NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Description of Business
EMCORE Corporation (referred to herein, together with its subsidiaries, as the “Company,” “we,” “our,” or “EMCORE”) is a leading provider of sensors for navigation in the aerospace and defense market as well as a manufacturer of chips, laser components, and optical subsystems for use in the Broadband and Cable TV (“CATV”) industries. We pioneered the linear fiber optic transmission technology that enabled the world’s first delivery of CATV directly on fiber, and today are a leading provider of advanced mixed-signal products serving the aerospace and defense and broadband communications markets. The mixed-signal technology, at the heart of our broadband communications products, is shared with our fiber optic gyros (“FOGs”) and other inertial sensors to provide the aerospace and defense markets with state-of-the-art navigation systems technology. Over the last three years, we have expanded our scale and portfolio of inertial sensor products through the acquisitions of Systron Donner Inertial, Inc. (“SDI”) in June 2019, the Space and Navigation (“S&N”) business of L3Harris Technologies, Inc. (“L3H”) in April 2022, and the FOG and Inertial Navigation Systems business (“EMCORE Chicago”) of KVH Industries, Inc. (“KVH”) in August 2022. We have fully vertically-integrated manufacturing capability at our headquarters in Alhambra, CA, and at our facilities in Budd Lake, NJ, Concord, CA, and Tinley Park, IL (the “Tinley Park Facility”). These facilities support our vertically-integrated manufacturing strategy for quartz, FOG, and Ring Laser Gyro products for navigation systems, and for our chip, laser, transmitter, and receiver products for broadband applications. We design and manufacture industry-leading Quartz Mems (“QMEMS”), lithium niobate, and indium phosphide (InP) chip-level technology to deliver state-of-the-art component and system-level products across our end-market applications. Our best-in-class components and systems support a broad array of applications including navigation and inertial sensing, defense optoelectronics, broadband communications, optical sensing, and specialty chips for telecom and data center applications.
NOTE 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all information and notes required by U.S. GAAP for annual financial statements. In our opinion, the interim financial statements reflect all adjustments, which are all normal recurring adjustments, that are necessary to provide a fair presentation of the financial results for the interim periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for an entire fiscal year. The condensed consolidated balance sheet as of September 30, 2022 has been derived from the audited consolidated financial statements as of such date. For a more complete understanding of our business, financial position, operating results, cash flows, risk factors, and other matters, please refer to our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. Such estimates include accounts receivable, inventories, goodwill, long-lived assets, product warranty liabilities, legal contingencies, income taxes, asset retirement obligations, and pension obligation, as well as the evaluation associated with the Company's assessment of its ability to continue as a going concern.
We develop estimates based on historical experience and on various assumptions about the future that are believed to be reasonable based on the best information available to us. Our reported financial position or results of operations may be materially different under changed conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information.
NOTE 3. Acquisitions
On April 29, 2022, we completed the acquisition of the L3H S&N business for a total purchase price of approximately $5.0 million in cash, exclusive of transaction costs and expenses and subject to certain post-closing working capital adjustments, resulting in a final adjusted purchase consideration transferred of $4.9 million. Following the closing, S&N results are included in our Aerospace and Defense (“A&D”) reportable segment and in our consolidated financial statements beginning
on the acquisition date. Revenue and net income of S&N of $5.5 million and $1.1 million, respectively, is included in our condensed consolidated statements of operations and comprehensive (loss) income for the three months ended December 31, 2022.
On August 9, 2022, we completed the acquisition of EMCORE Chicago pursuant to which we acquired substantially all of KVH's assets and liabilities primarily related to its FOG and Inertial Navigation Systems business, including property interests in the Tinley Park Facility, for aggregate consideration of approximately $55.0 million, exclusive of transaction costs and expenses and subject to certain post-closing working capital adjustments. Following the closing, EMCORE Chicago results are included in our A&D reportable segment and in our consolidated financial statements beginning on the acquisition date. Revenue and net income of EMCORE Chicago of $7.8 million and $1.4 million, respectively, is included in our condensed consolidated statements of operations and comprehensive (loss) income for the three months ended December 31, 2022.
Preliminary Purchase Price Allocation
The total purchase price for each of the S&N acquisition and the EMCORE Chicago acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Due to the fact that each such acquisition occurred in the most recent 12-month period, the Company's fair value estimates for the purchase price allocations are preliminary. The final determination of fair value for the assets acquired and liabilities assumed is subject to further change and will be completed as soon as possible, but no later than one year from the applicable acquisition date. Since the acquisition, the preliminary purchase price allocation for S&N has changed by a $2.3 million reduction to contract assets and a $0.6 million reduction to asset retirement obligation, resulting in a corresponding increase to intangible assets and goodwill acquired. Goodwill is measured as the excess of the fair value of the purchase consideration transferred over the fair value of the identifiable net assets. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in a material adjustment to goodwill. Goodwill from these acquisitions totaled $16.4 million, of which 81.1% was the result of the EMCORE Chicago acquisition, which expanded EMCORE's competitive position in the Inertial Navigation market.
The table below represents the preliminary purchase price allocation to the assets acquired and liabilities assumed of S&N based on their estimated fair values as of the acquisition date based on management’s best estimates and assumptions:
| | | | | |
| (in thousands) | Amount |
| Tangible assets acquired: | |
| Accounts receivable | $ | 803 | |
| Inventory | 370 | |
| Contract assets | 3,920 | |
| Operating lease right-of-use assets | 1,529 | |
| Property, plant, and equipment | 1,996 | |
| Net pension benefit assets | 1,727 | |
| Intangible assets acquired | 2,740 | |
| Goodwill | 3,108 | |
| Liabilities assumed: | |
| Accounts payable | (1,226) | |
| Accrued expenses | (622) | |
| Contract liabilities | (6,024) | |
| Operating lease liabilities | (1,565) | |
| Asset retirement obligation | (1,895) | |
| Total purchase consideration | $ | 4,861 | |
The table below represents the preliminary purchase price allocation to the assets acquired and liabilities assumed of EMCORE Chicago based on their estimated fair values as of the acquisition date based on management’s best estimates and assumptions:
| | | | | |
| (in thousands) | Amount |
| Tangible assets acquired: | |
| Accounts receivable | $ | 4,977 | |
| Inventory | 10,800 | |
| Prepaid expenses and other current assets | 1,483 | |
| Property, plant, and equipment | 14,442 | |
| Intangible assets acquired | 12,770 | |
| Goodwill | 13,342 | |
| Liabilities assumed: | |
| Accounts payable | (1,699) | |
| Accrued expenses | (485) | |
| Contract liabilities | (637) | |
| Other long-term liabilities | (8) | |
| Total purchase consideration | $ | 54,985 | |
Included in intangible assets acquired are customer relationships of $4.0 million, technology of $2.6 million, in-process research and development of $6.7 million, and trademarks of $2.2 million.
For the three months ended December 31, 2022, the Company incurred transaction costs of approximately $2.1 million, in connection with the acquisitions, which were expensed as incurred and included in selling, general, and administrative (“SG&A”) expenses within the accompanying condensed consolidated statements of operations and comprehensive (loss) income.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presented for the three months ended December 31, 2021 does not purport to be indicative of the results of operations that would have been achieved had the EMCORE Chicago acquisition been consummated on October 1, 2020, nor of the results which may occur in the future. The pro forma amounts are based upon available information and certain assumptions that the Company believes are reasonable.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2021 |
| Historical | | | | |
(in thousands, except per share data) | EMCORE Corporation
(excluding EMCORE Chicago) | | EMCORE Chicago | | Pro Forma Adjustments | | Pro Forma Combined |
Revenue | $ | 42,236 | | | $ | 7,698 | | | $ | — | | | $ | 49,934 | |
Cost of revenue | 26,439 | | | 5,827 | | | 171 | | (a) | 32,437 | |
Gross profit | 15,797 | | | 1,871 | | | (171) | | | 17,497 | |
Operating expense: | | | | | | | |
Selling, general, and administrative | 7,187 | | | 2,684 | | | (1,026) | | (a)(b) | 8,845 | |
Research and development | 4,627 | | | 1,443 | | | (264) | | (a)(b) | 5,806 | |
Severance | 1,298 | | | — | | | — | | | 1,298 | |
(Gain) loss on sale of assets | 187 | | | — | | | — | | | 187 | |
Total operating expense | 13,299 | | | 4,127 | | | (1,290) | | | 16,136 | |
Operating (loss) income | 2,498 | | | (2,256) | | | 1,119 | | | 1,361 | |
Other (expense) income: | | | | | | | 0 |
Interest expense, net | (11) | | | — | | | 318 | | (c) | 307 | |
Foreign exchange gain | 42 | | | — | | | — | | | 42 | |
| Other income | — | | | 33 | | | — | | | 33 | |
Total other (expense) income | 31 | | | 33 | | | 318 | | | 382 | |
(Loss) income before income tax expense | 2,529 | | | (2,223) | | | 1,437 | | | 1,743 | |
Income tax expense | (115) | | | (13) | | | (5) | | (d)(e) | (133) | |
Net (loss) income | 2,414 | | | (2,236) | | | 1,432 | | | 1,610 | |
Foreign exchange translation adjustment | 20 | | | — | | | — | | | 20 | |
Comprehensive (loss) income | $ | 2,434 | | | $ | (2,236) | | | 1,432 | | | $ | 1,630 | |
Per share data: | | | | | | | |
Net (loss) income per basic share | $ | 0.07 | | | | | $ | — | | | $ | 0.04 | |
Weighted-average number of basic shares outstanding | 36,950 | | | | — | | | 36,950 | |
Net (loss) income per diluted share | $ | 0.06 | | | | | $ | — | | | $ | 0.04 | |
Weighted-average number of diluted shares outstanding | 39,031 | | | | | — | | | 39,031 | |
(a) Reflects the impact to depreciation expense and amortization expense as a result of the change in fair value of property, plant, and equipment and intangible assets acquired. Adjustment was made to the unaudited pro forma condensed combined statements of operations for the three months ended December 31, 2022.
(b) Reflects the deduction of various sales, general, and administrative and research and development expenses allocated from corporate overhead to EMCORE Chicago during the periods presented that will not be incurred on an ongoing basis as a result of existing EMCORE management structures in place, which will provide the same support to EMCORE Chicago upon completion of a transition services agreement entered into between EMCORE and KVH in connection with the EMCORE Chicago acquisition. Amounts were estimated based on historical allocation included in the stand-alone financial statements of EMCORE Chicago. However, actual costs to be incurred associated with corporate support may vary under the EMCORE structure.
(c) Reflects the impact of interest expense related to cash from borrowing facility for funding of the transaction.
(d) Reflects the current tax expense due to additional income and deferred income tax expense related to deferred tax liability generated from annual tax amortization of indefinite-lived assets that were acquired for the periods presented. Such amounts were determined based on the effective tax rate of EMCORE rather than statutory tax rates as a result of a tax valuation allowance covering substantially all deferred tax assets and the existence of tax loss carryforwards present at both entities.
(e) Reflects the deduction of the income tax expense related to the FIN 48 liability of EMCORE Chicago that is not assumed by EMCORE.
NOTE 4. Cash, Cash Equivalents, and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total of the same amounts shown in the unaudited condensed consolidated statements of cash flows:
| | | | | | | | | | | |
| (in thousands) | December 31, 2022 | | September 30, 2022 |
| Cash | $ | 18,037 | | | $ | 20,011 | |
| Cash equivalents | 5,655 | | | 5,614 | |
| Restricted cash | 495 | | | 520 | |
| Total cash, cash equivalents, and restricted cash | $ | 24,187 | | | $ | 26,145 | |
NOTE 5. Accounts Receivable, net
The components of accounts receivable, net consisted of the following:
| | | | | | | | | | | |
| (in thousands) | December 31, 2022 | | September 30, 2022 |
| Accounts receivable, gross | $ | 17,477 | | | $ | 18,410 | |
| Allowance for credit loss | (361) | | | (337) | |
| Accounts receivable, net | $ | 17,116 | | | $ | 18,073 | |
NOTE 6. Inventory
The components of inventory consisted of the following:
| | | | | | | | | | | |
| (in thousands) | December 31, 2022 | | September 30, 2022 |
| Raw materials | $ | 24,831 | | | $ | 22,927 | |
| Work in-process | 10,586 | | | 9,587 |
| Finished goods | 4,181 | | | 4,521 |
| Inventory | $ | 39,598 | | | $ | 37,035 | |
NOTE 7. Property, Plant, and Equipment, net
The components of property, plant, and equipment, net consisted of the following:
| | | | | | | | | | | |
| (in thousands) | December 31, 2022 | | September 30, 2022 |
| Land | $ | — | | | $ | 995 | |
| Building | — | | | 8,805 | |
| Equipment | 47,100 | | | 42,330 | |
| Furniture and fixtures | 1,394 | | | 1,394 | |
| Computer hardware and software | 3,379 | | | 3,378 | |
| Leasehold improvements | 7,750 | | | 7,180 | |
| Construction in progress | 5,528 | | | 9,886 | |
| Property, plant, and equipment, gross | $ | 65,151 | | | $ | 73,968 | |
| Accumulated depreciation | (37,491) | | | (36,101) | |
| Property, plant, and equipment, net | $ | 27,660 | | | $ | 37,867 | |
Depreciation expense totaled $1.5 million during the three months ended December 31, 2022. During the three months ended December 31, 2022, the Company consummated the sale of the real property interests in the Tinley Park Facility to 8400 W
185TH STREET INVESTORS, LLC, resulting in net proceeds of approximately $10.3 million and a gain on sale of assets of $1.2 million. During the three months ended December 31, 2021, the Company sold certain equipment and recognized a loss on sale of assets of $0.2 million.
During the fiscal year ended September 30, 2022, there was a triggering event of negative cash flows and operating losses at the FOG asset group level within the Inertial Navigation product line of the A&D segment that indicated the carrying amounts of our long-lived assets may not be recoverable. In accordance with ASC 360, with regard to our long-lived assets, we performed an undiscounted cash flow analysis and concluded that the carrying value of the asset group was not recoverable. Accordingly, we then performed an analysis to estimate the fair value of the other long-lived assets and recognized an impairment charge within operating expenses of $3.0 million against the FOG property, plant, and equipment by the amount by which the carrying value of the asset group's other long-lived assets exceeded their estimated fair value for the fiscal year ended September 30, 2022. Key assumptions utilized in the determination of fair value include expected future cash flows and working capital requirements. While we believe the expectations and assumptions about the future are reasonable, they are inherently uncertain.
Geographical Concentrations
Long-lived assets consist of land, building, property, plant, and equipment. As of December 31, 2022 and September 30, 2022, 94.4% and 95.4%, respectively, of our long-lived assets were located in the United States.
NOTE 8. Intangible Assets and Goodwill
Intangible assets arose from the acquisition of SDI in fiscal year 2019 and the acquisitions of S&N and EMCORE Chicago in fiscal year 2022 and are reported within the A&D segment. Definite-lived intangible assets are amortized on a straight-line basis over the estimated useful life of: (a) 7.0 years for patents, (b) 8.0 years for customer relationships, and (c) 2.0-8.0 years for technology. In-process research and development (“IPR&D”) is indefinite-lived until completion of the related development project, at which point amortization of the carrying value of the technology will commence. Trademarks are indefinite-lived.
The following table summarizes changes in intangible assets, net:
| | | | | | | | | | | |
| (in thousands) | December 31, 2022 | | September 30, 2022 |
| Balance at beginning of period | $ | 14,790 | | | $ | 167 | |
| Changes from acquisition | 770 | | 14,740 |
| Amortization | (326) | | | (117) | |
| Balance at end of period | $ | 15,234 | | | $ | 14,790 | |
The weighted average remaining useful lives by definite-lived intangible asset category are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| (in thousands, except weighted average remaining life) | Weighted Average Remaining Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| Technology | 3.7 | | $ | 11,001 | | | $ | (8,424) | | | $ | 2,577 | |
| Customer relationships | 3.5 | | 3,990 | | | (213) | | | 3,777 | |
| Definite-lived intangible assets total | | | $ | 14,991 | | | $ | (8,637) | | | $ | 6,354 | |
As of December 31, 2022 IPR&D and trademarks was approximately $6.7 million and $2.2 million, respectively.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| (in thousands, except weighted average remaining life) | Weighted Average Remaining Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| Technology | 5.4 | | $ | 10,991 | | | $ | (8,261) | | | $ | 2,730 | |
| Customer relationships | 4.6 | | 3,260 | | | (50) | | | 3,210 | |
| Definite-lived intangible assets total | | | $ | 14,251 | | | $ | (8,311) | | | $ | 5,940 | |
As of September 30, 2022 IPR&D and trademarks was approximately $6.7 million and $2.2 million, respectively.
Estimated future amortization expense for intangible assets recorded by the Company as of December 31, 2022 is as follows:
| | | | | |
| (in thousands) | Amount |
| 2023 | $ | 862 | |
| 2024 | 1,131 | |
| 2025 | 1,104 | |
| 2026 | 702 | |
| 2027 | 679 | |
| Thereafter | 1,876 | |
| Total amortization expense | $ | 6,354 | |
Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. $16.4 million of the Company's goodwill of $16.5 million relates to the recent S&N and EMCORE Chicago acquisitions and is recorded within the A&D segment. None of the Company's goodwill is deductible for tax purposes. The following table summarizes changes in goodwill:
| | | | | | | | | | | |
| (in thousands) | December 31, 2022 | | September 30, 2022 |
| Balance at beginning of period | $ | 17,894 | | | $ | 69 | |
| Adjustments to preliminary purchase price allocation | (1,375) | | | 17,825 |
| Balance at end of period | $ | 16,519 | | | $ | 17,894 | |
NOTE 9. Benefit Plans
We assumed a defined benefit pension plan (the “Pension Plan”) on April 29, 2022 as a result of the acquisition of S&N. The Pension Plan was frozen to new hires as of March 31, 2007 and employees hired on or after April 1, 2007 are not eligible to participate in the Pension Plan. On July 1, 2022, the Pension Plan was amended to freeze benefit plan accruals for participants. As a result of the freeze, a curtailment was triggered and a restatement of the benefit obligation and plan assets occurred, although no gain or loss resulted. The annual measurement date for the Pension Plan is September 30. Benefits are based on years of credited service at retirement. Annual contributions to the Pension Plan are not less than the minimum funding standards outlined in the Employee Retirement Income Security Act of 1974, as amended. We maintain the Pension Plan with the goal of ensuring that it is adequately funded to meet its future obligations. We did not make any contributions to the Pension Plan during the three months ended December 31, 2022 and do not anticipate making any contributions for the remainder of the fiscal year ending September 30, 2023.
The components of net periodic pension cost are as follows:
| | | | | | | | | |
| (in thousands) | Three Months Ended December 31, 2022 | | |
| Service cost | $ | 26 | | | | | |
| Interest cost | 93 | | | | | |
| Expected return on plan assets | (84) | | | | | |
| Net periodic pension cost | $ | 35 | | | | | |
The service cost component of total pension expense is included as a component of SG&A expense on the condensed consolidated statements of operations and comprehensive (loss) income for the three months ended December 31, 2022. The interest cost and expected return on plan assets components of total pension expense are included as components of other (expense) income on the condensed consolidated statements of operations and comprehensive (loss) income for the three months ended December 31, 2022.
Net pension asset is included as a component of other non-current assets on the condensed consolidated balance sheets as of December 31, 2022. As of December 31, 2022, the Pension Plan assets consist of cash and cash equivalents, and we manage a liability driven investment strategy intended to maintain fully-funded status.
401(k) Plan
We have a savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under this savings plan, participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. Our matching contribution in cash for each of the three months ended December 31, 2022 and 2021, was $0.2 million.
NOTE 10. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities consisted of the following:
| | | | | | | | | | | |
| (in thousands) | December 31, 2022 | | September 30, 2022 |
| Compensation | $ | 5,964 | | | $ | 4,213 | |
| Warranty | 1,522 | | | 1,504 |
| Commissions | 429 | | | 228 |
| Consulting | 264 | | | 241 |
| Legal expenses and other professional fees | 242 | | | 275 |
| Income and other taxes | 108 | | | — | |
| Severance and restructuring accruals | 854 | | | 423 |
| Litigation settlement | 294 | | | 341 |
| Other | 1,520 | | | 899 |
| Accrued expenses and other current liabilities | $ | 11,197 | | | $ | 8,124 | |
Severance and restructuring-related accruals specifically relate to the reductions in force. Expense related to severance and restructuring accruals is included in SG&A expense on the condensed consolidated statements of operations and comprehensive (loss) income. In an effort to better align current and future business operations related to CATV product lines, we reduced our workforce and recorded $0.5 million and $1.4 million in severance expense in the three months ended December 31, 2022 and 2021, respectively. As of December 31, 2022 and September 30, 2022 there was $0.9 million and $0.4 million accrued severance expense, respectively. We expect all severance to be fully paid by the quarter ending June 30, 2023.
NOTE 11. Credit Agreement
Wingspire Credit Agreement
On August 9, 2022, EMCORE and EMCORE Space & Navigation Corporation, our wholly-owned subsidiary, entered into that certain Credit Agreement with the lenders party thereto and Wingspire Capital LLC (“Wingspire”), as administrative agent for the lenders, as amended pursuant to that First Amendment to Credit Agreement, dated as of October 25, 2022, among EMCORE and EMCORE Space & Navigation Corporation, EMCORE Chicago Inertial Corporation, our wholly-owned subsidiary (together with the Company and S&N, the “Borrowers”), the lenders party thereto and Wingspire, to add EMCORE Chicago as a Borrower and include certain of its assets in the borrowing base (as amended, the “Credit Agreement”). The Credit Agreement provides for two credit facilities: (a) an asset-based revolving credit facility in an aggregate principal amount of up to $40.0 million, subject to a borrowing base consisting of eligible accounts receivable and eligible inventory (subject to certain reserves), and (b) a term loan facility in an aggregate principal amount of approximately $6.0 million.
The proceeds of the loans made under the Credit Agreement may be used for general corporate purposes. Borrowings under the Credit Agreement will mature on August 8, 2025, and bear interest at a rate per annum equal to term SOFR plus a margin of (i) 3.75% or 5.50% in the case of revolving loans, depending on the applicable assets corresponding to the borrowing base pursuant to which the applicable loans are made and (ii) 5.50% in the case of the term loan. In addition, the Borrowers are responsible for Wingspire’s annual collateral monitoring fees as well as the lenders’ fees and expenses, including a closing fee of 1.0% of the aggregate principal amount of the commitments as of the closing with respect to revolving loans and 1.50% of the aggregate principal amount of the term loan. The Borrowers may also be required to pay an unused line fee of 0.50% in respect of the undrawn portion of the revolving commitments, which is generally based on average daily usage of the revolving facility during the immediately preceding month.
The Credit Agreement contains representations and warranties, affirmative and negative covenants that are generally customary for credit facilities of this type. Among others, the Credit Agreement contains various covenants that, subject to agreed upon exceptions, limit the Borrowers’ and their respective subsidiaries’ ability to incur indebtedness, grant liens, enter into sale and leaseback transactions, enter into swap agreements, make loans, acquisitions and investments, change the nature of their business, acquire or sell assets or consolidate or merge with or into other persons or entities, declare or pay dividends or make other restricted payments, enter into transactions with affiliates, enter into burdensome agreements, change fiscal year, amend organizational documents, and use proceeds to fund any activities of or business with any person that is the subject of governmental sanctions. In addition, the Credit Agreement requires that, for any period commencing upon the occurrence of an event of default or excess availability under the Credit Agreement being less than the greater of $5.0 million and 15% of the revolving commitments until such time as no event of default shall be continuing and excess availability under the Credit
Agreement shall be at least the greater of $5.0 million and 15% of the revolving commitments for a period of 60 consecutive days, the Borrowers satisfy a consolidated fixed charge coverage ratio of not less than 1.10:1.00.
The Credit Agreement also includes customary events of default, the occurrence of which, following any applicable grace period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Borrowers under the Credit Agreement to be immediately due and payable, and exercise rights and remedies available to the lenders under the Credit Agreement or applicable law or equity. In connection with the Credit Agreement, the Borrowers entered into a pledge and security agreement pursuant to which the obligations under the Credit Agreement are secured on a senior secured basis (subject to permitted liens) by substantially all assets of the Borrowers and substantially all assets of any future guarantors.
As of December 31, 2022, an aggregate principal amount of $6.6 million was outstanding pursuant to the revolving credit facility and an aggregate principal amount of $5.7 million was outstanding pursuant to the term loan facility. As of September 30, 2022, an aggregate principal amount of $9.6 million was outstanding pursuant to the revolving credit facility and an aggregate principal amount of $5.9 million was outstanding pursuant to the term loan facility. Also, as of December 31, 2022, the revolving credit facility had approximately $15.0 million available for borrowing. Provided that no event of default has occurred, and subject to availability limitation, loans under the revolving credit facility can continue to be drawn/redrawn/outstanding until expiration in 2025.
Our future term loan repayments as of December 31, 2022 is as follows:
| | | | | |
| (in thousands) | Amount |
| 2023 | $ | 638 | |
| 2024 | 852 | |
| 2025 | 852 | |
| 2026 | 3,339 | |
| Total loan payments | $ | 5,681 | |
NOTE 12. Income and Other Taxes
During the three months ended December 31, 2022 and 2021, the Company recorded an income tax expense of $94,000 and $115,000, respectively. Income tax expense during the three months ended December 31, 2022 is composed primarily of state tax expense and tax expense generated from the tax amortization on acquired indefinitely lived assets. Income tax expense during the three months ended December 31, 2021 is composed primarily of state tax expense which is driven by the State of California's temporary suspension of net operating loss ("NOL") utilization.
For the three months ended December 31, 2022 and 2021 the effective tax rate on continuing operations was 0.8% and 4.5%, respectively. The tax rate for the three months ended December 31, 2021 is primarily driven by the State of California’s temporary suspension of NOL utilization.
The Company uses estimates to forecast the results from continuing operations for the current fiscal year as well as permanent differences between book and tax accounting.
We have not provided for income taxes on non-U.S. subsidiaries’ undistributed earnings as of December 31, 2022 because we plan to indefinitely reinvest the unremitted earnings of our non-U.S. subsidiaries and all of our non-U.S. subsidiaries historically have negative earnings and profits.
All deferred tax assets have a full valuation allowance as of December 31, 2022, except for the tax amortization of indefinitely lived goodwill, which cannot be utilized to reduce deferred tax assets. On a quarterly basis, the Company evaluates the positive and negative evidence to assess whether the more likely than not criteria has been satisfied in determining whether there will be further adjustments to the valuation allowance.
As of December 31, 2022 and September 30, 2022, we did not accrue any significant uncertain tax benefit, interest, or penalties as tax liabilities on our condensed consolidated balance sheets. During the three months ended December 31, 2022, there were no material increases or decreases in unrecognized tax benefits.
NOTE 13. Commitments and Contingencies
Indemnifications
We have agreed to indemnify certain customers against claims of infringement of intellectual property rights of others in our sales contracts with these customers. Historically, we have not paid any claims under these customer indemnification obligations. We enter into indemnification agreements with each of our directors and executive officers pursuant to which we agree to indemnify them for certain potential expenses and liabilities arising from their status as a director or executive officer of the Company. We maintain directors and officers insurance, which covers certain liabilities relating to our obligation to indemnify our directors and executive officers in certain circumstances. It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular claim.
Legal Proceedings
We are subject to various legal proceedings, claims, and litigation, either asserted or unasserted, that arise in the ordinary course of business. The outcome of these matters is currently not determinable and we are unable to estimate a range of loss, should a loss occur, from these proceedings. The ultimate outcome of legal proceedings involves judgments, estimates, and inherent uncertainties and the results of these matters cannot be predicted with certainty. Professional legal fees are expensed when incurred. We accrue for contingent losses when such losses are probable and reasonably estimable. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information. Should we fail to prevail in any legal matter, or should several legal matters be resolved against the Company in the same reporting period, then the financial results of that particular reporting period could be materially affected.
Intellectual Property Lawsuits
We protect our proprietary technology by applying for patents where appropriate and, in other cases, by preserving the technology, related know-how, and information as trade secrets. The success and competitive position of our product lines are impacted by our ability to obtain intellectual property protection for our research and development efforts. We have, from time to time, exchanged correspondence with third parties regarding the assertion of patent or other intellectual property rights in connection with certain of our products and processes.
Resilience Litigation
In February 2021, Resilience Capital (“Resilience”) filed a complaint against us with the Delaware Chancery Court containing claims arising from the February 2020 sale of SDI’s real property (the “Concord Property Sale”) located in Concord, California (the “Concord Real Property”) to Eagle Rock Holdings, LP (“Buyer”) and that certain Single-Tenant Triple Net Lease, dated as of February 10, 2020, entered into by and between SDI and the Buyer, pursuant to which SDI leased from the Buyer the Concord Real Property for a 15-year term. The Resilience complaint seeks, among other items, (a) a declaration that the Concord Property Sale included a non-cash component, (b) a decree requiring us and Resilience to follow the appraisal requirements set forth in that certain Purchase and Sale Agreement (the “SDI Purchase Agreement”), dated as of June 7, 2019, by and among the Company, The Resilience Fund IV, L.P., The Resilience Fund IV-A, L.P., Aerospace Newco Holdings, Inc. and Ember Acquisition Sub, Inc., (c) recovery of Resilience’s costs and expenses, and (d) pre- and post-judgment interest.
In April 2021, we filed with the Delaware Chancery Court our answer to the Resilience complaint and counterclaims against Resilience, in which we are seeking, among other items, (a) dismissal of the Resilience complaint and/or granting of judgment in favor of EMCORE with respect to the Resilience complaint, (b) entering final judgment against Resilience awarding damages to us for Resilience’s fraud and breaches of the SDI Purchase Agreement in an amount to be proven at trial and not less than $1,565,000, (c) a judicial determination of the respective rights and duties of us and Resilience under the SDI Purchase Agreement, (d) an award to us of costs and expenses, and (e) pre- and post-judgment interest. We believe that the claims made by Resilience in its complaint are without merit and we intend to vigorously defend ourselves against them.
NOTE 14. Equity
Equity Plans
We provide long-term incentives to eligible officers, directors, and employees in the form of equity-based awards. We maintain four equity incentive compensation plans, collectively described as our “Equity Plans”: (a) the 2010 Equity Incentive Plan (the “2010 Plan”), (b) the 2012 Equity Incentive Plan (the “2012 Plan”), (c) the Amended and Restated 2019 Equity Incentive Plan (the “2019 Plan”), and (d) the 2022 New Employee Inducement Plan.
We issue new shares of common stock to satisfy awards granted under our Equity Plans. In December 2022, our Board of Directors approved an amendment to the 2019 Plan, which, subject to shareholder approval at our 2023 annual meeting of shareholders, would increase the maximum number of shares of the Company’s common stock that may be issued or transferred pursuant to awards under the 2019 Plan by an additional 1.549 million shares.
Stock-Based Compensation
The following table sets forth stock-based compensation expense by award type:
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| (in thousands) | 2022 | | 2021 | | | | |
| Employee stock options | $ | — | | | $ | — | | | | | |
| RSUs and RSAs | 915 | | | 554 | | | | | |
| PSUs and PRSAs | 693 | | | 407 | | | | | |
| Outside director equity awards and fees in common stock | 126 | | | 127 | | | | | |
| Total stock-based compensation expense | $ | 1,734 | | | $ | 1,088 | | | | | |
The following table sets forth stock-based compensation expense by expense type:
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| (in thousands) | 2022 | | 2021 | | | | |
| Cost of revenue | $ | 387 | | | $ | 151 | | | | | |
| Selling, general, and administrative | 1,075 | | | 755 | | | | | |
| Research and development | 272 | | | 182 | | | | | |
| Total stock-based compensation expense | $ | 1,734 | | | $ | 1,088 | | | | | |
(Loss) Income Per Share
The following table sets forth the computation of basic and diluted net (loss) income per share:
| | | | | | | | | | | |
| Three Months Ended December 31, |
| (in thousands, except per share data) | 2022 | | 2021 |
| Numerator | | | |
| Net (loss) income | $ | (11,693) | | | $ | 2,414 | |
| Denominator | | | |
| Weighted average number of shares outstanding - basic | 37,557 | | | 36,950 | |
| Effect of dilutive securities | | | |
| Stock options | — | | | 7 | |
| PSUs, RSUs, and restricted stock | — | | | 2,074 | |
| Weighted average number of shares outstanding - diluted | 37,557 | | | 39,031 | |
| Earnings per share - basic | $ | (0.31) | | | $ | 0.07 | |
| Earnings per share - diluted | $ | (0.31) | | | $ | 0.06 | |
| Weighted average antidilutive options, unvested RSUs and RSAs, and unvested PSUs excluded from the computation | 2,807 | | | 53 | |
Basic earnings per share (“EPS”) is computed by dividing net (loss) income for the period by the weighted-average number of common stock outstanding during the period. Diluted EPS is computed by dividing net (loss) income for the period by the weighted average number of common stock outstanding during the period, plus the dilutive effect of outstanding restricted stock units (“RSUs”) and restricted stock awards (“RSAs”), performance stock units (“PSUs”), and stock options as applicable pursuant to the treasury stock method. Certain of the Company's outstanding share-based awards, noted in the table above, were excluded because they were anti-dilutive, but they could become dilutive in the future. The anti-dilutive stock options and shares of outstanding and unvested restricted stock were excluded from the computation of earnings per share for the three months ended December 31, 2022 due to the Company incurring a net loss for such period.
Future Issuances
Common stock reserved for future issuances as of December 31, 2022 was as follows:
| | | | | |
| Amount |
| Exercise of outstanding stock options | 9,981 | |
| Unvested RSUs and RSAs | 2,644,870 | |
Unvested PSUs and PRSAs (at 200% maximum payout) | 2,722,106 | |
| Issuance of stock-based awards under the Equity Plans | 1,128,932 | |
| Purchases under the officer and director share purchase plan | 88,741 | |
| Total reserved | 6,594,630 | |
NOTE 15. Segment and Revenue Information
Reportable Segments
Reported below are the Company’s segments for which separate financial information is available and upon which operating results are evaluated by the chief operating decision maker, the Chief Executive Officer, to assess performance and to allocate resources. We do not allocate sales and marketing, general and administrative expenses, or interest expense and interest income to our segments because management does not include the information in its measurement of the performance of the operating segments. Also, a measure of segment assets and liabilities has not been provided to the Company's chief operating decision maker and therefore is not shown below.
Information on reportable segments utilized by the chief operating decision maker is as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| (in thousands) | 2022 | | 2021 | | | | |
| Revenue | | | | | | | |
| Aerospace and Defense | $ | 21,675 | | | $ | 9,900 | | | | | |
| Broadband | 3,278 | | | 32,336 | | | | | |
| Total revenue | $ | 24,953 | | | $ | 42,236 | | | | | |
| Segment profit | | | | | | | |
| Aerospace and Defense gross profit | $ | 4,108 | | | $ | 1,684 | | | | | |
| Aerospace and Defense research and development expense | 4,349 | | | 4,162 | | | | | |
| Aerospace and Defense segment profit | $ | (241) | | | $ | (2,478) | | | | | |
| Broadband gross profit | $ | (1,049) | | | $ | 14,113 | | | | | |
| Broadband research and development expense | 1,002 | | | 465 | | | | | |
| Broadband segment profit | $ | (2,051) | | | $ | 13,648 | | | | | |
| Total segment profit | $ | (2,292) | | | $ | 11,170 | | | | | |
Product Categories
Revenue is classified by major product category as presented below:
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| (in thousands) | 2022 | | 2021 | | | | | | | | |
| Aerospace and Defense | | | | | | | | | | | |
| Inertial Navigation | $ | 19,979 | | | $ | 8,145 | | | | | | | | | |
| Defense Optoelectronics | 1,696 | | | 1,755 | | | | | | | | | |
| Broadband | | | | | | | | | | | |
| CATV Optical Transmitters and Components | 1,553 | | | 28,459 | | | | | | | | | |
| Data Center Chips | 407 | | | 1,068 | | | | | | | | | |
| Optical Sensing | 1,318 | | | 2,809 | | | | | | | | | |
| Total revenue | $ | 24,953 | | | $ | 42,236 | | | | | | | | | |
Timing of Revenue
The following table sets forth revenue by geographic area based on our customers’ billing address:
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| (in thousands) | 2022 | | 2021 | | | | |
| Trade revenue (recognized at a point in time) | $ | 19,107 | | | $ | 41,692 | | | | | |
| Contract revenue (recognized over time) | 5,846 | | | 544 | | | | | |
| Total revenue | $ | 24,953 | | | $ | 42,236 | | | | | |
Geographical Concentration
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| (in thousands) | 2022 | | 2021 | | | | |
| United States and Canada | $ | 19,002 | | | $ | 38,056 | | | | | |
| Asia | 1,420 | | | 3,086 | | | | | |
| Europe | 3,203 | | | 820 | | | | | |
| Other | 1,328 | | | 274 | | | | | |
| Total revenue | $ | 24,953 | | | $ | 42,236 | | | | | |
Customer Concentration
Portions of the Company’s sales are concentrated among a limited number of customers. Significant customers are defined as customers representing greater than 10% of consolidated revenue. Revenue from two significant customers represented an aggregate of 38% and 65% of our consolidated revenue for the three months ended December 31, 2022 and 2021, respectively. The percentage from significant customers decreased due to lower CATV revenue from our Broadband segment.