss) per share:
Basic and Diluted Net Income (Loss) Per Share
(in thousands, except per share)
Numerator:
For the Fiscal Years Ended September 30,
2016
2015
2014
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Undistributed earnings allocated to common shareholders for basic and diluted net
income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,619
5,647
8,266
$
(2,272)
65,372
$
4,082
770
63,100
4,852
Denominator:
Denominator for basic net income (loss) per share - weighted average shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive options outstanding, unvested stock units and ESPP . . . . . . . . . . . . . . . . . . . . .
Denominator for diluted net income (loss) per share - adjusted weighted average shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per basic share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per basic share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per diluted share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average antidilutive options, unvested restricted stock units and awards,
warrants and ESPP shares excluded from the computation . . . . . . . . . . . . . . . . . . . .
25,979
539
30,012
—
30,453
324
26,518
30,012
30,777
$
$
$
$
0.10
0.22
0.32
0.10
0.21
0.31
508
$
$
$
$
(0.08)
2.18
2.10
(0.08)
2.18
2.10
$
$
$
$
0.13
0.03
0.16
0.13
0.03
0.16
1,391
1,936
Average market price of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5.88
$
5.81
$
4.69
For diluted income (loss) per share, the denominator includes all outstanding common shares and all potential dilutive common
shares to be issued. For the fiscal years ended September 30, 2016, 2015 and 2014, we excluded 0.5 million, 1.4 million and 1.9
million, respectively, of weighted average outstanding stock options, restricted stock awards, restricted stock units and warrants from
the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive.
Employee Stock Purchase Plan
We maintain an Employee Stock Purchase Plan (“ESPP”) that provides employees an opportunity to purchase common stock
through payroll deductions. The ESPP is a 6-month duration plan with new participation periods beginning on February 25 and August
26 of each year. The purchase price is set at 85% of the average high and low market price of our common stock on either the first
or last day of the participation period, whichever is lower, and annual contributions are limited to the lower of 10% of an employee’s
compensation or $25,000. Per the amended ESPP, the total number of shares of common stock on which options may be granted under
the ESPP are 3,250,000 shares. With the special dividend paid in July 2016, the total number of shares of common stock on which
options may be granted under the ESPP were increased by 265,574 shares to a total of 3,515,574 shares. We issue new shares of common
stock to satisfy the issuance of shares under this stock-based compensation plan. Common stock issued under the ESPP during the fiscal
years ended September 30, 2016, 2015 and 2014 totaled 193,000, 121,000 and 341,000 shares, respectively. As of September 30, 2016,
the total amount of common stock issued under the ESPP totaled 2,470,896 shares and the total shares remaining available for issuance
under the ESPP as of September 30, 2016 totaled 1,044,678.
Officer and Director Share Purchase Plan
On January 21, 2011, the Compensation Committee of the Board approved an Officer and Director Share Purchase Plan, or
ODPP, which allows executive officers and directors to purchase shares of our common stock at fair market value in lieu of salary or,
in the case of directors, director fees. Eligible individuals may voluntarily participate in the ODPP by authorizing payroll deductions
or, in the case of directors, deductions from director fees for the purpose of purchasing common stock. Elections to participate in
the ODPP may only be made during open trading windows under our insider trading policy when the participant does not otherwise
72
possess material non-public information concerning the Company. The Board of Directors has authorized 125,000 shares to be made
available for purchase by officers and directors under the ODPP. Common stock issued under the ODPP during the fiscal years ended
September 30, 2016, 2015 and 2014 totaled 0, 0 and 1,600 shares, respectively.
Future Issuances
As of September 30, 2016, we had common stock reserved for the following future issuances:
Future Issuances
Exercise of outstanding stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases under the employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of stock-based awards under the Equity Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases under the officer and director share purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of deferred stock-based awards under the Directors’ Stock Award Plan, as amended . . . . . . . . . . .
Total reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of Common
Stock Shares Available for
Future Issuances
750,338
878,416
1,044,678
926,893
88,741
28,840
3,717,906
With the dividend of $1.50 per share declared on July 5, 2016, payable to shareholders of record as of the close of business on
July 18, 2016 and paid by the Company on July 29, 2016, the number of shares subject to outstanding equity awards, the exercise price
of outstanding stock options and the overall limit on the number of shares remaining available for future issuance under the 2010 Plan
and 2012 Plan were equitably and proportionately adjusted to preserve the intrinsic value of the outstanding awards under the original
terms of the plans and to preserve the intended effect of the overall share limits. Accordingly, the impact of the dividend adjustment has
increased the share amounts reserved for future issuances as disclosed in the above table.
NOTE 14. GEOGRAPHICAL INFORMATION
Following the sale of the Photovoltaics Business on December 10, 2014, the Company has one remaining reportable segment:
Fiber Optics. See also Note 4 - Discontinued Operations for additional disclosures.
We evaluate our reportable segment pursuant to ASC 280, Segment Reporting. The Company’s Chief Executive Officer is
the chief operating decision maker and he assesses the performance of the operating segment and allocates resources to the segment
based on its business prospects, competitive factors, net revenue, operating results, and other non-GAAP financial ratios. Based on this
evaluation, the Company operates as a single reportable segment.
Revenue: The following tables set forth revenue by geographic region with revenue assigned to geographic regions based on our
customers’ billing address.
Revenue by Geographic Region
(in thousands)
United States
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Fiscal Years Ended September 30,
2016
2015
2014
$
$
66,436
17,401
7,618
543
91,998
$
$
55,736
16,885
8,249
815
81,685
$
$
37,284
8,652
7,746
1,832
55,514
Significant Customers: Significant customers are defined as customers representing greater than 10% of our consolidated revenue.
Revenue from three of our significant customers represented 61% of our consolidated revenue for the fiscal year ended September 30,
2016. Revenue from four of our significant customers represented 61% of our consolidated revenue for the fiscal year ended
September 30, 2015. Revenue from three of our significant customers represented 41% of our consolidated revenue for the fiscal year
ended September 30, 2014.
Long-lived Assets: Long-lived assets consist of property, plant, and equipment. As of September 30, 2016 and September 30, 2015,
approximately 38% of our long-lived assets were located in the United States. The remaining long-lived assets are primarily located
in China.
73
NOTE 15. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables present our unaudited consolidated results of operations for the eight most recently ended quarters. We
believe that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below to
present fairly the selected quarterly information when read in conjunction with the consolidated financial statements and notes included
elsewhere in this Annual Report. Our results from operations vary substantially from quarter to quarter. Accordingly, the operating
results for a quarter are not necessarily indicative of results for any subsequent quarter or for the full year. We have experienced and
expect to continue to experience significant fluctuations in quarterly results.
On December 10, 2014, we sold our Photovoltaics Business to SolAero. On January 2, 2015, we sold our Digital Products
Business to NeoPhotonics. These asset sales are reported as discontinued operations, and therefore are excluded from the continuing
operations presented below.
EMCORE CORPORATION
Quarterly Consolidated Statements of Operations
For the Fiscal Year Ended September 30, 2016
(in thousands, except (loss) income per share) (unaudited)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expense (income):
Selling, general, and administrative . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recovery of previously incurred litigation related fees and
expenses from arbitration award . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest (expense) income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other (expense) income . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from continuing operations before income
tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (expense) benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from continuing operations . . . . . . . . . . . . . .
Income from discontinued operations, net of tax . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per share data:
Net income (loss) per basic share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per basic share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per diluted share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average number of basic shares outstanding . . . . . . . . . .
Weighted-average number of diluted shares outstanding . . . . . . . . .
For the Three Months Ended
$
December 31,
2015
22,490
15,089
7,401
$
March 31,
2016
21,532
14,510
7,022
$
June 30,
2016
22,376
14,964
7,412
$
September 30,
2016
25,600
16,481
9,119
4,821
2,560
—
—
7,381
20
(17)
(135)
(152)
(132)
(2)
(134)
1,121
987
0.00
0.04
0.04
0.00
0.04
0.04
25,697
25,697
$
$
$
$
$
4,825
2,564
—
—
7,389
(367)
25
25
50
(317)
155
(162)
4,144
3,982
(0.01)
0.16
0.15
(0.01)
0.16
0.15
25,942
25,942
$
$
$
$
$
6,125
2,405
(2,599)
(41)
5,890
1,522
32
(201)
(169)
1,353
(175)
1,178
123
1,301
0.05
—
0.05
0.05
—
0.05
26,103
26,269
$
$
$
$
$
4,963
2,392
—
—
7,355
1,764
48
(83)
(35)
1,729
8
1,737
259
1,996
0.07
0.01
0.08
0.06
0.01
0.07
26,177
26,674
$
$
$
$
$
74
EMCORE CORPORATION
Quarterly Consolidated Statements of Operations
For the Fiscal Year Ended September 30, 2015
(in thousands, except (loss) income per share)
(unaudited)
For the Three Months Ended
December 31,
2014
March 31,
2015
June 30,
2015
September 30,
2015
$
$
$
$
$
$
$
18,416
13,237
5,179
8,627
2,174
(845)
228
10,184
(5,005)
(130)
57
36
(37)
(5,042)
1,912
(3,130)
59,258
56,128
(0.10)
1.90
1.80
(0.10)
1.90
1.80
31,217
31,217
19,057
12,678
6,379
5,954
2,022
—
—
7,976
(1,597)
165
(6)
86
245
(1,352)
396
(956)
4,008
3,052
(0.03)
0.13
0.10
(0.03)
0.13
0.10
32,077
32,077
$
$
21,194
13,511
7,683
23,018
13,568
9,450
4,543
2,274
—
—
6,817
866
4
50
—
54
920
(456)
464
1,976
2,440
0.02
0.06
0.08
0.02
0.06
0.08
31,203
31,432
$
$
$
$
$
$
5,587
2,649
—
—
8,236
1,214
36
(239)
—
(203)
1,011
339
1,350
130
1,480
0.05
0.01
0.06
0.05
0.01
0.06
25,615
25,896
$
$
$
$
$
$
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Operating expense (income):
Selling, general, and administrative . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . .
Gain from change in estimate on ARO obligation . . . . . .
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expense . . . . . . . . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange gain (loss) . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of financial instruments . . . . . . . . . .
Total other income (expense) . . . . . . . . . . . . . . . . . . . .
Loss from continuing operations before income tax
benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from continuing operations . . . . . . . .
Income from discontinued operations, net of tax . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per share data:
Net (loss) income per basic share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income per basic share . . . . . . . . . . . . . . . . . . . . .
Net (loss) income per diluted share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income per diluted share . . . . . . . . . . . . . . . . . . .
Weighted-average number of basic shares outstanding . . . .
Weighted-average number of diluted shares outstanding . . .
$
$
$
$
$
$
75
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
EMCORE Corporation:
We have audited the accompanying consolidated balance sheets of EMCORE Corporation and subsidiaries (the Company) as of
September 30, 2016 and 2015, and the related consolidated statements of operations and comprehensive income, shareholders’ equity,
and cash flows for each of the years in the three-year period ended September 30, 2016. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
EMCORE Corporation and subsidiaries as of September 30, 2016 and 2015, and the results of their operations and their cash flows for
each of the years in the three-year period ended September 30, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of September 30, 2016, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
December 7, 2016, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Albuquerque, New Mexico
December 7, 2016
76
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
a.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of its Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer
(Principal Financial Officer and Accounting Officer), evaluated the effectiveness of the Company’s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of the end of the period
covered by this Annual Report on Form 10-K. Based upon this evaluation, our Chief Executive Officer and our Chief Financial
Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
b.
Management’s Annual Report on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act. Under the supervision of our Chief
Executive Officer and Chief Financial Officer and with the participation of our management, we conducted an evaluation of
the effectiveness of our internal control over financial reporting as of September 30, 2016 based on the framework in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Based on that evaluation, our management concluded that our internal control over financial reporting was effective
as of September 30, 2016.
c.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15(d)-
15(f) promulgated under the Exchange Act) during the quarter ended September 30, 2016 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
d.
Limitations on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls
or our internal controls over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be
met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls
must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Controls can also be circumvented by individual acts, by collusion of two or more people, or
by management override of the controls. The design of any system of controls is based, in part, upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in
the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
The effectiveness of our internal control over financial reporting as of September 30, 2016 has been audited by KPMG LLP, our
independent registered public accounting firm, as stated in their report which is included as follows.
77
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
EMCORE Corporation:
We have audited EMCORE Corporation’s internal control over financial reporting as of September 30, 2016, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). EMCORE Corporation’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, EMCORE Corporation maintained, in all material respects, effective internal control over financial reporting as of
September 30, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of EMCORE Corporation and subsidiaries as of September 30, 2016 and 2015, and the related consolidated
statements of operations and comprehensive income, shareholders’ equity and cash flows for each of the years in the three-year
period ended September 30, 2016, and our report dated December 7, 2016 expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG LLP
Albuquerque, New Mexico
December 7, 2016
78
ITEM 9B. OTHER INFORMATION
Not Applicable.
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding our executive officers and directors required by this Item is incorporated by reference to our Definitive
Proxy Statement in connection with our Annual Meeting of Stockholders (Proxy Statement), which will be filed with the Securities and
Exchange Commission within 120 days after the fiscal year ended September 30, 2016. Information required by Item 405 of Regulation
S-K is incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy
Statement referenced above. Information required by Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated by reference
to the Section entitled “Proposal 1: Election of Directors - Governance of the Company - Board Committees” in the Proxy Statement.
We have adopted a code of ethics entitled the “EMCORE Corporation Code of Business Conduct and Ethics,” which is
applicable to all employees, officers, and directors of the Company. The full text of our Code of Business Conduct and Ethics is included
with the Corporate Governance information available on our website (www.emcore.com). We intend to disclose any changes in or
waivers from our code of ethics for our directors and executive officers to the extent disclosure is required by the applicable rules of the
SEC and NASDAQ Stock Market LLC by posting such information on our website or by filing a Current Report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference to the sections entitled “Proposal 1: Election of Directors -
Director Compensation for Fiscal Year 2016,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation
Committee Report” and “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the
section entitled “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
Information regarding our equity compensation plans is incorporated by reference to the section entitled “Equity Compensation
Plan Information ” in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information required by this Item is incorporated by reference to the sections entitled “Proposal 1: Election of Directors -
Governance of the Company - Related Person Transaction Approval Policy” and “Proposal 1 - Election of Directors - Governance of the
Company - Director Independence” in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item is incorporated by reference to the section entitled “Fiscal Years 2016 & 2015 Auditor Fees
and Services” in the Proxy Statement.
79
PART IV.
ITEM 15. EXHIBITS
(a)(1)
Financial Statements
Included in Part II, Item 8 of this Annual Report on Form 10-K:
•
•
•
•
•
•
Consolidated Statements of Operations and Comprehensive Income for the fiscal years ended September 30, 2016, 2015,
and 2014
Consolidated Balance Sheets as of September 30, 2016 and 2015
Consolidated Statements of Shareholders’ Equity for the fiscal years ended September 30, 2016, 2015, and 2014
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2016, 2015, and 2014
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
(a)(2)
Financial Statement Schedules
The applicable financial statement schedules required under this Item 15(a)(2) are presented in our consolidated financial
statements and notes thereto under Item 8 of this Annual Report on Form 10-K.
(a)(3)
Exhibits
2.1
2.2
2.3
2.4
3.1
3.2
3.3
3.4
3.5
4.1
4.2
10.1
Asset Purchase Agreement, dated as of September 17, 2014, by and between EMCORE Corporation and SolAero
Technologies Corp. (f/k/a Photon Acquisition Corporation) ( incorporated by reference to Exhibit 2.1 to the Company’s
Current Report on Form 8-K filed on September 18, 2014).
Amendment No. 1, dated as of November 26, 2014, to that certain Asset Purchase Agreement, dated as of September 17,
2014, by and between EMCORE Corporation and SolAero Technologies Corp. (f/k/a Photon Acquisition Corporation)
(incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the Registrant on November 26, 2014).
Asset Purchase Agreement, dated October 22, 2014, by and between EMCORE Corporation and NeoPhotonics
Corporation (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on
October 24, 2014).
Amendment No. 1, dated January 2, 2015, to that certain Asset Purchase Agreement, dated as of October 22, 2014, by
and between EMCORE Corporation and NeoPhotonics Corporation (incorporated by reference to Exhibit 2.1 to the
Company’s Current Report on Form 8-K filed on January 5, 2015).
Restated Certificate of Incorporation, dated April 4, 2008, (incorporated by reference to Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed on April 4, 2008).
Certificate of Amendment of Restated Certificate of Incorporation, dated February 15, 2012 (incorporated by reference
to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on February 16, 2012).
Certificate of Amendment of Restated Certificate of Incorporation of EMCORE Corporation, dated September 18, 2014
(incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 18, 2014).
Certificate of Designation Establishing the Series A Junior Participating Preferred Stock and Fixing the Powers,
Designations, Preferences and Relative, Participating, Optional and Other Special Rights, and the Qualifications,
Limitations and Restrictions, of the Series A Junior Participating Preferred Stock, dated September 18, 2014
(incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 18, 2014).
By-Laws of EMCORE Corporation, as amended through December 10, 2014 (incorporated by reference to Exhibit 3.1
to the Company’s Current Report on Form 8-K filed on December 10, 2014).
Specimen Certificate for Shares of Common Stock (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to
the registration statement on Form S-1 filed on February 24, 1997).
Tax Benefits Preservation Plan, dated September 17, 2014, by and between EMCORE Corporation and American
Stock Transfer & Trust Company, LLC (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on
Form 8-K filed on September 18, 2014).
Stipulation of Compromise and Settlement, dated as of November 28, 2007, executed by the Company and the other
defendants and the plaintiffs in the Federal Court Action and the State Court Actions (incorporated by reference to
Exhibit 10.19 to the Company’s Annual Report on Form 10-K filed on December 31, 2007).
80
10.2†
10.3†
10.4†
10.5†
10.6†
10.7†
10.8†
Directors Compensation Policy (Effective January 1, 2016) (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q filed on May 5, 2016).
Officer and Director Share Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on January 27, 2011).
2007 Directors’ Stock Award Plan (incorporated by reference to Exhibit A to the Company’s Proxy Statement filed on
January 25, 2013).
2010 Equity Incentive Plan, as amended and restated on June 14, 2011 (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on June 16, 2011).
Form of award agreement under 2010 Equity Incentive Plan (Incorporated by reference to Exhibit 10.7 to the Company’s
Annual Report on Form 10-K filed on December 14, 2015).
2012 Equity Incentive Plan, as amended and restated on January 13, 2016 (incorporated by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K filed on March 14, 2016).
Form of award agreement under 2012 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 to the Company’s
Annual Report on Form 10-K filed on December 14, 2015).
10.9**† Form of time-based RSU award agreement under the 2012 Equity Incentive Plan (as of October 2016).
10.10**† Form of performance-based RSU award agreement under the 2012 Equity Incentive Plan (as of October 2016).
10.11†
10.12†
10.13†
10.14†
EMCORE Corporation 2000 Employee Stock Purchase Plan, as amended March 5, 2014 (incorporated by reference to
Exhibit B to the Company’s Proxy Statement filed on January 28, 2014).
Form of Indemnification Agreement entered into with directors and executive officers (incorporated by reference to
Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 14, 2012).
Employment Agreement, dated December 10, 2014, by and between EMCORE Corporation and Jeff Rittichier
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 10, 2014).
Employment Agreement entered into by the Company and Mark B. Weinswig as of August 2, 2011 (incorporated by
reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on August 4, 2011).
10.15† Retention Letter Agreement, dated September 17, 2014, between EMCORE Corporation and Mark Weinswig
(incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on September 18, 2014).
10.16† General Release Agreement, dated June 7, 2016, by and between EMCORE Corporation and Mark Weinswig
(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 4, 2016).
Employment Agreement, dated June 6, 2016, by and between EMCORE Corporation and Jikun Kim (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 8, 2016).
EMCORE Corporation Fiscal 2016 Bonus Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on November 18, 2015).
Subsidiaries of the Company.
10.17†
21.1**
10.18†
23.1** Consent of KPMG LLP.
24.1
Power of Attorney (see the signature page of this Annual Report on Form 10-K).
31.1** Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2** Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*** Certificate of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*** Certificate of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS** XBRL Instance 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.
† Management contract or compensatory plan
Filed herewith
**
*** Furnished herewith
81
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.
SIGNATURES
Date: December 7, 2016
Date: December 7, 2016
EMCORE CORPORATION
By:
By:
/s/ Jeffrey Rittichier
Jeffrey Rittichier
Chief Executive Officer
(Principal Executive Officer)
/s/ Jikun Kim
Jikun Kim
Chief Financial Officer
(Principal Financial and Accounting Officer)
Each person whose signature appears below constitutes and appoints and hereby authorizes Jeffrey Rittichier such person’s true
and lawful attorney-in-fact, with full power of substitution or resubstitution, for such person and in his name, place and stead, in any
and all capacities, to sign on such person’s behalf, individually and in each capacity stated below, any and all amendments to this Form
10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Commission granting unto
said attorney-in-fact, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and
about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant in the capacities indicated, on December 7, 2016.
Signature
Title
/s/ Jeffrey Rittichier
Jeffrey Rittichier
/s/ Jikun Kim
Jikun Kim
/s/ Robert L. Bogomolny
Robert L. Bogomolny
/s/ Ettore J. Coringrato, Jr.
Ettore J. Coringrato, Jr.
/s/ Stephen L. Domenik
Stephen L. Domenik
/s/ Gerald J. Fine, Ph.D.
Gerald J. Fine, Ph.D.
/s/ Rex S. Jackson
Rex S. Jackson
Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Chairman of the Board
Director
82
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CORPORATE PROFILE
About EMCORE
EMCORE Corporation is a leading provider of advanced Mixed-
Signal Optics products that provide the foundation for today’s
high-speed communication network infrastructures and leading-
Board of Directors
Gerald Fine, Ph.D.
Chairman of the Board
Professor of Practice and Director of
the Engineering Product Innovation
Center (EPIC) at Boston University
edge defense systems. Our optical chips, components, subsystems
and systems enable broadband and wireless providers to continu-
Robert L. Bogomolny
President Emeritus and Professor of Law,
University of Baltimore
ally enhance their network capacity, speed and coverage to
advance the free flow of information that empowers the lives of
Ed Coringrato
Senior Adviser to Nanowave Technologies, Inc.
millions of people daily. The Mixed-Signal Optics technology at the
heart of our broadband transmission products is shared with our
Stephen Domenik
General Partner, Sevin Rosen Funds
fiber optic gyros and military communications links to provide the
aerospace and defense markets state-of-the-art systems that keep
Rex S. Jackson
Chief Financial Officer
Gigamon Inc.
us safe in an increasingly unpredictable world. EMCORE’s
performance-leading optical components and systems serve a
broad array of applications including cable television, fiber-to-the-
Jeffrey Rittichier
President & Chief Executive Officer
EMCORE Corporation
premise networks, telecommunications, wireless infrastructure,
Auditors
satellite RF fiber links, navigation systems and military communica-
tions. EMCORE has fully vertically-integrated manufacturing
capability through its world-class Indium Phosphide (InP) wafer
fabrication facility at our headquarters in Alhambra, California
and is ISO 9001 certified in Alhambra, and at our facilities in
Warminster, Pennsylvania and China.
Stock Listing
The Company’s common stock is traded on the NASDAQ Global
Market. Stock Ticker: EMKR
For specific information about our company, our products
and the markets we serve, please visit our website:
www.emcore.com
KPMG LLP
P.O. Box 3990
Albuquerque, NM 87190
Phone: 505-884-3939
Fax: 505-212-0363
Transfer Agent
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
Investor Relations
Sapphire Investor Relations, LLC
Erica Mannion
617-542-6182
emannion@sapphireir.com
Jikun Kim
Chief Financial Officer
2015 Chestnut Street
Alhambra, CA 91803
626-293-3400
2016 ANNUAL REPORT
Corporate Headquarters
EMCORE Locations
EMCORE Corporation
2015 Chestnut Street
Alhambra, CA 91803 USA
626 293 3400
626 293 3428
Broadband
2015 Chestnut Street
Alhambra, CA 91803 USA
626 293 3400
626 293 3428
Broadband East
One Ivybrook Blvd., Suite 150
Warminster, PA 18974 USA
626 293 3400
215 672 9097
China
Langfang EMCORE Optoelectronics Co., Ltd.
East of Wanfu Road
Langfang Economic & Technology Development Zone
Langfang, Hebei Province, People’s Republic of China
86 316 529 5100
EMCORE Optoelectronics (Beijing) Co., Ltd
Room 102,103,105, Block 4, No. 36 Kechuang 4th Street
Beijing Economic-Technological Development Area
Beijing, People’s Republic of China
86 316 529 5100
www.emcore.com