EMCORE CORPORATION You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included in Financial Statements under Item 1 within this 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 aNew Jersey corporation. We became publicly traded in 1997 and are listed on theNasdaq Stock Exchange under the ticker symbol EMKR. We are a leading provider of sensors for navigation in the Aerospace and Defense market as well as a manufacturer of lasers and optical subsystems for use in the Cable TV ("CATV") industry. We pioneered the linear fiber optic transmission technology that enabled the world's first delivery of CATV directly on fiber, and today is a leading provider of advanced Mixed-Signal Optics products serving the broadband communications and Aerospace and Defense markets. 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 the acquisition ofSystron Donner Inertial, Inc. ("SDI"), a navigation systems provider with a scalable, chip-based platform for higher volume gyro applications utilizing Quartz MEMS technology, inJune 2019 , we further expanded our portfolio of gyros and inertial sensors with SDI's quartz MEMS gyro and accelerometer technology. We have fully vertically-integrated manufacturing capability through our indium phosphide compound semiconductor wafer fabrication facility at our headquarters inAlhambra, CA , and through our quartz processing and sensor manufacturing facility inConcord, CA. These facilities support our vertically-integrated manufacturing strategy for quartz and fiber optic gyro products, for navigation systems, and for our chip, laser, transmitter, and receiver products for broadband applications. We have two reporting segments, Aerospace and Defense, and Broadband. Aerospace and Defense is comprised of two product lines: (i) Navigation and Inertial Sensing, and (ii) Defense Optoelectronics. The Broadband segment is comprised of three product lines: (i) CATV Lasers and Transmitters, (ii) Chip Devices, and (iii) Other. Due to a shift in customer base, the previously existingSatellite/Microwave Communications product line has been renamed "Defense Optoelectronics." Recent Developments COVID-19 The global outbreak of the coronavirus disease 2019 ("COVID-19") was declared a pandemic by theWorld Health Organization and a national emergency by theU.S. Government inMarch 2020 . The COVID-19 pandemic has negatively affected theU.S. and global economy, disrupted global supply chains, significantly restricted travel and transportation, resulted in mandated closures and orders to "shelter-in-place," and created significant disruption of the financial markets. The full extent of the COVID-19 impact on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by theU.S. government, state and local government officials, and international governments to prevent disease spread, all of which are uncertain, out of our control, and cannot be predicted. Each region we and our supply chain partners operate in has been affected by COVID-19 at varying times and magnitudes, often creating unforeseen challenges associated with logistics, raw material supply and labor shortages. In accordance with applicableU.S. state and county ordinances generally exempting essential businesses and/or critical infrastructure workforces from mandated closures and orders to "shelter-in-place," ourU.S. production facilities have 48 Table of Contents
continued to operate in support of essential products and services, subject to limitations and requirements pursuant to applicable state and county orders with regard to ongoing operations that have reduced the efficiency of our engineering and operational teams. While operations at our facility inChina were delayed in earlyFebruary 2020 , we were at planned capacity by the end of February and throughout the quarters endedJune 30 andSeptember 30, 2020 . We rely on third party suppliers and contract manufacturers to provide materials, major components and products, and services. Many of our suppliers have at times temporarily ceased or limited operations as a result of COVID-19 and failed to deliver parts or components to us. For example, in the quarter endedJune 30, 2020 , unexpected delays and cancellations of key component deliveries caused disruption to our business, and these actions may continue in the future. In addition, the decline in commercial airline traffic has at times created shortages in air freight capacity, making it more difficult and costly to timely procure parts and components. We remain diligent in continuing to identify and manage risks to our business given the changing uncertainties related to COVID-19 and have plans in place intended to address or mitigate shortages of labor, material supplies and logistics services. While we believe that our supply chain, logistics and operations teams are currently in a position to meet expected customer demand levels in the coming quarters, we recognize that unpredictable events could create new challenges in the months ahead. We may not be able to address these challenges in a timely manner, which could negatively impact our financial results. In addition, restrictions related to the COVID-19 pandemic have negatively affected the timing of the sale and transfer of certain CATV module and transmitter manufacturing equipment to the Buyers (defined below), as described in more detail below under "Hytera Transactions". Travel intoThailand by our manufacturing engineers to support the transfer remains difficult, and customer product qualification processes for products being manufactured inThailand are being delayed due to our customers' inability to access their facilities to perform testing. While we are taking actions within our supply chain and manufacturing operations to mitigate the effects of these delays, the timing and completion of these transfers may be further disrupted as a result of COVID-19, which could delay our recognition of the anticipated benefits of transferring this equipment and could disrupt our manufacturing activities for these products. Our customer orders to date have generally remained stable with our pre-COVID-19 outlook, except with respect to customer orders related to the CATV Lasers and Transmitters product line, which have increased compared to our pre-COVID-19 outlook. However, qualification testing for certain of our products has been delayed due to customer engineering shortages and limitations on their ability to access their facilities, and development timelines for certain programs are being extended. We continue to analyze on an ongoing basis how COVID-19 related actions could affect our product development efforts, future customer demand, timing of orders, recognized revenues, and cash flows. The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future. If we need to raise additional capital to support operations in the future, we may be unable to access capital markets and additional capital may only be available to us on terms that could be significantly detrimental to our existing stockholders and to our business as a result of COVID-19.
SDI Acquisition
OnJune 7, 2019 , we completed the acquisition of SDI, a private-equity backed navigation systems provider with a scalable, chip-based platform for higher volume gyro applications utilizing Quartz MEMS technology. See Note 4 - Acquisition in the notes to our consolidated financial statements for additional information regarding this acquisition. Following the closing, we began integrating SDI into our current Navigation and Inertial Sensing product line and have included the financial results of SDI in our consolidated financial statements beginning on the acquisition date.
Hytera Transactions
As part of the effort to streamline operations and move to a variable cost model in our CATV Lasers and Transmitters product line, onOctober 25, 2019 , we entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with Hytera Communications (Hong Kong )Company Limited , a limited liability company incorporated inHong Kong 49 Table of Contents
("Hytera HK"), and Shenzhen Hytera Communications Co., Ltd. , a corporation
formed under the laws of the P.R.C. ("Shenzhen Hytera", and together with Hytera
HK, the "Buyers"), pursuant to which the Buyers agreed to purchase from EMCORE
certain CATV module and transmitter manufacturing equipment (the "Equipment")
owned by EMCORE and currently located at the manufacturing facility of our
wholly-owned subsidiary, EMCORE Optoelectronics (Beijing) Co, Ltd. , a
corporation formed under the laws of the P.R.C., for an aggregate purchase price
of approximately $5.54 million .
As described under "COVID-19" above, travel restrictions and delays in customer
product qualification processes related to the COVID-19 pandemic have negatively
affected the timing of the sale and transfer of some of the Equipment to the
Buyers. The Equipment has been or will be transferred to the Buyers in three
separate closings, (a) one of which occurred in the quarter ended December 31,
2019 , with aggregate payments in an amount equal to approximately $2.3 million
received in such quarter, (b) one of which is now expected to occur during the
quarter ending March 31, 2021 , for which 80% of the applicable sale price
(approximately $1.4 million ) was received in April 2020 and the remaining 20%
(approximately $0.4 million ) is expected to be received in the quarter ending
March 31, 2021 , and (c) one of which is now expected to occur during the quarter
ending June 30, 2021 , with payment expected to be received in the quarter ending
June 30, 2021 .
Concurrently with entry into the Asset Purchase Agreement, we entered into a
Contract Manufacturing Agreement (the "Manufacturing Agreement"), dated as of
October 25, 2019 , with the Buyers pursuant to which the Buyers agreed to
manufacture certain CATV module and transmitter products for us from a
manufacturing facility located in Thailand for an initial five year term at
product prices agreed to between the parties. In the Manufacturing Agreement, we
agreed to pay certain shortfall penalties in the event that orders for
manufactured products are below certain thresholds.
Other Actions Related to CATV Business
In the quarter endedSeptember 30, 2019 , we also reduced the size of our CATV-related employee headcount and reduced the capacity of our wafer fab to one shift, and inJanuary 2020 , we further reduced the size of our employee headcount. These actions incurred costs of$0.4 million in the quarter endedSeptember 30, 2019 and$0.4 million in the quarter endedMarch 31, 2020 and, together with previously-disclosed headcount reduction at ourBeijing, China facility and the continuing shift to a variable cost model in our CATV Lasers and Transmitters product line as described under "Hytera Transactions" above, have collectively resulted in annual cash savings of approximately$3.4 million beginning in the quarter endedMarch 31, 2020 and continuing through the quarter endedSeptember 30, 2020 . These operational changes in CATV also fulfill a strategic objective of better positioning the CATV Lasers and Transmitters product line to generate positive cash flow to help fund our growth areas including Aerospace and Defense.
Sale/Leaseback Transaction
SDI entered into a Standard Offer, Agreement and Escrow Instructions for Purchase of Real Estate (Non-Residential) (the "Concord Purchase Agreement") dated as ofDecember 31, 2019 withParkview Management Group, Inc. pursuant to which the parties agreed to consummate a sale and leaseback transaction (the "Sale and Leaseback Transaction"). Under the terms of the Concord Purchase Agreement, SDI sold the property located inConcord, California (the "Concord Real Property") toEagle Rock Holdings, LP ("Buyer"), an affiliate ofParkview Management Group, Inc. onFebruary 10, 2020 for a total purchase price of$13.2 million . SDI received net proceeds of$12.8 million after transaction commissions and expenses incurred in connection with the sale. At the consummation of the Sale and Leaseback Transaction, SDI entered into a Single-Tenant TripleNet Lease (the "Lease Agreement") with Buyer pursuant to which SDI leased back from Buyer the Concord Real Property for a term commencing on the consummation of the Sale and Leaseback Transaction and ending fifteen (15) years after the consummation of the Sale and Leaseback Transaction, unless earlier terminated or extended in accordance with the terms of the Lease Agreement. Under the Lease Agreement, SDI's financial obligations will include base monthly rent of$0.75 per square foot, or approximately$77,500 per month, which rent will increase on an annual basis at three percent (3%) over the life of the lease. SDI is also responsible for all monthly expenses related to the Concord Real Property, including insurance premiums, taxes and other expenses, such as utilities. In connection with the execution of the Lease Agreement, EMCORE executed a Lease Guaranty with Buyer under which EMCORE guaranteed the payment 50 Table of Contents
when due of the monthly rent, and all other additional rent, interest and charges to be paid by SDI under the Lease Agreement.
Customer Settlement Agreement
OnNovember 17, 2020 , we entered into an agreement with a customer to resolve certain potential product claims (the "Customer Settlement Agreement"). In exchange for a release of any and all potential claims the customer may have related to the applicable product, we have agreed to provide up to$1.5 million of product discounts on future purchases from us by the customer. We recorded the full potential expense of$1.5 million in the fiscal year endedSeptember 30, 2020 within Research and Development expense.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with
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:
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. 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.
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Revenue Recognition
We recognize revenue in accordance with theFinancial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") 606 Revenue from Contracts with Customers. The majority of our products have shipping terms that are free on board or free carrier alongside shipping point, which means that we fulfill our delivery obligation and control has transferred to the customer when the goods are handed over to the freight carrier at our shipping dock. In those instances where inventory is maintained at a consigned location, revenue is recognized only when our customer pulls product for use and control has transferred to the customer. Any warranty cost and remaining obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized. ***
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 requiredU.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 Years Ended
September 30,
2020 2019 2018
Revenue 100.0 % 100.0 % 100.0 %
Cost of revenue 67.7 82.7 78.4
Gross profit 32.3 17.3 21.6
Operating expense:
Selling, general, and administrative 22.4 36.8 25.0
Research and development 18.4 22.3 18.0
(Gain) loss on sale of assets (2.1) (0.3) -
Total operating expense 38.7 58.8 43.0
Operating loss (6.4) (41.5) (21.4)
Other income:
Interest (expense) income, net (0.1) 0.7 0.9
Foreign exchange gain (loss) 0.2 (0.5) (0.5)
Other income - - 0.1
Total other income 0.1 0.2 0.5
Loss before income tax benefit (expense) (6.3) (41.3) (20.9)
Income tax (expense) benefit (0.1) (0.1) 0.5
Net loss (6.4) % (41.2) % (20.4) %
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Comparison of Financial Results for the Fiscal Years ended September 30, 2020
and 2019
For the Fiscal Years Ended September 30,(in thousands, except percentages) 2020 2019
$ Change % Change Revenue$ 110,128 $ 87,265 $ 22,863 26.2 % Cost of revenue 74,546 72,176 2,370 3.3 % Gross profit 35,582 15,089 20,493 135.8 % Operating expense:
Selling, general, and administrative 24,631 32,080
(7,449) (23.2) %
Research and development 20,269 19,443 826 4.2 %
Gain on sale of assets (2,284) (302) (1,982) (656.3) %
Total operating expense 42,616 51,221 (8,605) (16.8) %
Operating loss (7,034) (36,132) 29,098 80.5 %
Other income (expense):Interest (expense) income, net (104) 629
(733) (116.5) %
Foreign exchange gain (loss) 198 (427) 625 146.4 %
Total other income 94 202 (108) (53.5) %Loss before income tax expense (6,940) (35,930)
28,990 80.7 %
Income tax expense (60) (54) (6) (11.1) %
Net loss $ (7,000) $ (35,984) $ 28,984 80.5 %
Revenue
For the Fiscal Years Ended September 30,(in thousands, except percentages) 2020 2019 $ Change % Change Aerospace and Defense revenue$ 55,240 $ 33,086 $ 22,154 67.0% Broadband revenue 54,888 54,179 709 1.3% Total revenue$ 110,128 $ 87,265 $ 22,863 26.2%
Aerospace and Defense Revenue:
For the fiscal year endedSeptember 30, 2020 , our Aerospace and Defense revenue increased$22.2 million , or 67%, compared to the same period in the prior year. Included in Aerospace and Defense revenue is$30.3 million and$9.8 million of revenue from SDI for the fiscal years endedSeptember 30, 2020 and 2019, respectively, partially offset by a decrease in our other Aerospace and Defense revenue of$4.7 million . For the fiscal year endedSeptember 30, 2020 , our Navigation and Inertial Sensing product line revenue increased$15.8 million compared to the same period in the prior year, primarily due to inclusion of SDI revenue, of$20.5 million , for the full 2020 fiscal year, and an increase in revenue from our Defense Optoelectronics product line of$6.4 million compared to the same period in the prior year partially offset by a decrease in our other Aerospace and Defense revenue of$4.7 million . For the fiscal year endedSeptember 30, 2020 , our Defense Optoelectronics product line revenue increase was primarily due to an increase in products sold arising from increased customer demand.
Broadband Revenue:
For the fiscal year endedSeptember 30, 2020 , our Broadband revenue increased$0.7 million , or 1%, compared to the same period in the prior year, primarily due to higher customer demand in the CATV Lasers and Transmitters and Sensing product lines partially offset by a decrease in demand of the Chips product
line.
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Gross Profit
For the Fiscal Years Ended September 30,
(in thousands, except percentages) 2020 2019 $ Change % Change
Aerospace and Defense gross profit $ 16,729 $ 9,207 $ 7,522 81.7%
Broadband gross profit 18,853 5,882 12,971 220.5%
Total gross profit $ 35,582 $ 15,089 $ 20,493 135.8%
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 32.3% and 17.3% for the fiscal years ended
Stock-based compensation expense within cost of revenue totaled approximately$0.7 million and$0.5 million for the fiscal years endedSeptember 30, 2020 and 2019, respectively.
Aerospace and Defense Gross Profit:
For the fiscal year endedSeptember 30, 2020 , Aerospace and Defense gross profit increased$7.5 million , or 82%, compared to the same period in the prior year, primarily due to higher revenue, of which$9.3 million results from the inclusion of SDI gross profit in the fiscal year endedSeptember 30, 2020 , compared to a$2.6 million inclusion of SDI gross profit in the fiscal year endedSeptember 30, 2019 . For the fiscal years endedSeptember 30, 2020 and 2019, Aerospace and Defense gross margin was 30.3% and 27.8%, respectively. The higher gross margin in the fiscal year endedSeptember 30, 2020 is primarily due to improved product mix. Broadband Gross Profit: For the fiscal year endedSeptember 30, 2020 , Broadband gross profit increased$13.0 million , or 221%, compared to the same period in the prior year, primarily as a result of improved product mix in the fiscal year endedSeptember 30, 2020 and product costs and inventory charges related to excess and obsolete inventory in the fiscal year endedSeptember 30, 2019 . For the fiscal years endedSeptember 30, 2020 and 2019, Broadband gross margin was 34.3% and 10.9%, respectively. The higher gross margin in the fiscal year endedSeptember 30, 2020 was primarily the result of improved product mix and lower product costs and inventory related charges.
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
SG&A expense for the fiscal year endedSeptember 30, 2020 was lower than the amount reported in the same period in the prior year, primarily due to lower attorneys' fees and costs arising from litigation proceedings, partially offset by an increase in compensation, insurance and bad debt expenses.
As a percentage of revenue, SG&A expenses were 22.4% and 36.8% for the
fiscal years ended
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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 relate 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
For the fiscal years endedSeptember 30, 2020 and 2019, Aerospace and Defense R&D expense was$17.5 million and$10.4 million , respectively. For the fiscal years endedSeptember 30, 2020 and 2019, Broadband R&D expense was$2.8 million and$9.0 million , respectively. R&D expense for the fiscal year endedSeptember 30, 2020 was higher than the amounts reported in the same period in the prior year primarily due to the expense arising from the Customer Settlement Agreement of$1.5 million and an increase in compensation costs (including due to a higher R&D headcount than the prior period due to the SDI acquisition), partially offset by lower project spending, primarily in Aerospace and Defense, and an overall reduction in Broadband R&D expense.
As a percentage of revenue, R&D expenses were 18.4% and 22.3% for the
fiscal years ended
Operating Loss
Operating loss represents revenue less the cost of revenue and direct operating expenses incurred. As a percentage of revenue, our operating loss was (6.4)% and (41.5)% for the fiscal years endedSeptember 30, 2020 and 2019, respectively. The decrease in operating loss as a percentage of revenue in the fiscal years endedSeptember 30, 2020 compared to the same period in the prior year is primarily due to the increase in gross profit, the gain on sale of equipment of$2.0 million and the Concord Real Property of$0.3 million , and the decrease in SG&A expense in the fiscal year endedSeptember 30, 2020 .
Other Income
Interest Income, net
During the fiscal years endedSeptember 30, 2020 and 2019, we recorded$0.2 million and$1.0 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 endedSeptember 30, 2020 was lower than the amount reported in the same period in the prior year due to the impact of COVID-19 onU.S. financial markets and lower cash and cash equivalents balances.
Foreign Exchange
Gains or losses from foreign currency transactions denominated in currencies other than theU.S. dollar, both realized and unrealized, are recorded as foreign exchange gain (loss) on our consolidated statements of operations and comprehensive loss. The gain (losses) recorded relate to the change in value of the Yuan Renminbi relative to theU.S. dollar.
Income Tax Expense
For each of the fiscal years ended
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expense partially offset by the reversal of a deferred tax liability related to
the Concord Real Property. Income tax expense for the fiscal year ended
Comparison of Financial Results for the Fiscal Years Ended
(in thousands, except percentages) For the Fiscal Years
Ended September 30,
2019 2018 $Change % Change
Revenue $ 87,265 $ 85,617 $ 1,648 1.9 %
Cost of revenue 72,176 67,130 5,046 7.5 %
Gross profit 15,089 18,487 (3,398) (18.4) %
Operating expense (income):Selling, general, and administrative 32,080 21,377 10,703 50.1 % Research and development 19,443 15,387 4,056 26.4 % (Gain) loss on sale of assets (302) 34
(336) (988.2) %
Total operating expense 51,221 36,798 14,423 39.2 %
Operating (loss) income (36,132) (18,311) (17,821) (97.3) %
Other income (expense):
Interest income, net 629 733 (104) (14.2) %
Foreign exchange loss (427) (434) 7 1.6 %
Other income - 110 (110) (100.0) %
Total other income 202 409 (207) (50.6) %Loss before income tax benefit (expense) (35,930) (17,902)
(18,028) (100.7) %
Income tax benefit (expense) (54) 449 (503) (112.0) %
Net loss $ (35,984) $ (17,453) $ (18,531) (106.2) %
Revenue
For the Fiscal Years Ended September 30,(in thousands, except percentages) 2019 2018 $ Change % Change Aerospace and Defense revenue$ 33,086 $ 13,567 $ 19,519
143.9%
Broadband revenue 54,179 72,050 (17,871) -24.8%
Total revenue $ 87,265 $ 85,617 $ 1,648 1.9%
Aerospace and Defense Revenue:
For the fiscal year endedSeptember 30, 2019 , our Aerospace and Defense revenue increased$19.5 million , or 144%, compared to the same period in the prior year. Included in Aerospace and Defense revenue is$9.8 million and$0 of revenue from SDI for the fiscal years endedSeptember 30, 2019 and 2018, respectively. For the fiscal year endedSeptember 30, 2019 , our Navigation and Inertial Sensing product line revenue increased$16.0 million compared to the same period in the prior year, primarily due to the increase of SDI revenue of$9.8 million , and an increase of$3.5 million in our Defense Optoelectronics product line, and an increase in our other Aerospace and Defense revenue of$6.2 million . For the fiscal year endedSeptember 30, 2019 , our Defense Optoelectronics product line revenue increase was primarily due to an increase in products sold arising
from increased customer demand. Broadband Revenue: For the fiscal year endedSeptember 30, 2019 , our Broadband revenue decreased$17.9 million , or 25%, compared to the same period in the prior year primarily due to lower customer demand in the CATV Lasers and Transmitters product lines partially offset by an increase in our Sensing and Chips product lines. 56 Table of Contents Gross Profit For the Fiscal Years EndedSeptember 30 ,
(in thousands, except percentages) 2019 2018 $ Change % Change Aerospace and Defense gross profit$ 9,207 $ 2,406 $ 6,801
282.7%
Broadband gross profit 5,882 16,081 (10,199) -63.4%
Total gross profit $ 15,089 $ 18,487 $ (3,398) -18.4%
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 17.3% and 21.6% for the fiscal years ended
Stock-based compensation expense within cost of revenue totaled approximately
Aerospace and Defense Gross Profit:
For the fiscal year endedSeptember 30, 2019 , Aerospace and Defense gross profit increased$6.8 million , or 283%, compared to the same period in the prior year, primarily due to higher revenue, of which$2.6 million results from the inclusion of SDI gross profit in the fiscal year endedSeptember 30, 2019 , compared to a$0 inclusion of SDI gross profit in the fiscal year endedSeptember 30, 2018 . For the fiscal years endedSeptember 30, 2019 and 2018, Aerospace and Defense gross margin was 27.8% and 17.7%, respectively. The higher gross margin in the fiscal year endedSeptember 30, 2019 was primarily due to higher revenue and product mix.
Broadband Gross Profit:
For the fiscal year endedSeptember 30, 2019 , Broadband gross profit decreased$10.2 million , or 63%, compared to the same period in the prior year, primarily as a result of the decrease in revenue and product mix in the fiscal year endedSeptember 30, 2019 , and an increase in product costs and inventory related charges related to excess and obsolete inventory in the fiscal year endedSeptember 30, 2019 . For the fiscal years endedSeptember 30, 2019 and 2018, Broadband gross margin was 10.9% and 22.3%, respectively. The lower gross margin in the fiscal year endedSeptember 30, 2019 was primarily the result of product mix and higher product costs and inventory related charges.
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
SG&A expense for the fiscal year endedSeptember 30, 2019 was higher than the amount reported in the prior year primarily due to an increase in expense for professional services of$5.7 million , primarily as a result of the litigation proceedings withPhoenix , the recording of$3.8 million of attorneys' fees and costs arising from the arbitrator's modified partial final award in the litigation proceedings withPhoenix , the inclusion of$1.8 million of expense at SDI for the period ofJune 7, 2019 throughSeptember 30, 2019 and costs related to the acquisition of SDI of$0.8 million , partially offset by a decrease in compensation expenses and an allowance for bad debt expenses. 57
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As a percentage of revenue, SG&A expenses were 36.8% and 25.0% for the fiscal
years ended
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
For the fiscal years endedSeptember 30, 2019 and 2018, Aerospace and Defense R&D expense was$10.4 million and$4.2 million , respectively. For the fiscal years endedSeptember 30, 2019 and 2018, Broadband R&D expense was$9.0 million and$11.2 million , respectively. R&D expense for the fiscal year endedSeptember 30, 2019 was higher than the amounts reported in the same period in 2018 primarily due to an increase in compensation costs and project spending, primarily in Navigation and Inertial Sensing.
As a percentage of revenue, R&D expenses were 22.3% and 18.0% for the
fiscal years ended
Operating Loss
Operating loss represents revenue less the cost of revenue and direct operating expenses incurred. Operating loss is a measure that executive management uses to assess performance and make decisions. As a percentage of revenue, our operating loss was (41.4)% and (21.5)% for the fiscal years endedSeptember 30, 2019 and 2018, respectively. The increase in operating loss as a percentage of revenue in the fiscal year endedSeptember 30, 2019 compared to the prior year is primarily due to a decrease in gross profit and an increase in SG&A and R&D expense in the fiscal year endedSeptember 30, 2019 .
Other Income
Interest Income, net
During the fiscal years endedSeptember 30, 2019 and 2018, we recorded$1.0 million and$0.7 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 endedSeptember 30, 2019 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 theU.S. dollar, both realized and unrealized, are recorded as foreign exchange gain (loss) on our consolidated statements of operations and comprehensive loss. The gain (losses) recorded relate to the change in value of the Yuan Renminbi relative to theU.S. dollar. 58
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Income Tax Benefit (Expense)
For the fiscal year endedSeptember 30, 2019 , we recorded income tax expense of approximately$0.1 million . For the fiscal year endedSeptember 30, 2018 , we recorded income tax benefit of approximately$0.4 million . Income tax expense for the fiscal year endedSeptember 30, 2019 is primarily comprised of state minimum tax expense. Income tax benefit for the fiscal year endedSeptember 30, 2018 is primarily comprised of the effect of the Tax Cuts and Jobs Act of 2017 which eliminated Alternative Minimum Taxes and resulted in a refund of amounts that we paid in prior fiscal years.
Liquidity and Capital Resources
Historically in most periods we have consumed cash from operations and 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 ofSeptember 30, 2020 , cash and cash equivalents totaled approximately$30.5 million and net working capital totaled approximately$61.1 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:
Credit Facility: On
Agreement (as amended to date, the "Credit Facility") with
? N.A. ("Wells Fargo"). The Credit Facility is secured by the Company's assets
and is subject to a borrowing base formula based on the Company's eligible
accounts receivable, inventory, and machinery and equipment accounts.
The Credit Facility matures inNovember 2021 and 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, acquisitions, and other general corporate purposes subject to a requirement, for certain specific uses, that the Company have liquidity of at least$25.0 million after such use. The Credit Facility requires us to maintain (a) liquidity of at least$10.0 million and (b) excess availability of at least$1.0 million . See Note 11 - Credit Facilities and Debt in the notes to the consolidated financial statements for additional disclosures. As ofNovember 30, 2020 , there was no outstanding balance under this Credit Facility, approximately$0.5 million reserved for one outstanding stand-by letter of credit and approximately$9.7 million available for borrowing.
PPP Loan: On
Promissory Note and Agreement (the "PPP Loan Agreement") with Wells Fargo under
the Paycheck Protection Program ("PPP") established under the Coronavirus Aid,
Relief and Economic Security Act ("CARES Act") to receive loan proceeds of
approximately
The PPP Loan matures on
per annum, payable monthly. Monthly payments in the amount of
due and payable beginning at such time as is in accordance with the terms of
the Paycheck Protection Flexibility Act of 2020 and continuing each month
? thereafter until maturity of the PPP Loan. There is no prepayment penalty.
Under the terms of the PPP, all or a portion of the principal may be forgiven
if the PPP Loan proceeds are used for qualifying expenses as described in the
CARES Act, such as payroll costs, benefits, rent, and utilities. No assurance
is provided that we will obtain forgiveness of the PPP Loan in whole or in
part. With respect to any portion of the PPP Loan that is not forgiven, the PPP
Loan will be subject to customary provisions for a loan of this type, including
customary events of default relating to, among other things, payment defaults
and breaches of the provisions of the PPP Loan Agreement. As of
2020, approximately
We have a history of operating losses and negative cash flows from operations.
We believe that our existing balances of cash and cash equivalents, cash flows
from operations, amounts expected to be available under our Credit Facility and
any amounts that may be available to us under governmental lending programs 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 from the issuance date of these financial statements. We have
taken a number of actions to continue to support our operations and meet our
obligations, including completing the sale of the Concord Real Property,
headcount
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reductions and other cost reductions. In addition, should we require more
capital than what is generated by our operations, we could engage in additional
sales or other monetization of certain fixed assets and real estate, additional
cost reductions, or elect to raise capital in the U.S. through debt or equity
issuances. These alternatives may not be available to us on reasonable terms or
at all, could result in higher effective tax rates, increased interest expense,
and/or dilution of our earnings.
Cash Flow
Operating Activities For the Fiscal Years Ended September 30, Fiscal 2020 vs Fiscal 2019 Fiscal 2019 vs Fiscal 2018 (in thousands, except percentages) 2020 2019 2018 $ Change % Change $ Change % Change Net cash (used in) provided by operating activities (net of acquired assets and assumed liabilities)$ (3,892) $ (15,151) $ 1,470 $ 11,259 74.3%$ (16,621) -1130.7% Fiscal 2020:
For the fiscal year endedSeptember 30, 2020 , our operating activities used cash of$3.9 million , primarily due to our net loss of$7.0 million , changes in our operating assets and liabilities (or working capital components, which includes non-current inventory) of$3.8 million and gain on disposal of assets of$2.3 million , partially offset by adjustments for non-cash charges, including depreciation and amortization expense of$5.5 million , stock-based compensation expense of$3.5 million , issuance of restricted stock units of$0.4 million , product warranty provision of$0.4 million and bad debt provision of$0.2 million . The change in our operating assets and liabilities was primarily the result of an increase in accounts receivable and contract assets of$7.5 million , inventory of$1.2 million and other assets of$13.5 million , partially offset by an increase in accounts payable of$6.1 million and accrued expenses and other liabilities of$12.2 million .
Fiscal 2019:
For the fiscal year endedSeptember 30, 2019 , our operating activities used cash of$15.2 million , primarily due to our net loss of$36.0 million , partially offset by a gain on disposal of equipment of$0.3 million , changes in our operating assets and liabilities (or working capital components, which includes non-current inventory) of$10.7 million , depreciation and amortization expense of$7.1 million , stock-based compensation expense of$2.6 million , warranty provision of$0.2 million and bad debt provision of$0.1 million . The change in our operating assets and liabilities was primarily the result of a decrease in accounts receivable of$4.0 million and an increase in accrued expenses and other liabilities of$5.0 million , partially offset by a decrease in inventory of$6.5 million and other assets of$0.2 million and a decrease in accounts payable of$4.5 million .
Fiscal 2018:
For the fiscal year endedSeptember 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 , inventory of$5.1 million , other assets of$0.6 million and an increase in accounts payable of$0.5 million partially offset by a decrease in accrued expenses and other liabilities of$0.4 million . 60
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Working Capital Components:
Accounts Receivable: We generally expect the level of accounts receivable at any given quarter end to reflect the level of sales in that quarter. 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 end to reflect the change in our expectations of forecasted sales during the quarter. 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 Provided By (Used In) Investing Activities
Investing Activities For the Fiscal Years Ended September 30, Fiscal 2020 vs Fiscal 2019 Fiscal 2019 vs Fiscal 2018 (in thousands, except percentages) 2020 2019 2018 $ Change % Change $ Change %
Change
Net cash provided by (used) in investing activities$ 10,887 $ (31,803) $ (6,501) $ 42,690 134.2%$ (25,302) -389.2% Fiscal 2020: For the fiscal year endedSeptember 30, 2020 , our investing activities provided cash of$10.9 million primarily from cash proceeds from the disposal of property, plant and equipment of$15.4 million partially offset by capital-related expenditures of$4.5 million . The$15.4 million of cash proceeds from the disposal of property, plant and equipment primarily consisted of net proceeds of$12.8 million in connection with the Sale and Leaseback Transaction.
Fiscal 2019:
For the fiscal year endedSeptember 30, 2019 , our investing activities used$31.8 million of cash, including$21.5 million for the acquisition of SDI, net of cash acquired, and capital-related expenditures of$10.8 million primarily related to investment in our wafer fabrication facility partially offset by proceeds from the disposal of equipment of$0.5 million .
Fiscal 2018:
For the fiscal year endedSeptember 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, partially offset by the receipt of proceeds from the disposal of equipment of$0.1 million .
Net Cash Provided By (Used In) Financing Activities
Financing Activities For the Fiscal Years Ended September 30, Fiscal 2020 vs Fiscal 2019 Fiscal 2019 vs Fiscal 2018 (in thousands, except percentages) 2020 2019 2018 $ Change % Change $ Change %
Change
Net cash provided by (used in) financing activities$ 1,499 $ 5,799 $ (487) $ (4,300) -74.2%$ 6,286 1290.8% 61 Table of Contents Fiscal 2020: For the fiscal year endedSeptember 30, 2020 , our financing activities provided cash of$1.5 million , primarily due to$6.5 million of borrowings from the PPP Loan and proceeds from stock plan transactions of$0.6 million , partially offset by net payments related to borrowings from our bank Credit Facility of$5.5 million and tax withholding paid on behalf of employees for stock-based awards of$0.1 million . Fiscal 2019: For the fiscal year endedSeptember 30, 2019 , our financing activities provided cash of$5.8 million , primarily from$5.5 million of proceeds related to borrowings from our bank credit facility and stock plan transactions of$0.5 million , partially offset by tax withholding paid on behalf of employees for stock-based awards of$0.2 million .
Fiscal 2018:
For the fiscal year endedSeptember 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$0.8 million .
Contractual Obligations and Commitments
Our contractual obligations and commitments for fiscal 2021 and over the next five fiscal years are summarized in the table below (and are presented as ofSeptember 30, 2020 ): (in thousands) Total Less than a year 1 to 3 years 4 to 5 years Over 5 years
Purchase obligations$ 15,315 $ 14,199$ 1,056 $ 60 $ - Asset retirement obligations 2,249 - 59 - 2,190 Operating lease obligations 21,138 1,785 3,655 3,421 12,277 Total contractual obligations and commitments$ 38,702 $ 15,984$ 4,770 $ 3,481 $ 14,467
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
Purchase Obligations
Our purchase obligations represent an estimate of all open purchase orders and contractual obligations in the ordinary course of business for which we have not received the goods or services as ofSeptember 30, 2020 . Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services. The purchase obligations of$15.3 million set forth above include, as ofSeptember 30, 2020 ,$1.0 million that we have committed for the purchase and installation of capital equipment. In addition, we expect to incur, during the fiscal year endingSeptember 30, 2021 , an additional$1.2 million to complete the purchase and installation of capital equipment, which we expect to fund
via
cash on hand.
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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.
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.
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