EMCORE Corporation
EMCORE CORP (Form: 10-Q, Received: 05/10/2013 06:01:47)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___

Commission File Number 0-22175

  EMCORE Corporation
(Exact name of registrant as specified in its charter)
New Jersey
(State or other jurisdiction of incorporation or organization)
22-2746503
(I.R.S. Employer Identification No.)
 
 
10420 Research Road, SE, Albuquerque, New Mexico, 87123
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:   (505) 332-5000

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value
(Title of each class)
NASDAQ Stock Market
(Name of each exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. ¨ Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No

As of May 3, 2013 , the number of shares outstanding of our no par value common stock totaled 26,713,466 .




CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS


This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities and Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are largely based on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Such forward-looking statements include, in particular, projections about our future results included in our Exchange Act reports, statements about our plans, strategies, business prospects, changes and trends in our business and the markets in which we operate. These forward-looking statements may be identified by the use of terms and phrases such as “anticipates”, “believes”, “can”, “could”, “estimates”, “expects”, “forecasts”, “intends”, “may”, “plans”, “projects”, "should", “targets”, “will”, "would", and similar expressions or variations of these terms and similar phrases. Additionally, statements concerning future matters such as our expected liquidity, development of new products, enhancements or technologies, sales levels, expense levels, and other statements regarding matters that are not historical are forward-looking statements. Management cautions that these forward-looking statements relate to future events or our future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance, or achievements of our business or our industry to be materially different from those expressed or implied by any forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under Item 1A - Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012, as updated by our subsequent periodic reports. These cautionary statements apply to all forward-looking statements wherever they appear in this Quarterly Report.

Forward-looking statements are based on certain assumptions and analyses made in light of our experience and perception of historical trends, current conditions and expected future developments as well as other factors that we believe are appropriate under the circumstances. While these statements represent our judgement on what the future may hold, and we believe these judgements are reasonable, these statements are not guarantees of any events or financial results. All forward-looking statements in this Quarterly Report are made as of the date hereof, based on information available to us as of the date hereof, and subsequent facts or circumstances may contradict, obviate, undermine, or otherwise fail to support or substantiate such statements. We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in this Quarterly Report. Certain information included in this Quarterly Report may supersede or supplement forward-looking statements in our other reports filed with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statement to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.









2


EMCORE Corporation
FORM 10-Q
For The Quarterly Period Ended March 31, 2013

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3

Table of Contents

PART I.
Financial Information

ITEM 1.
Financial Statements


EMCORE CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three and Six Months Ended March 31, 2013 and 2012
(in thousands, except net income (loss) per share)
(unaudited)
 
 
For the Three Months Ended March 31,
 
For the Six Months Ended March 31,
 
2013
 
2012
 
2013
 
2012
Revenue
$
42,277

 
$
37,780

 
$
91,583

 
$
75,231

Cost of revenue
34,444

 
32,404

 
72,802

 
66,387

Gross profit
7,833

 
5,376

 
18,781

 
8,844

Operating expense (income):
 
 
 
 
 
 
 
Selling, general, and administrative
6,771

 
8,365

 
13,675

 
15,845

Research and development
4,112

 
5,781

 
9,502

 
12,761

Flood-related loss

 
114

 

 
5,812

Flood-related insurance proceeds
(14,808
)
 

 
(19,000
)
 
(5,000
)
Gain on sale of assets
(413
)
 

 
(413
)
 

Total operating (income) expense
(4,338
)
 
14,260

 
3,764

 
29,418

Operating income (loss)
12,171

 
(8,884
)
 
15,017

 
(20,574
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(186
)
 
(121
)
 
(424
)
 
(250
)
Foreign exchange (loss) gain
(21
)
 
167

 
80

 
256

Loss from equity method investment

 
(241
)
 

 
(1,201
)
Change in fair value of financial instruments
(267
)
 
(256
)
 
(30
)
 
(151
)
Total other expense
(474
)
 
(451
)
 
(374
)
 
(1,346
)
Income (loss) before income tax expense
11,697

 
(9,335
)
 
14,643

 
(21,920
)
Income tax expense

 

 
(120
)
 
(1,644
)
Net income (loss)
$
11,697

 
$
(9,335
)
 
$
14,523

 
$
(23,564
)
Foreign exchange translation adjustment
(76
)
 
24

 
(7
)
 
425

Comprehensive income (loss)
$
11,621

 
$
(9,311
)
 
$
14,516

 
$
(23,139
)
Per share data:
 
 
 
 
 
 
 
Net income (loss) per basic share
$
0.44

 
$
(0.40
)
 
$
0.55

 
$
(1.00
)
Net income (loss) per diluted share
$
0.44

 
$
(0.40
)
 
$
0.54

 
$
(1.00
)
Weighted-average number of basic shares outstanding
26,310

 
23,529

 
26,142

 
23,577

Weighted-average number of diluted shares outstanding
26,642

 
23,529

 
26,432

 
23,577


The accompanying notes are an integral part of these condensed consolidated financial statements.

4


EMCORE CORPORATION
Condensed Consolidated Balance Sheets
As of March 31, 2013 and September 30, 2012
(in thousands, except per share data)
(unaudited)
 
As of
 
As of
 
March 31,
2013
 
September 30,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,922

 
$
9,047

Restricted cash
330

 
82

Accounts receivable, net of allowance of $3,281 at March 31, 2013 and $3,279 at September 30, 2012
39,537

 
36,939

Inventory
35,604

 
35,192

Prepaid expenses and other current assets
19,350

 
14,146

Total current assets
100,743

 
95,406

Property, plant, and equipment, net
50,461

 
47,896

Goodwill
20,384

 
20,384

Other intangible assets, net
2,793

 
3,428

Other non-current assets, net of allowance of $3,413 at March 31, 2013 and $3,419 at September 30, 2012
3,206

 
2,752

Total assets
$
177,587

 
$
169,866

LIABILITIES and SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Borrowings from credit facility
$
20,779

 
$
19,316

Accounts payable
24,507

 
38,814

Warrant liability
700

 
670

Accrued expenses and other current liabilities
26,105

 
32,635

Total current liabilities
72,091

 
91,435

Asset retirement obligations
5,075

 
5,004

Deferred gain associated with sale of assets
3,400

 
3,400

Other long-term liabilities
937

 
1,004

Total liabilities
81,503

 
100,843

Commitments and contingencies (Note 11)


 


Shareholders’ equity:
 
 
 
Preferred stock, $0.0001 par value, 5,882 shares authorized; none issued or outstanding

 

Common stock, no par value, 50,000 shares authorized; 26,733 shares issued and 26,693 shares outstanding as of March 31, 2013; 24,412 shares issued and 24,372 shares outstanding as of September 30, 2012
734,890

 
722,345

Treasury stock, at cost; 40 shares
(2,071
)
 
(2,071
)
Accumulated other comprehensive income
1,369

 
1,376

Accumulated deficit
(638,104
)
 
(652,627
)
Total shareholders’ equity
96,084

 
69,023

Total liabilities and shareholders’ equity
$
177,587

 
$
169,866


The accompanying notes are an integral part of these condensed consolidated financial statements.

5



EMCORE CORPORATION
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended March 31, 2013 and 2012
(in thousands)
(unaudited)
 
For the Six Months Ended March 31,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income (loss)
$
14,523

 
$
(23,564
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 
Depreciation, amortization, and accretion expense
4,062

 
5,152

Stock-based compensation expense
2,133

 
4,722

Provision adjustments related to doubtful accounts
15

 
(87
)
Provision adjustments related to product warranty
2,401

 
86

Provision for losses on inventory purchase commitments

 
1,343

Loss from equity method investment

 
1,201

Change in fair value of financial instruments
30

 
151

Net loss on disposal of equipment

 
(3
)
Flood-related loss

 
5,812

Non-cash insurance proceeds
(19,000
)
 

Total non-cash adjustments
(10,359
)
 
18,377

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(2,628
)
 
7,109

Inventory
(600
)
 
(7,829
)
Other assets
2,448

 
115

Accounts payable
(9,176
)
 
8,191

Accrued expenses and other current liabilities
(4,406
)
 
8,556

Total change in operating assets and liabilities
(14,362
)
 
16,142

Net cash (used in) provided by operating activities
(10,198
)
 
10,955

Cash flows from investing activities:
 
 
 
Purchase of equipment
(4,961
)
 
(5,533
)
Deposits on equipment orders
(3
)
 
(1,981
)
Dividend from an unconsolidated affiliate

 
1,644

Increase in restricted cash
(248
)
 
(697
)
Proceeds from disposal of property, plant and equipment
396

 

Net cash used in investing activities
(4,816
)
 
(6,567
)
Cash flows from financing activities:
 
 
 
Net proceeds from borrowings from credit facilities
1,463

 
3,443

Proceeds from sale of common stock
9,475

 

Proceeds from stock plans
1,006

 
652

Net cash provided by financing activities
11,944

 
4,095

Effect of exchange rate changes on foreign currency
(55
)
 
31

Net (decrease) increase in cash and cash equivalents
(3,125
)
 
8,514

Cash and cash equivalents at beginning of period
9,047

 
15,598

Cash and cash equivalents at end of period
$
5,922

 
$
24,112

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
Cash paid during the period for interest
$
370

 
$
252

Cash paid during the period for income taxes
$
15

 
$
1,644

NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Forgiveness of capital lease and accounts payable
$
10,761

 
$

Note Receivable from contract manufacturer
$
8,239

 
$

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


EMCORE Corporation
Notes to our Condensed Consolidated Financial Statements
For the three and six months ended March 31, 2013
(unaudited)

NOTE 1.
Description of Business

Business Overview

EMCORE Corporation and its subsidiaries (the “Company”, “we”, “our”, or “EMCORE”) offers a broad portfolio of compound semiconductor-based products for the fiber optics and solar power markets. We were established in 1984 as a New Jersey corporation and we have two reporting segments: Fiber Optics and Photovoltaics. Our Fiber Optics business segment provides optical components, subsystems and systems for high-speed telecommunications, Cable Television (CATV) and Fiber-To-The-Premise (FTTP) networks, as well as products for satellite communications, video transport and specialty photonics technologies for defense and homeland security applications. EMCORE's Solar Photovoltaics business segment provides products for space power applications including high-efficiency multi-junction solar cells, Covered Interconnect Cells (CICs) and complete satellite solar panels, and terrestrial applications, including high-efficiency GaAs solar cells for concentration photovoltaic (CPV) power systems.


Interim Financial Statements

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 of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by U.S. GAAP for annual financial statements. In our opinion, the interim financial statements reflect all normal 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, 2012 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, 2012 .

All significant intercompany accounts and transactions have been eliminated in consolidation. We are not the primary beneficiary of, nor do we hold a significant variable interest in, any variable interest entity. Certain prior period amounts have been reclassified to conform to the current period presentation. We have evaluated subsequent events through the date that the financial statements were issued.


Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period.

The accounting estimates that require significant, difficult, and/or subjective judgments include:

the valuation of inventory, goodwill, intangible assets, warrants, and stock-based compensation;
depreciation, amortization, and assessment of recovery of long-lived assets;
asset retirement obligations and contingencies including litigation and indemnification-related;
revenue recognition associated with the percentage of completion method;
the allowance for doubtful accounts and warranty accruals; and,
impairment and other losses associated with the Thailand flood.

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 and/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.

7




Sale of Fiber Optics-related Assets

On March 27, 2012, we entered into a Master Purchase Agreement with a subsidiary of Sumitomo Electric Industries, LTD (SEI), pursuant to which we agreed to sell certain assets and transfer certain obligations associated with our Fiber Optics segment. On May 7, 2012, we completed the sale of these assets to SEI and recorded a gain of approximately $2.8 million . This transaction was recorded as a sale of assets since it did not meet the criteria to be considered a component of our business. Under the terms of the Master Purchase Agreement, we have agreed to indemnify SEI for up to $3.4 million of potential claims and expenses for the two -year period following the sale and we have recorded this amount as a deferred gain on our balance sheet as of March 31, 2013 as a result of these contingencies. SEI paid $13.1 million in cash and deposited approximately $2.6 million into escrow as security for indemnification obligations and any purchase price adjustments. Payment of escrow amounts occurs over a two -year period and is subject to claim adjustments. In total, we deferred approximately $4.9 million of the total paid by SEI as a gain on sale until the indemnification obligation of $3.4 million and $1.5 million of purchase price adjustment contingencies are resolved. During the three months ended March 31, 2013 , we resolved the purchase price contingencies resulting in the reduction of the purchase price by $1.1 million . The reduced purchase price is recorded as an offset to the escrow receivable of $2.6 million while an additional $0.4 million of gain on sale of assets was recognized during the three months ended March 31, 2013 . There remains a deferred gain of $3.4 million related to our indemnification obligation at March 31, 2013 .

In May 2012, we also entered into a separate facility lease and transition services agreement (TSA) with SEI related to financial services, supply chain, facility, and information infrastructure support functions to be provided by us. We believe the values assigned to the facility lease and TSA approximate fair value. During the three and six months period ended March 31, 2013 , we recognized $0.6 million and $1.2 million , respectively, related to TSA fees and facility rental income which was recorded as a benefit against operating expenses incurred for such services.

The TSA included a $0.5 million credit to be applied against fees incurred over a twelve -month period through May 2013. We also incurred $0.6 million in expenses directly associated with this transaction. The TSA credit and transaction-related expenses incurred were applied against the proceeds received in determination of the gain recognized during the fiscal year ended September 30, 2012.


Liquidity and Capital Resources

Historically, we have consumed cash from operations and incurred significant net losses. We have managed our liquidity position through a series of cost reduction initiatives, borrowings from our credit facility, capital markets transactions, and the sale of assets.

As of March 31, 2013 , cash and cash equivalents totaled $5.9 million and net working capital totaled approximately $28.7 million . Working capital, calculated as current assets minus current liabilities, is a financial metric we use which represents available operating liquidity. For the three and six months ended March 31, 2013 , we had net income of $11.7 million and $14.5 million , repectively. Net cash used in operating activities for the six months ended March 31, 2013 totaled $10.2 million .

With respect to measures taken to improve liquidity:

Credit Facility : In November 2010, we entered into a Credit and Security Agreement (credit facility) with Wells Fargo Bank (Wells Fargo). The credit facility provides us with a revolving credit of up to $35.0 million originally through November 2013 that can be used for working capital requirements, letters of credit, and other general corporate purposes. The credit facility was initially secured by the Company's assets and is subject to a borrowing base formula based on the Company's eligible accounts receivable and inventory accounts.

Our credit facility contains customary representations and warranties, and affirmative and negative covenants, including, among other things, cash balance and excess availability requirements, minimum tangible net worth and EBITDA covenants, and limitations on liens and certain additional indebtedness and guarantees. The covenants are written such that as long as we maintain the minimum cash balance and excess availability requirement, the other covenants are not required to be met. As of March 31, 2013 , we were in compliance with all of the financial covenants contained in the credit facility including the cash on deposit and excess availability that exceeded the $3.5 million financial covenant.


8


Our credit facility also contains certain events of default, including a subjective acceleration clause. Under this clause, Wells Fargo may declare an event of default if it believes in good faith that our ability to pay all or any portion of our indebtedness with Wells Fargo or to perform any of our material obligations under the credit facility has been impaired, or if it believes in good faith that there has been a material adverse change in the business or financial condition of the Company. If an event of default is not cured within the grace period (if applicable), then Wells Fargo may, among other things, accelerate repayment of amounts borrowed under the credit facility, cease making advances under the credit facility, or take possession of the Company's assets that secure its obligations under the credit facility. We do not anticipate at this time any change in the business or financial condition of the Company that could be deemed a material adverse change by Wells Fargo. Wells Fargo has confirmed that they do not consider the flooding at our contract manufacturer's facility in Thailand in 2011 to be a material adverse change in the business or financial condition of the Company.

On December 21, 2011, we entered into a First Amendment to the credit facility which increased our eligible borrowing base by up to $10.0 million by adding to the borrowing base formula 85% of the appraised value of the Company's equipment and 50% of the appraised value of the Company's real estate. In addition, Wells Fargo reduced our restrictions under the excess availability financial covenant requirement from $7.5 million to $3.5 million through December 2012. The interest rate on outstanding borrowings was increased to LIBOR rate plus four percent. The credit facility was to return to its previous agreement terms on the earlier of (i) December 31, 2012, or (ii) the date that we received insurance proceeds of not less than $30.0 million in the aggregate applicable to the flooding of our primary contract manufacturer in Thailand.

On June 14, 2012, we entered into a Second Amendment to the credit facility, which amended among other things, the borrowing base increase under the First Amendment, which was subject to automatic reductions to (i) $8.1 million on July 1, 2012; and to (ii) $3.1 million on January 1, 2013. The Second Amendment automatically reduced the $8.1 million and $3.1 million thresholds referenced above to $5.0 million and $0 , respectively, if the sale of certain assets did not occur. The Second Amendment no longer included certain assets in the potential borrowing base including certain machinery and equipment and real estate.

On December 28, 2012, we entered into a Third Amendment to the credit facility, which amended among other things, the maturity date of the facility to November 11, 2015. The Third Amendment also amends the Credit Facility by adjusting the borrowing availability provided by machinery and equipment, which amount is currently set at approximately $7.6 million and which was reduced monthly by approximately $101,000 through March 31, 2013, at which time the borrowing availability was reduced to $5.0 million and thereafter will be further reduced monthly by approximately $91,000 .

The Third Amendment also maintains the Company's minimum cash balance and excess liquidity requirement at $3.5 million through June 30, 2013, which had been scheduled to increase to $7.5 million on December 31, 2012, below which certain financial covenants are triggered which relate to minimum tangible net worth, minimum EBITDA amounts and limitations on capital expenditures. The amounts of these financial covenants have been amended from those previously introduced in the First Amendment. At June 30, 2013 the liquidity requirement will be increased by $1.0 million , and will be further increased, quarterly, until such amount reaches $7.5 million at March 31, 2014.

As of March 31, 2013 , we had a $20.8 million LIBOR rate loan outstanding under our credit facility, with an interest rate of 3.4% . As of May 3, 2013 , the outstanding balance under this credit facility totaled approximately $14.6 million . As of March 31, 2013 , the credit facility also had $2.4 million reserved for six outstanding stand-by letters of credit, leaving a remaining $2.0 million borrowing availability balance under this credit facility. We now expect at least 70% of the $35.0 million credit facility to be available for use over the remainder of fiscal year 2013.

October 2012 Stock Sale : On October 3, 2012 we sold 1,832,410 shares of common stock for net proceeds of $9.5 million . See Note 13 - Equity for additional disclosures related to the stock sale.

Equity Facility : In August 2011, we entered into a committed equity line financing facility (equity facility) with Commerce Court Small Cap Value Fund, Ltd. (Commerce Court) whereby Commerce Court has committed, upon issuance of a draw-down request by us, to purchase up to $50 million worth of our common stock over a two -year period, subject to our common stock trading above $4 per share, as adjusted for the reverse stock split, during the draw down period, unless a waiver is received. As of March 31, 2013 , there have been no draw down transactions completed under this equity facility.


9


Impact From Thailand Flood : In November 2011, we entered into an agreement with our contract manufacturer in Thailand whereby our contract manufacturer agreed to purchase equipment to rebuild certain manufacturing lines damaged by flood waters and we agreed to reimburse our contract manufacturer for the cost of the equipment out of insurance proceeds that we expect to receive. We were not a named beneficiary of our contract manufacturer's insurance policy. As of September 30, 2012 , we capitalized the cost of our new manufacturing lines of approximately $5.2 million and recorded an equipment capital lease obligation of $4.4 million , net of equipment deposits. In addition, during the three and six months ended March 31, 2013, we capitalized an additional $0.9 million and $1.2 million , respectively, of new manufacturing lines and recorded a corresponding amount of capital lease obligation. Additionally, we restructured our outstanding payables owed to our contract manufacturer, which delayed payments to future dates to coincide with expected timing of insurance proceeds. Flood-related insurance proceeds related to inventory and equipment destroyed by the Thailand flood are recognized when they become realized. In December 2012, we recorded flood-related insurance proceeds of $4.2 million in the form of forgiveness of $2.2 million of outstanding capital lease obligations and $2.0 million of outstanding payables. In March 2013, we received the final flood-related insurance proceeds of $14.8 million in the form of a receivable of $8.2 million , forgiveness of $3.4 million of outstanding capital lease obligations and $3.2 million of outstanding payables. The receivable balance of $8.2 million was paid in April 2013. No additional flood-related insurance proceeds associated with this event are anticipated. See Note 9 - Impact from Thailand Flood for additional disclosures related to the impact of the Thailand flood on our operations.

We believe that our existing balances of cash and cash equivalents, remaining insurance proceeds received in April 2013 and amounts expected to be available under our credit and equity facilities will provide us with sufficient financial resources to meet our cash requirements for operations, working capital, and capital expenditures for the next twelve months.

However, in the event of unforeseen circumstances, unfavorable market or economic developments, unfavorable results from operations, material claims made under the indemnification provisions of our Master Purchase Agreement with SEI in excess of amounts held in escrow, or if Wells Fargo declares an event of default on the credit facility, we may have to raise additional funds or reduce expenditures by any one or a combination of the following: issuing equity, debt or convertible debt, selling certain product lines and/or portions of our business, furloughs, or reduction of discretionary spending. There can be no assurance that we will be able to raise additional funds on terms acceptable to us, or at all. A significant contraction in the capital markets, particularly in the technology sector, or adverse developments in our business may make it difficult for us to raise additional capital if or when it is required, especially if we experience negative operating results. If adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition, results of operations, and cash flows may be adversely affected.


NOTE 2.
Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements that are of significance, or of potential significance, to us other than those discussed below:

In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11, Disclosures about Offsetting Assets and Liabilities, which requires us to disclose gross information and net information about instruments and transactions eligible for offset in the statement of financial position. ASU No. 2011-11 will be effective for our fiscal year beginning on October 1, 2013. We are currently evaluating the impact of this accounting standard update on our Consolidated Financial Statements.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Income, which requires reclassification adjustments from other comprehensive income to be presented either in the financial statements or in the notes to the financial statements. This accounting standard update will be effective for our fiscal year beginning on October 1, 2013. We do not expect this to have a significant impact on our Consolidated Financial Statements.


NOTE 3.
Fair Value Accounting

ASC 820, Fair Value Measurements and Disclosures, establishes a valuation hierarchy for disclosure of the inputs to valuation techniques used to measure fair value. This standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:


10


Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. We classify investments within Level 1 if quoted prices are available in active markets.

Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly, through market corroboration, for substantially the full term of the financial instrument. We classify items in Level 2 if the investments are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency.

Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability's classification within this hierarchy is determined based on the lowest level input that is significant to the fair value measurement. We do not hold any financial assets or liabilities within Level 3.

Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The following table lists our financial assets and liabilities that are measured at fair value on a recurring basis:

Fair Value Measurement
 
 
 
 
 
 
 
(in thousands)
Level 1
 
Level 2
 
Level 3
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Remaining Inputs
 
Significant Unobservable Inputs
 
Total
As of March 31, 2013
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,922

 

 

 
$
5,922

Restricted cash
330

 

 

 
330

Liabilities:
 
 
 
 
 
 
 
Warrant liability

 
700

 

 
700

As of September 30, 2012
 
 
 
 
 
 
 
Assets:
 

 
 

 
 

 
 

Cash and cash equivalents
$
9,047

 

 

 
$
9,047

Restricted cash
82

 

 

 
82

Liabilities:
 

 
 

 
 

 
 

Warrant liability

 
670

 

 
670



Cash consists primarily of bank deposits or, occasionally, highly liquid short-term investments with a maturity of three months or less at the time of purchase.

Restricted cash represents temporarily restricted deposits held as compensating balances against short-term borrowing arrangements.

As of March 31, 2013 and September 30, 2012 , warrants representing the right to purchase 400,001 and 750,011 shares, respectively, of our common stock were outstanding. All of our warrants meet the classification requirements for liability accounting pursuant to ASC 815, Derivatives and Hedging . Each quarter, we expect an impact on our statement of operations and comprehensive income (loss) when we record the change in fair value of our outstanding warrants using the Monte Carlo option valuation model. The Monte Carlo option valuation model is used since it allows the valuation of each warrant to factor in the value associated with our right to effect a mandatory exercise of each warrant. The valuation model requires the input of highly subjective assumptions, including the warrant's expected life and the price volatility of the underlying stock. The change in the fair value of our warrants has been primarily due to the change in the closing price of our common stock.

The carrying amounts of accounts receivable, prepaid expenses and other current assets, borrowings from our credit facility, accounts payable, accrued expenses and other current liabilities approximate fair value because of the short maturity of these instruments.


11




NOTE 4.
Accounts Receivable

The components of accounts receivable consisted of the following:


As of

As of
(in thousands)
March 31,
2013

September 30, 2012
Accounts receivable
$
32,167

 
$
33,893

Accounts receivable – unbilled
10,651

 
6,325

Accounts receivable, gross
42,818

 
40,218

Allowance for doubtful accounts
(3,281
)
 
(3,279
)
Accounts receivable, net
$
39,537

 
$
36,939



Unbilled accounts receivable represents revenue recognized but not yet billed as of the period ended. Billings on contracts using the percentage-of-completion method usually occur upon completion of predetermined contract milestones or other contract terms, such as customer approval. The allowance for doubtful accounts is based on the age of receivables and a specific identification of receivables considered at risk of collection.

As of March 31, 2013 and September 30, 2012 , we had $9.3 million and $6.3 million , respectively, of accounts receivable recorded using the percentage of completion method. Of these amounts, $0.6 million was invoiced and $8.7 million was unbilled as of March 31, 2013 and $1.9 million was invoiced and $4.4 million was unbilled as of September 30, 2012 .

Included in accounts receivable, net at March 31, 2013 and September 30, 2012 is $3.6 million and $2.3 million , respectively, from sales to Suncore. See Note 15 - Suncore Joint Venture for additional disclosures related to Suncore.


NOTE 5.
Inventory

The components of inventory consisted of the following:

 
As of
 
As of
(in thousands)
March 31,
2013
 
September 30, 2012
Raw materials
$
15,855

 
$
14,471

Work in-process
6,388

 
8,853

Finished goods
13,361

 
11,868

Inventory
$
35,604

 
$
35,192



During the three and six months ended March 31, 2012 , we recorded flood-related losses associated with damaged inventory of approximately $0.1 million and $4.0 million , respectively. See Note 9- Impact from Thailand Flood for additional disclosures related to the impact of the Thailand flood on our operations.


12


NOTE 6.
Property, Plant, and Equipment, net

The components of property, plant, and equipment, net consisted of the following:
 
As of
 
As of
(in thousands)
March 31,
2013
 
September 30, 2012
Land
$
1,502

 
$
1,502

Building and improvements
18,760

 
19,065

Equipment
16,632

 
15,088

Furniture and fixtures
112

 
206

Computer hardware and software
937

 
1,017

Leasehold improvements
3,207

 
3,598

Construction in progress
9,311

 
7,420

Property, plant, and equipment, net
$
50,461

 
$
47,896



During the three months ended December 31, 2011 , we recorded flood-related losses associated with damaged equipment of approximately $1.8 million . In addition, equipment under capital lease totaling $1.9 million was also damaged by the Thailand flood and was written off against our outstanding capital lease obligation during the three month period ended December 31, 2011. We have entered into agreements with our contract manufacturer in Thailand whereby our contract manufacturer agreed to purchase equipment to rebuild certain manufacturing lines damaged by flood waters and we agreed to reimburse our contract manufacturer for the cost of the equipment out of insurance proceeds that we expect to receive. As of September 30, 2012 , we capitalized the cost of our new manufacturing lines of approximately $5.2 million and recorded an equipment capital lease obligation of $4.4 million , net of equipment deposits. In addition, during the three and six months ended March 31, 2013 , we capitalized an additional $0.9 million and $1.2 million , respectively, of new manufacturing lines and recorded a corresponding amount of capital lease obligation. In December 2012, we received flood-related insurance proceeds of $4.2 million in the form of forgiveness of $2.2 million of outstanding capital lease obligations and $2.0 million of outstanding payables. In March 2013 we recorded the final flood-related insurance proceeds of $14.8 million in the form of a receivable of $8.2 million , forgiveness of $3.4 million of outstanding capital lease obligations and $3.2 million of outstanding payables. The receivable balance of $8.2 million was paid in April 2013. See Note 9 - Impact from Thailand Flood for additional disclosures related to the impact of the Thailand flood on our operations.

As of March 31, 2013 and September 30, 2012 , accumulated depreciation was approximately $76.1 million and $74.5 million , respectively.


NOTE 7.
Intangible Assets

The following table sets forth the carrying value of intangible assets by reporting segment:
(in thousands)
 
As of March 31, 2013
 
As of September 30, 2012
 
 
Gross
Assets
 
Accumulated
Amortization
 
Net
Assets
 
Gross Assets
 
Accumulated
Amortization
 
Net
Assets
Fiber Optics:
 
 
 
 
 
 
 
 
 
 
 
 
   Core Technology
 
$
12,727

 
$
(11,486
)
 
$
1,241

 
$
12,727

 
$
(11,150
)
 
$
1,577

   Customer Relations
 
3,511

 
(2,503
)
 
1,008

 
3,511

 
(2,359
)
 
1,152

   Patents
 
4,697

 
(4,440
)
 
257

 
4,697

 
(4,381
)
 
316

 
 
20,935

 
(18,429
)
 
2,506

 
20,935

 
(17,890
)
 
3,045

Photovoltaics:
 
 
 
 
 
 
 
 
 
 
 
 
   Patents
 
1,972

 
(1,685
)
 
287

 
1,972

 
(1,589
)
 
383

Total
 
$
22,907

 
$
(20,114
)
 
$
2,793

 
$
22,907

 
$
(19,479
)
 
$
3,428


13


Amortization expense related to intangible assets is included in sales, general, and administrative expense on our statement of operations and comprehensive income (loss). Based on the carrying amount of our intangible assets as of March 31, 2013 , the estimated future amortization expense is as follows:
Estimated Future Amortization Expense
 
(in thousands)
 
Six months ended September 30, 2013
$
634

Fiscal year ended September 30, 2014
1,017

Fiscal year ended September 30, 2015
555

Fiscal year ended September 30, 2016
555

Fiscal year ended September 30, 2017
32

Thereafter

Total
$
2,793



NOTE 8.
Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities consisted of the following:

As of

As of
(in thousands)
March 31,
2013

September 30, 2012
Compensation
$
4,433

 
$
3,798

Warranty
5,942

 
3,692

Termination fee
2,775

 
2,775

Professional fees
1,001

 
938

Royalty
1,289

 
1,445

Customer deposits
655

 
2,408

Deferred revenue
4,368

 
6,670

Self insurance
1,328

 
1,155

Capital lease obligations

 
4,411

Income and other taxes
1,310

 
1,573

Loss on sale contracts
807

 
765

Severance and restructuring accruals
892

 
1,521

Loss on inventory purchase commitments

 
723

Other
1,305

 
761

Accrued expenses and other current liabilities
$
26,105

 
$
32,635



Customer deposits : We signed agreements with certain customers related to our Fiber Optics segment pursuant to which they have received an allocation of our finished goods inventory that was not damaged by the Thailand flood and have started to receive a percentage of output from our new production lines placed into service. As consideration, we received $6.8 million as partial prepayments for future product shipments, of which none is outstanding as of March 31, 2013 .

Capital lease obligations : As of September 30, 2012 , we capitalized the cost of our new manufacturing lines of approximately $5.2 million and recorded an equipment capital lease obligation of $4.4 million , net of equipment deposits. In addition, during the three and six months ended March 31,2013, we capitalized an additional $ 0.9 million and $ 1.2 million , respectively, of manufacturing lines and recorded a corresponding amount of capital lease obligations. See Note 9 - Impact from Thailand Flood for additional disclosures related to the impact of the Thailand flood on our operations.

Severance and restructuring accruals : In August 2012, Mr. Reuben Richards, Jr. proposed to the Board to step-down from his position as the Company's Executive Chairman and all other positions he held as an officer or employee of the Company and its affiliates, effective as of September 30, 2012. Mr. Richards will remain as Chairman of the Board and a member of the Board.


14


The Company and Mr. Richards entered into a separation agreement and general release, dated August 6, 2012 (Separation Agreement), which includes mutual releases by Mr. Richards and the Company of all claims related to Mr. Richards' employment and service relationship with, and termination of employment and service from, the Company. Under the terms of the Separation Agreement, Mr. Richards acknowledged and agreed that the restrictive covenants contained in his employment agreement would remain in full force and effect. The separation agreement provides for among other things, the continuation of his base salary for 88 weeks, benefits for 18 months, and immediate vesting of all his outstanding non-vested equity awards. These payments are not contingent upon any future service by Mr. Richards. In fiscal year 2012, we recorded a charge of $1.1 million related to Mr. Richards' separation agreement.

Our restructuring-related accrual specifically relates to the Separation Agreement and non-cancelable obligations associated with an abandoned leased facility. Expense related to severance and restructuring accruals is included in sales, general, and administrative expense on our statement of operations and comprehensive income (loss). The following table summarizes the changes in the severance and restructuring-related accrual accounts:
(in thousands)
Severance-related accruals
 
Restructuring-related accruals
 
Total
Balance as of September 30, 2012
1,105

 
416

 
1,521

Expense - charged to accrual
180

 

 
180

Payments and accrual adjustments
(488
)
 
(321
)
 
(809
)
Balance as of March 31, 2013
$
797

 
$
95

 
$
892



The following table summarizes the changes in our product warranty accrual accounts:
Product Warranty Accruals
For the Three Months Ended March 31,
 
For the Six Months Ended March 31,
(in thousands)
2013
 
2012
 
2013
 
2012
Balance at beginning of period
$
4,580

 
$
4,686

 
$
4,100

 
$
4,566

Provision for product warranty - expense
1,772

 
(86
)
 
2,401

 
86

Adjustments and utilization of warranty accrual
(2
)
 
(6
)
 
(151
)
 
(58
)
Balance at end of period
$
6,350

 
$
4,594

 
$
6,350

 
$
4,594

Current portion
$
5,942

 
$
4,186

 
$
5,942

 
$
4,186

Non-current portion
408

 
408

 
408

 
408

Product warranty liability at end of period
$
6,350

 
$
4,594

 
$
6,350

 
$
4,594


The increase in our provision for product warranty expense for the three and six months ended March 31, 2013 compared to the same periods in 2012 was a result of a specific customer warranty claim.

15


NOTE 9.
Impact from Thailand Flood

In October 2011, we announced that flood waters had severely impacted the inventory and production operations of our primary contract manufacturer in Thailand. The impacted areas included certain product lines for the Telecom and Cable Television (CATV) market segments. Our Photovoltaics segment was not affected by the Thailand floods. Since that announcement, we developed and implemented a plan to rebuild the impacted production lines at other locations, including an alternate facility of our contract manufacturer in Thailand, as well as our own manufacturing facilities in the United States and China.

During the six months ended March 31, 2012 , we recorded estimated flood-related losses associated with damaged inventory and equipment of approximately $4.0 million and $1.8 million , respectively. Equipment under capital lease totaling $1.9 million as of September 30, 2011 was also damaged by the Thailand flood and written off against our outstanding capital lease obligation.

Instead of completely rebuilding all flood-damaged manufacturing lines in Thailand, management decided to realign the Company's fiber optics product portfolio and focus on business areas with strong technology differentiation and growth opportunities. Management identified certain inventory on order related to manufacturing product lines that were destroyed by the Thailand flood and will not be replaced. This expense, which totaled $0.4 million and $1.3 million , respectively, for the three and six months ended March 31, 2012 , was recorded within cost of revenue on our statement of operations and comprehensive loss.

In November 2011, we entered into an agreement with our contract manufacturer in Thailand whereby our contract manufacturer agreed to purchase equipment to rebuild certain manufacturing lines damaged by flood waters and we agreed to reimburse our contract manufacturer for the cost of the equipment out of insurance proceeds that we expect to receive. We were not a named beneficiary of our contract manufacturer's insurance policy. As of September 30, 2012, we capitalized the cost of our new manufacturing lines of approximately $5.2 million and recorded an equipment capital lease obligation of $4.4 million , net of equipment deposits. In addition, during the three and six months ended March 31, 2013 , we capitalized an additional $0.9 million and $1.2 million , respectively, of new manufacturing lines and recorded a corresponding amount to capital lease obligation. Additionally, we restructured our outstanding payables owed to our contract manufacturer, which delayed payments to future dates to coincide with expected timing of insurance proceeds. Flood-related insurance proceeds related to inventory and equipment destroyed by the Thailand flood will be recognized when they become realized. In September 2012 we received cash flood-related insurance proceeds of $4.0 million . In December 2012, we received flood-related insurance proceeds of $4.2 million in the form of forgiveness of $2.2 million of outstanding capital lease obligations and $2.0 million of outstanding payables. In March 2013, we received the final flood-related insurance proceeds of $14.8 million in the form of a receivable of $8.2 million , forgiveness of $3.4 million of outstanding capital lease obligations and $3.2 million of outstanding payables. The receivable balance of $8.2 million was paid in April 2013. No additional flood-related insurance proceeds associated with this event are anticipated. Additionally, we also claimed damages and received proceeds of $5.0 million under our own comprehensive insurance policy relating to business interruption and we recorded this amount as flood-related insurance proceeds during the fiscal year ended September 30, 2012 . No additional business interruption insurance proceeds associated with this event are anticipated.

The flooding has delayed our development and introduction of new fiber optics-related products and technologies. Delays in implementing new technologies and introducing new products may reduce our revenue and adversely affect our consolidated results of operations into the future.
   
NOTE 10.
Income and other Taxes

During the six months ended March 31, 2013, there were no material increases or decreases in unrecognized tax benefits and we do not anticipate any material increases or decreases in the amounts of unrecognized tax benefits for the remaining fiscal year 2013. As of March 31, 2013 , we had approximately $215,000 of interest and penalties accrued as tax liabilities on our balance sheet.
During the three and six months ended March 31, 2013 , we incurred $ 0.0 million and $0.1 million , respectively, of income tax expense primarily due to federal alternative minimum tax and state income tax. During the three months ended March 31, 2013, we have considered certain tax planning strategies available to the Company that resulted in a decrease in our estimated annual effective tax rate for the year ending September 30, 2013.



16


During the three months ended December 31, 2011 , as part of an equity recapitalization at our Suncore joint venture we received a deemed capital distribution of $14.8 million . The deemed capital distribution was subject to a 10% foreign withholding tax. As a result, we were subject to a $1.6 million foreign tax expense and Suncore made a cash dividend for an equal amount. The foreign tax expense was treated as a tax credit for U.S. tax purposes. No tax expense was incurred during the three months ended March 31, 2012. See Note 15 - Suncore Joint Venture for additional disclosures related to this foreign income tax expense.
We file income tax returns in the U.S. federal, state, and local jurisdictions and, currently, no federal, state, and local income tax returns are under examination. The following tax years remain open to assessment for each of the more significant jurisdictions where we are subject to income taxes: after fiscal year 2008 for U.S. federal, after fiscal year 2007 for the state of California, and after fiscal year 2008 for the state of New Mexico.
Included in our operating income for the three and six months ended March 31, 2013 were $1.4 million of New Mexico incentive tax credits received. The amount received was allocated to cost of goods sold, selling, general and administrative and research and development expense primarily based on the number of employees allocated to the related departments. These credits will result in cash refunds and reduction of future payroll and compensation taxes. There were no incentive tax credits received during the three and six months ended March 31, 2012 .

NOTE 11.
Commitments and Contingencies

Operating Lease Obligations : We lease certain land, facilities, and equipment under non-cancelable operating leases. Operating lease amounts above exclude renewal option periods, property taxes, insurance, and maintenance expenses on leased properties. Our facility leases typically provide for rental adjustments for increases in base rent (up to specific limits), property taxes, insurance, and general property maintenance that would be recorded as rent expense. Rent expense was approximately $0.8 million and $0.7 million for the three months ended March 31, 2013 and 2012, respectively and approximately $1.5 million and $1.4 million for the six months ended March 31, 2013 and 2012, respectively.  There are no off-balance sheet arrangements other than our operating leases.


Capital Lease Obligations : Equipment under capital lease as of September 30, 2011 was damaged by the Thailand flood and was written off against our outstanding capital lease obligation. During fiscal year 2012, we entered into agreements with our contract manufacturer in Thailand whereby our contract manufacturer agreed to purchase equipment to rebuild certain manufacturing lines damaged by flood waters and we agreed to reimburse our contract manufacturer for the cost of the equipment out of insurance proceeds that we expect to receive. As of September 30, 2012 , we capitalized the cost of our new manufacturing lines of approximately $5.2 million and recorded an equipment capital lease obligation of $4.4 million , net of equipment deposits. In December 2012, we received flood-related insurance proceeds of $4.2 million in the form of forgiveness of $2.2 million of outstanding capital lease obligations and $2.0 million of outstanding payables. In March 2013, we received the final flood-related insurance proceeds of $14.8 million in the form of a receivable of $8.2 million , forgiveness of $3.4 million of outstanding capital lease obligations and $3.2 million of outstanding payables. The receivable balance of $8.2 million was paid in April 2013. See Note 9 - Impact from Thailand Flood for additional disclosures related to the impact of the Thailand flood on our operations.


Asset Retirement Obligations : We have known conditional asset retirement conditions, such as certain asset decommissioning and restoration of rented facilities to be performed in the future. Our asset retirement obligations include assumptions related to renewal option periods for those facilities where we expect to extend lease terms. In future periods, the asset retirement obligation is accreted for the change in its present value and capitalized costs are depreciated over the useful life of the related assets. If the fair value of the estimated asset retirement obligation changes, an adjustment will be recorded to both the asset retirement obligation and the asset retirement capitalized cost. Revisions in estimated liabilities can result from revisions of estimated inflation rates, escalating retirement costs, and changes in the estimated timing of settling asset retirement obligations. The fair value of our asset retirement obligations were estimated by discounting projected cash flows over the estimated life of the related assets using credit adjusted risk-free rates which ranged from 3.25% to 5.78% . There were no liabilities associated with asset retirements that were settled during the six months ended March 31, 2013 . Accretion expense of $0.1 million was recorded during the three and six months ended March 31, 2013 .



17


Warranty : We generally provide a product and other warranties on our CPV-related solar cells, components, power systems, and fiber optic products. Certain parts and labor warranties from our vendors can be assigned to our customers. Our reported financial position or results of operations may be materially different under changed conditions or when using different estimates and assumptions. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information.


Indemnifications : We have agreed to indemnify certain customers against claims of infringement of the intellectual property rights of others in our sales contracts with these customers. Historically, we have not paid any claims under these indemnification obligations, and we do not have any pending indemnification claims as of March 31, 2013 . In March 2012, we entered into a Master Purchase Agreement with SEI, pursuant to which we agreed to sell certain assets and transfer certain obligations associated with our Fiber Optics segment. Under the terms of the Master Purchase Agreement, we have agreed to indemnify SEI for up to $3.4 million of potential claims and expenses for the two -year period following the sale and we have recorded this amount as a deferred gain on our balance sheet as of March 31, 2013 and September 30, 2012 as a result of these contingencies. In April and May 2013, we received letters from SEI asserting indemnification claims under the Master Purchase Agreement up to $1.5 million . As of May 9, 2013 , there has been no resolution to these claims. See Note 1 - Description of Business in the notes to the consolidated financial statements for additional disclosures related to this asset sale.


Legal Proceedings : We are subject to various legal proceedings, claims, and litigation, either asserted or unasserted that arise in the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect the resolution of these matters will have a material adverse effect on our business, financial position, results of operations, or cash flows. However, the results of these matters cannot be predicted with certainty. Professional legal fees are expensed when incurred. We accrue for contingent losses when such losses are probable and reasonably estimable. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information. Should we fail to prevail in any legal matter or should several legal matters be resolved against the Company in the same reporting period, then the financial results of that particular reporting period could be materially affected.

a) Intellectual Property Lawsuits

We protect our proprietary technology by applying for patents where appropriate and, in other cases, by preserving the technology, related know-how and information as trade secrets. The success and competitive position of our product lines are impacted by our ability to obtain intellectual property protection for our research and development efforts. We have, from time to time, exchanged correspondence with third parties regarding the assertion of patent or other intellectual property rights in connection with certain of our products and processes.

b) Avago-related Litigation

On December 5, 2008, we were served with a complaint by Avago Technologies filed in the United States District Court for the Northern District of California, San Jose Division alleging infringement of two patents by our VCSEL products. (Avago Technologies Singapore et al., EMCORE Corporation, et al., Case No.: C08-5394 EMC) (the “N.D. CA Patent Case”). This case was stayed and recommenced following completion of the ITC case described below. In April 2012, Avago amended its complaint to include additional patents and claims. Avago and the Company agreed to mediate, and as a result of that mediation held on May 10, 2012, the Company and Avago agreed to a confidential settlement agreement for a one-time payment by the Company in exchange for a full release of all claims against the Company relating to the N.D. CA Patent Case, including claims made in the amended complaint.

On March 5, 2009, we were notified that, based on a complaint filed by Avago alleging the same patent infringement that formed the basis of the complaint previously filed in the Northern District of California, the U.S. International Trade Commission (the “ITC”) had determined to begin an investigation titled “In the Matter of Certain Optoelectronic Devices, Components Thereof and Products Containing the Same”, Inv. No. 337-TA-669. This matter was tried before an administrative law judge of the ITC in November 2009.

On July 12, 2010, the ITC issued its final determination, as well as a limited exclusion order and cease and desist order directed to our infringing products which prohibits importation of those products into the United States. Those remedial orders were reviewed by the President of the United States and his decision to approve those orders was issued on September 10, 2010, thereby prohibiting further importation of the infringing products. We appealed the ITC's decision, and on November 14, 2011, the Court of Appeals affirmed the ITC's determination.


18


c) Green and Gold-related litigation

On December 23, 2008, Plaintiffs Maurice Prissert and Claude Prissert filed a purported stockholder class action (the “Prissert Class Action”) pursuant to Federal Rule of Civil Procedure 23 allegedly on behalf of a class of Company shareholders against the Company and certain of its present and former directors and officers (the “Individual Defendants”) in the United States District Court for the District of New Mexico captioned, Maurice Prissert and Claude Prissert v. EMCORE Corporation, Adam Gushard, Hong Q. Hou, Reuben F. Richards, Jr., David Danzilio and Thomas Werthan, Case No. 1:08cv1190 (D.N.M.) . The Complaint alleges that the Company and the Individual Defendants violated certain provisions of the federal securities laws, including Section 10(b) of the Exchange Act, arising out of the Company's disclosure regarding its customer Green and Gold Energy (“GGE”) and the associated backlog of GGE orders with the Company's Photovoltaics business segment. The Complaint in the Prissert Class Action seeks, among other things, an unspecified amount of compensatory damages and other costs and expenses associated with the maintenance of the action. On or about February 12, 2009, a second purported stockholder class action ( Mueller v. EMCORE Corporation et al., Case No. 1:09cv 133 (D.N.M. )) (the “Mueller Class Action”), together with the Prissert Class Action, the “Class Actions”) was filed in the United States District Court for the District of New Mexico against the same defendants named in the Prissert Class Action, based on substantially the same facts and circumstances, containing substantially the same allegations and seeking substantially the same relief.

On September 25, 2009, the court issued an order consolidating both the Prissert and Mueller class actions into one consolidated proceeding, but denied plaintiffs motions for appointment of a lead plaintiff or lead plaintiff's counsel. On July 15, 2010, the court appointed IBEW Local Union No. 58 Annuity Fund to serve as lead plaintiff (“IBEW”), but denied, without prejudice, IBEW's motion to appoint lead counsel. On August 24, 2010, IBEW filed a renewed motion for appointment as lead plaintiff and for approval of its selection of counsel. IBEW filed a renewed motion for appointment of counsel on May 13, 2011 which we did not oppose. By Order dated September 30, 2011, the court appointed counsel to act on behalf of the purported class. On November 14, 2011, the plaintiffs filed a Consolidated Amended Complaint, again alleging violations of the federal securities laws arising out of the Company's disclosure regarding its customer GGE and the associated backlog of GGE orders with the Company's Photovoltaics business segment (the “Amended Complaint”). We filed a motion to dismiss the Amended Complaint on January 9, 2012, and on September 28, 2012, the court ruled in our favor. On November 9, 2012, we entered into a stipulation and agreement with the lead class representative, pursuant to which the parties agreed to release each other from all claims related to the matter and not to appeal the dismissal of the Amended Complaint, effectively ending this litigation.

On January 23, 2009, Plaintiff James E. Stearns filed a purported stockholder derivative action (the “Stearns Derivative Action”) on behalf of the Company against the Individual Defendants, as well as the Company as nominal defendant in the Superior Court of New Jersey, Atlantic County, Chancery Division ( James E. Stearns, derivatively on behalf of EMCORE Corporation v. Thomas J. Russell, Robert Bogomolny, Charles Scott, John Gillen, Reuben F. Richards, Jr., Hong Q. Hou, Adam Gushard, David Danzilio and Thomas Werthan, Case No. Atl-C-10-09 ). This action is based on essentially the same factual contentions as the Prissert Class Action, and alleges that the Individual Defendants engaged in improprieties and violations of law in connection with the reporting of the GGE backlog. The Stearns Derivative Action seeks several forms of relief, allegedly on behalf of the Company, including, among other things, damages, equitable relief, corporate governance reforms, an accounting of, rescission of, restitution of, and costs and disbursements of the lawsuit.

On March 11, 2009, Plaintiff Gary Thomas filed a second purported shareholder derivative action (the “Thomas Derivative Action”; together with the Stearns Derivative Action, the “Derivative Actions”) in the U.S. District Court for the District of New Mexico against the Company and certain of the Individual Defendants ( Gary Thomas, derivatively on behalf of EMCORE Corporation v. Thomas J. Russell, Robert Bogomolny, Charles Scott, John Gillen, Reuben F. Richards, Jr., Hong Q. Hou, and EMCORE Corporation, Case No. 1.09-cv-00236, (D.N.M.) ). The Thomas Derivative Action makes substantially the same allegations as the Stearns Derivative Action and seeks essentially the same relief.

The Stearns Derivative Action and the Thomas Derivative action were consolidated before a single judge in Somerset County, New Jersey.

Based on the dismissal of the Class Actions, on December 5, 2012, we entered into a stipulation and agreement whereby the plaintiffs in the Derivative Actions agreed to dismiss their claims with prejudice, effectively ending the Derivative Actions and the last remaining Green and Gold-related litigation. No payment was made in connection with the dismissal of the Class Actions or the Derivative Actions.


19


NOTE 12.
Credit Facilities

On November 11, 2010, we entered into a Credit and Security Agreement (credit facility) with Wells Fargo Bank (Wells Fargo). The initial credit facility provided us with a three -year revolving credit of up to $35 million that can be used for working capital requirements, letters of credit, and other general corporate purposes. The credit facility was initially secured by the Company's accounts receivables and inventory assets and was subject to a borrowing base formula based on the Company's eligible accounts receivable and inventory accounts.

The credit facility contains customary representations and warranties, and affirmative and negative covenants, including, among other things, cash balance and excess availability requirements, minimum tangible net worth and EBITDA covenants and limitations on liens and certain additional indebtedness and guarantees. The covenants are written such that as long as we maintain the minimum cash balance and excess availability requirement of $7.5 million prior to the amendment, and $3.5 million following the amendments discussed below, the other covenants are not required to be met. As of March 31, 2013, we were in compliance with the financial covenants contained in the credit facility since cash on deposit and excess availability exceeded the $3.5 million financial covenant requirement.

The credit facility also contains certain events of default, including a subjective acceleration clause. Under this clause, Wells Fargo may declare an event of default if it believes in good faith that our ability to pay all or any portion of its indebtedness with Wells Fargo or to perform any of its material obligations under the credit facility has been impaired, or if it believes in good faith that there has been a material adverse change in the business or financial condition of the Company. If an event of default is not cured within the grace period (if applicable), then Wells Fargo may, among other things, accelerate repayment of amounts borrowed under the credit facility, cease making advances under the credit facility or take possession of the Company's assets that secure its obligations under the credit facility. We do not anticipate at this time any change in the business or financial condition of the Company that could be deemed a material adverse change by Wells Fargo. Wells Fargo has confirmed that they do not consider the flooding at our contract manufacturer to be a material adverse change in the business or financial condition of the Company.

On December 21, 2011, we signed an amendment to our credit facility that increased our eligible borrowing base by up to $10 million by adding to the borrowing base formula 85% of the appraised value of the Company's equipment and 50% of the appraised value of the Company's real estate. In addition, Wells Fargo reduced our restrictions under the excess availability financial covenant requirement from $7.5 million to $3.5 million through December 2012. The interest rate on outstanding borrowings was increased to LIBOR rate plus 4% . The credit facility was to return to its full previous terms on the earlier of (i) December 31, 2012, or (ii) the date that we received insurance proceeds of not less than $30.0 million in the aggregate applicable to the flooding of our primary contract manufacturer in Thailand.

On June 14, 2012, we entered into a Second Amendment to the credit facility, which amended among other things, the borrowing base increase under the First Amendment, which was subject to automatic reductions to (i) $8.1 million on July 1, 2012; and to (ii) $3.1 million on January 1, 2013. The Second Amendment automatically reduced the $8.1 million and $3.1 million thresholds referenced above to $5.0 million and $0 , respectively, if the sale of certain assets did not occur. The Second Amendment credit facility no longer included certain assets in the potential borrowing base including certain machinery and equipment and real estate.

On December 28, 2012, we entered into a Third Amendment to the credit facility, which amended among other things, the maturity date of the facility to November 11, 2015. The Third Amendment also amends the credit facility by adjusting the borrowing availability provided by machinery and equipment, which amount was then currently set at approximately $7.6 million and which was reduced monthly by approximately $101,000 through March 31, 2013, at which time the borrowing availability was reduced to $5.0 million and thereafter will be further reduced monthly by approximately $91,000 .
The Third Amendment also maintains the Company's minimum cash balance and excess liquidity requirement at $3.5 million through June 30, 2013, which had been scheduled to increase to $7.5 million on December 31, 2012, below which certain financial covenants are triggered which relate to minimum tangible net worth, minimum EBITDA amounts and limitations on capital expenditures. The amounts of these financial covenants have been amended from those previously introduced in the First Amendment. At June 30, 2013 the liquidity requirement will be increased by $1.0 million , and will be further increased, quarterly, until such amount reaches $7.5 million at March 31, 2014.
As of March 31, 2013 , we had a $20.8 million LIBOR rate loan outstanding, with an interest rate of 3.4%, and approximately $2.4 million reserved for six outstanding stand-by letters of credit under the credit facility. We now expect at least 70% of the $35.0 million credit facility to be available for use over the remainder of fiscal year 2013.



20


NOTE 13.
Equity

Stock Sale
During August 2012, we filed a shelf registration statement on Form S-3 with the SEC pursuant to which we may, from time to time, sell up to an aggregate of $50 million of our common or preferred stock, warrants or debt securities. On August 23, 2012, the registration statement was declared effective by the SEC, which will allow us to access the capital markets for the three year period following this effective date. On September 28, 2012, we entered into an Underwriting Agreement with B. Riley & Co., LLC (the “Underwriter”) pursuant to which we agreed to sell and the Underwriter agreed to purchase 1,593,400 shares of our common stock at a price per share of $5.19 . We also granted the Underwriter a 30 -day option to purchase up to 239,010 additional shares of common stock at the same price per share. On October 3, 2012 we sold 1,832,410 shares of common stock for net proceeds of $9.5 million .

Equity Plans
We provide long-term incentives to eligible officers, directors, and employees in the form of equity-based awards.  We maintain three equity incentive compensation plans, collectively described below as our Equity Plans:

the 2000 Stock Option Plan (2000 Plan),
the 2010 Equity Incentive Plan (2010 Equity Plan),
the 2012 Equity Incentive Plan (2012 Equity Plan).

We issue new shares of common stock to satisfy awards issued under our Equity Plans.


Stock Options
Most of our stock options vest and become exercisable over a four to five year period and have a contractual life of 10 years. Certain stock options awarded are intended to qualify as incentive stock options pursuant to Section 422A of the Internal Revenue Code.

The following table summarizes stock option activity under the Equity Plans for the six months ended March 31, 2013:


Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average
Remaining Contractual Life
(in years)
 
Aggregate Intrinsic Value (*) (in thousands)
Outstanding as of September 30, 2012
2,032,215

 
$17.76
 
 
 
 
Granted
35,400

 
$5.11
 
 
 
 
Exercised
(76,179
)
 
$4.94
 
 
 
$
92

Forfeited
(44,088
)
 
$7.66
 
 
 
 
Expired
(178,515
)
 
$20.48
 
 
 
 
Outstanding as of March 31, 2013
1,768,833

 
$18.04
 
4.80
 
 
Exercisable as of March 31, 2013
1,456,747

 
$20.73
 
4.19
 
$
365

Vested and expected to vest as of March 31, 2013
1,731,105

 
$18.32
 
4.72
 
$
634


(*) Intrinsic value for stock options represents the “in-the-money” portion or the positive variance between a stock option's exercise price and the underlying stock price.

As of March 31, 2013 , there was approximately $0.8 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested stock options granted under the Equity Plans which is expected to be recognized over an estimated weighted average life of 2.2 years.


21


Valuation Assumptions

The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option valuation model, adhering to the straight-line attribution approach using the following weighted-average assumptions, of which the expected term and stock price volatility rate are highly subjective:

 
For the Three Months Ended March 31,
 
For the Six Months Ended March 31,
 
2013
 
2012
 
2013
 
2012
Black-Scholes weighted average assumptions:
 
 
 
 
 
 
 
Expected dividend rate
%
 
%
 
%
 
%
Expected stock price volatility rate
96.5
%
 
103.9
%
 
96.9
%
 
105.2
%
Risk-free interest rate 
1.1
%
 
1.0
%
 
1.0
%
 
0.9
%
Expected term (in years)
6.0

 
5.0

 
6.0

 
5.0

 
 
 
 
 
 
 
 
Weighted average grant date fair value per share of stock options granted:
$4.28
 
$
3.46

 
$
3.94

 
$
3.23


Restricted Stock

Restricted stock awards (RSAs) and restricted stock units (RSUs) granted under the 2010 Equity Plan and 2012 Equity Plan typically vest over 3 years and are subject to forfeiture if employment terminates prior to the lapse of the restrictions. RSAs are considered issued and outstanding shares on the grant date and have the same dividend and voting rights as other common stock. RSUs are not considered issued or outstanding common stock until they vest.

The following table summarizes the activity related to RSAs and RSUs for the six months ended March 31, 2013 :

Restricted Stock Activity
Restricted Stock Awards
 
Restricted Stock Units
 
Number of Shares
 
Weighted Average Grant Date Fair Value
 
Number of Shares
 
Weighted Average Grant Date Fair Value
Non-vested as of September 30, 2012
216,703

 
$5.83
 
700,043

 
$4.44
Granted

 
 
480,800

 
$4.72
Vested
(102,630
)
 
$5.68
 
(174,175
)
 
$3.87
Forfeited
(4,063
)
 
$5.68
 
(25,720
)
 
$4.47
Non-vested as of March 31, 2013
110,010

 
$5.98
 
980,948

 
$4.68

Restricted stock awards : As of March 31, 2013 , there was approximately $0.4 million of remaining unamortized stock-based compensation expense, net of estimated forfeitures, associated with RSAs, which will be expensed over a weighted average remaining service period of approximately 0.9 years.

Restricted stock units : As of March 31, 2013 , there was approximately $3.1 million of remaining unamortized stock-based compensation expense, net of estimated forfeitures, associated with RSUs, which will be expensed over a weighted average remaining service period of approximately 2.2 years. The 1.0 million outstanding non-vested RSUs have an aggregate intrinsic value of approximately $5.7 million and a weighted average remaining contractual term of 1.4 years. Of the 1.0 million outstanding non-vested RSUs, approximately 0.9 million RSUs are expected to vest and have an aggregate intrinsic value of approximately $5.0 million and a weighted average remaining contractual term of 1.4 years.


22


Stock-based compensation
The effect of recording stock-based compensation expense was as follows:

Stock-based Compensation Expense - by award type
For the Three Months Ended March 31,
 
For the Six Months Ended March 31,
(in thousands)
2013
 
2012
 
2013
 
2012
Employee stock options
$
123

 
$
1,088

 
$
381

 
$
2,135

Restricted stock awards and units
515

 
946

 
921

 
1,521

Employee stock purchase plan
125

 
189

 
256

 
413

401(k) match in common stock
257

 
245

 
513

 
475

Outside director fees in common stock
31

 
74

 
62

 
178

Total stock-based compensation expense
$
1,051

 
$
2,542

 
$
2,133

 
$
4,722


Stock-based Compensation Expense - by expense type
For the Three Months Ended March 31,
 
For the Six Months Ended March 31,
(in thousands)
2013
 
2012
 
2013
 
2012
Cost of revenue
$
290

 
$
593

 
$
605

 
$
1,069

Selling, general, and administrative
459

 
1,233

 
841

 
2,246

Research and development
302

 
716

 
687

 
1,407

Total stock-based compensation expense
$
1,051

 
$
2,542

 
$
2,133

 
$
4,722






Income (Loss) Per Share .
The following table sets forth the computation of basic and diluted net income (loss) per share:

Basic and Diluted Net Income (Loss) Per Share
For the Three Months Ended March 31,
 
For the Six Months Ended March 31,
(in thousands, except per share)
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
Numerator - Net income (loss)
$
11,697

 
$
(9,335
)
 
$
14,523

 
$
(23,564
)
Less: Undistributed earnings allocated to participating securities
(94
)
 

 
(118
)
 

Undistributed earnings allocated to common shareholders for basic net income (loss) per share
$
11,603

 
$
(9,335
)
 
$
14,405

 
$
(23,564
)
Undistributed earnings allocated to common shareholders for diluted net income (loss) per share
$
11,603

 
$
(9,335
)
 
$
14,405

 
$
(23,564
)
Denominator:
 
 
 
 
 
 
 
Denominator for basic net income (loss) per share - weighted average shares outstanding
26,310

 
23,529

 
26,142

 
23,577

Dilutive options outstanding, unvested stock units and ESPP
332

 

 
290

 

Denominator for diluted net income (loss) per share - adjusted weighted average shares outstanding
26,642

 
23,529

 
26,432

 
23,577

Basic net income (loss) per share
$
0.44

 
$
(0.40
)
 
$
0.55

 
$
(1.00
)
Diluted net income (loss) per share
$
0.44

 
$
(0.40
)
 
$
0.54

 
$
(1.00
)
Weighted average antidilutive options, unvested restricted stock units and warrants excluded from the computation
1,869

 
3,587

 
2,265

 
3,384

Average market price of common stock
$
5.66

 
$
4.72

 
$
5.16

 
$
4.31


23



The antidilutive stock options and unvested stock were excluded from the computation of diluted net income (loss) per share due to the assumed proceeds from the award’s exercise or vesting being greater than the average market price of the common shares or due to the Company incurring a net loss for the periods presented.

Future Issuances  

As of  March 31, 2013 , we had common stock reserved for the following future issuances:

Future Issuances
Number of Common Stock Shares Available for Future Issuances
Exercise of outstanding stock options
1,768,833

Unvested restricted stock units
980,948

Purchases under the employee stock purchase plan
636,001

Issuance of stock-based awards under the Equity Plans
588,650

Exercise of outstanding warrants
400,001

Purchases under the officer and director share purchase plan
94,811

Total reserved
4,469,244




24


NOTE 14.
Segment Data and Related Information

We have four operating divisions within the following two reporting segments:

Fiber Optics: EMCORE Digital Fiber Optics Products and EMCORE Broadband Fiber Optics Products are aggregated as a separate reporting segment, Fiber Optics. Our Fiber Optics reporting segment provides optical components, subsystems, and systems for high-speed telecommunications, cable television (CATV), and fiber-to-the-premise (FTTP) networks, as well as products for satellite communications, video transport, and specialty photonics technologies for defense and homeland security applications.

Photovoltaics: EMCORE Photovoltaics and EMCORE Solar Power are aggregated as a separate reporting segment, Photovoltaics. Our Photovoltaics reporting segment provides products for both space and terrestrial solar power applications. For space solar power applications, we offer high-efficiency multi-junction solar cells, covered interconnect cells (CICs), and complete satellite solar panels.

We evaluate our reportable segments pursuant to ASC 280, Segment Reporting . The Company's Chief Executive Officer is the chief operating decision maker and he assesses the performance of the operating segments and allocates resources to segments based on their business prospects, competitive factors, net revenue, operating results, and other non-GAAP financial ratios.

Revenue : The following tables set forth revenue attributable to each of our reporting segments and by geographic region with revenue assigned to geographic regions based on our customers’ billing address.


Segment Revenue
For the Three Months Ended March 31,
 
For the Six Months Ended March 31,
(in thousands)
2013
 
2012
 
2013
 
2012
Fiber Optics revenue
$
23,130

 
$
21,938

 
$
52,808

 
$
40,241

Photovoltaics revenue
19,147

 
15,842

 
38,775

 
34,990

Total revenue
$
42,277

 
$
37,780

 
$
91,583

 
$
75,231


Revenue by Geographic Region
For the Three Months Ended March 31,
 
For the Six Months Ended March 31,
(in thousands)
2013
 
2012
 
2013
 
2012
United States
$
28,324

 
$
25,207

 
$
62,991

 
$
47,573

Asia
8,825

 
6,513

 
17,725

 
11,785

Europe
4,892

 
1,512

 
10,105

 
3,673

Other
236

 
4,548

 
762

 
12,200

Total revenue
$
42,277

 
$
37,780

 
$
91,583

 
$
75,231


Revenue by geographic location is determined based on the location of our customer.


Impact from Thailand Flood : In October 2011, we announced that flood waters had severely impacted the inventory and production operations of our primary contract manufacturer in Thailand. The impacted areas included certain product lines for the Telecom and Cable Television (CATV) market segments. This had a significant impact on our operations and our ability to meet customer demand for certain of our fiber optics products. Our Photovoltaics segment was not affected by the Thailand floods. See Note 9 - Impact from Thailand Flood for additional disclosures related to the impact of the Thailand flood on our operations.



25


Sale of Fiber Optics-related Assets : On May 7, 2012, we sold certain assets and transferred certain inventory purchase obligations associated with our Fiber Optics segment to SEI. See Note 1 - Description of Business for additional disclosures related to this asset sale.


Significant Customers : No single customer from the Fiber segment or Photovoltaics segment represented greater than 10% of our consolidated revenue for the three and six months ended March 31, 2013. Revenue from one customer of the Photovoltaics segment represented 20% and 15% of our consolidated revenue for the three and six months ended March 31, 2012.


Operating Income (Loss) : The following table sets forth operating income (loss) attributable to each of our reporting segments.

Operating Income (Loss)
For the Three Months Ended March 31,
 
For the Six Months Ended March 31,
(in thousands)
2013
 
2012
 
2013
 
2012
Fiber Optics operating income (loss)
$
7,892

 
$
(7,251
)
 
$
7,497

 
$
(18,444
)
Photovoltaics operating income (loss)
4,279

 
(1,633
)
 
7,520

 
(2,130
)
Total operating income (loss)
$
12,171

 
$
(8,884
)
 
$
15,017

 
$
(20,574
)


Non-Cash Expenses : The following tables set forth our significant non-cash expenses attributable to each of our reporting segments.
Depreciation, Amortization, and Accretion Expense
For the Three Months Ended March 31,
 
For the Six Months Ended March 31,
(in thousands)
2013
 
2012
 
2013
 
2012
Fiber Optics segment
$
1,384

 
$
1,271

 
$
2,666

 
$
2,926

Photovoltaics segment
660

 
1,106

 
1,396

 
2,226

Total depreciation, amortization, and accretion expense
$
2,044

 
$
2,377

 
$
4,062

 
$
5,152


Stock-based Compensation Expense
For the Three Months Ended March 31,
 
For the Six Months Ended March 31,
(in thousands)
2013
 
2012
 
2013
 
2012
Fiber Optics segment
$
702

 
$
1,575

 
$
1,428

 
$
2,970

Photovoltaics segment
349

 
967

 
705

 
1,752

Total stock-based compensation expense
$
1,051

 
$
2,542

 
$
2,133

 
$
4,722



Long-lived Assets : Long-lived assets consist primarily of property, plant, and equipment and also goodwill and intangible assets.  The following table sets forth long-lived assets for each of our reporting segments and our unallocated Corporate division.
Long-lived Assets
As of
 
As of
(in thousands)
March 31, 2013
 
September 30, 2012
Fiber Optics segment
$
26,017

 
$
24,209

Photovoltaics segment
38,868

 
40,252

Unallocated Corporate division
8,753

 
7,247

Long-lived assets
$
73,638

 
$
71,708



26


As of March 31, 2013 and September 30, 2012 , approximately 77% and 86% , respectively, of our long-lived assets were located in the United States.

NOTE 15.
Suncore Joint Venture

On July 30, 2010, we entered into a joint venture agreement with San'an Optoelectronics Co., Ltd. (San'an), for the purpose of engaging in the development, manufacturing, and distribution of CPV receivers, modules, and systems for terrestrial solar power applications under a technology license from us. The joint venture, Suncore Photovoltaic Technology Co., Ltd. (Suncore), is a limited liability company under the laws of the People's Republic of China.

Initially, the total registered capital of Suncore was $30.0 million , of which San'an contributed $18.0 million in cash and EMCORE contributed $12.0 million in cash. In addition, we entered into a Cooperation Agreement with an affiliate of San'an whereby we received $8.5 million in consulting fees in exchange for the technology license and related support and strategic consulting services to Suncore, which was recorded as a reduction to our investment in Suncore resulting in a basis difference. We amortize this basis difference in our equity investment over an estimated five-year technology useful life using the straight-line amortization method.

During the three months ended December 31, 2011, Suncore increased its registered capital by recording a deemed capital distribution of $37.0 million which was distributed and reinvested in proportion to each entity's registered capital, of which San'an was allocated $22.2 million and EMCORE was allocated $14.8 million . During this same period, Suncore also recorded a cash dividend of approximately $4.1 million in proportion to each entity's registered capital of which San'an received $2.5 million and EMCORE received $1.6 million . We recorded the cash dividend as a reduction in our investment in Suncore. We incurred foreign income tax of approximately $1.6 million associated with these capital distributions which is presented under the caption "income tax expense" on our statement of operations and comprehensive income (loss). EMCORE's cash dividend was equal to the foreign income tax expense incurred on the capital distributions.

In August 2011, we signed a solar rooftop CPV development agreement with Suncore pursuant to which we agreed to collaborate on the development and application of the current 500X and next-generation 1000X rooftop CPV systems. In summary, Suncore agreed to purchase joint ownership rights to rooftop CPV intellectual property and reimburse us 50% of all research and development costs incurred related to rooftop CPV solutions in exchange for joint ownership rights to the newly developed intellectual property. In addition, Suncore agreed to pay us a development fee of 20% on research and development costs billed to Suncore with a maximum development fee payout of approximately $0.2 million . During the six months ended March 31, 2012, we billed Suncore approximately $0.7 million for research and development costs and recognized $0.2 million in development fees. With the agreement in August 2012 to consolidate the Company's terrestrial CPV system engineering and development efforts, for both ground mount and rooftop terrestrial CPV products, into Suncore, the collaboration on research and development costs agreement was terminated between the Company and Suncore.

In November 2011, we agreed to grant Suncore an exclusive license to use certain intellectual property and know-how, both existing and to-be-developed, related to the fabrication process and testing of terrestrial CPV solar cells on terrestrial CPV solar systems solely within the PRC, Hong Kong, Macau, and Taiwan (the licensed territory) and be able to use, market, and sell the terrestrial CPV solar cells worldwide, excluding only the United States. This licensing agreement valued at $2.5 million does not include intellectual property associated with the development of space qualified or radiation hardened solar cells. Suncore has not fulfilled all the requirements necessary to initiate payment for this license; as a result, we did not record any receivables from Suncore associated with this license agreement as of March 31, 2013 .

Pursuant to the joint venture agreement, San'an and EMCORE share the profits, losses, and risks of Suncore in proportion to and, in the event of losses, to the extent of their respective contributions to the registered capital of Suncore. We continue to hold a 40% registered ownership in Suncore. As of March 31, 2013 , our cumulative proportionate loss in Suncore has exceeded our net investment in Suncore by approximately $3.1 million . Pursuant to ASC 323-10, Investments—Equity Method and Joint Ventures – Overall , we stopped recording our proportionate share of Suncore's loss after our investment declined to a zero value since we have no obligation or intent to fund the deficit balance. We will resume applying the equity method only after our share of net income in Suncore equals the share of net losses not recognized during the period we suspended using the equity method.


27


On August 5, 2012, we entered into a definitive agreement which consolidated the Company's terrestrial CPV system engineering and development efforts, for both ground mount and rooftop terrestrial CPV products, into Suncore. EMCORE employees who were engaged in terrestrial CPV product and business development, as well as key engineering, sales, and marketing personnel, were transferred to Suncore upon the closing of the agreement on September 21, 2012. Suncore will fund all ongoing R&D, marketing, sales, and business development functions related to terrestrial CPV systems. EMCORE will continue to own all of its intellectual property related to solar cell technology and maintain investment activities to advance CPV solar cell performance to serve a broader customer base within the CPV industry. We sold these assets for $2.8 million . Included in prepaid expenses and other current assets at September 30, 2012 is the $2.8 million sale price, which the amount was collected during the three months ended December 31, 2012.

During the three and six months ended March 31, 2013, we recorded revenue from Suncore of $2.9 million and $5.5 million , respectively. During the three and six months ended March 31, 2012, we recorded revenue from Suncore of $ 1.8 million and $ 2.1 million , respectively During the three and six months ended March 31, 2012, we recorded a loss associated with our Suncore joint venture totaling $0.2 million and $1.2 million , respectively.

In March 2013, we sold certain solar assets and our ownership interest in Emcore Solar New Mexico (“ESNM”) to Suncore for $1.5 million and deferred the related gain of $ 0.3 million . Included in other current assets as of March 31, 2013 and September 30, 2012 is $4.6 million and $0 , respectively, for amounts due from Suncore related to the ESNM sales transaction, transaction services provided in accordance with the August 2012 definitive agreement, and other smaller amounts.


28


ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included in Financial Statements under Item 1 of this Quarterly Report. The following discussion contains forward-looking statements that reflect our plans, estimates, expectations and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report, particularly in Risk Factors under Part II, Item 1A. These cautionary statements apply to all forward-looking statements wherever they appear in this Quarterly Report.


Business Overview

EMCORE Corporation and its subsidiaries (referred to herin as the “Company”, “we”, “our”, or “EMCORE”) offers a broad portfolio of compound semiconductor-based products for the broadband, fiber optics, satellite, and solar power markets. We were established in 1984 as a New Jersey corporation and we have two reporting segments: Fiber Optics and Photovoltaics. EMCORE's Fiber Optics business segment provides optical components, subsystems and systems for high-speed telecommunications, Cable Television (CATV) and Fiber-To-The-Premise (FTTP) networks, as well as products for satellite communications, video transport and specialty photonics technologies for defense and homeland security applications. Our solar Photovoltaics business segment provides products for space power applications including high-efficiency multi-junction solar cells, Covered Interconnect Cells (CICs) and complete satellite solar panels, and terrestrial applications, including high-efficiency GaAs solar cells for concentrating photovoltaic (CPV) power systems.

Our headquarters and principal executive offices are located at 10420 Research Road, SE, Albuquerque, New Mexico, 87123, and our main telephone number is (505) 332-5000. For specific information about us, our products, or the markets we serve, please visit our website at http://www.emcore.com. The information contained in or linked to our website is not a part of, nor incorporated by reference into, this Quarterly Report on Form 10-Q or a part of any other report or filing with the Securities and Exchange Commission (SEC).

See Note 15 - Suncore Joint Venture in the notes to the condensed consolidated financial statements for disclosures related to the definitive agreement which consolidated the Company's terrestrial CPV system engineering and development efforts into the Company's joint venture.


Impact from Thailand Flood

In October 2011, flood waters severely impacted the inventory and production operations of our primary contract manufacturer in Thailand. The impacted areas included certain product lines for the Telecom and Cable Television (CATV) market segments. This had a significant impact on our operations and our ability to meet customer demand for certain of our fiber optics products. Our Photovoltaics segment was not affected by the Thailand floods.

Since that announcement, we have developed and implemented a plan to rebuild the impacted production lines at other locations, including an alternate facility of our contract manufacturer in Thailand, as well as our own manufacturing facilities in the United States and China. Our production line for ITLAs (Integrable Tunable Laser Assemblies) for 40 and 100 Gb/s (Gigabit per second) coherent telecom applications has been up and running since April 2012 at our contract manufacturer in Thailand. Production line qualification has been completed and most customers have successfully completed full-line audits and started taking shipments in April 2012. As of September 2012, our ITLA line was operating at pre-flood capacity production levels. The CATV laser module and transmitter production lines at our manufacturing facility in China reached pre-flood capacity production levels as of September 2012. See Note 9 - Impact from Thailand Flood in the notes to the condensed consolidated financial statements for additional disclosures related to the impact of the Thailand flood on our operations.



29


Sale of Fiber Optics-related Assets

On March 27, 2012, we entered into a Master Purchase Agreement with a subsidiary of Sumitomo Electric Industries, LTD (SEI), pursuant to which we agreed to sell certain assets and transfer certain obligations associated with our Fiber Optics segment. On May 7, 2012, we completed the sale of these assets to SEI and recorded a gain of approximately $2.8 million . This transaction was recorded as a sale of assets since it did not meet the criteria to be considered a component of our business. Under the terms of the Master Purchase Agreement, we have agreed to indemnify SEI for up to $3.4 million of potential claims and expenses for the two-year period following the sale, and we have recorded this amount as a deferred gain on our balance sheet as of March 31, 2013 as a result of these contingencies. SEI paid $13.1 million in cash and deposited approximately $2.6 million into escrow as security for indemnification obligations and any purchase price adjustments. Payment of escrow amounts occurs over a two-year period and is subject to claim adjustments. In total, we deferred approximately $4.9 million of the total paid by SEI as a gain on sale until the indemnification obligation of $3.4 million and $1.5 million of purchase price adjustment contingencies are resolved. During the three months ended March 31, 2013 , we resolved the purchase price contingencies resulting in the reduction of the purchase price by $1.1 million . The reduced purchase price is recorded as an offset to the escrow receivable of $2.6 million while an additional $0.4 million of gain on sale of assets was recognized during the three months ended March 31, 2013 . There remains a deferred gain of $3.4 million related to our indemnification obligation at March 31, 2013 . See Note 1 - Description of Business in the notes to the consolidated financial statements for additional disclosures related to this asset sale.


Results of Operations

The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue. 
 
For the Three Months Ended March 31,
 
For the Six Months Ended March 31,
 
2013
 
2012
 
2013
 
2012
Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenue
81.5

 
85.8

 
79.5

 
88.2

Gross profit
18.5

 
14.2

 
20.5

 
11.8

Operating expense (income):
 
 
 
 
 
 
 
Selling, general, and administrative
16.0

 
22.1

 
14.9

 
21.1

Research and development
9.7

 
15.3

 
10.4

 
17.0

Flood-related loss

 
0.3

 

 
7.7

Flood-related insurance proceeds
(35.0
)
 

 
(20.7
)
 
(6.6
)
Gain on sale of assets
(1.0
)
 

 
(0.5
)
 

Total operating expense (income)
(10.3
)
 
37.7

 
4.1

 
39.2

Operating income (loss)
28.8

 
(23.5
)
 
16.4

 
(27.4
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(0.4
)
 
(0.3
)
 
(0.5
)
 
(0.3
)
Foreign exchange gain

 
0.4

 
0.1

 
0.3

Loss from equity method investment

 
(0.6
)
 

 
(1.6
)
Change in fair value of financial instruments
(0.6
)
 
(0.7
)
 

 
(0.2
)
Total other income (expense)
(1.0
)
 
(1.2
)
 
(0.4
)
 
(1.8
)
Income (loss) before income tax expense
27.8

 
(24.7
)
 
16.0

 
(29.2
)
Income tax expense

 

 
(0.1
)
 
(2.2
)
Net income (loss)
27.8
 %
 
(24.7
)%
 
15.9
 %
 
(31.4
)%



30


Comparison of financial results :

Revenue:


(in thousands, except percentages)
For the Three Months Ended March 31,
 
2013
2012
 
$ Change
 
% Change
Fiber Optics revenue
$
23,130

$
21,938

 
$
1,192

 
5.4%
Photovoltaics revenue
19,147

15,842

 
3,305

 
20.9%
Total revenue
$
42,277

$
37,780

 
$
4,497

 
11.9%

(in thousands, except percentages)
For the Six Months Ended March 31,
 
2013
2012
 
$ Change
 
% Change
Fiber Optics revenue
$
52,808

$
40,241

 
$
12,567

 
31.2%
Photovoltaics revenue
38,775

34,990

 
3,785

 
10.8%
Total revenue
$
91,583

$
75,231

 
$
16,352

 
21.7%

Fiber Optics Revenue

Our Fiber Optics reporting segment provides optical components, subsystems, and systems for high-speed telecommunications, cable television (CATV), and fiber-to-the-premise (FTTP) networks, as well as products for satellite communications, video transport, and specialty photonics technologies for defense and homeland security applications. Our Fiber Optics segment is broken out into two distinct product lines:
 
Broadband products, which includes cable television products, fiber-to-the-premises products, satellite communication products, and defense and homeland security products; and,

Digital products, which include telecom optical products.

For the three months ended March 31, 2013 , revenue from broadband products increased 10% from the prior year which was primarily driven by increased unit shipments of our CATV-related products primarily due to the impact of the Thailand flood in 2011. Sales of our CATV products, which include our quadrature amplitude modulation (QAM) transmitters and receivers, represents the largest percentage of our total fiber optics-related revenue.

For the six months ended March 31, 2013 , revenue from broadband products increased 48% from the prior year which was primarily driven by increased unit shipments of our CATV-related products primarily due to the impact of the Thailand flood in 2011. Sales of our CATV products, which include our quadrature amplitude modulation (QAM) transmitters and receivers, represents the largest percentage of our total fiber optics-related revenue.

For the three months ended March 31, 2013 , revenue from digital products decreased 1% from the prior year. Our telecom optical-related product line, which includes tunable XFP, and integrated tunable laser assemblies (ITLAs), represents the second largest percentage of our total fiber optics-related revenue. Our enterprise digital product lines were sold to SEI in May 2012.

For the six months ended March 31, 2013 , revenue from digital products increased 11% from the prior year which was also primarily due to the impact of the Thailand flood on the telecom product lines. Our telecom optical-related product line, which includes tunable XFP, and integrated tunable laser assemblies (ITLAs), represents the second largest percentage of our total fiber optics-related revenue. Our enterprise digital product lines were sold to SEI in May 2012.

Our Fiber Optics segment accounted for 55% and 58% of our consolidated revenue for the three months ended March 31, 2013 and 2012 , respectively. Our Fiber Optics segment accounted for 58% and 53% of our consolidated revenue for the six months ended March 31, 2013 and 2012 , respectively.

31


 
 

Photovoltaics Revenue :

Our Photovoltaics reporting segment provides products for both space and terrestrial solar power applications. For space solar power applications, we offer high-efficiency multi-junction solar cells, covered interconnect cells (CICs), and complete satellite solar panels. For terrestrial powers applications, we offer high-efficiency GaAs solar cells for concentrating photovoltaic (CPV) power systems.

For the three months ended March 31, 2013 , revenue from photovoltaics increased approximately 21% from the prior year primarily due to higher revenues from our space and terrestrial cell products. Sales of our satellite solar cells and CICs products represents the largest percentage of our total photovoltaics-related revenue. Historically, our Photovoltaics revenue has fluctuated significantly due to the timing of program completions and product shipments of major orders.

For the six months ended March 31, 2013 , revenue from photovoltaics increased approximately 11% from the prior year primarily due to higher revenues from our space and terrestrial cell products. Sales of our satellite solar cells and CICs products represents the largest percentage of our total photovoltaics-related revenue. Historically, our Photovoltaics revenue has fluctuated significantly due to the timing of program completions and product shipments of major orders.

Our Photovoltaics segment accounted for 45% and 42% of our consolidated revenue for the three months ended March 31, 2013 and 2012 , respectively. Our Photovoltaics segment accounted for 42% and 47% of our consolidated revenue for the six months ended March 31, 2013 and 2012 , respectively.


Gross Profit:

(in thousands, except percentages)
For the Three Months Ended March 31,
 
2013
2012
 
$ Change
 
% Change
Fiber Optics gross profit
$
1,619

$
2,059

 
$
(440
)