Annual Report
Mixed-Signal Optics
2018
TO OUR SHAREHOLDERS
Although fiscal 2018 was an unexpectedly challenging year for EMCORE, we finished the year on a high note; turning in a strong 4th quarter.
Improved ordering patterns have demonstrated that the inventory overhang in Cable TV, which was confined to one customer and a single
major product, is behind us now. During 2018, we saw strong growth in Linear Externally Modulated Laser (L-EMLTM) transmitter design wins
and shipments, setting the stage for a stronger CATV business in fiscal 2019.
In our Chip and Navigation businesses, we experienced good performance in 2018 in line with our expectations and we entered the new
fiscal year with a robust backlog in both areas. We look forward to realizing continued growth in these areas as part of our “tripod” strategy
to build revenue diversity with these businesses.
Some key highlights from fiscal 2018 include:
Further market penetration of our groundbreaking L-EMLTM transmission technology that provides Cable MSOs a cost-effective, higher
transmission efficiency solution without needing to remove existing linear fiber optic network infrastructure
Introduction of the Mini-Tx 1.2 GHz, 1550 nm L-EMLTM CATV transmitter that provides customers expanded form-factor options for
greater flexibility on how they integrate the L-EMLTM technology into their platforms
Announcement at the Mobile World Congress Americas of our new 6 GHz cooled coaxial laser designed for emerging 5G wireless and
Distributed Antenna System (DAS) deployments
Strengthening demand for our 2.5G PON and non-PON chip products in China
Execution of an $18M, 4-year sole source Fiber Optic Gyro (FOG) contract award from Raytheon providing fixed volume commitments
through fiscal 2022
Announcement of three additional contract awards for our Inertial Measurement Unit (IMU) and Inertial Navigation Systems (INS)
products. These wins validate our two-part strategy of providing superior CSWaP (Cost, Size, Weight and Power) solutions for legacy
products being replaced, as well as designing custom solutions that leverage common technical building blocks for next-generation
navigation systems
Expansion of our overall Navigation product line with the introduction of the EMCORE-HawkeyeTM Series EG-120 and EG-200 FOGs, and
the EN-150 Series Inertial Measurement/Navigation Units
In addition to the growth in L-EMLTM revenue, we have begun to see resumption of normal ordering of our legacy DFB products. Beyond
CATV, our other Broadband products saw quarter over quarter growth, driven by SatCom product revenue and the development of our
Wireless and DAS portfolio. These efforts are on-plan with expectations for revenue growth in fiscal 2020 as 5G deployments move beyond
trial phase.
In the Chip business, in addition to strengthening demand for 2.5G PON products in China, our development work on new chip products
continues with the goal of broadening our chip product portfolio and the markets served. Margins should improve as the product mix
develops and becomes more favorable.
In Navigation, we are expecting substantial growth as well. We entered fiscal 2019 with nearly 150% of fiscal 2018 revenue already in
backlog and we have made significant improvements in operations and facilities to increase capacity and efficiency in our FOG, IMU and
INS product manufacturing.
In fiscal 2018, EMCORE continued to benefit from the operational transformation we initiated in 2015. We have embarked on a long overdue
campus upgrade at our headquarters that will take place in phases over the next few years. This will upgrade our office and manufacturing
facilities, improving efficiency and operational performance while helping to attract top-level talent to support our growth.
As we look forward to 2019 and beyond, I’d like to congratulate and thank the EMCORE team for the progress made over the past 4-years.
On behalf of EMCORE’s management team and board of directors, I would also like to thank our shareholders, customers and suppliers for
their continued support, and I look forward to updating you on our progress in 2019.
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.
OVERVIEW OF OUR INDUSTRY AND MARKETS WE SERVE
InP compound semiconductor-based products provide the foundation of components, subsystems, and systems used in a broad
range of technology markets. Compound semiconductor materials can provide electrical or electro-optical functions, such as
emitting optical communications signals and detecting optical communications signals.
Specifically, within our Fiber Optics reporting segment, our Broadband products serve the Cable TV (“CATV”), Satellite Communications and
Wireless markets; our Chip products serve the Telecommunications, Fiber-To-The-Premises (“FTTP”), Long-Term Evolution (“LTE”) and Data
Center markets; and our Navigation Systems products primarily serve the Aerospace and Defense markets.
Broadband Product Line
Our broadband fiber optic products enable information that is modulated on light signals to be transmitted, routed (switched) and received
in communication systems and networks. Our products in this area include:
CATV Products
EMCORE is an established market leader in providing Radio Frequency (“RF”) over fiber products for the CATV industry. Our products enable
cable systems providers to increase data transmission distance, speed and bandwidth in Hybrid Fiber Coaxial (“HFC”) networks, with lower
noise and power consumption. This empowers cable service operators to meet the growing demand for high-speed Internet, HDTV,
Ultra HDTV, video streaming and other advanced services. Our CATV products include forward and return-path analog lasers, receivers,
photodetectors and subassembly components; analog and digital fiber-optic transmitters, Quadrature Amplitude Modulation (“QAM”)
transmitters, optical switches and CATV fiber amplifiers. EMCORE’s latest series of CATV transmitters feature the Company’s breakthrough
Linear Externally Modulated Laser (“L-EML”) technology that enables long distance optical link performance approaching traditional lithium
niobate-based externally-modulated transmitters, but is more cost-effective and far exceeds the performance of Distributed Feedback
(“DFB”) laser-based systems.
EMCORE’s CATV transmitter products are offered on an OEM and ODM basis for integration into complete CATV transmission systems, and
the Company also offers its own branded line of EMCORE Medallion series rack-mount CATV transmitters, optical switches and fiber
amplifiers. EMCORE’s Medallion series products include DOCSIS 3.1, 1550 nm externally-modulated transmitters, 1550 nm directly-
modulated transmitters, optical A/B switches, and 1RU and 2RU rack-mount CATV fiber amplifiers. EMCORE’s Medallion series transmitters,
optical switches and fiber amplifiers, in conjunction with EMCORE’s components and Radio Frequency over Glass (“RFoG”) products,
comprise a complete end-to-end CATV system.
OVERVIEW OF OUR INDUSTRY AND MARKETS WE SERVE
Broadband Product Line (continued)
Laser, Receiver and Photodetector Component Products
We are a leading provider of optical components including lasers, receivers and photodetectors (also called “photodiodes”). Our products
include CWDM (“Coarse Wavelength Division Multiplexing”) and DWDM (“Dense Wavelength Division Multiplexing”), 1310 nm and 1550 nm
DFB lasers and optical receivers optimized for CATV, DOCSIS (Data Over Cable Service Interface Specification) 3.1 and wireless applications.
Form-factors for laser products include 14-pin butterfly and coaxial TO-Can. In addition, we offer broadband photodiodes used in forward-
and return-path broadband and FTTP applications. EMCORE’s component products to the global fiber optics industry leverage the benefits
of our vertically-integrated infrastructure, low-cost manufacturing and early access to newly developed internally produced components.
Radio Frequency over Glass (RFoG) FTTP Products
EMCORE supports deployments of RFoG access networks for homes and businesses worldwide with customer qualified FTTP products for
video, voice and data services. Our products include an RFoG Optical Networking Unit (“ONU”) transceiver that features breakthrough
OBI (“Optical Beat Interference”) mitigation technology to significantly improve RFoG network performance in high-density customer
environments. Additional products for RFoG networks include analog fiber optic transmitters for video overlay, high-power Erbium-Doped
Fiber Amplifiers (“EDFA”), analog and digital lasers, photodetectors and subassembly components. Our RFoG-FTTP products provide our
customers with higher performance designs and support exceptional network performance capabilities for service providers.
OVERVIEW OF OUR INDUSTRY AND MARKETS WE SERVE
Broadband Product Line (continued)
Satellite & Microwave Communications Products
EMCORE has an established history as a pioneer of innovative RF over fiber solutions for high-performance fiber optic links in the terrestrial
portion of satellite communications networks. EMCORE’s satellite/microwave band components and complete systems transport an
ultra-broadband frequency range including IF, L, S, C, X, DBS, Ku, K, Ka, and Ultra-Wideband signal transport. A wide range of high-dynamic-
range applications are supported including satellite antenna remoting and signal distribution, interand intra-facility links, site diversity
systems, high-performance supertrunking links, electronic warfare systems and radar testing. EMCORE’s complete line of satellite and
microwave components, subassemblies and systems eliminate the distance limitations of copper-based coaxial systems. Our rack-mount
Optiva Platform RF & Microwave Fiber Optic Transport System features a wide range of Simple Network Management Protocol (“SNMP”)
managed fiber optic transmitters, receivers, optical amplifiers, RF and optical switches, passive devices and Ethernet products that provide
high-performance fiber optic transmission between satellite hub equipment and antenna dishes. EMCORE also offers a series of ruggedized
microwave flange-mount transmitters, receivers and optical delay line products that meet the reliability and durability requirements of the
U.S. government and defense markets. These products provide our customers with high frequency, dynamic range, compact form-factors,
and extreme temperature, shock and vibration tolerance.
Wireless Communications Products
The increasing dependence on wireless access for social media, text, email, uploading and downloading of apps, music, videos and photos
has created greater demand for deployment of costeffective, high-performance, integrated wireless Distributed Antenna System (“DAS”)
networks. Wireless systems providers are building systems in subway tunnels, stadiums, hotels, high-speed trains and cruise ships.
EMCORE has developed highly linear fiber optic products that are optimized for wireless applications which we believe integrate extremely
well into these systems. They enhance bandwidth and linearity to enable the delivery of consistent, reliable signals in areas where interfer-
ence is high or signals are weak. EMCORE’s products for wireless applications include DFB lasers and optical receivers specifically designed
for wireless networks, 3 GHz and 6.5 GHz fiber optic links for cellular backhaul, 4G LTE and DAS.
OVERVIEW OF OUR INDUSTRY AND MARKETS WE SERVE
Chip Devices Product Line
Telecommunications companies throughout the world have been extending their Passive Optical Network (“PON”) infrastructure to
business, enterprise and residential customers for several years. Since the sale of the Company’s telecom module products in 2015,
EMCORE has supported this market through commercialization of products developed in our InP wafer fab to become a merchant supplier
of high-performance chip devices to the Telecom industry.
EMCORE’s semiconductor wafer fabrication facility features Metal-Organic Chemical Vapor Deposition (“MOCVD”) reactors for 2" or 3" wafer
processing for InP-based devices including high-power gain chips, laser chips, Avalanche Photodiode (“APD”) and P-type Intrinsic N-type
(“PIN”) photodetector chips. Our technical team has expertise in device design, epitaxial growth, wafer processing, device characterization,
and Chip-On-Block (“COB”), TO-Can and Optical Sub-Assembly (“OSA”) from development through manufacturing.
High-Power Gain Chips Products
EMCORE, through our previous experience in the Telecom tunable module market, has design and engineering expertise in development and
manufacturing of high-power gain chips for tunable lasers and transceivers utilized in coherent DWDM optical transmission systems.
GPON Fiber-To-The-Premises (FTTP) and Data Center Chip Products
EMCORE’s chip devices portfolio is continually developing to support the latest advances in PON including GPON, 10G-EPON, XG-PON, XGS-
PON, along with 4G LTE and data center applications. The Company’s laser chip devices offering includes 2.5G and 10G PON DFB and 10G
Fabry-Perot laser chips. Wavelengths supported include 1270, 1290, 1310, 1330, 1490, 1550 and 1610 nm. In addition, EMCORE offers 2.5G
and 10G APD top and bottom illuminated chips and COB, along with 10G PIN photodiode chips, with additional products in development.
OVERVIEW OF OUR INDUSTRY AND MARKETS WE SERVE
Navigation Systems Product Line
EMCORE, through our vertically-integrated infrastructure, has been able to adapt the same technologies, chip designs and production assets
applicable to our CATV products to the development of state-of-the-art Fiber Optic Gyroscopes (“FOG”) that have broad application within
the aerospace and defense markets for land, sea, air and space navigation. This gives EMCORE the ability to leverage our high-volume
infrastructure for lower volume, higher value-added product. EMCORE has expanded its FOG-based product line to include Inertial Measure-
ment Units (“IMU or IMUs”) and Inertial Navigation Systems (“INS”) that provide superior Size, Weight and Power (“SWaP”) compared to
competing or legacy systems.
Fiber Optic Gyroscope Products
EMCORE’s FOG program has received multiple U.S. patents and has been qualified for several key military programs for applications
including Unmanned Aerial Systems (“UAS”), line-of-site stabilization, aviation and aeronautics. All EMCORE FOGs feature advanced optics
with only three components for simplified assembly along with Digital Signal Processing (“DSP”) or Field Programmable Gate Array (“FPGA”)
for higher accuracy, lower noise and greater efficiency. The integrated DSP or FGPA also improves optical drift stability and enables higher
linearity and greater environmental flexibility. EMCORE’s FOG products range from tactical to navigational grade gyros where the critical
specifications for fiber length, Angle Random Walk (“ARW”) and drift rate improves through the product line to provide customers greater
flexibility in choosing the performance level that best meets their application.
Inertial Measurement Units and Navigation Systems Products
EMCORE’s IMU and INS systems are based on our advanced FOG technology and provide superior SWaP compared to competing systems.
Our products provide customers the flexibility to choose options from straightforward IMU operation to full navigation and are higher
performance form, fit and function replacements for other IMUs and legacy systems. EMCORE’s IMUs and INS products deliver
high-precision with up to five-times better performance than competing units in compact, portable form-factors that provide standalone
aircraft grade navigator performance at one-third the size of competing systems. Recently EMCORE launched its new EMCORE-OrionTM
series of high-precision Micro Inertial Navigation (MINAV) systems designed primarily for applications where navigation aids such as GPS
are unavailable or denied. The advanced technology incorporated enables these systems to provide performance close to that of traditional
RLG (Ring Laser) INS with one-third the SWaP. We believe the EMCORE MINAV’s low SWaP makes it an ideal inertial navigation system for
unmanned aerial vehicle and dismounted soldier applications, and the units can operate as navigators or very precise IMUs with lower noise
and greater stability than competing systems.
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2018
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
Common stock, no par value
Name of Each Exchange on Which Registered
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 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 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. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). 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, a smaller reporting
company or an emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”
and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-
accelerated filer Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of our common stock held by non-affiliates as of March 29, 2018 (the last business day of our most recently
completed second fiscal quarter) was approximately $132.2 million, based on the closing sale price of $5.70 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 10% or more of our outstanding common stock have been excluded. This determination of affiliate status is not
necessarily a conclusive determination for any other purpose.
As of November 29, 2018, the number of shares outstanding of our no par value common stock totaled 27,607,194.
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, 2018 or will be included in an amendment to this Form 10-K filed within 120 days of September 30, 2018.
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, 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; (g) risks and uncertainties related to applicable laws and regulations, including
the impact of changes to applicable tax laws and tariff regulations and (h) 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, as such risk factors may be
amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission
(“SEC”). 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 on Form 10-K. Certain information included in this Annual Report
may supersede or supplement forward-looking statements in our other reports filed with the SEC. 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, 2018
TABLE OF CONTENTS
Part I:
Part II:
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Part III:
Part IV.
Item 9.
Item 9A.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operation
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Consolidated Statements of Operations and Comprehensive (Loss) Income for the
Fiscal Years Ended September 30, 2018, 2017 and 2016
Consolidated Balance Sheets as of September 30, 2018 and 2017
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
September 30, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Fiscal Years Ended September 30,
2018, 2017 and 2016
Notes to our Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm - KPMG LLP
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Mnagement and Related
Stockholder Matters
Certain Relationships, Related Transactions and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
SIGNATURES
Page
4
14
39
39
39
39
40
41
44
58
59
59
60
61
62
63
89
90
90
92
92
92
92
92
93
95
96
3
PART I.
Item 1. Business
Company Overview
EMCORE Corporation, together with its subsidiaries (referred to herein as the “Company,” “we,” “our,” or “EMCORE”), was
established in 1984 as a New Jersey corporation. The Company became publicly traded in 1997 and is listed on the Nasdaq
Stock Exchange under the ticker symbol EMKR. EMCORE pioneered the linear fiber optic transmission technology that
enabled the world’s first delivery of Cable TV directly on fiber, and today is a leading provider of advanced Mixed-Signal
Optics products that enable communications systems and service providers to meet growing demand for increased bandwidth
and connectivity. The Mixed-Signal Optics technology at the heart of our broadband communications products is shared with
our fiber optic gyros and inertial sensors to provide the aerospace and defense markets with state-of-the-art navigations systems
technology. With both analog and digital circuits on multiple chips, or even a single chip, the value of Mixed-Signal device
solutions is often far greater than traditional digital applications and requires a specialized expertise held by EMCORE which is
unique in the optics industry.
EMCORE has fully vertically-integrated manufacturing capability through our Indium Phosphide (“InP”) compound
semiconductor wafer fabrication facility at our headquarters in Alhambra, CA. The facility supports EMCORE’s vertically-
integrated manufacturing for our laser, transmitter and receiver products for Cable TV and other broadband applications, fiber
optic gyro sensors for Navigation Systems, and chip devices for Telecom and Datacom applications.
We currently have one reporting segment: Fiber Optics. This segment is comprised of three product lines: Broadband, Chip
Devices and Navigation Systems. Please see our consolidated financial statements and footnotes included in this Annual Report
for financial information regarding this segment. Until the quarter ended December 31, 2014, we operated as two segments:
Fiber Optics and Photovoltaics. EMCORE's former 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 described below, EMCORE sold certain assets, and transferred certain
liabilities, of the Company's telecommunications business, including the ITLA (Integrable Tunable Laser Assembly) micro-
ITLA, T-TOSA (Tunable Transmitter Optical Subassembly) and T-XFP (Tunable 10 Gigabit Form Factor Pluggable) product
lines within the Company’s telecommunications business, in January 2015. See Note 2 - Summary of Significant Accounting
Policies in the notes to our consolidated financial statements for disclosures related to the reclassification of prior period
amounts related to discontinued operations as a result of the sale of these businesses to conform to the current period financial
statement presentation.
EMCORE’s 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
InP compound semiconductor-based products provide the foundation of components, subsystems, and systems used in a broad
range of technology markets. Compound semiconductor materials can provide electrical or electro-optical functions, such as
emitting optical communications signals and detecting optical communications signals.
4
Specifically, within our Fiber Optics reporting segment, our Broadband products serve the Cable TV (“CATV”), Satellite
Communications and Wireless markets; our Chip products serve the Telecommunications, Fiber-To-The-Premises (“FTTP”),
Long-Term Evolution (“LTE”) and Data Center markets; and our Navigation Systems products primarily serve the Aerospace
and Defense markets.
Broadband Product Line
Our broadband fiber optic products enable information that is modulated on light signals to be transmitted, routed
(switched) and received in communication systems and networks. Our products in this area include:
▪ CATV Products - EMCORE is an established market leader in providing Radio Frequency (“RF”) over fiber
products for the CATV industry. Our products enable cable systems providers to increase data transmission
distance, speed and bandwidth in Hybrid Fiber Coaxial (“HFC”) networks, with lower noise and power
consumption. This empowers cable service operators to meet the growing demand for high-speed Internet, HDTV,
Ultra HDTV, video streaming and other advanced services. Our CATV products include forward and return-path
analog lasers, receivers, photodetectors and subassembly components; analog and digital fiber-optic transmitters,
Quadrature Amplitude Modulation (“QAM”) transmitters, optical switches and CATV fiber amplifiers.
EMCORE’s latest series of CATV transmitters feature the Company’s breakthrough Linear Externally Modulated
Laser (“L-EML”) technology that enables long distance optical link performance approaching traditional lithium
niobate-based externally-modulated transmitters, but is more cost-effective and far exceeds the performance of
Distributed Feedback (“DFB”) laser-based systems. EMCORE’s CATV transmitter products are offered on an
OEM and ODM basis for integration into complete CATV transmission systems, and the Company also offers its
own branded line of EMCORE Medallion series rack-mount CATV transmitters, optical switches and fiber
amplifiers. EMCORE’s Medallion series products include DOCSIS 3.1, 1550 nm externally-modulated
transmitters, 1550 nm directly-modulated transmitters, optical A/B switches, and 1RU and 2RU rack-mount
CATV fiber amplifiers. EMCORE’s Medallion series transmitters, optical switches and fiber amplifiers, in
conjunction with EMCORE’s components and Radio Frequency over Glass (“RFoG”) products, comprise a
complete end-to-end CATV system.
5
▪ Laser, Receiver and Photodetector Component Products - We are a leading provider of optical components
including lasers, receivers and photodetectors (also called “photodiodes”). Our products include CWDM (“Coarse
Wavelength Division Multiplexing”) and DWDM (“Dense Wavelength Division Multiplexing”), 1310 nm and
1550 nm DFB lasers and optical receivers optimized for CATV, DOCSIS (Data Over Cable Service Interface
Specification) 3.1 and wireless applications. Form-factors for laser products include 14-pin butterfly and coaxial
TO-Can. In addition, we offer broadband photodiodes used in forward-and return-path broadband and FTTP
applications. EMCORE’s component products to the global fiber optics industry leverage the benefits of our
vertically-integrated infrastructure, low-cost manufacturing and early access to newly developed internally-
produced components.
• Radio Frequency over Glass (RFoG) FTTP Products - EMCORE supports deployments of RFoG access
networks for homes and businesses worldwide with customer qualified FTTP products for video, voice and data
services. Our products include an RFoG Optical Networking Unit (“ONU”) transceiver that features breakthrough
OBI (“Optical Beat Interference”) mitigation technology to significantly improve RFoG network performance in
high-density customer environments. Additional products for RFoG networks include analog fiber optic
transmitters for video overlay, high-power Erbium-Doped Fiber Amplifiers (“EDFA”), analog and digital lasers,
photodetectors and subassembly components. Our RFoG-FTTP products provide our customers with higher
performance designs and support exceptional network performance capabilities for service providers.
6
• Satellite/Microwave Communications Products - EMCORE has an established history as a pioneer of innovative
RF over fiber solutions for high-performance fiber optic links in the terrestrial portion of satellite communications
networks. EMCORE’s satellite/microwave band components and complete systems transport an ultra-broadband
frequency range including IF, L, S, C, X, DBS, Ku, K, Ka, and Ultra-Wideband signal transport. A wide range of
high-dynamic-range applications are supported including satellite antenna remoting and signal distribution, inter-
and intra-facility links, site diversity systems, high-performance supertrunking links, electronic warfare systems
and radar testing. EMCORE’s complete line of satellite and microwave components, subassemblies and systems
eliminate the distance limitations of copper-based coaxial systems. Our rack-mount Optiva Platform RF &
Microwave Fiber Optic Transport System features a wide range of Simple Network Management Protocol
(“SNMP”) managed fiber optic transmitters, receivers, optical amplifiers, RF and optical switches, passive
devices and Ethernet products that provide high-performance fiber optic transmission between satellite hub
equipment and antenna dishes. EMCORE also offers a series of ruggedized microwave flange-mount transmitters,
receivers and optical delay line products that meet the reliability and durability requirements of the U.S.
government and defense markets. These products are tailored to the requirements of higher frequency applications
such as microwave antenna signal distribution, electronic warfare systems and radar system calibration and
testing. They provide our customers with high frequency, dynamic range, compact form-factors, and extreme
temperature, shock and vibration tolerance. To the extent sales of our satellite/microwave communications
products are related to U.S. government contracts or subcontracts, this portion of the business may be subject to
renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government or an
agency thereof.
• Wireless Communications Products - The increasing dependence on wireless access for social media, text, email,
uploading and downloading of apps, music, videos and photos has created greater demand for deployment of cost-
effective, high-performance, integrated wireless Distributed Antenna System (“DAS”) networks. Wireless systems
providers are building systems in subway tunnels, stadiums, hotels, high-speed trains and cruise ships. EMCORE
has developed highly linear fiber optic products that are optimized for wireless applications which we believe
integrate extremely well into these systems. They enhance bandwidth and linearity to enable the delivery of
consistent, reliable signals in areas where interference is high or signals are weak. EMCORE’s products for
wireless applications include DFB lasers and optical receivers specifically designed for wireless networks, 3 GHz
and 6.5 GHz fiber optic links for cellular backhaul, 4G LTE and DAS.
Chip Devices Product Line
7
Telecommunications companies throughout the world have been extending their Passive Optical Network (“PON”)
infrastructure to business, enterprise and residential customers for several years. Since the sale of the Company’s
telecom module products in 2015, EMCORE has supported this market through commercialization of products
developed in our InP wafer fab to become a merchant supplier of high-performance chip devices to the Telecom industry.
EMCORE’s semiconductor wafer fabrication facility features Metal-Organic Chemical Vapor Deposition (“MOCVD”)
reactors for 2" or 3" wafer processing for InP-based devices including high-power gain chips, laser chips, Avalanche
Photodiode (“APD”) and P-type Intrinsic N-type (“PIN”) photodetector chips. Our technical team has expertise in device
design, epitaxial growth, wafer processing, device characterization, and Chip-On-Block (“COB”), TO-Can and Optical
Sub-Assembly (“OSA”) from development through manufacturing.
▪ High-Power Gain Chips Products - EMCORE, through our previous experience in the Telecom tunable module
market, has design and engineering expertise in development and manufacturing of high-power gain chips for
tunable lasers and transceivers utilized in coherent DWDM optical transmission systems.
• GPON Fiber-To-The-Premises (FTTP) and Data Center Chip Products - EMCORE’s chip devices portfolio is
continually developing to support the latest advances in PON including GPON, 10G-EPON, XG-PON, XGS-
PON, along with 4G LTE and data center applications. The Company’s laser chip devices offering includes 2.5G
and 10G PON DFB and 10G Fabry-Perot laser chips. Wavelengths supported include 1270, 1290, 1310, 1330,
1490, 1550 and 1610 nm. In addition, EMCORE offers 2.5G and 10G APD top and bottom illuminated chips and
COB, along with 10G PIN photodiode chips, with additional products in development.
Navigation Systems Product Line
EMCORE, through our vertically-integrated infrastructure, has been able to adapt the same technologies, chip designs
and production assets applicable to our CATV products to the development of state-of-the-art Fiber Optic Gyroscopes
(“FOG”) that have broad application within the aerospace and defense markets for land, sea, air and space navigation.
This gives EMCORE the ability to leverage our high-volume infrastructure for lower volume, higher value-added
product. EMCORE has expanded its FOG-based product line to include Inertial Measurement Units (“IMU or IMUs”)
and Inertial Navigation Systems (“INS”) that provide superior Size, Weight and Power (“SWaP”) compared to
competing or legacy systems. To the extent sales of our navigation system products are related to U.S. government
contracts or subcontracts, this portion of the business may be subject to renegotiation of profits or termination of
contracts or subcontracts at the election of the U.S. government or an agency thereof.
• Fiber Optic Gyroscope Products - EMCORE’s FOG program has received multiple U.S. patents and has been
qualified for several key military programs for applications including Unmanned Aerial Systems (“UAS”), line-
of-site stabilization, aviation and aeronautics. All EMCORE FOGs feature advanced optics with only three
components for simplified assembly along with Digital Signal Processing (“DSP”) or Field Programmable Gate
Array (“FPGA”) for higher accuracy, lower noise and greater efficiency. The integrated DSP or FGPA also
improves optical drift stability and enables higher linearity and greater environmental flexibility. EMCORE’s
FOG products range from tactical to navigational grade gyros where the critical specifications for fiber length,
Angle Random Walk (“ARW”) and drift rate improves through the product line to provide customers greater
flexibility in choosing the performance level that best meets their application.
8
•
Inertial Measurement Units and Navigation Systems Products - EMCORE’s IMU and INS systems are based on
our advanced FOG technology and provide superior SWaP compared to competing systems. Our products provide
customers the flexibility to choose options from straightforward IMU operation to full navigation and are higher
performance form, fit and function replacements for other IMUs and legacy systems. EMCORE’s IMUs and INS
products deliver high-precision with up to five-times better performance than competing units in compact,
portable form-factors that provide standalone aircraft grade navigator performance at one-third the size of
competing systems. Recently EMCORE launched its new EMCORE-OrionTM series of high-precision Micro
Inertial Navigation (MINAV) systems designed primarily for applications where navigation aids such as GPS are
unavailable or denied. The advanced technology incorporated enables these systems to provide performance close
to that of traditional RLG (Ring Laser) INS with one-third the SWaP. We believe the EMCORE MINAV’s low
SWaP makes it an ideal inertial navigation system for unmanned aerial vehicle and dismounted soldier
applications, and the units can operate as navigators or very precise IMUs with lower noise and greater stability
than competing systems.
Customers
Our major customers include: ARRIS International plc, BUPT-GuoAn Broadband, Cisco Systems Inc. and Commscope and
their respective affiliates, who each at times have represented greater than 10% of our consolidated revenue in the fiscal years
ended September 30, 2018, 2017 and 2016. In the fiscal year ended September 30, 2018, ARRIS International plc and Cisco
Systems Inc. and their respective affiliates each represented greater than 10% of our consolidated revenue. See Note 15 -
Geographical Information in the notes to our consolidated financial statements for additional information about our significant
customers.
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.
The Strategy Committee met six (6) times during the fiscal year ended September 30, 2018.
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 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.
9
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
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 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 14 - 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; and Beijing, China are registered to ISO 9001 standards.
10
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 15 - 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.
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 $15.4
million, $12.5 million and $9.9 million for the fiscal years ended September 30, 2018, 2017 and 2016, respectively. As a
percentage of revenue, research and development expenses were 18.0%, 10.2% and 10.8% for the fiscal years ended
September 30, 2018, 2017 and 2016, 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,
2018, we held approximately 55 U.S. patents and approximately 25 foreign patents and had over 5 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 2019 and 2035. These patents and patent applications claim protection for various aspects of current or
planned commercial versions of our materials, components, subsystems, and systems.
11
We also have entered into license agreements with other organizations, under which we have obtained exclusive or non-
exclusive rights to practice inventions claimed in various patents and applications issued or pending in the U.S. or other foreign
jurisdictions. We do not believe our financial obligations under any of these agreements adversely affects our business,
financial condition, or results of operations.
We rely on trade secrets to protect our intellectual property when we believe that publishing patents would make it easier for
others to reverse engineer our proprietary processes. We also rely on other intellectual property rights such as trademarks and
copyrights where appropriate.
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 with respect to certain of our product lines, 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:
Broadband
CATV Systems - Our primary competitors include BK Tel, Hangzhou-Prevail, Oplink and Furukawa
Lasers & Components - Our primary competitors include Applied Optoelectronics, Finisar, Sumitomo Electric and
Fujitsu
Satellite & Microwave Communications - Our primary competitors include Foxcom, MITEQ, Inc., Glenair,
Microwave Photonic Systems and Vialite
Chip Level Devices - Our primary competitors include MACOM, Broadcom, Mitsubishi, GCS and Renesas
Navigation Systems - Our primary competitors include Northrup Grumman, Honeywell, iXblue and KVH Industries
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 (“EU”) and certain countries throughout the world, political and legal arrangements encourage the purchase of
domestically produced goods, which places us at a disadvantage in those regions or countries.
There are substantial barriers to entry by new competitors across our product lines. These barriers include the large number of
existing patents, the time and costs required to develop products, the technical difficulty in manufacturing semiconductor-based
products, the lengthy sales and qualification cycles, and the difficulties in hiring and retaining skilled employees with the
required scientific and technical backgrounds. We believe that the primary competitive factors within our current markets are
product cost, yield, throughput, performance and reliability, breadth of product line, product heritage, customer satisfaction, and
customer commitment to competing technologies. Competitors may develop enhancements to or future generations of
competitive products that offer superior price and performance characteristics. We believe that in order to remain competitive,
we must invest significant financial resources in developing new product features and enhancements and in maintaining
customer satisfaction worldwide.
12
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 and may not be comparable to prior periods.
Seasonality
In certain of our previous fiscal years, we have experienced an increase in revenues in our third and fourth fiscal quarters due to
increased sales of our CATV products resulting from an increased build of cable networks during seasons with warmer weather.
Employees
As of September 30, 2018, we had approximately 391 employees, including approximately 188 international employees that
are located primarily in China. This represents an increase of approximately 27 employees when compared to September 30,
2017, 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 and fiber optics industries. 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.
13
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 or maintain our supporting functions to fit the needs of a small company, which could
adversely affect our business, financial condition, results of operations, and cash flows.
We are substantially dependent on revenues from our cable television (“CATV”) business and from a small number of
customers. A substantial decrease in sales in our CATV business or the loss of or decrease in sales from any one of these
customers could adversely affect our business, financial condition, results of operations, and cash flows.
We are substantially dependent on revenues from sales of our CATV products. Sales of our CATV products may decline or
fluctuate significantly in the future, and we may not be able to offset any decline in sales of our CATV products with sales of
other products. Any decrease in sales of our CATV products without a corresponding increase in sales of our other products
would harm our business, operating results, financial condition and cash flows.
Also, 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. For
example, for the fiscal year ended September 30, 2018, sales to two customers accounted for an aggregate of 60.3% of our total
consolidated revenues, for the fiscal year ended September 30, 2017, sales to three customers accounted for an aggregate of
71% of our total consolidated revenues and for the fiscal year ended September 30, 2016, sales to three customers accounted
for an aggregate of 61% of our total consolidated revenues. Sales from any of our major customers may decline or fluctuate
significantly in the future. We may not be able to offset any decline in sales from our existing major customers with sales from
new customers or other existing customers. Because of our reliance on a limited number of customers, any decrease in sales
from, or loss of, one or more of these customers without a corresponding increase in sales from other customers would harm
our business, operating results, financial condition and cash flows.
In addition, any negative developments in the business of existing significant customers could result in significantly decreased
sales to these customers, which could seriously harm our business, operating results, financial condition and cash flows, and 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.
Although we are attempting to expand our customer base, the markets in which we sell our products are dominated by a
relatively small number of companies, thereby limiting the number of potential customers. Accordingly, our success will
depend on our continued ability to develop and manage relationships with significant customers, and we expect that the
majority of our sales will continue to depend on sales of our products to a limited number of customers for the foreseeable
future.
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.
14
We have incurred losses from continuing operations and our future profitability is not certain.
For the fiscal year ended September 30, 2018, loss from continuing operations was $17.5 million. For the fiscal years ended
September 30, 2017, and 2016, income from continuing operations was $8.2 million and $2.6 million, respectively. Our
operating results for future periods are subject to numerous uncertainties and we cannot be certain that we will be profitable or
that we will not experience substantial losses in the future. If we are not able to increase revenue and reduce our costs, we may
not be able to achieve profitability in future periods and our business, financial condition, results of operations and cash flows
may be adversely affected.
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 and may also increase the volatility of the price of our common stock.
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.
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:
•
•
•
•
•
•
•
•
•
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;
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;
15
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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 (including tariffs imposed on our products or raw materials, equipment or components used in the
production of our products), 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. 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.
16
Changes in U.S. and international trade policies, particularly with regard to China, may adversely impact our business and
operating results.
The U.S. government has recently made statements and taken certain actions that may lead to potential changes to U.S. and
international trade policies, including recently imposed tariffs affecting certain products manufactured in China. The U.S. and
China have applied tariffs or announced tariffs to be applied in the future to certain of each other’s exports. With respect to the
tariffs that took effect in September 2018, certain of our broadband products manufactured by our Chinese affiliate were
included in the tariffs imposed on imports into the U.S. from China. In addition, other products manufactured by our Chinese
affiliate may be included on lists of products to be targeted by proposed tariff increases that may be implemented in the future.
As a result of these tariffs imposed by the U.S. government, China has recently imposed retaliatory tariffs affecting certain
products manufactured in the U.S. In September 2018, certain of our chip products manufactured by us in the U.S. were
included in the tariffs imposed on imports into China from the U.S., and other products manufactured by us in the U.S. may be
included on lists of products to be targeted by proposed tariff increases that may be implemented by China in the future. Due to
the implementation of these tariffs, sales of our products manufactured in China and shipped to the U.S. and sales of our
products manufactured in the U.S. and shipped to China could each decrease, which would negatively impact our business.
In addition, it is unknown whether and to what extent new tariffs (or other new laws or regulations) will be adopted that
increase the cost of importing products into the U.S., or that might trigger retaliatory action by U.S. trading partners. Further, it
is unknown what effect that any such new tariffs or retaliatory actions would have on us or our industry and customers. For
example, there are risks that the Chinese government may, among other things, require the use of local suppliers, compel
companies that do business in China to partner with local companies to conduct business and provide incentives to
government-backed local customers to buy from local suppliers. If any new tariffs, legislation and/or regulations are
implemented, or if existing trade agreements are renegotiated or if China or other affected countries take retaliatory trade
actions, such changes could have a material adverse effect on our business, financial condition, results of operations and cash
flows.
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 a manufacturing facility 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. These uncertainties may impede our ability to
enforce the contracts we have entered into with our distributors, business partners, customers and suppliers. In addition,
protections of intellectual property rights and confidentiality in China may not be as effective as in the U.S. or other countries
or regions. All of these uncertainties could limit the legal protections available to us and could materially and adversely affect
our business, financial condition, cash flows and results of operations.
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.
17
While under certain circumstances we previously were not subject to certain Chinese taxes and were exempt from customs duty
assessment on imported components or materials when our finished products were exported from China, we are no longer
eligible for such exemptions due to our current Beijing facility being located in a non-economic zone. In addition, we are
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, including import tariffs as described in more detail above, 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.
Employee turnover of direct labor in the manufacturing sector in China is high and retention of such personnel is a challenge to
companies located in or with operations in China. Although direct labor costs do not represent a high proportion of our overall
manufacturing costs, direct labor is required for the manufacture of our products. If our direct labor turnover rates are higher
than we expect, or we otherwise fail to adequately manage our direct labor turnover rates, then our business and results of
operations could be adversely affected.
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 accounting principles generally accepted in the United States of America (“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.
We have a large amount of intercompany balances with our China entities, which may be subject to taxes and penalties
when we try to pay them down or collect them.
Payments for goods and services into and out of China are subject to numerous and over-lapping government regulation with
respect to foreign exchange controls, banking controls, import and export controls, and taxes. We have been operating in China
for an extended period of time and have accumulated significant intercompany balances with our related entities. Our ability to
repay or collect these balances may be restricted by Chinese laws and, as a result, we may be unable to successfully pay down
or collect on these balances. As a consequence, we may be assessed additional taxes in China if we are unable to claim bad debt
deductions or incur debt forgiveness income from the cancellation of these intercompany balances. Additionally, if we are
found not to have complied with the various local laws surrounding cross border payments, we may incur penalties and fines
for non-compliance. Any such taxes, penalties and/or fines could be significant in amount and, as a result, could have an
adverse effect on our financial condition and results of operations, including our cash and cash equivalent balances.
18
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, disposition, partnership, or other or strategic
alternative in the future, we cannot be certain 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:
•
•
•
•
•
•
•
•
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, environmental liabilities, regulatory
liabilities, tax examinations and warranty issues.
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.
19
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 cost 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, we cannot be certain that these
initiatives will be successful in creating profit margins sufficient to sustain our current operating structure and business.
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. 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, results of 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. In addition, certain of our arrangements with component vendors require us to
purchase minimum quantities of components within specific time periods, which could cause us to hold excess inventories of
these components during periods concurrent with a decrease in customer demand for our products.
We have limited operating history in the fiber to the home (“FTTH”) market, and our business could be harmed if this
market does not develop as we expect and we do not grow our business in this market to the level we expect.
In 2017, we began offering products to the FTTH market, and our radio frequency over glass (“RFoG”) products designed for
this market have not yet, and may never, gain widespread acceptance by large multiple system operators (“MSOs”). Our
business in this market is dependent on the deployment of our optical components, modules and subassemblies. We are relying
on increasing demand for bandwidth-intensive services and telecommunications service providers’ acceptance and deployment
of RFoG as a technology supporting service to the home. Without network and bandwidth growth and adoption of our solutions
by operators in these markets, we will not be able to sell our products in these markets in high volume or at our targeted
margins, which would adversely affect our business, financial condition, results of operations and cash flows. For example,
RFoG technology may not be adopted by equipment and service providers in the FTTH market as rapidly as we expect or in the
volumes we need to achieve acceptable margins. Network and bandwidth growth may be limited by several factors, including
an uncertain regulatory environment, high infrastructure costs to purchase and install equipment and uncertainty as to which
competing content delivery solution, such as CATV, will gain the most widespread acceptance. In addition, as we enter new
markets for RFoG or expand our RFoG product offerings in existing markets, our margins may be adversely affected due to
competition in those markets and commoditization of competing products. We may also face limitations due to sole or limited
sources for components of our RFoG products. If our expectations for the growth of these markets are not realized, our
business, financial condition, results of operations and cash flows may be adversely affected.
20
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 materials, components, and services used in our products from limited or sole sources. We generally do not
carry significant inventories of any raw materials. The reliance on a sole supplier, single qualified vendor or limited number of
suppliers could result in delivery or quality problems or reduced control over product pricing, reliability and performance.
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, and we may need large end of life purchases when a sole source supplier is
ceasing manufacturing of required components. Because some of these suppliers are located overseas, we may be faced with
higher costs of purchasing these materials if the U.S. dollar weakens against other currencies, or if import tariffs are imposed
on these materials. If we were to change any of our limited or sole source suppliers, we would be required to re-qualify each
new supplier. Re-qualification could prevent or delay product shipments that could adversely affect our results of operations
and cash flows. In addition, our reliance on these suppliers may adversely affect our production if the components vary in
quality or quantity. If we are unable to obtain timely deliveries of sufficient components of acceptable quality or if the prices of
components for which we do not have alternative sources increase, our business, financial condition, results of operations, and
cash flows could be materially adversely affected.
If our contract manufacturers fail to deliver qualified 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 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:
•
•
•
•
•
•
•
•
•
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;
21
•
•
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 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, results of operations and cash flows.
We participate in vendor managed inventory programs for the benefit of certain of our customers, which could result in
increased inventory levels and/or decreased visibility into the timing of sales.
Certain of our more significant customers have implemented a supply chain management tool called vendor managed inventory
(“VMI”) that requires us to assume responsibility for maintaining an agreed upon level of consigned inventory at the
customer’s location or at a third-party logistics provider, based on the customer’s demand forecast. Notwithstanding the fact
that the supplier builds and ships the inventory, the customer does not purchase the consigned inventory until the inventory is
drawn or pulled from the customer or third-party location to be used in the manufacture of the customer’s product. Though the
consigned inventory may be at the customer’s or third-party logistics provider’s physical location, it remains inventory owned
by the supplier until the inventory is drawn or pulled, which is the time at which the sale takes place. In addition, certain of our
customers require us to maintain agreed levels of product inventory at our own locations. Our participation in VMI programs
and our commitment to other product inventory requirements at our own locations has resulted in our experiencing higher
levels of inventory than we might otherwise and has decreased our visibility into the timing of when our finished goods will
ultimately result in revenue-generating sales.
Such VMI programs and other inventory requirements increase the likelihood that estimates of our customers’ requirements
that prove to be greater than our customers’ actual purchases could result in surplus inventory and we could be required to
record charges for obsolete or excess inventories. If we are unable to effectively manage our customers’ VMI programs or other
inventory requirements, our business, financial condition, results of operations and cash flows may be adversely affected.
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, to develop products that effectively
compete with competitors’ products used in new applications, such as remote physical layer (“remote PHY”), or to license the
technology from third parties that is necessary for our products. Product development delays may result from numerous factors,
including:
•
•
changing product specifications and customer requirements;
unanticipated engineering complexities;
22
•
•
•
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 be certain 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
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 fund these types of expenditures, we may be
unable to improve our technology or develop new technologies, which may adversely affect our business, financial condition,
results of operations and cash flows. 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.
23
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 adversely affected.
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. In
addition, transitioning to automation in certain manufacturing processes could result in manufacturing delays or significantly
reduce our manufacturing yields.
Manufacturing yields depend on a number of factors, including the stability and manufacturability of the product design,
manufacturing improvements gained over cumulative production volumes, the quality and consistency of component parts and
the nature and extent of customization requirements by customers. Higher volume demand for more mature designs requiring
less customization generally results in higher manufacturing yields than products with lower volumes, less mature designs and
requiring extensive customization. Capacity constraints, raw materials shortages, logistics issues, the introduction of new
product lines and changes in our customer requirements, manufacturing facilities or processes or those of our third-party
contract manufacturers and component suppliers have historically caused, and may in the future cause, significantly reduced
manufacturing yields, negatively impacting the gross margins on, and our production capacity for, those products. Our ability to
maintain sufficient manufacturing yields is particularly important with respect to certain products we manufacture, as a result of
the long manufacturing process. Moreover, an increase in the rejection and rework rate of products during the quality control
process before, during or after manufacture would result in lower yields, gross margins and production capacity. Finally,
manufacturing yields and margins can also be lower if we receive and inadvertently use defective or contaminated materials
from our suppliers.
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, may
not be readily available from multiple vendors, and would be difficult to repair or replace if they 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 adversely affected.
24
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 may adversely affect our business, financial condition, results of operations, and cash
flows.
Our products are complex and may take longer to develop and qualify than anticipated and 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.
We are constantly developing new products and using new technologies in these products. These products often take substantial
time to develop because of their complexity, rigorous testing and qualification requirements and because customer and market
requirements can change during the product development or qualification process. 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
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 may be 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 may be adversely affected.
25
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 net realizable market value.
If future demand or market conditions are less favorable than our estimates, inventory write-downs may be required. We cannot
be certain 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, 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 satisfied.
Risks associated with the absence of long-term purchase commitments with our customers include the following:
•
•
•
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.
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.
26
If we identify deficiencies in our current system of internal controls or fail to remediate them, 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 an 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 or other lesser deficiencies 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 or as executive officers, which could
harm our business.
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. As of September 30, 2018, we had $18.2 million of
property and equipment, net, on our consolidated balance sheet. If we make changes in our business strategy or if market or
other conditions adversely affect our business operations, we may be forced to record an impairment charge related to these
assets, which would adversely impact our results of operations. 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
changes in market conditions, underlying business operations, competition or technologies 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 the assumptions we used in testing for impairment are reasonable, we will continue to evaluate the recoverability of the
carrying amount of our property, plant and equipment on an ongoing basis, and significant changes in any one of our
assumptions could produce a significantly different result. In such a circumstance, we may incur substantial impairment
charges, which would adversely affect our financial results. 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.
Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) could have a material
effect on our balance sheet, revenue and result of operations, and could require a significant expenditure of time, attention
and resources, especially by senior management.
Our accounting and financial reporting policies conform to U.S. GAAP, which are periodically revised and/or expanded. The
application of accounting principles is also subject to varying interpretations over time. Accordingly, we are required to adopt
new or revised accounting standards or comply with revised interpretations that are issued from time to time by various parties,
including accounting standard setters and those who interpret the standards, such as the FASB and the SEC and our
independent registered public accounting firm. Such new financial accounting standards may result in significant changes that
could adversely affect our financial condition and results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires all operating leases with lease terms longer than
twelve months be recorded as lease assets and lease liabilities on our consolidated balance sheets. Implementing changes
required by new standards, requirements or laws likely will require a significant expenditure of time, attention and resources. It
is impossible to completely predict the impact, if any, on us of future changes to accounting standards and financial reporting
and corporate governance requirements.
27
Refer to Note 1 - Description of Business, Note 2 - Summary of Significant Accounting Policies and Note 3 - Recent
Accounting Pronouncements and U.S. Tax Reform of the notes to the consolidated financial statements for further discussion of
these new accounting standards, including the implementation status and potential impact to our consolidated financial
statements.
We have significant international sales, which expose us to additional risks and uncertainties.
For the fiscal years ended September 30, 2018, 2017 and 2016, sales to customers located outside the U.S. accounted for
approximately 19%, 20% and 28%, 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. In addition, certain of our sales to customers with a U.S. billing address may be physically shipped to
a location outside of the U.S. Our international sales and operations are subject to a number of material risks, including, but not
limited to:
•
•
•
•
•
•
•
•
•
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;
different technical standards or requirements, such as country or region-specific requirements to eliminate
the use of lead
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.
Negative developments in one or more countries or regions in which we operate or sell our products could result in a reduction
in demand for our products, the cancellation or delay of orders already placed, difficulties in producing and delivering our
products, threats to our intellectual property, difficulty in collecting receivables, or a higher cost of doing business, any of
which could negatively impact our business, financial condition, cash flows and results of operations. 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").
28
Our failure to successfully manage the transition of certain of our manufacturing operations from our Langfang facility to
our new Beijing location could harm our business, financial condition, results of operations and cash flows.
In February 2016, we leased a new manufacturing facility near Beijing, China. We have relocated the manufacture of our existing
product lines and sub-assemblies previously manufactured at our Langfang facility to our Beijing facility and have closed our
Langfang facility. This transition has and may continue to cause us to incur costs associated with some duplication of facilities,
equipment and personnel, and require us to install and/or transplant complex manufacturing equipment and processes and to hire and
train a new workforce. In addition, we are subject to the requirements of a different regional government than we were subject to at
our Langfang facility, which creates additional uncertainty. If we are unable to manage this transfer and training smoothly and
comprehensively, we could suffer delays in recognizing efficiencies, 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, results of operations and cash flows could be harmed.
We could be subject to legal and regulatory consequences if we fail to comply with applicable export control laws and
regulations.
Exports of certain of our products are subject to export controls imposed by the U.S. government and administered by the
United States Departments of State and Commerce. In certain instances, these regulations may require pre-shipment
authorization from the administering department. For products subject to the Export Administration Regulations, or EAR,
administered by the Department of Commerce’s Bureau of Industry and Security, the requirement for a license is dependent on
the type and end use of the product, the final destination, the identity of the end user and whether a license exception might
apply. Virtually all exports of products subject to the International Traffic in Arms Regulations, or ITAR, administered by the
Department of State’s Directorate of Defense Trade Controls, require a license.
Obtaining necessary export licenses can be difficult and time-consuming. Failure to obtain necessary export licenses could
significantly reduce our revenue and adversely affect our business, financial condition, results of operations and cash flows. We
could be subject to investigation and potential regulatory consequences, including, but not limited to, a no-action letter,
monetary penalties, debarment from government contracting or denial of export privileges and criminal sanctions, any of which
would adversely affect our business, financial condition, results of operations and cash flows. Compliance with U.S.
government regulations may also subject us to significant fees and expenses, including legal expenses, and require us to expend
significant time and resources. Finally, the absence of comparable restrictions on competitors in other countries may adversely
affect our competitive position.
For a portion of our business, we are subject to extensive government regulation, and our failure to comply with applicable
regulations could subject us to penalties that may restrict our ability to conduct our business.
As a contractor and/or subcontractor 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 the portion of our business related to U.S. government
contracts include the following:
•
•
•
•
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; and
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.
29
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, results of operations and cash
flows. 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, results of operations and cash flows.
Our business related to government contracts subjects us to additional risks.
We believe that the growth of our navigation business for the foreseeable future will depend to a certain degree on our ability to
win government contracts and subcontracts, in particular from the Department of Defense. Many of our government customers
are subject to budgetary constraints and our continued performance under these contracts or subcontracts, or award of
additional contracts or subcontracts from these agencies, could be jeopardized by spending reductions, including constraints on
government spending imposed by the Budget Control Act of 2011 and its subsequent amendments, or budget cutbacks at these
agencies. The funding of U.S. government programs is uncertain and dependent on continued congressional appropriations and
administrative allotment of funds based on an annual budgeting process. We cannot be certain that current levels of
congressional funding for our products and services will continue and that our business related to these products will not
decline or increase at currently anticipated levels, or that we will not be subject to delays in the negotiation of contracts or
increased costs due to changes in the funding of U.S. government programs. A significant decline in government expenditures
generally, or with respect to programs for which we provide products, could adversely affect our business and prospects.
In addition, our business could be adversely affected by a negative audit or investigation by the U.S. government. U.S.
government agencies, primarily the Defense Contract Audit Agency and the Defense Contract Management Agency, routinely
audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost
structure and compliance with applicable laws, regulations and standards. These agencies also may review the adequacy of, and
a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, quality,
accounting, property, estimating, compensation and management information systems. Any costs found to be improperly
allocated to a specific cost reimbursement contract will not be reimbursed, while such costs already reimbursed must be
refunded. If an audit or investigation of our business were to uncover improper or illegal activities, then we could be subject to
civil and criminal penalties and administrative sanctions, including termination of contracts, suspension of payments, fines and
suspension or debarment from doing business with the U.S. government. We could experience serious harm to our reputation if
allegations of impropriety or illegal acts were made against us, even if the allegations were inaccurate. In addition, responding
to governmental audits or investigations may involve significant expense and divert management attention. Moreover, if any of
our administrative processes and business systems are found not to comply with the applicable requirements, we may be
subjected to increased government scrutiny or required to obtain additional governmental approvals that could delay or
otherwise adversely affect our ability to compete for or perform contracts. If any of the foregoing were to occur, our business,
financial condition, operating results and cash flows may be adversely affected.
Our failure to obtain or maintain the right to use certain intellectual property may 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. Numerous patents in our industry are held by others, including our
competitors and certain academic institutions. Our competitors may seek to gain a competitive advantage or other third parties
may seek an economic return on their intellectual property portfolios by making infringement claims against us. We cannot be
certain that:
•
•
infringement claims (or claims for indemnification resulting from infringement claims) will not be asserted
against us or that such claims will not be successful;
future assertions will not result in an injunction against the sale of infringing products, which could require
us to cease the manufacture, use or sale of the infringing products, processes or technology and expend
significant resources to develop non-infringing technology, adversely affecting our business, results of
operations, and cash flows;
•
any patent owned or licensed by us will not be invalidated, circumvented, or challenged; or
30
•
we will not be required to obtain licenses or pay substantial damages for past, present and future use of the
infringing technology, the expense of which may adversely affect our results of operations, and cash flows.
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.
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 we cannot be certain 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, financial condition and cash flows 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. The availability of
financial resources may limit our ability to commence or defend such litigation. In addition, we may not prevail in such
proceedings. An adverse outcome of such proceedings may reduce our competitive advantage or otherwise harm our business,
financial condition, results of operations and cash flows.
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.
31
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 may have an adverse effect on our business, financial condition, results of operations and cash flows. 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. Litigation is costly, time-consuming and disruptive to normal business operations.
The costs of defending these lawsuits, particularly the securities class actions and shareholder 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 13 - 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 in our production activities. 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 an 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 may have an adverse effect on our business, financial condition, results of
operations and cash flows.
32
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 business, financial condition, results of operations and cash flows 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 an 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, we cannot be certain 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 and cash flows. 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, results of operations and cash flows.
Compliance with regulations related to conflict minerals and other regulations with respect to our supply chains
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.
In addition, the U.S. federal government has issued new policies for federal procurement focused on eradicating the practice of
forced labor and human trafficking, and the United Kingdom and the State of California have issued laws that require us to
disclose our policy and practices for identifying and eliminating forced labor and human trafficking in our supply chain.
Several customers as well as the Electronic Industry Citizenship Coalition (EICC) have also issued expectations to eliminate
these practices that may impact us. While we have a policy and management systems to identify and avoid these practices in
our supply chain, we cannot guarantee that our suppliers will always be in conformance to these laws and expectations. We
may face enforcement liability and reputational challenges if we are unable to sufficiently meet these expectations. Moreover,
we are likely to encounter challenges with customers if we cannot satisfy their forced and trafficked labor polices and they may
choose a competitor’s product.
33
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 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.
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 an adverse impact on our revenues. We cannot predict the timing, strength or
duration of any economic slowdown or subsequent economic recovery, worldwide or within our 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, results of operations and cash flows may be
adversely affected.
Natural disasters or other catastrophic events could have an adverse effect on our business.
Natural disasters, such as hurricanes, earthquakes, fires, and floods, could 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, 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
an 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 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 an
adverse effect on our business, financial condition, results of operations and cash flows.
34
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.
The secure maintenance of this information is critical to our business and reputation. Despite our implementation of security
measures, our systems are vulnerable to damages from computer viruses, computer denial-of-service attacks, worms, and other
malicious software programs or other attacks, covert introduction of malware to computers and networks, unauthorized access,
including impersonation of unauthorized users, efforts to discover and exploit any security vulnerabilities or securities
weaknesses, and other similar disruptions. Our business is also subject to break-ins, sabotage, and intentional acts of vandalism
by third parties as well as intentional and unintentional acts by employees or other insiders with access privileges. Our
customers’ network and storage applications may be subject to similar disruptions. It is often difficult to anticipate or
immediately detect such incidents and the damage caused by such incidents. Data breaches and any unauthorized access or
disclosure of our information, employee information or intellectual property could compromise our intellectual property, trade
secrets and other sensitive business information, any of which could result in legal action against us, exposure of our
intellectual property to our competitors, damages, fines and other adverse effects. A data security breach could also lead to
public exposure of personal information of our employees, customers and others. Any such 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. Cyber attacks, such as computer viruses or other forms of cyber terrorism, may disrupt access
to our network or storage applications. Such disruptions could result in delays or cancellations of customer orders or delays or
interruptions in the production or shipment of our products. Data security breaches involving our data center customers could
affect their financial condition and ability to continue to purchase our products. In addition, cyber attacks may cause us to
incur significant remediation costs, result in product development delays, disrupt key business operations and divert attention
of management and key information technology resources. These incidents could also subject us to liability, expose us to
significant expense and cause significant harm to our reputation and business.
In addition, our technology infrastructure and systems are vulnerable to damage or interruption from natural disasters, power
loss and telecommunications failures. Further, our products contain sophisticated hardware and operating system software and
applications that may contain security problems, security vulnerabilities, or defects in design or manufacture, including “bugs”
and other problems that could interfere with the intended operation of our products. To the extent that any disruption or security
breach results in a loss or damage to our technology infrastructure, systems or data or inappropriate disclosure of confidential
information or sensitive or personal information, it could harm our relationships with customers and other third parties and
damage our brand and reputation and 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.
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 or cause us to incur penalties or other significant legal liability or
change our business practices.
35
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, uncertainty surrounding domestic and foreign economies, conditions and
trends in the markets we serve, changes in the estimation of the future size and growth rate of our markets, publication of
research reports and recommendations by financial analysts relating to our business, the business of our competitors or the
industry in which we operate and compete, changes in market valuation or earnings of our competitors, legislation or regulatory
policies, practices, or actions, sales of our common stock by our principal shareholders, and the trading volume of our common
stock. 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 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 market price of our common stock 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.
Certain provisions of New Jersey law and our governing documents may make a takeover of our Company difficult even if such
takeover could be beneficial to some of our shareholders.
Certain provisions of our organizational documents and New Jersey law could discourage potential acquisition proposals, delay
or prevent a change in control of the Company or limit the price that investors may be willing to pay in the future for shares of
our common stock. For example, our amended and restated certificate of incorporation and amended and restated bylaws:
•
classify our Board of Directors into three classes, with staggered three-year terms and, until recent
respective amendments to our certificate of incorporation and bylaws that became effective in March 2018
to declassify our Board of Directors are fully phased in beginning with our 2021 annual meeting of
36
shareholders, the current three-year terms of our directors will remain in effect until the current terms
expire;
provide that directors are not subject to removal except for cause by the vote of the holders of a majority of
our capital stock;
provide that a supermajority vote of our shareholders is required to amend some portions of our amended
and restated certificate of incorporation and amended and restated bylaws, including requiring approval by
the holders of 80% of our voting stock 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;
authorize the issuance of preferred stock that can be created and issued by our Board of Directors without
prior shareholder approval, commonly referred to as “blank check” preferred stock, with rights senior to
those of our common stock;
limit the persons who can call special shareholder meetings;
establish advance notice requirements to nominate persons for election to our Board of Directors or to
propose matters that can be acted on by shareholders at shareholder meetings;
do not provide for cumulative voting in the election of directors; and
provide for the filling of vacancies on our Board of Directors by action of 66 2/3% of the directors and not
by the shareholders.
•
•
•
•
•
•
•
These and other provisions in our organizational documents could allow our Board of Directors to affect the rights of our
shareholders in a number of ways, including making it difficult for shareholders to replace members of the Board of Directors.
Because our Board of Directors is responsible for approving the appointment of members of our management team, these
provisions could in turn affect any attempt to replace the current management team. These provisions could also limit the price
that investors would be willing to pay in the future for shares of our common stock. 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.
We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our shareholders.
We believe that our existing cash and cash equivalents, and cash flows from our operating activities and funds available under
our credit facilities, will be sufficient to meet our anticipated cash needs for at least the next 12 months. 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.
37
If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our
shareholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior
to those of existing shareholders. We cannot be certain that additional financing will be available on terms favorable to us, or at
all. If adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our
operations, take advantage of unanticipated opportunities, develop or enhance our products, or otherwise respond to
competitive pressures could be significantly limited. Furthermore, in the event adequate capital is not available to us as
required, or is not available on favorable terms, our business, financial condition, results of operations, and cash flows may be
adversely affected.
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.
***
38
ITEM 1B. Unresolved Staff Comments
Not Applicable.
ITEM 2. Properties
The following chart contains certain information regarding each of our principal facilities.
Location
Function
Approximate
Square Footage
Term
(in calendar year)
Alhambra, California
Corporate Headquarters
Manufacturing and research and development
facilities
75,000
Leases covering two of six
buildings expired in 2011;
another lease covering four of
six buildings expires in 2020
(1) and (2)
Langfang, China
Warehouse facility
1,100
Lease expires in 2019
Beijing, China
Manufacturing facility
23,200
Lease expires in 2021 (1)
Ivyland, Pennsylvania Former manufacturing and research and
development facility (3)
9,000
Lease expires in 2019 (3)
Footnotes
(1) Leases have the option to be renewed by us at fixed terms.
(2) Certain facility leases in Alhambra, California which have expired are being maintained on a month-to-month basis.
(3) The Ivyland, Pennsylvania facility was closed during the fiscal year ended September 30, 2018 and is no longer
occupied.
ITEM 3.
Legal Proceedings
See the disclosures under the caption “Legal Proceedings” in Note 13- 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.
39
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 29,
2018, we had approximately 92 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
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2018
$5.80 - $8.75
$4.90 - $7.25
$4.40 - $5.85
$4.40 - $5.50
Fiscal 2017
$5.15 - $9.50
$8.05 - $10.50
$8.10 - $11.95 $8.20 - $12.20
Dividend Policy
No dividends have been declared during the two most recent fiscal years. Under the terms of our credit facility with Wells
Fargo Bank, N. A., we are restricted from paying dividends that result in the liquidity of the Company being less than $25.0
million after paying the dividend if any amounts are outstanding under our credit facility. The payment of dividends, if any, in
the future is at the discretion of the Board of Directors.
40
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, 2018, 2017, and 2016 and the balance sheet data as of September 30, 2018 and 2017 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, 2015 and 2014 and the selected balance sheet
data as of September 30, 2016, 2015, and 2014 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.
Selected Financial Data
Statements of Operations Data
(in thousands, except loss per share)
Revenue
Gross profit
Operating (loss) income
(Loss) income from continuing operations
Income from discontinued operations
Net (loss) income
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
$
$
$
$
$
Balance Sheet Data
(in thousands)
Cash, cash equivalents and restricted cash
Working capital
Total assets
Long-term liabilities
Shareholders' equity
2017
For the Fiscal Years Ended September 30,
2016
91,998 $
30,954
2,939
2,619
5,647
8,266
2018
85,617 $ 122,895 $
18,487
(18,311)
(17,453)
—
(17,453)
2015
81,685 $
28,691
(4,522)
(2,272)
65,372
63,100
42,534
7,741
8,221
14
8,235
2014
55,514
12,114
(20,331)
4,082
770
4,852
(0.64) $
—
(0.64) $
(0.64) $
—
(0.64) $
2018
0.31 $
0.00
0.31 $
0.30 $
0.00
0.30 $
0.10 $
0.22
0.32 $
0.10 $
0.21
0.31 $
(0.08) $
2.18
2.10 $
(0.08) $
2.18
2.10 $
0.13
0.03
0.16
0.13
0.03
0.16
As of September 30,
2016
2015
2017
2014
$ 63,195 $ 68,754 $ 64,870 $ 112,260
88,848
135,898
1,891
106,805
103,042
144,084
1,667
120,774
$ 22,169
92,957 127,994
30,914
127,211 160,907 191,342
6,018
107,317 135,442 112,347
1,774
1,635
Working capital, calculated as current assets minus current liabilities, is a financial metric we use that represents
available operating liquidity.
41
Significant Transactions
Significant transactions that affect the comparability of our operating results and financial condition include:
Fiscal 2018
Continuing Operations:
• We recorded a $1.0 million reserve on non-current inventory in the fiscal year ended September 30, 2018 due to
the decline in sales and future demand of the inventory.
• As a result of the revision in the estimated amount and timing of cash flows for Asset Retirement Obligations
(“ARO” or “AROs”) during the fiscal year ended September 30, 2018, the Company increased the ARO liability
by $0.1 million and recorded a loss from change in estimate on ARO liability.
Fiscal 2017
Continuing Operations:
• We recorded a charge to impairments of approximately $0.5 million in the fiscal year ended September 30, 2017
in connection with the transition of our manufacturing operations in China to a new manufacturing facility. See
Note 9 - Property, Plant, and Equipment, net for additional information.
• During the fiscal year ended September 30, 2017, the Company recorded charges of $2.0 million related to
various reductions in workforce primarily related to the outsourcing of our wafer fabrication lab and operations
assembly and the opening of our new manufacturing facility in China. See Note 10 - Accrued Expenses and Other
Current Liabilities for additional information.
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, for 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 14 - 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 owed 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 was 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 13 - 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 13 - 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 it would cease manufacturing a part.
42
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 5 - Discontinued Operations and Note 13 - 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.
• AROs: As a result of the revision in the estimated amount and timing of cash flows for AROs 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 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 13 - 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 Technologies Corporation (“SolAero”) purchased substantially all of the assets, and assumed
substantially all of the liabilities, 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”), for $149.9 million in cash, after giving effect to a $0.1 million working capital
adjustment finalized and paid during the fiscal year ended September 30, 2015. On January 2, 2015,
NeoPhotonics Corporation acquired certain assets, and assumed certain liabilities, of the Company’s
telecommunications business (the “Digital Products Business”), for $17.0 million in cash and a notes receivable
that was 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, 2018, 2017, 2016 and 2015. See Note 5 - 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.
43
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 8 within this Annual 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 (referred to herein, together with its subsidiaries, as the “Company,” “we,” “our,” or “EMCORE”), was
established in 1984 as a New Jersey corporation. The Company became publicly traded in 1997 and is listed on the Nasdaq
Stock Exchange under the ticker symbol EMKR. EMCORE pioneered the linear fiber optic transmission technology that
enabled the world’s first delivery of Cable TV directly on fiber, and today is a leading provider of advanced Mixed-Signal
Optics products that enable communications systems and service providers to meet growing demand for increased bandwidth
and connectivity. The Mixed-Signal Optics technology at the heart of our broadband communications products is shared with
our fiber optic gyros and inertial sensors to provide the aerospace and defense markets with state-of-the-art navigations systems
technology. With both analog and digital circuits on multiple chips, or even a single chip, the value of Mixed-Signal device
solutions is often far greater than traditional digital applications and requires a specialized expertise held by EMCORE which is
unique in the optics industry.
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;
the allowance for doubtful accounts; 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:
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 7 - Accounts Receivable
in the notes to the consolidated financial statements for additional information related to our receivables.
44
Inventory
Inventory is stated at the lower of cost or net realizable value (first-in, first-out). 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 assumptions about future demand and market conditions. The charge related to inventory write-downs is recorded as a
cost of revenue. We evaluate inventory levels at least quarterly against sales forecasts on 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 8 - Inventory in the notes to the consolidated financial statements for additional information related to our
inventory.
Income Taxes
In accordance with the authoritative guidance 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 sale of the photovoltaics business in December
2014, 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 12 - 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. 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 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.
45
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.
***
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 notes 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:
For the fiscal year ended
September 30,
2017
100.0%
65.4
34.6
2018
100.0 %
78.4
21.6
2016
100.0%
66.4
33.6
24.8
18.0
—
—
0.2
0.1
43.1
(21.5)
0.9
(0.5)
0.1
0.5
(21.0)
0.5
(20.5)
18.1
10.2
0.4
—
—
(0.4)
28.3
6.3
0.2
0.1
0.2
0.5
6.8
(0.1)
6.7
22.5
10.8
(2.8)
—
(0.1)
30.4
3.2
0.1
(0.4)
—
(0.3)
2.9
(0.0)
2.9
—
(20.4)%
0.0
6.7%
6.1
9.0%
Revenue
Cost of revenue
Gross profit
Operating expense (income):
Selling, general, and administrative
Research and development
Impairments
Recovery of previously incurred litigation related
fees and expenses from arbitration award
Loss (gain) from change in estimate on ARO
Loss (gain) on sale of assets
Total operating expense
Operating (loss) income
Other income (expense):
Interest income, net
Foreign exchange (loss) gain
Other income
Total other income (expense)
(Loss) income from continuing operations
before income tax benefit (expense)
Income tax benefit (expense)
(Loss) income from continuing operations
Loss from discontinued operations, net of
tax
Net (loss) income
46
Comparison of Financial Results for the Fiscal Years Ended September 30, 2018 and 2017
(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
Impairments
Loss (gain) from change in estimate on ARO
Loss (gain) on sale of assets
Total operating expense
Operating (loss) income
Other income (expense):
Interest income, net
Foreign exchange (loss) gain
Other income
Total other income
(Loss) income 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 (loss) income
Revenue
$
2018
85,617 $
67,130
18,487
2017
122,895 $
80,361
42,534
$ Change
% Change
(30.3)%
(16.5)%
(56.5)%
(37,278)
(13,231)
(24,047)
21,232
15,387
—
145
34
36,798
(18,311)
733
(434)
110
409
22,246
12,542
506
(45)
(456)
34,793
7,741
245
82
316
643
(1,014)
2,845
(506)
190
490
2,005
(26,052)
488
(516)
(206)
(234)
(17,902)
449
(17,453)
—
(17,453) $
$
8,384
(163)
8,221
14
8,235 $
(26,286)
612
(25,674)
(14)
(25,688)
(4.6)%
22.7%
(100.0)%
422.2%
107.5%
5.8%
(336.5)%
199.2%
(629.3)%
(65.2)%
(36.4)%
(313.5)%
375.5%
(312.3)%
(100.0)%
(311.9)%
For the fiscal year ended September 30, 2018, revenue decreased 30.3% compared to the prior year driven by lower sales
volume of our CATV components and RFoG products primarily to U.S. customers partially offset by increases in revenue from
our Chip Devices and Navigation Systems product lines. The decrease in CATV components is primarily the result of a
significant customer experiencing a large inventory accumulation due to the consolidation of contract manufacturers' inventory
in the U.S..
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 21.6% and 34.6% for the fiscal years ended September 30, 2018 and 2017, respectively.
Stock-based compensation expense within cost of revenue totaled approximately $0.5 million during each of the fiscal years
ended September 30, 2018 and 2017.
47
For the fiscal year ended September 30, 2018, gross profit decreased by 56.5% when compared to the prior year. The decrease
in gross profit for the fiscal year ended September 30, 2018 was primarily due to lower sales and production volumes, resulting
in lower operating leverage due to higher fixed manufacturing labor and expenses, and higher wafer fabrication expenses. The
decrease in gross margin for the fiscal year ended September 30, 2018 was primarily due to lower revenue and cost of revenue
comprising a higher percentage of revenue. During the fiscal year ended September 30, 2018, we recorded a $1.0 million
reserve on non-current inventory due to the decline in sales and future demand of the inventory.
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 $2.6 million during each of the fiscal years ended
September 30, 2018 and 2017.
SG&A expense for the fiscal year ended September 30, 2018 was lower than the amount reported in the prior year primarily
due to lower compensation costs and severance expenses partially offset by an increase in expense for professional services, an
increase in the allowance for bad debts and the costs incurred in connection with the closing of our Pennsylvania facility.
As a percentage of revenue, SG&A expenses were 24.8% and 18.1% for fiscal years ended September 30, 2018 and 2017,
respectively. The increase in SG&A expense as a percentage of revenue in the fiscal year ended September 30, 2018 compared
to the prior year is due to the decrease in revenues in the fiscal year ended September 30, 2018.
Research and Development (“R&D”)
R&D consists primarily of compensation expense including non-cash stock-based compensation expense, as well as
engineering and prototype costs, depreciation expense, and other overhead expenses, as they related to the design,
development, and testing of our products. Our R&D costs are expensed as incurred. We believe that in order to remain
competitive, we must invest significant financial resources in developing new product features and enhancements and in
maintaining customer satisfaction worldwide.
Stock-based compensation expense within R&D totaled approximately $0.6 million and $0.5 million during the fiscal years
ended September 30, 2018 and 2017, respectively.
R&D expense for the fiscal year ended September 30, 2018 was higher than the amounts reported in the same period in 2017
primarily due to an increase in compensation costs and project spending, primarily in navigation systems.
As a percentage of revenue, R&D expenses were 18.0% and 10.2% for the fiscal years ended September 30, 2018 and 2017,
respectively. The increase in R&D expense as a percentage of revenue in the fiscal year ended September 30, 2018 compared
to the prior year is due to the decrease in revenues and higher R&D expense in the fiscal year ended September 30, 2018.
Impairments
In March 2017, in connection with our opening of a new manufacturing facility in China, we identified equipment with a net
book value of approximately $0.6 million that would no longer be utilized after the planned move later in fiscal year 2017.
After taking into consideration the costs of disposal and estimated net funds from the sale of the equipment of approximately
$0.1 million, we recorded a charge to impairments of approximately $0.5 million in the fiscal year ended September 30, 2017.
See Note 9 - Property, Plant and Equipment, net in the notes to the consolidated financial statements for additional information.
48
Loss (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, 2018, the Company increased the ARO liability by $0.1 million and recorded a loss from change in estimate on
ARO liability of $0.1 million. As a result of the revision in the estimated amount and timing of cash flows for ARO during the
fiscal year ended September 30, 2017, the Company reduced the ARO liability by $45,000 and recorded a gain from change in
estimate on ARO liability of $45,000. See Note 13 - Commitments and Contingencies in the notes to the consolidated financial
statements for additional information.
Operating (Loss) Income
Operating (loss) income represents revenue less the cost of revenue and direct operating expenses incurred. Operating (loss)
income 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) income was (21.5)% and 6.3% for the fiscal years ended September 30, 2018 and
2017, respectively. The decrease in operating income as a percentage of revenue in the fiscal year ended September 30, 2018
compared to the prior year is primarily due to the decline in gross profit in the fiscal year ended September 30, 2018.
Other Income (Expense)
Interest Income, net
During the fiscal years ended September 30, 2018 and 2017, we recorded $0.7 million and $0.4 million, respectively, of interest
income earned on cash and cash equivalents balances, which was partially offset by interest expense and letter of credit fees
related to our Credit Facility (as defined below). Interest income for the fiscal year ended September 30, 2018 was higher than
the amount reported in the prior year due to higher interest income earned on cash and cash equivalents balances.
Foreign Exchange
Gains or losses from foreign currency transactions denominated in currencies other than the U.S. dollar, both realized and
unrealized, are recorded as foreign exchange gain (loss) on our consolidated statements of operations and comprehensive
income. The gain (losses) recorded relate to the change in value of the Yuan Renminbi relative to the U.S. dollar.
49
Income Tax Benefit (Expense)
For the fiscal year ended September 30, 2018, the Company recorded income tax benefit from continuing operations of
approximately $0.4 million, and $0 of income tax benefit within income from discontinued operations. The income tax benefit
is primarily comprised of the effect of recent changes in tax laws in December 2017 that eliminates the Alternative Minimum
Tax (“AMT”) and will result in a refund to the Company of amounts paid in prior fiscal years and the fiscal year 2018
operating loss. See Note 12 - Income and other Taxes in the notes to the consolidated financial statements for additional
disclosures. For the fiscal year ended September 30, 2017, the Company recorded income tax expense from continuing
operations of approximately $0.2 million and $0 of income tax expense within income from discontinued operations.
Comparison of Financial Results for the Fiscal Years Ended September 30, 2017 and 2016
(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
Impairments
Recovery of previously incurred litigation related fees
and expenses from arbitration award
Gain from change in estimate on ARO
Gain on sale of assets
Total operating expense
Operating income
Other income (expense):
Interest income, net
Foreign exchange gain (loss)
Other income
Total other income (expense)
Income from continuing operations before
income tax expense
Income tax expense
Income from continuing operations
Income from discontinued operations, net of tax
Net income
Revenue
$
2017
122,895 $
80,361
42,534
22,246
12,542
506
—
(45)
(456)
34,793
7,741
245
82
316
643
8,384
(163)
8,221
2016
$ Change % Change
91,998 $
61,044
30,954
20,734
9,921
—
(2,599)
—
(41)
28,015
2,939
88
(394)
—
(306)
2,633
(14)
2,619
30,897
19,317
11,580
1,512
2,621
506
33.6%
31.6%
37.4%
7.3%
26.4%
N/A
2,599
(45)
(415)
6,778
4,802
100.0%
N/A
(1,012.2)%
24.2%
163.4%
157
476
316
949
178.4%
120.8%
N/A
310.1%
5,751
(149)
5,602
218.4%
(1,064.3)%
213.9%
14
8,235 $
5,647
8,266 $
(5,633)
(31)
(99.8)%
(0.4)%
$
For the fiscal year ended September 30, 2017, revenue increased 33.6% compared to the prior year driven by significantly
higher sales of our CATV products primarily to U.S. customers.
50
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 34.6% and 33.6% for fiscal years ended September 30, 2017 and 2016, respectively.
Stock-based compensation expense within cost of revenue totaled approximately $0.5 million and $0.3 million during the fiscal
years ended September 30, 2017 and 2016, respectively.
For the fiscal year ended September 30, 2017, gross margins increased by 37.4% when compared to the prior year. The
increase in gross profit and margins for the fiscal year ended September 30, 2017 was primarily due to product mix and higher
sales volume.
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 $2.6 million and $1.4 million during the fiscal years
ended September 30, 2017 and 2016, respectively. The increase in stock-based compensation within SG&A during the fiscal
year ended September 30, 2017 when compared to the prior year is primarily due to expense associated with Performance
Stock Units granted during the fiscal year ended September 30, 2017.
SG&A expense for the fiscal year ended September 30, 2017 was higher than the amount reported in the prior year primarily
due to higher compensation costs, severance, including $1.0 million related to a workforce reduction we initiated in connection
with the transition of our manufacturing operations in China to a new manufacturing facility in China during the fiscal year
ended September 30, 2017, and stock-based compensation partially offset by lower legal and professional expenses.
As a percentage of revenue, SG&A expenses were 18.1% and 22.5% for the fiscal years ended September 30, 2017 and 2016,
respectively. The decrease in SG&A expense as a percentage of revenue in the fiscal year ended September 30, 2017 compared
to the prior year is due to the increase in revenues in the fiscal year ended September 30, 2017.
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 $0.5 million and $0.4 million during the fiscal years
ended September 30, 2017 and 2016, respectively.
R&D expense for the fiscal year ended September 30, 2017 was higher than the amounts reported in the prior year primarily
due to higher compensation costs and increased project spending primarily related to navigation products and Linear Externally
Modulated Lasers.
As a percentage of revenue, R&D expenses were 10.2% and 10.8% for the fiscal years ended September 30, 2017 and 2016,
respectively. The decrease in R&D expense as a percentage of revenue in the fiscal year ended September 30, 2017 compared
to the prior year is due to the increase in revenues in the fiscal year ended September 30, 2017.
51
Impairments
In March 2017, in connection with the transition of our manufacturing operations in China to a new manufacturing facility in
China, we identified equipment with a net book value of approximately $0.6 million that would no longer be utilized after the
planned move later in fiscal year 2017. After taking into consideration the costs of disposal and estimated net funds from the
sale of the equipment of approximately $0.1 million, we recorded a charge to impairments of approximately $0.5 million in the
fiscal year ended September 30, 2017. See Note 9 - Property, Plant and Equipment, net in the notes to the consolidated financial
statements for additional information.
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 and costs
recovered by the Company from Sumitomo Electric Industries Ltd. (“SEI”) as a result of a decision by the International Court
of Arbitration tribunal in April 2016 related to an arbitration proceeding previously commenced by SEI. 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.
Operating Income
Operating income represents revenue less the cost of revenue and direct operating expenses incurred. Operating income 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 was 6.3% and 3.2% for the fiscal years ended September 30, 2017 and 2016, respectively. The
increase in operating income as a percentage of revenue in the fiscal year ended September 30, 2017 compared to the prior year
is due to the increase in operating income in the fiscal year ended September 30, 2017.
Other Income (Expense)
Interest Income, net
During the fiscal years ended September 30, 2017 and 2016, we recorded $0.4 million and $0.2 million, respectively, of interest
income earned on cash and cash equivalents balances, which was partially offset by interest expense and letter of credit fees
related to our Credit Facility (as defined below) . Interest income for the fiscal year ended September 30, 2017 was higher than
the amount reported in the prior year due to higher interest income earned on cash and cash equivalents balances.
Foreign Exchange
Gains or losses from foreign currency transactions denominated in currencies other than the U.S. dollar, both realized and
unrealized, are recorded as foreign exchange gain (loss) on our consolidated statements of operations and comprehensive
income. The gain (losses) recorded relate to the change in value of the Yuan Renminbi relative to the U.S. dollar.
Income Tax Expense
For the fiscal year ended September 30, 2017, the Company recorded income tax expense from continuing operations of
approximately $0.2 million, and $0 of income tax expense within income from discontinued operations.
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.
52
Income from Discontinued Operations, Net of Tax
(in thousands, except percentages)
$
Revenue
Cost of revenue
Gross (loss) profit
Operating expense (income)
Recognition of previously deferred gain on sale of assets
Other income
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,
2017
2016
$ Change % Change
— $
12
(12)
15
—
41
14
—
14 $
— $
(659)
659
(1,160)
3,804
—
5,623
24
5,647 $
—
671
(671)
(1,175)
(3,804)
41
(5,609)
(24)
(5,633)
N/A
101.8%
(101.8)%
(101.3)%
(100.0)%
N/A
(99.8)%
(100.0)%
(99.8)%
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, 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 deferred
gain 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 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 13 - Commitments and Contingencies in the
notes to the consolidated financial statements for additional information.
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 and may not be comparable to prior periods.
Liquidity and Capital Resources
Other than the fiscal years ended September 30, 2018 and 2017, in recent years we have historically consumed cash from
operations and, 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.
As of September 30, 2018, cash and cash equivalents totaled $63.1 million and net working capital totaled approximately $88.8
million. Net working capital, calculated as current assets minus current liabilities, is a financial metric we use which represents
available operating liquidity. With respect to measures related to liquidity:
53
• Credit Facility: On November 11, 2010, we entered into a Credit and Security Agreement (“Credit Facility”) with
Wells Fargo Bank, N.A. (“Wells Fargo”). The Credit Facility, as amended by its seventh amendment on November 10,
2015, currently provides us with a revolving credit of up to $15.0 million. On November 7, 2018 we entered into a
Tenth Amendment of the Credit Facility which extended the maturity date of the facility to November 2021 that can be
used for working capital requirements, letters of credit, and other general corporate purposes subject to a limitation of
the Company having liquidity of at least $25,000,000 million after such use. 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 11 - Credit Facilities in the notes to the consolidated
financial statements for additional disclosures. As of November 29, 2018, there was no outstanding balance under this
Credit Facility, $0.5 million reserved for one outstanding stand-by letter of credit and $11.1 million available for
borrowing.
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. At the discretion of our Board of
Directors and subject to restrictions in our Credit Facility, 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. For example, under our Credit Facility, 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. 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.
Cash Flow
The Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2018, 2017 and 2016
reflects cash flows from both the continuing and discontinued operations of the Company.
Net Cash Provided By (Used In) Operating Activities
Operating Activities
(in thousands, except percentages)
Net cash provided by (used in)
operating activities
For the fiscal years ended September
30,
2017
2016
2018
Fiscal 2018 vs Fiscal 2017
$ Change % Change
Fiscal 2017 vs Fiscal
2016
$ Change % Change
$
1,470
$
11,701 $
(5,552) $
(10,231)
(87.4)%
$
17,253
310.8%
Fiscal 2018:
For the fiscal year ended September 30, 2018, our operating activities provided cash of $1.5 million primarily due to
changes in our operating assets and liabilities (or working capital components, which includes non-current inventory)
of $8.2 million, depreciation and amortization expense of $5.6 million, stock-based compensation expense of $3.6
million, provision for doubtful accounts of $0.6 million, warranty provision of $0.4 million and loss on disposal of
equipment of $34,000 partially offset by our net loss of $17.5 million. The change in our operating assets and
liabilities was primarily the result of a decrease in accounts receivable of $2.4 million and inventory of $5.1 million
and an increase in accounts payable of $0.5 million and other liabilities of $4.2 million, partially offset by an increase
in other assets of $3.9 million.
Fiscal 2017:
For the fiscal year ended September 30, 2017, our operating activities provided cash of $11.7 million primarily due to
our net income of $8.2 million, depreciation, amortization and accretion expense of $3.8 million, stock-based
compensation expense of $3.6 million, impairment charge of $0.5 million and warranty provision of $0.6 million,
partially offset by a change in our operating assets and liabilities (or working capital components, which includes non-
current inventory) of $4.5 million. The change in our operating assets and liabilities was primarily the result of an
increase in accounts receivable of $3.9 million, inventory of $0.1 million and other assets of $4.5 million partially
offset by an increase in accounts payable of approximately $2.1 million and accrued expenses and other liabilities of
$1.9 million.
54
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 the 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.
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.
Net Cash Used In Investing Activities
Investing Activities
(in thousands, except percentages)
Net cash used in investing
activities
For the fiscal year ended September 30, Fiscal 2018 vs Fiscal 2017
2018
2017
2016
$ Change % Change
Fiscal 2017 vs Fiscal
2016
$ Change % Change
$
(6,501) $
(9,126) $
(3,826) $
2,625
28.8%
$
(5,300)
(138.5)%
Fiscal 2018:
For the fiscal year ended September 30, 2018, our investing activities used $6.5 million of cash for capital related
expenditures of $6.6 million primarily related to investment in our wafer fabrication facility.
Fiscal 2017:
For the fiscal year ended September 30, 2017, our investing activities used $9.1 million of cash primarily for capital
related expenditures of $9.6 million, partially offset by the receipt of proceeds from the disposal of equipment of $0.5
million.
Fiscal 2016:
For the fiscal year ended September 30, 2016, our investing activities used $3.8 million of cash primarily from capital
related expenditures of $5.8 million, partially offset by the receipt of escrow funds from sale of assets of $1.9 million.
55
Net Cash (Used In) Provided By Financing Activities
Financing Activities
(in thousands, except percentages)
Net cash (used in) provided by
financing activities
For the fiscal year ended September
30,
2017
2016
2018
Fiscal 2018 vs Fiscal
2017
$ Change % Change
Fiscal 2017 vs Fiscal
2016
$ Change % Change
$
(487) $
1,306 $
(38,254) $
(1,793)
(137.3)%
$
39,560
103.4%
Fiscal 2018:
For the fiscal year ended September 30, 2018, our financing activities used cash of $0.5 million primarily for tax
withholding paid on behalf of employees for stock-based awards of $1.3 million partially offset by proceeds from
stock plan transactions of $0.8 million.
Fiscal 2017:
For the fiscal year ended September 30, 2017, our financing activities provided cash of $1.3 million from proceeds
from stock transactions.
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.
Contractual Obligations and Commitments
Our contractual obligations and commitments for fiscal 2019 and over the next five fiscal years are summarized in the table below:
(in thousands)
Total
Purchase obligations
Asset retirement obligations
Operating lease obligations
$
21,669 $
2,192
3,488
2019
21,223 $
40
803
2020 to
2021
2022 to
2023
2024 and
later
227 $
—
1,425
160 $
59
1,260
59
2,093
—
Total contractual obligations
and commitments
$
27,349 $
22,066 $
1,652 $
1,479
$
2,152
Interest payments are not included in the contractual obligations and commitments table above since they are insignificant
to our consolidated results of operations.
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,
2018, we had unrecognized tax benefits of $0.4 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
We have known conditional ARO conditions, such as certain asset decommissioning and restoration of rented facilities
to be performed in the future. Our ARO includes 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 the ARO. See Note 13 - Commitments and
Contingencies in the notes to the consolidated financial statements for additional information related to our AROs.
Operating Leases
Operating leases include non-cancelable terms and exclude renewal option periods, property taxes, insurance and
maintenance expenses on leased properties. See Note 13 - Commitments and Contingencies in the notes to the
consolidated financial statements for additional information related to our operating lease obligations.
56
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.
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 10 - 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.
57
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.
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
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
The U.S. and global capital markets have periodically experienced 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.
58
ITEM 8.
Financial Statements and Supplementary Data
EMCORE CORPORATION
Consolidated Statements of Operations and Comprehensive (Loss) Income
For the Fiscal Years Ended September 30, 2018, 2017 and 2016
(in thousands, except per share data)
$
Revenue
Cost of revenue
Gross profit
Operating expense (income):
Selling, general, and administrative
Research and development
Impairments
Recovery of previously incurred litigation related
fees and expenses from arbitration award
Loss (gain) from change in estimate on ARO
obligation
Loss (gain) on sale of assets
Total operating expense
Operating (loss) income
Other income (expense):
Interest income, net
Foreign exchange (loss) gain
Other income
Total other income (expense)
(Loss) income 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 (loss) income
Foreign exchange translation adjustment
Comprehensive (loss) 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
$
$
$
$
$
$
2018
For the Fiscal Years ended September 30,
2017
122,895 $
80,361
42,534
85,617 $
67,130
18,487
91,998
61,044
30,954
2016
21,232
15,387
—
22,246
12,542
506
20,734
9,921
—
—
—
(2,599)
145
34
36,798
(18,311)
733
(434)
110
409
(17,902)
449
(17,453)
—
(17,453) $
324
(17,129) $
(0.64) $
—
(0.64) $
(0.64) $
—
(0.64) $
(45)
(456)
34,793
7,741
245
82
316
643
8,384
(163)
8,221
14
8,235 $
(18)
8,217 $
0.31 $
0.00
0.31 $
0.30 $
0.00
0.30 $
—
(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
Weighted-average number of basic shares outstanding
Weighted-average number of diluted shares
outstanding
27,266
27,266
26,659
27,544
25,979
26,518
The accompanying notes are an integral part of these consolidated financial statements.
59
EMCORE CORPORATION
Consolidated Balance Sheets
As of September 30, 2018 and 2017
(in thousands)
Current assets:
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance of $548 and $22, respectively
Inventory
Prepaid expenses and other current assets
Total current assets
Property, plant, and equipment, net
Non-current inventory
Other non-current assets
Total assets
LIABILITIES and SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Total current liabilities
Asset retirement obligations
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 11)
Shareholders’ equity:
Common stock, no par value, 50,000 shares authorized; 34,487 shares issued
and 27,577 shares outstanding as of September 30, 2018; 33,938 shares issued
and 27,028 shares outstanding as of September 30, 2017
Treasury stock at cost; 6,910 shares
Accumulated other comprehensive income
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
As of
September 30,
2018
As of
September 30,
2017
$
$
$
$
63,117 $
78
19,275
20,850
12,730
116,050
18,216
1,433
199
135,898 $
12,997 $
14,205
27,202
1,809
82
29,093
68,333
421
22,265
25,139
8,527
124,685
16,635
2,686
78
144,084
11,818
9,825
21,643
1,638
29
23,310
734,066
(47,721 )
885
(580,425 )
106,805
135,898 $
730,906
(47,721)
561
(562,972)
120,774
144,084
The accompanying notes are an integral part of these consolidated financial statements.
60
EMCORE CORPORATION
Consolidated Statements of Shareholders' Equity
For the Fiscal Years Ended September 30, 2018, 2017 and 2016
(in thousands)
Shares of
Common
Stock
Value of
Common
Stock
Treasury
Stock
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
Shareholders'
Equity
Balance as of September 30, 2015
25,676
$
762,003 $
(47,721) $
847
(579,687) $
135,442
Net income
Translation adjustment
Stock-based compensation
Stock option exercises
Special dividend paid
Issuance of common stock - ESPP
Issuance of common stock - Board of
Directors
Cumulative adjustment for adoption
of accounting standard
—
—
284
45
—
193
46
—
—
—
1,868
225
(39,214)
735
263
(214)
—
—
—
—
—
—
—
—
Balance as of September 30, 2016
26,244
725,666
(47,721)
Net income
Translation adjustment
Stock-based compensation
Stock option exercises
Issuance of common stock - ESPP
Issuance of common stock - Board of
Directors
—
—
432
158
133
61
—
—
3,602
534
773
331
—
—
—
—
—
—
Balance as of September 30, 2017
27,028
730,906
(47,721)
Net loss
Translation adjustment
Stock-based compensation
Stock option exercises
Tax withholding paid on behalf of
employees for stock-based awards
Issuance of common stock - ESPP
—
—
372
6
—
171
—
—
3,648
28
(1,257)
741
—
—
—
—
—
—
—
(268)
—
—
—
—
—
—
579
—
(18)
—
—
—
—
561
—
324
—
—
—
—
8,266
—
—
—
—
—
—
214
8,266
(268)
1,868
225
(39,214)
735
263
—
(571,207)
107,317
8,235
—
—
—
—
—
8,235
(18)
3,602
534
773
331
(562,972)
120,774
(17,453)
—
—
—
—
—
(17,453)
324
3,648
28
(1,257)
741
Balance as of September 30, 2018
27,577
$
734,066 $
(47,721) $
885 $
(580,425) $
106,805
The accompanying notes are an integral part of these consolidated financial statements.
61
EMCORE CORPORATION
Consolidated Statements of Cash Flows
For the Fiscal Years Ended September 30, 2018, 2017 and 2016
(in thousands)
For the fiscal year ended September 30,
2018
2017
2016
$
(17,453) $
8,235 $
8,266
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense
Stock-based compensation expense
Provision adjustments related to doubtful accounts
Provision adjustments related to product warranty
Impairments of equipment
Recognition of previously deferred gain on sale of assets from discontinued operations
Net loss (gain) on disposal of equipment
Other
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 provided by (used in) operating activities
Cash flows from investing activities:
Purchase of equipment
Receipt of escrow funds from sale of assets
Proceeds from disposal of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities:
Payment of special dividend
Proceeds from stock plans
Tax withholding paid on behalf of employees for stock-based awards
Net cash (used in) provided by financing activities
Effect of exchange rate changes on foreign currency
Net (decrease) increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash 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
$
$
$
$
$
5,617
3,648
599
431
—
—
34
412
10,741
2,372
5,067
(3,925)
477
4,191
8,182
1,470
(6,583)
—
82
(6,501)
—
770
(1,257)
(487)
(41)
(5,559)
68,754
63,195 $
63 $
131 $
755 $
— $
3,757
3,602
23
573
506
—
(456)
(50)
7,955
(3,859)
(140)
(4,455)
2,095
1,870
(4,489)
11,701
(9,600)
—
474
(9,126)
—
1,306
—
1,306
3
3,884
64,870
68,754 $
71 $
114 $
(861) $
331 $
2,506
2,086
23
376
—
(3,804)
(41)
(1,422)
(276)
(1,171)
(10,904)
148
3,179
(4,794)
(13,542)
(5,552)
(5,779)
1,853
100
(3,826)
(39,214)
960
—
(38,254)
242
(47,390)
112,260
64,870
88
124
282
263
The accompanying notes are an integral part of these consolidated financial statements.
62
EMCORE Corporation
Notes to our Consolidated Financial Statements
NOTE 1.
Description of Business
Business Overview
EMCORE Corporation (referred to herein, together with its subsidiaries, as the “Company,” “we,” “our,” or “EMCORE”) was
established in 1984 as a New Jersey corporation. The Company became publicly traded in 1997 and is listed on the Nasdaq
stock exchange under the ticker symbol EMKR. EMCORE pioneered the linear fiber optic transmission technology that
enabled the world’s first delivery of Cable TV directly on fiber, and today is a leading provider of advanced Mixed-Signal
Optics products that enable communications systems and service providers to meet growing demand for increased bandwidth
and connectivity. The Mixed-Signal Optics technology at the heart of our broadband communications products is shared with
our fiber optic gyros and inertial sensors to provide the aerospace and defense markets with state-of-the-art navigation systems
technology. With both analog and digital circuits on multiple chips, or even a single chip, the value of Mixed-Signal device
solutions is often far greater than traditional digital applications and requires a specialized expertise held by EMCORE which is
unique in the optics industry.
We currently have one reporting segment: Fiber Optics. This segment is comprised of three product lines: Broadband (which
includes Cable TV (“CATV”) systems and components, radio frequency over glass (“RFoG”) products, satellite/microwave
communications products and wireless communication products), Chip Devices and Navigation Systems.
Sale of Photovoltaics and Digital Products Businesses
In the fiscal year ended September 30, 2015, EMCORE completed the sale of the Company's Photovoltaics Business to
SolAero Technologies Corporation (“SolAero”) pursuant to the Asset Purchase Agreement (the “Photovoltaics Agreement”)
under 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 $149.9 million in cash.
In the fiscal year ended September 30, 2015, EMCORE completed the sale of the Company's telecommunications business (the
“Digital Products Business”) to NeoPhotonics Corporation, a Delaware corporation (“NeoPhotonics”), pursuant to the Asset
Purchase Agreement (the “Digital Products Agreement”), under which NeoPhotonics acquired certain assets, and certain
liabilities, related to the Company's Digital Products Business for an aggregate purchase price of $17.5 million. On January 2,
2015, EMCORE completed the sale of the Digital Products Business for $1.5 million in cash and a promissory note in the
principal amount of $16.0 million (the "Promissory Note"). 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 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, 2018 or September 30, 2017. 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, 2018, 2017 and 2016. See Note 5 - Discontinued Operations for additional
information. The notes to our consolidated financial statements relate to our continuing operations only, unless otherwise
indicated.
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.
63
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:
•
•
•
the valuation of inventory;
the allowance for doubtful accounts; 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 net realizable value (first-in, first-out). 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 assumptions about future demand and market conditions. The charge related to inventory write-downs is
recorded as a cost of revenue. We evaluate inventory levels at least quarterly against sales forecasts on 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 8 - Inventory in the notes to the consolidated financial statements for additional information related to
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:
Description
Equipment
Furniture and fixtures
Computer hardware and software
Leasehold improvements
Estimated Useful Life
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.
64
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 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.
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. 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.
65
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.
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 or award 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 or the Monte-Carlo lattice model and the straight-line attribution approach to determine the fair value of stock-
based awards in accordance with ASU 2016-09, Compensation. These option-pricing models require the input of highly
subjective assumptions, including the option's expected life, the expected volatility of the price of the Company’s common
stock, risk-free interest rates and the expected dividend yield of the Company’s common stock. Stock-based compensation
expense is reduced for 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.
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 and U.S. Tax Reform
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:
66
•
•
•
•
•
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09
clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as
modifications. The new guidance is intended to reduce diversity in practice and result in fewer changes to the terms of
an award being accounted for as a modification. Under ASU 2017-09, an entity will not apply modification accounting
to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability
instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to
awards modified on or after the adoption date. The new standard is effective for annual periods, beginning after
December 15, 2017 and interim periods within those annual periods. The new standard will be effective for our fiscal
year beginning October 1, 2018 and early adoption is permitted. The Company does not expect the adoption of ASU
2017-09 will have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses, Measurement of Credit Losses on
Financial Instruments, which changes the way entities measure credit losses for most financial assets and certain other
instruments that are not measured at fair value through net earnings. The new standard is effective for annual periods
beginning after December 15, 2019, including interim periods within those annual periods. The new standard will be
effective for our fiscal year beginning October 1, 2020 and early adoption is permitted. We are evaluating the impact
the adoption of the new standard will have on our consolidated financial statements and related disclosures.
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. We are in the process of
implementing changes to our systems and processes in conjunction with our review of lease agreements. Topic 842
will be effective for our fiscal year beginning October 1, 2019 and expect to elect certain available transitional
practical expedients. Early adoption is permitted.
As currently issued, entities are required to use a modified retrospective transition approach for leases existing at, or
entered into after, the beginning of the earliest comparative period presented in the financial statements. There are
additional optional practical expedients that an entity may elect to apply. The Company is continuing to evaluate the
effect of this update on its consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Topic 825): Recognition and
Measurement of Financial Assets and Financial Liabilities. This ASU amends certain aspects of recognition,
measurement, presentation and disclosure of financial instruments, and supersedes the guidance to classify equity
securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and
requires equity securities to be measured at fair value with changes in the fair value recognized through net income.
This ASU is effective for annual and interim periods beginning after December 15, 2017. The new standard will be
effective for our fiscal year beginning October 1, 2018. The Company does not anticipate the adoption will have a
material impact on our consolidated financial statements and related disclosures.
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 was effective for fiscal years beginning after December 15,
2016 and interim periods within those fiscal years. The new standard was effective for our fiscal year beginning
October 1, 2017, but there was no significant impact on our consolidated financial statements.
67
•
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 through December 2016, was effective for our fiscal year
beginning October 1, 2018. The standard permits the use of either the full retrospective or modified retrospective
method. We established a cross-functional implementation team to implement ASU 2014-09. We have substantially
completed and implemented changes to our systems, processes and internal controls to meet the reporting and
disclosure requirements upon adoption as of October 1, 2018.
We believe that the key revenue streams will be split between product sales and firm fixed price contracts, which
comprise the majority of our business. Based upon our evaluation completed, the Company believes that the pattern of
revenue recognition for these revenue streams upon implementation will generally be at a point-in-time for product
sales and over a period of time for firm fixed price contracts, which is consistent with current guidance. As of
September 30, 2018, the Company plans to adopt ASU 2014-09 utilizing a modified retrospective method on
October 1, 2018. The adoption of ASU 2014-09 will not have a material impact on the Company's consolidated
financial statements and related disclosures.
U.S. Tax Reform
• On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the future ongoing U.S. corporate income tax by,
among other things, lowering U. S. corporate income tax rates and implementing a territorial tax system. As the
Company has a September 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S.
statutory federal rate of approximately 25% for our fiscal year ending September 30, 2018, and 21% for subsequent
fiscal years. However, the Tax Act provides for a credit for historical Alternative Minimum Taxes (“AMT”) paid
against future taxes. As a result, the Company has taken a tax benefit of $0.5 million in the fiscal year ended
September 30, 2018 for historical AMT payments. In addition, the Tax Act eliminates the domestic manufacturing
deduction and moves to a territorial system, which also eliminates the ability to credit certain foreign taxes that existed
prior to enactment of the Tax Act. For the fiscal year ended September 30, 2018, the elimination of the manufacturing
deduction and credit for certain foreign taxes paid did not result in a significant impact on our consolidated financial
statements.
There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the
Tax Act imposes a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. In
addition, the reduction of the U.S. corporate tax rate will cause us to adjust our U.S. deferred tax assets and liabilities
to the lower federal base rate of 21%. Due to historical foreign losses and a full valuation allowance on our deferred
tax assets as of September 30, 2018, these transitional impacts did not result in an impact on our consolidated financial
statements for the fiscal year ended September 30, 2018.
The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ
from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any
legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for
income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company
has utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and
foreign exchange rates of foreign subsidiaries. The SEC has issued rules that allow for a measurement period of up to
one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We completed
finalizing and recording any resulting adjustments during our fiscal year ending September 30, 2018. See also Note 12
- Income and other Taxes.
NOTE 4.
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited
consolidated balance sheets that sum to the total of the same amounts shown in the unaudited statements of consolidated cash
flows:
68
(in thousands)
Cash
Cash equivalents
Restricted cash
Total cash, cash equivalents and
restricted cash
2018
As of September 30,
2017
2016
2,965 $
60,152 $
78
8,054 $
60,279 $
421
63,195
68,754
3,989
59,916
965
64,870
$
$
$
The Company's restricted cash includes cash balances which are legally or contractually restricted to use. The Company's
restricted cash is included in current assets as of September 30, 2018, 2017, and 2016.
NOTE 5.
Discontinued Operations
Sale of Photovoltaics Business
The following table presents the statements of operations for the discontinued operations of the Photovoltaics Business:
(in thousands)
Revenue
Cost of revenue
Gross (loss) income
Operating expense (income)
(Loss) income from discontinued operations
before income tax expense
Income tax benefit
For the Fiscal Years Ended September 30,
2017
2016
2018
$
— $
—
—
—
—
—
— $
12
(12)
13
(25)
—
—
(159)
159
(868)
1,027
20
(Loss) income from discontinued operations, net
of tax
$
— $
(25) $
1,047
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.
Included in discontinued operations of the Photovoltaics Business during the fiscal year ended September 30, 2016 were $0.4
million of New Mexico incentive tax credits received. There were no incentive tax credits received during the fiscal years
ended September 30, 2018 and 2017.
69
Sale of Digital Products Business
The following table presents the statements of operations for the discontinued operations of the Digital Products Business:
$
(in thousands)
Revenue
Cost of revenue
Gross profit
Operating expense (income)
Recognition of previously deferred gain on sale of
assets
Other income
Income from discontinued operations before
income tax expense
Income tax benefit
For the Fiscal Years Ended September
30,
2017
2016
2018
— $
—
—
—
—
—
—
—
— $
—
—
2
—
41
39
—
—
(500)
500
(292)
3,804
—
4,596
4
Income from discontinued operations, net of
tax
$
— $
39
$
4,600
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. As a
result of this agreement, we paid $0.2 million and 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. Also see Note 10 - 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 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
Sumitomo Electric Industries, LTD (“SEI”) arbitration. Also see Note 13- Commitments and Contingencies.
NOTE 6.
Fair Value Accounting
ASC Topic 820 (“ASC 820”), Fair Value Measurements, establishes a valuation hierarchy for disclosure of the inputs to
valuation techniques used to measure fair value. This standard describes a fair value hierarchy based on three levels of 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.
70
Cash consists primarily of bank deposits or highly liquid short-term investments with a maturity of three months or less at the
time of purchase. Restricted cash represents temporarily restricted deposits held as compensating balances against short-term
borrowing arrangements. Cash, cash equivalents and restricted cash are based on Level 1 measurements.
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, other current assets, and accounts
payable approximate fair value because of the short maturity of these instruments.
NOTE 7.
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,
2018
2017
19,823 $
(548)
19,275 $
22,287
(22)
22,265
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, 2018,
2017 and 2016.
Allowance for Doubtful Accounts
(in thousands)
For the Fiscal Years ended September 30,
2017
2016
2018
Balance at beginning of period
Provision adjustment - expense, net of
recoveries
Write-offs and other adjustments -
deductions to receivable balances
Balance at end of period
$
$
22 $
36 $
599
(73)
548 $
23
(37)
22 $
462
23
(449 )
36
During the fiscal year ended September 30, 2018, we recorded a $0.5 million reserve on accounts receivable related to two
customers account balances for which management had uncertainty with respect to its respective total collectability.
NOTE 8.
Inventory
The components of inventory consisted of the following:
As of September 30,
2018
2017
11,857 $
5,402
5,024
22,283 $
20,850 $
1,433 $
15,826
6,586
5,413
27,825
25,139
2,686
(in thousands)
Raw materials
Work in-process
Finished goods
Inventory balance at end of period
Current portion
Non-Current portion
$
$
$
$
71
The non-current inventory balance of $1.4 million and $2.7 million as of September 30, 2018 and 2017, respectively, is
comprised entirely of raw materials which we acquired as part of a last time purchase as a result of the vendor announcing it
would cease manufacturing a part. During the fiscal year ended September 30, 2018, we recorded a $1.0 million reserve on
non-current inventory due to the decline in sales and future demand of the inventory.
NOTE 9.
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,
2018
2017
36,625 $
1,109
2,928
2,049
3,648
46,359
(28,143)
18,216 $
31,507
1,109
2,974
2,330
4,539
42,459
(25,824)
16,635
Depreciation expense totaled $5.6 million, $3.7 million and $2.4 million during the fiscal years ended September 30, 2018,
2017 and 2016, respectively.
Impairment testing
As of September 30, 2018 and 2016, we determined no impairment triggers were present, and therefore, an impairment test was
not performed.
In March 2017, in connection with our opening a new manufacturing facility in China, we identified equipment with a net book
value of approximately $0.6 million that would no longer be utilized after the completion of the move later in fiscal year 2017.
After taking into consideration the costs of disposal and estimated net funds from the sale of the equipment of approximately
$0.1 million, we recorded a charge to impairments of approximately $0.5 million in the fiscal year ended September 30, 2017.
NOTE 10.
Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities consisted of the following:
$
(in thousands)
Compensation
Warranty
Professional fees
Customer deposits
Deferred revenue
Income and other taxes
Severance and restructuring accruals
Other
As of September 30,
2018
2017
3,065 $
642
604
22
368
7,593
82
1,829
Accrued expenses and other current liabilities $
14,205 $
Compensation: Compensation is primarily comprised of accrued employee salaries, taxes and benefits.
72
3,904
684
653
20
—
2,920
628
1,016
9,825
Severance and restructuring accruals: 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 was recorded in the discontinued operations of the Digital Products Business for the fiscal year
ended September 30, 2016. See Note 5 - Discontinued Operations.
On June 7, 2016, the Company's former Chief Financial Officer (“CFO”) notified the Company that he would resign as the
Company's CFO, effective as of June 20, 2016 (the “Separation Date”). The Company and the former CFO entered into a
separation agreement and general release, dated June 7, 2016 (the “Separation Agreement”), which includes mutual releases by
the former CFO and the Company of all claims related to his 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 the former CFO. The Company recorded a
charge of approximately $0.4 million in the fiscal year ended September 30, 2016 related to this 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. In November 2016, the Company announced an additional reduction
in the workforce of approximately 5 individuals and recorded a charge of $0.2 million in the fiscal year ended September 30,
2017 related to the outsourcing of our satellite communications assembly operations.
In March 2017, the Company announced an additional workforce reduction of approximately 14 individuals and recorded a
charge of $0.1 million in the fiscal year ended September 30, 2017 related to the outsourcing of a portion of our wafer
fabrication lab. During the fiscal year ended September 30, 2017, the Company recorded an additional charge of $0.4 million
for six additional individuals related to the March 2017 workforce reduction. Also, in March 2017, in connection with our
anticipated opening later in fiscal year 2017 of a new manufacturing facility in China to reduce costs and improve efficiency,
we accrued for a workforce reduction of approximately 265 individuals and recorded a charge of $0.5 million in the fiscal year
ended September 30, 2017. During the fiscal year ended September 30, 2017, the Company recorded an additional charge of
$0.4 million for the workforce reduction of 72 additional individuals related to the opening of our new manufacturing facility in
China.
In September 2017, the Company announced it would close its Ivyland, Pennsylvania location during fiscal year 2018 and
reduce its workforce by approximately 11 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, 2017.
In connection with the closing of the Ivyland, Pennsylvania location in January 2018, we accrued for the remaining lease costs
of the facility through the lease termination of February 2019. Included in selling, general and administrative expense for the
fiscal year ended September 30, 2018, was $0.2 million related to the remaining lease costs.
In March 2018, the Company announced an additional workforce reduction of approximately 21 individuals to better align our
workforce towards our Chip Devices and Navigation Systems product lines and away from Broadbrand product lines and
recorded a charge of $0.4 million in the fiscal year ended September 30, 2018.
Our severance and restructuring-related accruals specifically relate to the separation agreements and reductions 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 statements of operations and
comprehensive income. The following table summarizes the changes in the severance accrual account:
73
Severance-
related accruals
$
642 $
Restructuring-
related accruals
Total
(in thousands)
Balance as of September 30, 2016
Expense - charged to accrual
Payments and accrual adjustments
Balance as of September 30, 2017
Expense - charged to accrual
Payments and accrual adjustments
Balance as of September 30, 2018 $
1,994
(2,008)
628
512
(1,133)
7 $
— $
—
—
—
186
(111)
75 $
642
1,994
(2,008)
628
698
(1,244)
82
Warranty: 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,
2017
2018
2016
$
$
684 $
431
(473)
642 $
871 $
573
1,664
376
(760)
684 $
(1,169)
871
NOTE 11.
Credit Facilities
On November 11, 2010, we entered into a Credit and Security Agreement (the “Credit Facility”) with Wells Fargo Bank, N.A. The
Credit Facility is secured by the Company's assets and is subject to a borrowing base formula based on the Company's eligible
accounts receivable, inventory, and machinery and equipment accounts.
On July 27, 2017, we entered into a Ninth Amendment of the Credit Facility which adjusted the interest rate to LIBOR plus
1.75%. On November 7, 2018, we entered into a Tenth Amendment of the Credit Facility which extended the maturity date of
the facility to November 2021. The Credit Facility currently provides us with a revolving credit line of up to $15.0 million,
subject to a borrowing base formula, that can be used for working capital requirements, letters of credit, and other general
corporate purpose subject to a limitation of the Company having liquidity of at least $25,000,000 million after such use.
As of September 30, 2018, there were no amounts outstanding under this Credit Facility and the Company was in compliance with
all financial covenants. Also, as of September 30, 2018, the Credit Facility had approximately $0.5 million reserved for one
outstanding stand-by letter of credit and $7.3 million available for borrowing. As of November 29, 2018, there was no outstanding
balance under this Credit Facility and $0.5 million reserved for one outstanding stand-by letter of credit.
NOTE 12.
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)
For the Fiscal Years Ended September 30,
2017
2016
2018
Domestic
Foreign
Income (loss) from continuing operations before
income taxes
$
$
(16,752) $
(1,150)
$
10,632
(2,248)
1,735
898
(17,902) $
8,384
$
2,633
74
—
—
—
(117)
—
(117)
131
—
131
14
896
(41)
(94)
626
—
(57)
685
(2,001)
14
0.5%
The Company's income tax (benefit) expense consisted of the following:
Income tax (benefit) expense
For the Fiscal Years Ended September 30,
2018
2017
2016
(in thousands)
Federal:
Current
Deferred
State:
Current
Deferred
Foreign:
Current
Deferred
$
(502) $
—
(502)
53
—
53
—
—
—
135 $
—
135
28
—
28
—
—
—
Total income tax (benefit) expense
$
(449) $
163
$
EMCORE Corporation is incorporated in the state of New Jersey. A reconciliation of the provision for income taxes, with the
amount computed by applying the statutory U.S. federal and state income tax rates to continuing operations income before
provision for income taxes is as follows:
For the Fiscal Years Ended September 30,
2017
2016
2018
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
Shortfall (windfall) from stock based compensation
Other
State net operating loss carryforward adjustment
Change in valuation allowance
$
$
(4,346)
(168)
36
57,988
681
216
(305)
(54,551)
$
2,841
414
229
2,528
(150)
126
933
(6,758)
Income tax (benefit) expense
$
(449)
$
163
$
Effective tax rate
(2.5)%
1.9%
75
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
Valuation allowance
Net deferred tax assets
$
As of September 30
2018
2017
91,639 $
1,301
2,671
2,065
123
144
4,624
728
200
(33)
838
104,300
144,455
587
3,211
2,037
8
249
4,525
2,367
349
136
927
158,851
(104,300)
(158,851)
$
—
$
—
For the fiscal years ended September 30, 2018, 2017 and 2016, the Company recorded income tax benefit (expense) from
continuing operations of approximately $0.4 million, $(0.2) million and $(14,000), respectively. For the fiscal years ended
September 30, 2018, 2017 and 2016, the Company recorded income tax benefit from discontinued operations of $0, $0 and
$24,000, respectively. Income tax benefit for fiscal year ended September 30, 2018 is primarily comprised of the effect of the
Tax Act which eliminates AMT and will result in a refund to the Company of amounts paid in prior fiscal years, state minimum
taxes, and foreign tax expense included within continuing operations.
For the fiscal years ended September 30, 2018, 2017 and 2016, the effective tax rate on continuing operations was (2.5)%,
1.9% and 0.5%, respectively. The higher beneficial tax rate for fiscal year 2018 was primarily due to the effect of the Tax Act,
which resulted in a credit to the Company on future tax payments for past AMT amounts paid and the fiscal year 2018
operating loss. The higher tax rate for fiscal year 2017 was primarily due to higher alternative minimum tax as a result of the
increase in net income. The lower tax rate for fiscal year 2016 was primarily due to permanent differences, state tax benefits,
foreign tax rate differentials and changes in the Company's results in the current year. The Company uses some estimates to
forecast permanent differences between book and tax accounting.
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes
significant changes to the U.S. corporate income tax system including: a federal corporate rate reduction from 34% to 21%
effective January 1, 2018. Consequently, the Company recorded a decrease to the tax effected U.S. net deferred tax assets of
$58.0 million, which was primarily offset by a change in the valuation allowance.
The Tax Act also includes other items such as limitations on the deductibility of executive compensation, immediate expensing
of qualified property, the creation of new minimum taxes such as the base erosion anti-abuse tax (“BEAT”), global Intangible
Low Taxed Income (“GILTI”) tax and the transition of U.S. international taxation from a worldwide tax system to a modified
territorial tax system, which will result in a one time U.S. tax liability on those earnings which have not previously been
repatriated to the U.S. (the “Transition Tax”). The Company evaluated the applicability of these items and appropriately
reflected them in the tax provision as of September 30, 2018.
In the fourth quarter of fiscal 2018, we recorded an adjustment to the provisional amounts originally recorded in the first and
second quarters of fiscal 2018 related to the re-measurement of net DTA. This adjustment was $58.0 million.
During fiscal 2018, we recorded a tax benefit of $0.5 million related to the Tax Act related to the credit on future tax payments
for past AMT amounts paid.
76
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses
how a company recognizes provisional estimates when a company does not have the necessary information available, prepared
or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax
Act. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize
its accounting, but cannot extend beyond one year. The final impact of the Tax Act may differ from the above provisional
estimates due to changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the
Tax Act, by changes in accounting standard for income taxes and related interpretations in response to the Tax Act, and any
updates or changes to estimates used in the provisional amounts. We have determined that the $0.5 million of tax benefit for the
credit on future tax payments for past AMT amounts paid and the $58.0 million of tax expense for DTA re-measurement were
each provisional amounts and reasonable estimates for fiscal 2018. Estimates used in the provisional amounts include: the
anticipated reversal pattern of the gross DTAs; and earnings and foreign taxes attributable to foreign subsidiaries.
All deferred tax assets have a full valuation allowance at September 30, 2018. 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 year ended September 30, 2017, we increased previously unrecognized tax benefits by $0.1 million related to
foreign taxes. During the fiscal year ended September 30, 2016, we decreased previously unrecognized tax benefits by $0.1
million. 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. As of September 30,
2018 and 2017, we had approximately $0.4 million and $0.3 million, respectively of interest and penalties accrued as tax
liabilities on our balance sheet.
As of September 30, 2018, the Company had net operating loss carryforwards for U.S. federal income tax purposes of
approximately $436.4 million which begin to expire in 2022. As of September 30, 2018, the Company had foreign net
operating loss carryforwards of $5.2 million which begin to expire in 2021, as well as state net operating loss carryforwards of
approximately $53.0 million which begin to expire in 2019. As of September 30, 2018, the Company also had tax credits
(primarily foreign income and U.S. research and development tax credits) of approximately $2.7 million. The research credits
will begin to expire in 2019. 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 $436.4 million of U.S. net operating loss carryforwards,
approximately $219.5 million is subject to an annual limitation and $216.9 million of the net operating losses are not subject to
an annual limitation. Such annual limitations could result in the expiration of the net operating loss and tax credit carryforwards
before utilization.
A reconciliation of the beginning and ending amount of unrecognized gross tax benefits is as follows:
Unrecognized Gross Tax Benefit
(in thousands)
Balance as of September 30, 2016
Adjustments based on tax positions related to the current year
Adjustments based on tax positions of prior years
Balance as of September 30, 2017
Adjustments based on tax positions related to the current year
Adjustments based on tax positions of prior years
Balance as of September 30, 2018
$
$
288
131
—
419
—
—
419
As of September 30, 2018 and 2017, we had approximately $0.4 million and $0.3 million, respectively of interest and penalties
accrued as tax liabilities on our balance sheet. We believe that it is reasonably possible that none of the uncertain tax position
will be paid or settled within the next 12 months.
77
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 2014 for the U.S. federal, after fiscal year 2013 for the State
of New Mexico, and after fiscal year 2013 for the state of California.
Included in discontinued operations during the fiscal year ended September 30, 2016 was $0.4 million 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. There were no incentive tax credits
received during the fiscal years ended September 30, 2018 and 2017.
NOTE 13.
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, $0.8 million, $0.6 million, $0.6 million, and $0.7 million for the fiscal years ended
September 30, 2019, 2020, 2021, 2022 and 2023 and thereafter, 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 $1.2 million, $1.4 million and $1.4
million for the fiscal years ended September 30, 2018, 2017 and 2016, respectively. There are no off-balance sheet arrangements
other than our operating leases.
Asset Retirement Obligation: We have known conditional Asset Retirement Obligations (“AROs”) such as certain asset
decommissioning and restoration of rented facilities to be performed in the future. Our ARO includes assumptions related to renewal
option periods for those facilities where we expect to extend lease terms. The Company recognizes its estimate of the fair value of
its ARO in the period incurred in long-term liabilities. The fair value of the ARO is also capitalized as property, plant and
equipment.
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 the ARO. The fair value of our ARO was estimated by
discounting projected cash flows over the estimated life of the related assets using credit adjusted risk-free rates which ranged from
1.20% to 4.20%. There was no ARO settled during the fiscal year ended September 30, 2018. Accretion expense of $0.1 million was
recorded during fiscal years ended September 30, 2018, 2017 and 2016.
EMCORE leases its primary facility in Alhambra, California covering six buildings where manufacturing, research and
development, and general and administrative work is performed. In September 2017, a new lease for four of the six buildings
was signed, which was effective on October 1, 2017. The new lease extends the terms of the lease for three years plus a three
year option to extend the lease through September 2023. In connection with the lease agreement, the Company has recorded an
ARO liability at September 30, 2018 and September 30, 2017 of $1.8 million and $1.6 million, respectively. Leases related to
the other two buildings expired in 2011, and these buildings are being occupied on a month-to-month basis.
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, 2018, in connection with the Company extending the lease term of the Alhambra
facility, the lease and related obligations, including ARO, were revised, resulting in an increase of the estimated ARO
obligation by the Company. As a result of the lease extension, the Company increased its ARO associated with the Alhambra
facility by $0.1 million.
During the fiscal year ended September 30, 2017, in connection with the Company moving to a new manufacturing facility in
China, the lease and related obligations, including ARO, at the former China facility was terminated, resulting in no payment
by the Company. As a result of this agreement, the Company reduced its ARO associated with the former China facility by
$45,000.
78
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.
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 liability in the amount of $0.1 million at September 30, 2018 and 2017.
The following table summarizes ARO activity:
Asset Retirement Obligations
(in thousands)
Balance at September 30, 2017
Accretion expense
Revision in estimated cash flows
Balance at September 30, 2018
September 30,
2018
$
$
1,638
66
105
1,809
Indemnifications: We have agreed to indemnify certain customers against claims of infringement of intellectual property rights
of others in our sales contracts with these customers. Historically, we have not paid any claims under these indemnification
obligations. 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 owed 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 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 5 - Discontinued Operations.
We enter into indemnification agreements with each of our directors and executive officers pursuant to which we agree to
indemnify them for certain potential expenses and liabilities arising from their status as a director or executive officer of the
Company. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to
indemnify our directors and executive officers in certain circumstances. It is not possible to determine the aggregate maximum
potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique
facts and circumstances involved in each particular agreement.
Legal Proceedings: We are subject to various legal proceedings, claims, and litigation, either asserted or unasserted, that arise in
the ordinary course of business. The outcome of these matters is currently not determinable and we are unable to estimate a
range of loss, should a loss occur, from these proceedings. The ultimate outcome of legal proceedings involves judgments,
estimates and inherent uncertainties and the results of these matters cannot be predicted with certainty. Professional legal fees
are expensed when incurred. We accrue for contingent losses when such losses are probable and reasonably estimable. In the
event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect
more current information. Should we fail to prevail in any legal matter or should several legal matters be resolved against the
Company in the same reporting period, then the financial results of that particular reporting period could be materially affected.
79
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
“Court”). The complaint alleged 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 were premised primarily on the allegation that Mirasol and the putative
class members were not provided with their legally required meal periods. Mirasol sought 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 previously agreed to
release the Company from all potential claims related to the matters alleged in the Mirasol lawsuit. The Company had recorded an
accrual for these amounts at September 30, 2016 that was not material to the Company's results of operations, financial condition or
cash flows, which had been recorded within Operating Expenses for the fiscal year ended September 30, 2016. On January 6, 2017,
the Company and Mirasol agreed to a class action settlement of $0.3 million with regards to all outstanding claims. On January 24,
2018, the Court granted final approval of the formal settlement agreement entered into between the parties and on February 26,
2018, the Court entered final judgment. The settlement amount of $0.3 million was paid in May 2018. There remains no
outstanding liability related to the settlement as of September 30, 2018. During the fiscal year ended September 30, 2017, the
Company recorded an accrual of $0.2 million within Operating Expenses related to the settlement.
c) Mirasol Wrongful Termination Lawsuit
In August 2016, EMCORE was served with a second lawsuit by former employee 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 complaint, Mirasol asserted 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 alleged 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 sought general, special, and punitive damages. On January 6, 2017, the Company
and Mirasol agreed to a settlement of $50,000 with regards to all outstanding claims. This amount was paid as of September 30,
2017.
d) Phoenix Navigation Components, LLC Legal Proceedings
On June 12, 2018, Phoenix Navigation Components, LLC (“Phoenix”) commenced an arbitration against EMCORE with the
American Arbitration Association (“AAA”) in New York. On August 31, 2018, Phoenix filed a First Amended Demand for
Arbitration, asserting the following claims: breach of contract, breach of the covenant of good faith and fair dealing,
misappropriation of trade secrets (under the Defend Trade Secrets Act, 18 U.S.C. § 1836, and New York law), conversion,
unjust enrichment, correction of inventorship relating to U.S. Patent No. 8,773,665, and declaratory relief, relating to
EMCORE’s termination of certain agreements entered into between EMCORE and Phoenix related to the purported license of
certain intellectual property related to fiber optic gyroscope technology and disputed royalty payments related thereto. On
September 14, 2018, EMCORE filed an Answering Statement and Counterclaim, denying all of Phoenix’s claims and asserting
counterclaims for breach of the implied covenant of good faith and fair dealing and declaratory relief. An arbitration hearing on
all claims with the exception of the patent claims has been set for January 8, 2019. A second arbitration hearing on the patent
claims has been set for May 20, 2019. We believe that the claims asserted by Phoenix are without merit and we intend to
vigorously defend ourselves against them.
80
On June 21, 2018, Phoenix Navigation Components, LLC commenced a special proceeding against EMCORE in the New York
Supreme Court, Commercial Division, Index No. 653128/2018. As part of the special proceeding, Phoenix filed an application
for a preliminary injunction in aid of arbitration pursuant to CLPR 7502(c), in connection with the AAA arbitration proceeding
in New York. On August 6, 2018, Phoenix’s application was resolved pursuant to a stipulation between EMCORE and Phoenix.
This special proceeding remains open pending resolution of the AAA arbitration.
On September 18, 2018, EMCORE filed a complaint against Phoenix in the United States District Court for the Central District
of California seeking a declaratory judgment with respect to U.S. Patent No. 8,773,665. On October 19, 2018, Phoenix filed a
Motion to Stay Pending Arbitration or to Dismiss the Complaint.
NOTE 14.
Equity
Equity Plans
We provide long-term incentives to eligible officers, directors, and employees in the form of equity-based awards. We maintain
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.
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, 2018:
Outstanding as of September 30, 2017
Granted
Exercised
Forfeited
Expired
Outstanding as of September 30, 2018
Exercisable as of September 30, 2018
Vested and expected to vest as of September 30,
2018
Number of
Shares
Weighted
Average
Exercise
Price
Weighted Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic
Value (*) (in
thousands)
326,798
—
(6,392)
(6,407)
(244,019)
69,980
46,886
69,980
$19.54
—
$4.37
$4.60
$24.57
$4.74
$4.76
$4.74
$
$
$
$
5.11
4.11
5.11
15
31
23
45
(*) 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, 2017 and 2016, the intrinsic value of
options exercised was $0.9 million and $87,000, respectively.
As of September 30, 2018, there was approximately $0.1 million of unrecognized stock-based compensation expense related to
non-vested stock options granted under the Equity Plans which is expected to be recognized over an estimated weighted
average life of 2.0 years.
81
Valuation Assumptions
There were no stock option grants for the fiscal years ended September 30, 2018 and 2017.
Time-Based Restricted Stock
Time-based restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) granted to employees under the 2010 Plan
and 2012 Plan typically vest over 3 to 4 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. RSAs are considered issued and
outstanding on the grant date and are subject to forfeiture if specified vesting conditions are not satisfied.
The following table summarizes the activity related to RSUs and RSAs subject to time-based vesting requirements for fiscal
year ended September 30, 2018:
Restricted Stock Activity
Restricted Stock Units
Restricted Stock Awards
Number of
Shares
Weighted Average
Grant Date Fair Value
Number of
Shares
Weighted Average
Grant Date Fair Value
Non-vested as of
September 30, 2017
Granted
Vested
Forfeited
Non-vested as of
September 30, 2018
778,084
648,043
(374,969)
(39,537)
1,011,621
$5.91
$5.80
$5.40
$5.23
$6.04
8,154
—
—
—
8,154
$8.20
$0.00
$0.00
$0.00
$8.20
As of September 30, 2018, there was approximately $5.0 million of remaining unamortized stock-based compensation expense
associated with RSUs, which will be expensed over a weighted average remaining service period of approximately 2.9 years.
The 1.0 million outstanding non-vested and expected to vest RSUs have an aggregate intrinsic value of approximately $4.8
million and a weighted average remaining contractual term of 1.7 years. For fiscal years ended September 30, 2018, 2017 and
2016, the intrinsic value of RSUs vested was approximately $2.3 million, $3.4 million and $1.6 million, respectively. For the
fiscal years ended September 30, 2017 and 2016, the weighted average grant date fair value of RSUs granted was $8.20 and
$5.53 per share, respectively.
As of September 30, 2018, there was approximately $45,000 of remaining unamortized stock-based compensation expense
associated with RSAs, which will be expensed over a weighted average remaining service period of approximately 2.0 years.
On December 28, 2017, the Company granted our CEO, Jeffrey Rittichier, our Senior Vice President of Engineering, Albert Lu,
and our Vice President of Sales (now co-VP, Broadband), David Wojciechowski, 40,000, 14,000 and 10,000 RSUs with a grant
date fair value of $0.3 million, $0.1 million and $0.1 million, respectively, that will vest in 4 equal annual installments
beginning on December 28, 2018.
Performance Stock
Performance based restricted stock units (“PSUs”) and performance based shares of restricted stock (“PRSAs”) granted to
employees under the 2012 Plan typically vest over 1 to 3 years and are subject to forfeiture in whole, if employment terminates,
or in whole or in part, if specified vesting conditions are not satisfied, in each case prior to vesting. PSUs are not considered
issued or outstanding common stock until they vest. PRSAs are considered issued and outstanding on the grant date (at 200%
of the target number of shares) and are subject to forfeiture if specified vesting conditions are not satisfied. PSUs and PRSAs
that are granted to our executive officers and key employees are provided as long-term incentive compensation that is based on
relative total shareholder return, which measures our performance against that of our competitors.
82
The following table summarizes the activity related to PSUs and PRSAs for the fiscal year ended September 30, 2018:
Performance Stock
Activity
Performance Stock Units
Performance Stock Awards
Number of Shares
(at Target)
Weighted
Average Grant
Date Fair Value
Number of Shares
(at Target)
Weighted
Average Grant
Date Fair Value
Non-vested as of
September 30, 2017
Granted
Vested
Forfeited
Non-vested as of
September 30, 2018
328,708
240,164
(166,058)
(5,037)
$8.36
$7.62
$6.86
$13.36
33,333
—
—
—
$12.25
$0.00
$0.00
$0.00
397,777
$8.48
33,333
$12.25
As of September 30, 2018, there was approximately $1.5 million of remaining unamortized stock-based compensation expense
associated with PSUs, which will be expensed over a weighted average remaining service period of approximately 1.3 years.
The 0.4 million outstanding non-vested and expected to vest PSUs have an aggregate intrinsic value of approximately $1.9
million and a weighted average remaining contractual term of 1.3 years. For the fiscal year ended September 30, 2018, the
intrinsic value of PSUs vested was approximately $1.4 million. There were no PSUs vested in the fiscal years ended
September 30, 2017 and 2016. For the fiscal year ended September 30, 2017, the weighted average grant date fair value of
PSUs granted was $8.34. There was no PSUs granted in the fiscal year ended September 30, 2016.
As of September 30, 2018, there was approximately $0.3 million of remaining unamortized stock-based compensation expense
associated with PRSAs, which will be expensed over a weighted average remaining service period of approximately 1.0 year.
On December 28, 2017, the Company granted Messrs. Rittichier, Lu and Wojciechowski, 40,000, 14,000 and 10,000 PSUs with
a grant date fair value of $0.3 million, $0.1 million and $0.1 million, respectively. The PSUs issued will vest based on a
combination of the relative total shareholder return of EMCORE’s stock compared to the Russell Microcap Index and the
executive's continued employment. The total number of shares to be issued to each individual ranges from zero (0) to 200% of
the target PSUs granted. Between zero (0) and 200% of the target PSUs will vest, if at all, on December 28, 2020.
On December 28, 2017, in addition to the PSUs granted to Messrs. Rittichier, Lu and Wojciechowski, the Company granted
108,500 target PSUs with a grant date fair value of $0.9 million to certain key non-executive employees. The PSUs issued will
vest based on a combination of the relative total shareholder return of EMCORE’s stock compared to the Russell Microcap
Index and the employee's continued employment. 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 the target PSUs granted will vest, if at all, on
December 28, 2020.
Included in the 240,164 PSUs granted and 166,058 PSUs vested during the fiscal year ended September 30, 2018 are 67,664
PSUs that vested at more than 100% of the target PSUs upon vesting.
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 units and awards
Performance stock units and awards
Employee stock purchase plan
Outside director equity awards and fees in common
stock
Total stock-based compensation expense
83
For the Fiscal Years Ended September
30,
2017
2016
2018
$
$
32 $
1,742
1,343
276
255
3,648 $
45 $
1,643
1,367
300
247
3,602 $
38
1,683
—
223
218
2,162
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,
2017
2016
2018
450 $
2,584
614
3,648 $
492 $
2,605
505
3,602 $
345
1,445
372
2,162
For the fiscal year ended September 30, 2017, total stock-based compensation expense did not agree with the amount listed on
our statements of shareholders' equity due to the timing difference between the expense accrued and the issuance of common
stock for the payment of outside directors' fees. 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.
The stock-based compensation expense above relates to continuing operations. Stock-based compensation within selling,
general and administrative expense was higher for the fiscal year ended September 30, 2017 due to stock-based compensation
expense associated with the grants of PSUs and PRSAs. Included within discontinued operations is $0, $0 and $(77,000) of
stock-based compensation expense for the fiscal year ended September 30, 2018, 2017 and 2016, 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, 2018, we had 34.5 million and 27.6 million shares of common stock issued and
outstanding, respectively. There were no shares of preferred stock issued or outstanding as of September 30, 2018 and 2017.
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. Since June 2015, all employer contributions are made in cash. Our matching contribution in
cash for the fiscal years ended September 30, 2018, 2017 and 2016 was approximately $0.5 million, $0.5 million and $0.4
million, respectively.
84
(Loss) Income Per Share
The following table sets forth the computation of basic and diluted net (loss) income per share:
Basic and Diluted Net (Loss) Income Per Share
(in thousands, except per share)
Numerator:
(Loss) income from continuing operations
Loss from discontinued operations
Undistributed earnings allocated to common
shareholders for basic and diluted net income per share
Denominator:
Denominator for basic net income per share - weighted
average shares outstanding
Dilutive options outstanding, unvested stock units,
unvested stock awards and ESPP
Denominator for diluted net income per share -
adjusted weighted average shares outstanding
For the Fiscal Years Ended September
30,
2017
2018
2016
$
(17,453) $
—
8,221 $
14
2,619
5,647
(17,453)
8,235
8,266
27,266
26,659
25,979
—
885
539
27,266
27,544
26,518
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
$
$
$
$
(0.64) $
—
(0.64) $
(0.64) $
—
(0.64) $
0.31 $
0.00
0.31 $
0.30 $
0.00
0.30 $
Weighted average antidilutive options, unvested
restricted stock units and awards, unvested
performance stock units and ESPP shares excluded
from the computation
949
398
Average market price of common stock
$
5.87 $
8.92 $
0.10
0.22
0.32
0.10
0.21
0.31
508
5.88
For diluted (loss) income per share, the denominator includes all outstanding common shares and all potential dilutive common
shares to be issued. The anti-dilutive stock options and unvested stock were excluded from the computation of diluted net loss
per share for the fiscal year ended September 30, 2018 due to the Company incurring a net loss for the period. For the fiscal
year ended September 30, 2017, we excluded 0.4 million of weighted average outstanding stock options, RSUs and PSUs from
the calculation of diluted net income per share because their effect would have been anti-dilutive. For the fiscal year ended
September 30, 2016 we excluded 0.5 million of weighted average outstanding stock options and RSUs from the calculation of
diluted net income 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 approximately
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 trading 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.
85
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, 2018, 2017 and 2016 totaled 171,000, 133,000 and 193,000 shares,
respectively. As of September 30, 2018, the total amount of common stock issued under the ESPP totaled 2,775,016 shares and
the total shares remaining available for issuance under the ESPP totaled 740,558.
Future Issuances
As of September 30, 2018, we had common stock reserved for the following future issuances:
Future Issuances
Exercise of outstanding stock options
Unvested restricted stock units
Unvested performance stock units and awards (at 200% maximum
payout)
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
Total reserved
Number of Common
Stock Shares Available
for Future Issuances
69,980
1,011,621
862,220
740,558
1,474,701
88,741
4,247,821
NOTE 15.
Geographical Information
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-U.S. GAAP
financial ratios. Based on this evaluation, the Company operates as a single reportable segment, Fiber Optics.
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,
2017
2018
2016
$
$
69,543 $
10,386
5,422
266
85,617 $
98,520 $ 66,436
17,401
16,713
7,618
7,015
543
647
122,895 $ 91,998
Significant Customers: Significant customers are defined as customers representing greater than 10% of our consolidated
revenue. Revenue from two of our significant customers represented an aggregate of 60% of our consolidated revenue for the
fiscal year ended September 30, 2018. Revenue from three of our significant customers represented an aggregate of 71% and
61% of our consolidated revenue for the fiscal years ended September 30, 2017 and 2016, respectively.
Long-lived Assets: Long-lived assets consist of property, plant, and equipment. As of September 30, 2018 and 2017,
approximately 49% and 46%,respectively, of our long-lived assets were located in the United States. The remaining long-lived
assets are primarily located in China.
86
NOTE 16.
Selected Quarterly Financial Information (unaudited)
The following tables present our unaudited consolidated results of operations for the eight most recently ended quarters. We
believe that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts
below to present fairly the selected quarterly information when read in conjunction with the consolidated financial statements
and notes included elsewhere in this Annual Report. Our results from operations vary substantially from quarter to quarter.
Accordingly, the operating results for a quarter are not necessarily indicative of results for any subsequent quarter or for the full
year. We have experienced and expect to continue to experience significant fluctuations in quarterly results.
EMCORE CORPORATION
Quarterly Consolidated Statements of Operations
For the Fiscal Year Ended September 30, 2018
(in thousands, except income per share)
(unaudited)
December 31,
2017
For the Three Months Ended
March 31,
2018
June 30,
2018
September 30,
2018
Revenue
Cost of revenue
Gross profit
Operating expense (income):
Selling, general, and administrative
Research and development
Loss from change in estimate on ARO obligation
Loss (gain) on sale of assets
Total operating expense
Operating loss
Other income (expense):
Interest income, net
Foreign exchange gain (loss)
Other income
Total other income (expense)
Loss from continuing operations before income
tax (expense) benefit
Income tax benefit (expense)
Loss from continuing operations
Loss from discontinued operations, net of tax
Net income
Per share data:
Net income per basic share:
Continuing operations
Discontinued operations
Net income per basic share
Net income per diluted share:
Continuing operations
Discontinued operations
Net income per diluted share
Weighted-average number of basic and diluted shares
outstanding
$
24,036 $
16,122
7,914
18,623 $
13,676
4,947
4,819
3,800
—
107
8,726
(812)
111
286
—
397
(415)
333
(82)
—
5,644
3,300
—
(68)
8,876
(3,929)
163
526
—
689
(3,240)
169
(3,071)
—
(82) $
(3,071) $
(0.00) $
—
(0.00) $
(0.00) $
—
(0.00) $
(0.11) $
—
(0.11) $
(0.11) $
—
(0.11) $
17,717 $
16,519
1,198
5,237
3,915
—
—
9,152
(7,954)
216
(676)
—
(460)
(8,414)
—
(8,414)
—
(8,414) $
(0.31) $
—
(0.31) $
(0.31) $
—
(0.31) $
25,241
20,813
4,428
5,532
4,372
145
(5)
10,044
(5,616)
243
(570)
110
(217)
(5,833)
(53)
(5,886)
—
(5,886)
(0.21)
—
(0.21)
(0.21)
—
(0.21)
27,032
27,197
27,387
27,424
$
$
$
$
$
87
EMCORE CORPORATION
Quarterly Consolidated Statements of Operations
For the Fiscal Year Ended September 30, 2017
(in thousands, except income per share)
(unaudited)
December 31,
2016
For the Three Months Ended
March 31,
2017
June 30,
2017
September 30,
2017
$
30,176 $
20,133
10,043
32,591 $
21,553
11,038
30,952 $
20,110
10,842
29,176
18,565
10,611
5,578
2,199
—
—
—
7,777
2,266
23
(403)
—
(380)
1,886
(120)
1,766
(9)
5,672
3,141
468
—
—
9,281
1,757
46
44
—
90
1,847
8
1,855
(7)
5,815
3,340
—
—
(322)
8,833
2,009
77
53
316
446
2,455
(19)
2,436
(11)
1,757 $
1,848 $
2,425
$
0.07 $
0.00
0.07 $
0.07 $
0.00
0.07 $
0.07 $
0.00
0.07 $
0.07 $
0.00
0.07 $
0.09 $
0.00
0.09 $
0.09 $
0.00
0.09 $
26,279
27,039
26,622
27,585
26,833
27,816
5,181
3,862
38
(45)
(134)
8,902
1,709
99
388
—
487
2,196
(32)
2,164
41
2,205
0.08
0.00
0.08
0.08
0.00
0.08
26,904
27,768
Revenue
Cost of revenue
Gross profit
Operating expense (income):
Selling, general, and administrative
Research and development
Impairments
Gain from change in estimate on ARO obligation
Gain on sale of assets
Total operating expense
Operating income
Other income (expense):
Interest income, net
Foreign exchange (loss) gain
Other income
Total other (expense) income
Income from continuing operations before
income tax (expense) benefit
Income tax (expense) benefit
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
Per share data:
Net income per basic share:
Continuing operations
Discontinued operations
Net income per basic share
Net income 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
$
$
$
$
$
88
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
EMCORE Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of EMCORE Corporation and subsidiaries (the Company) as of
September 30, 2018 and 2017, the related consolidated statements of operations and comprehensive (loss) income, shareholders'
equity, and cash flows for each of the years in the three–year period ended September 30, 2018, and the related notes (collectively,
the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects,
the financial position of the Company as of September 30, 2018 and 2017, and the results of their operations and their cash flows for
each of the years in the three–year period ended September 30, 2018, 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)
(PCAOB), the Company's internal control over financial reporting as of September 30, 2018, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated December 4, 2018 expressed an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
Basis for Opinion
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 are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company's auditor since 2010.
Irvine, California
December 4, 2018
89
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 Securities
Exchange Act of 1934, as amended) (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, 2018 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, 2018.
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
15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended) during the quarter ended
September 30, 2018 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, 2018 has been audited by KPMG LLP,
our independent registered public accounting firm, as stated in their report which is included as follows.
90
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
EMCORE Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited EMCORE Corporation and subsidiaries’ (the Company) internal control over financial reporting as of
September 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of September 30, 2018, 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)
(PCAOB), the consolidated balance sheets of the Company as of September 30, 2018 and 2017, the related consolidated
statements of operations and comprehensive (loss) income, shareholders’ equity, and cash flows for each of the years in the
three-year period ended September 30, 2018, and the related notes (collectively, the consolidated financial statements), and our
report dated December 4, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ KPMG LLP
Irvine, California
December 4, 2018
91
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 the section
entitled “Proposal I: Election of Directors - Directors and Executive Officers” that will be included in 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, 2018. Information required by Item 405
of Regulation S-K is incorporated by reference to the section entitled “Ownership of Securities - 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 I: Election of Directors -
Director Compensation for Fiscal Year 2018,” “Compensation Discussion and Analysis,” “Executive Compensation,”
“Executive Compensation - Compensation Committee Report” and “Executive Compensation - 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 “Ownership of Securities - Security Ownership of Certain Beneficial Owners and Management” in the Proxy
Statement.
Information regarding our equity compensation plans is incorporated by reference to the section entitled “Ownership of
Securities - 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 I: Election of Directors -
Governance of the Company - Related Person Transaction Approval Policy” and “Proposal I - 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 “Proposal II: Ratification of the
Appointment of Independent Registered Public Accounting Firm - Fiscal Years 2018 & 2017 Auditor Fees and Services” in the
Proxy Statement.
92
Part IV.
ITEM 15.
Exhibits and Financial Statement Schedules
(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, 2018,
2017, and 2016
• Consolidated Balance Sheets as of September 30, 2018 and 2017
• Consolidated Statements of Shareholders' Equity for the fiscal years ended September 30, 2018, 2017, and 2016
• Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2018, 2017, and 2016
• 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.
2.1
2.2
2.3
2.4
3.1
3.2
3.3
3.4
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).
3.5
3.6
4.1
10.1
10.2†
Certificate of Amendment to the Restated Certificate of Incorporation (incorporated by reference to Exhibit
3.1 to the Company's Current Report on Form 8-K filed with the SEC on March 20, 2018).
By-Laws of EMCORE Corporation, as amended through March 19, 2018 (incorporated by reference to
Exhibit 3.2 to the Company's Current Report on Form 8-K filed with the SEC on March 20, 2018).
Specimen Certificate for Shares of Common Stock (incorporated by reference to Exhibit 4.1 to the
Company's Annual Report on Form 10-K filed on December 6, 2017).
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).
Directors Compensation Policy (Effective March 17, 2017) (incorporated by reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q filed on May 4, 2017).
93
10.3†
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
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).
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 19, 2017 (incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K filed on December 6, 2017).
Form of Restricted Stock Unit Award Agreement under the 2012 Equity Incentive Plan (incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K filed on December 14, 2015).
Form of time-based Restricted Stock Unit Award Agreement under the 2012 Equity Incentive Plan (as of
October 2016) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K
filed on December 7, 2016).
Form of Performance-Based Restricted Stock Award Agreement under the 2012 Equity Incentive Plan (for
executive officers) (as of December 2017) (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q filed on February 6, 2018).
Form of Performance-Based Restricted Stock Award Agreement under the 2012 Equity Incentive Plan (for
non-executive officers) (as of October 2016) (incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-K filed on December 6, 2017).
Restricted Stock and Restricted Stock Unit Award Agreement under the 2012 Equity Incentive Plan entered
into between the Company and Jeffrey Rittichier, with a grant date of October 18, 2016 (incorporated by
reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K filed on December 6, 2017).
Performance-Based Restricted Stock and Restricted Stock Unit Award Agreement under the 2012 Equity
Incentive Plan entered into between the Company and Jeffrey Rittichier, with a grant date of October 18,
2016 (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K filed on
December 6, 2017).
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 11, 2014).
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 2018 Bonus Plan (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on October 17, 2017).
21.1**
Subsidiaries of the Company.
23.1**
Consent of KPMG LLP, independent registered public accounting firm.
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.
94
101.DEF** XBRL Taxonomy Extension Definition Linkbase Document.
_________
† Management contract or compensatory plan
** Filed herewith
*** Furnished herewith
ITEM 16.
Form 10-K Summary
None.
95
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
EMCORE CORPORATION
Date: December 4, 2018
By:
/s/ Jeffrey Rittichier
Jeffrey Rittichier
Chief Executive Officer
(Principal Executive Officer)
Date: December 4, 2018
By:
/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 Securities and Exchange Commission granting unto said attorney-in-fact, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as
such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant in the capacities indicated, on December 4, 2018.
Signature
Title
/s/ Jeffrey Rittichier
Jeffrey Rittichier
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Jikun Kim
Jikun Kim
Chief Financial Officer
(Principal Financial and Accounting Officer)
/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
Director
Chairman of the Board
Director
96
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-edge defense systems. Our optical chips, components,
subsystems and systems enable broadband and wireless provid-
ers to continually enhance their network capacity, speed and
coverage to advance the free flow of information that empowers
the lives of millions of people daily. The Mixed-Signal Optics
technology at the heart of our broadband transmission products
is shared with our fiber optic gyros and military communications
links to provide the aerospace and defense markets state-of-
the-art systems that keep us safe in an increasingly unpredict-
able world. EMCORE’s performance-leading optical components
and systems serve a broad array of applications including cable
television, fiber-to-the-premise networks, telecommunications,
data centers, wireless infrastructure, satellite RF fiber links,
navigation systems and military communications. 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 facility in Beijing, 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
Board of Directors
Gerald J. Fine, Ph.D.
Chairman of the Board
Professor of Practice and Director of
the Engineering Product Innovation
Center (EPIC) at Boston University
Stephen L. Domenik
General Partner, Sevin Rosen Funds
Rex S. Jackson
Chief Financial Officer
Gigamon Inc.
Jeffrey Rittichier
President & Chief Executive Officer
EMCORE Corporation
Auditors
KPMG LLP
20 Pacifica, Suite 700
Irvine, CA 92618
Phone: 949-885-5400
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
2018 ANNUAL REPORT
Corporate Headquarters
EMCORE Corporation
2015 Chestnut Street
Alhambra, CA 91803 USA
626 293 3400
626 293 3428
EMCORE Asia
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 100176
+86 10 8783 2200
Langfang EMCORE Optoelectronics Co., Ltd.
East of Wanfu Road
Langfang Economic & Technology Development Zone
Langfang, Hebei Province, People’s Republic of China
www.emcore.com