EMCORE Corporation
EMCORE CORP (Form: 10-Q, Received: 05/05/2016 17:09:12)
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, 2016
or

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

Commission File Number 001-36632

  EMCORE Corporation
(Exact name of registrant as specified in its charter)
New Jersey
(State or other jurisdiction of incorporation or organization)
22-2746503
(I.R.S. Employer Identification No.)
 
 
2015 W. Chestnut Street, Alhambra, California, 91803
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:   (626) 293-3400

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 2, 2016 , the number of shares outstanding of our no par value common stock totaled 26,102,399 .
.




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 based on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Such forward-looking statements include, in particular, projections about our future results included in our Exchange Act reports and statements about our plans, strategies, business prospects, changes and trends in our business and the markets in which we operate. These forward-looking statements may be identified by the use of terms and phrases such as “anticipates”, “believes”, “can”, “could”, “estimates”, “expects”, “forecasts”, “intends”, “may”, “plans”, “projects”, "should", “targets”, “will”, "would", and similar expressions or variations of these terms and similar phrases. Additionally, statements concerning future matters such as our expected liquidity, development of new products, enhancements or technologies, sales levels, expense levels, expectations regarding the outcome of legal proceedings and other statements regarding matters that are not historical are forward-looking statements. Management cautions that these forward-looking statements relate to future events or our future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance, or achievements of our business or our industry to be materially different from those expressed or implied by any forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation the following: (a) the rapidly evolving markets for the Company's products and uncertainty regarding the development of these markets; (b) the Company's historical dependence on sales to a limited number of customers and fluctuations in the mix of products and customers in any period; (c) delays and other difficulties in commercializing new products; (d) the failure of new products: (i) to perform as expected without material defects, (ii) to be manufactured at acceptable volumes, yields, and cost, (iii) to be qualified and accepted by our customers, and (iv) to successfully compete with products offered by our competitors; (e) uncertainties concerning the availability and cost of commodity materials and specialized product components that we do not make internally; (f) actions by competitors; and (g) other risks and uncertainties discussed under Item 1A - Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, 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 analysis made in light of our experience and perception of historical trends, current conditions and expected future developments as well as other factors that we believe are appropriate under the circumstances. While these statements represent our judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results. All forward-looking statements in this 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 and our Annual Report on Form 10-K for the fiscal year ended September 30, 2015. 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, 2016

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
For the Three and Six Months Ended March 31, 2016 and 2015
(in thousands, except net (loss) income per share)
(unaudited)

For the three months ended March 31,
 
For the six months ended March 31,
 
2016

2015
 
2016
 
2015
Revenue
$
21,532


$
19,057

 
$
44,022

 
$
37,473

Cost of revenue
14,510


12,678

 
29,599

 
25,915

Gross profit
7,022


6,379

 
14,423

 
11,558

Operating expense (income):
 

 
 
 
 
 
Selling, general, and administrative
4,825


5,954

 
9,646

 
14,581

Research and development
2,564


2,022

 
5,124

 
4,196

Gain from change in estimate on ARO obligation



 

 
(845
)
Loss on sale of assets



 

 
228

Total operating expense
7,389


7,976

 
14,770

 
18,160

Operating loss
(367
)

(1,597
)
 
(347
)
 
(6,602
)
Other income (expense):
 

 
 
 
 
 
Interest income, net
25


165

 
8

 
35

Foreign exchange gain (loss)
25


(6
)
 
(110
)
 
51

Change in fair value of financial instruments


86

 

 
122

Total other income (expense)
50


245

 
(102
)
 
208

Loss from continuing operations before income tax benefit
(317
)

(1,352
)
 
(449
)
 
(6,394
)
Income tax benefit
155


396

 
153

 
2,308

Loss from continuing operations
(162
)

(956
)
 
(296
)
 
(4,086
)
Income from discontinued operations, net of tax
4,144


4,008

 
5,265

 
63,266

Net income
$
3,982


$
3,052

 
$
4,969

 
$
59,180

Foreign exchange translation adjustment
43


(8
)
 
(45
)
 
(719
)
Comprehensive income
$
4,025


$
3,044

 
$
4,924

 
$
58,461

Per share data:





 
 
 
 
Net (loss) income per basic and diluted share:





 
 
 
 
Continuing operations
$
(0.01
)

$
(0.03
)
 
$
(0.01
)
 
$
(0.13
)
Discontinued operations
0.16


0.13

 
0.20

 
2.00

Net income per basic and diluted share
$
0.15


$
0.10

 
$
0.19

 
$
1.87

Weighted-average number of basic and diluted shares outstanding
25,942


32,077

 
25,818

 
31,640


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

4


EMCORE CORPORATION
Condensed Consolidated Balance Sheets
As of March 31, 2016 and September 30, 2015
(in thousands, except per share data)
(unaudited)
 
As of
 
As of
 
March 31,
2016
 
September 30,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
110,031

 
$
111,885

Restricted cash
529

 
375

Accounts receivable, net of allowance of $103 and $462, respectively
19,326

 
17,319

Inventory
16,792

 
17,130

Prepaid expenses and other current assets
4,362

 
4,976

Total current assets
151,040

 
151,685

Property, plant, and equipment, net
10,228

 
8,925

Other non-current assets, net of allowance of $0 and $3,561, respectively
298

 
297

Total assets
$
161,566

 
$
160,907

LIABILITIES and SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
8,150

 
$
7,189

Deferred gain associated with sale of assets

 
3,400

Accrued expenses and other current liabilities
9,859

 
13,102

Total current liabilities
18,009

 
23,691

Asset retirement obligations
1,540

 
1,774

Total liabilities
19,549

 
25,465

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; 33,012 shares issued and 26,102 shares outstanding as of March 31, 2016; 32,586 shares issued and 25,676 shares outstanding as of September 30, 2015
763,654

 
762,003

Treasury stock at cost; 6,910 shares at March 31, 2016 and September 30, 2015
(47,721
)
 
(47,721
)
Accumulated other comprehensive income
802

 
847

Accumulated deficit
(574,718
)
 
(579,687
)
Total shareholders’ equity
142,017

 
135,442

Total liabilities and shareholders’ equity
$
161,566

 
$
160,907


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, 2016 and 2015
(in thousands)
(unaudited)


 
For the six months ended March 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
4,969

 
$
59,180

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation, amortization and accretion expense
1,081

 
1,803

Stock-based compensation expense
920

 
3,760

Deferred income taxes

 
24,080

Gain on sale of Photovoltaics Business

 
(87,022
)
Gain on sale of Digital Products Business

 
(1,994
)
Provision adjustments related to doubtful accounts
4

 
463

Provision adjustments related to product warranty
234

 
515

Change in fair value of financial instruments

 
(122
)
Gain from change in estimate on ARO obligation

 
(845
)
Reclassification of foreign currency translation adjustment

 
(744
)
Recognition of previously deferred gain on sale of assets from discontinued operations
(3,804
)
 

Gain on reduction of product warranty of discontinued operations
(423
)
 

Gain on settlement of solar power assets and obligations
(689
)
 

Gain on settlement of Newark lease
(310
)
 

Net loss on disposal of equipment

 
237

Settlement of customer related warranty claim

 
(280
)
Total non-cash adjustments
(2,987
)
 
(60,149
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(2,017
)
 
3,859

Inventory
228

 
(1,541
)
Other assets
1,323

 
(913
)
Accounts payable
1,172

 
(3,151
)
Accrued expenses and other current liabilities
(2,412
)
 
(3,012
)
Total change in operating assets and liabilities
(1,706
)
 
(4,758
)
Net cash provided by (used in) operating activities
276

 
(5,727
)
Cash flows from investing activities:
 
 
 
Proceeds from sale of Photovoltaics Business

 
150,000

Proceeds from sale of Digital Products Business

 
1,500

Purchase of equipment
(2,685
)
 
(1,150
)
(Increase) decrease in restricted cash
(155
)
 
1,314

Proceeds from disposal of property, plant and equipment

 
50

Net cash (used in) provided by investing activities
(2,840
)
 
151,714

Cash flows from financing activities:
 
 
 
Payments on credit facilities

 
(26,518
)
Proceeds from stock plans
597

 
834

Net cash provided by (used in) financing activities
597

 
(25,684
)
Effect of exchange rate changes on foreign currency
113

 
(25
)
Net (decrease) increase in cash and cash equivalents
(1,854
)
 
120,278

Cash and cash equivalents at beginning of period
111,885

 
20,687

Cash and cash equivalents at end of period
$
110,031

 
$
140,965

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
Cash paid during the period for interest
$
44

 
$
139

Cash paid during the period for income taxes
$
108

 
$
25

NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Sale of Digital Products assets to NeoPhotonics for note receivable
$

 
$
15,482

Changes in accounts payable related to purchases of equipment
$
(191
)
 
$

Issuance of common stock to Board of Directors
$
263

 
$
301

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, 2016
(unaudited)


NOTE 1.
Description of Business

Business Overview

EMCORE Corporation and its subsidiaries (referred to herein as the “Company”, “we”, “our”, or “EMCORE”), established in 1984 as a New Jersey corporation, designs and manufactures Indium Phosphide (InP) optical chips, components, subsystems and systems for the broadband and specialty fiber optics market. EMCORE is a provider of optical components, as well as complete end-to-end solutions for high-speed communications network infrastructures enabling systems and service providers to meet growing demand for bandwidth and connectivity. EMCORE's advance optical technologies are designed for Cable Television (CATV), Fiber-To-The-Premises (FTTP) networks, telecommunications and data centers, satellite communications, aerospace and defense, wireless networks, and broadcast and professional audio/video systems. With its InP semiconductor wafer fabrication facility, EMCORE has fully vertically-integrated manufacturing capability and also provides contract design, foundry and component packaging services.

We currently have one reporting segment: Fiber Optics. Until the first quarter of fiscal year 2015, we operated as two segments: Fiber Optics and Photovoltaics. EMCORE's Solar Photovoltaics business, which was sold in December 2014, provided products for space power applications including high-efficiency multi-junction solar cells, Covered Interconnect Cells and complete satellite solar panels. In addition, EMCORE sold certain assets, and transferred certain liabilities, of the Company's telecommunications business, including the ITLA, micro-ITLA, T-TOSA and T-XFP product lines within the Company’s telecommunications business in January 2015. In addition to organic growth and development of our existing Fiber Optics market, we intend to pursue other strategies to enhance shareholder value, which may include acquisitions, investments in joint ventures, partnerships, and other strategic alternatives, such as dispositions, reorganizations, recapitalizations or other similar transactions, the repurchase of shares of our outstanding common stock or payment of dividends to our shareholders, and we may engage financial and other advisors to assist in these efforts. Accordingly, the Strategy and Alternatives Committee of the Board of Directors and our management may from time to time be engaged in evaluating potential strategic opportunities and may enter into definitive agreements with respect to such transactions or other strategic alternatives.


Sale of Photovoltaics and Digital Products Businesses

On September 17, 2014 , EMCORE entered into an Asset Purchase Agreement (the “Photovoltaics Agreement”) with SolAero Technologies Corporation ("SolAero") (formerly known as Photon Acquisition Corporation) pursuant to which SolAero acquired substantially all of the assets, and assumed substantially all of the liabilities, primarily related to or used in connection with the Company's photovoltaics business, including EMCORE's subsidiaries EMCORE Solar Power, Inc. and EMCORE IRB Company, LLC (collectively, the "Photovoltaics Business" and, the sale of the Photovoltaics Business, the "Photovoltaics Asset Sale") for $150.0 million in cash, prior to a $0.1 million working capital adjustment pursuant to the Photovoltaics Agreement finalized and paid by EMCORE during the fiscal year ended September 30, 2015 . On December 10, 2014 , EMCORE completed the Photovoltaics Asset Sale.

On October 22, 2014 , EMCORE entered into an Asset Purchase Agreement (the "Digital Products Agreement") with NeoPhotonics Corporation, a Delaware corporation ("NeoPhotonics"), pursuant to which the Company sold certain assets, and transferred certain liabilities, of the Company's telecommunications business (the "Digital Products Business") to NeoPhotonics for an aggregate purchase price of $17.5 million , subject to certain adjustments.

On January 2, 2015 , EMCORE completed the sale of the Digital Products Business for $1.5 million in cash and an adjusted Promissory Note balance of $15.5 million . On April 17, 2015 , NeoPhotonics paid in full the outstanding balance of the Promissory Note of $15.5 million , plus accrued interest of $0.2 million .

7



No Photovoltaics Business or Digital Products Business assets or liabilities that were sold remain on the condensed consolidated balance sheet as of March 31, 2016 . The financial results of the Photovoltaics Business and the Digital Products Business are presented as "discontinued operations" on the condensed consolidated statements of operations and comprehensive income for the three and six months ended March 31, 2016 and 2015 . See Note 3 - Discontinued Operations for additional information. The notes to our condensed consolidated financial statements relate to our continuing operations only, unless otherwise indicated.


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, 2015 has been derived from the audited consolidated financial statements as of such date as adjusted for discontinued operations. Also see Note 3 - Discontinued Operations . 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, 2015 .

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. We have evaluated subsequent events through the date that the financial statements were issued.


Liquidity and Capital Resources

Historically, we have consumed cash from operations and in most periods, we have incurred operating losses from continuing operations. We have managed our liquidity position through the sale of assets, and cost reduction initiatives, as well as, from time to time, borrowings from our credit facility and capital markets transactions.

On June 15, 2015 , we completed the modified "Dutch auction" tender offer (the "Tender Offer") and purchased 6.9 million shares of our common stock at a purchase price of $6.55 per share, for an aggregate cost of $45.0 million excluding fees and expenses. Repurchased common stock was recorded to treasury stock. The Company incurred costs of $0.7 million in connection with the Tender Offer, which were recorded to treasury stock.

As of March 31, 2016 , cash and cash equivalents totaled $110.0 million and net working capital totaled approximately $133.0 million . Net working capital, calculated as current assets minus current liabilities, is a financial metric we use which represents available operating liquidity. For the six months ended March 31, 2016 , we earned net income of $5.0 million .

With respect to measures related to liquidity:

We expect existing cash, cash equivalents, cash flows from operations, and access to capital markets to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for at least the next 12 months and thereafter for the foreseeable future. Should we require more capital than what is generated by our operations, for example to fund significant discretionary activities, such as business acquisitions and share repurchases, we could elect to raise capital in the U.S. through debt or equity issuances. These alternatives could result in higher effective tax rates, increased interest expense, or dilution of our earnings. We have borrowed funds in the past and continue to believe we have the ability to do so at reasonable interest rates.

Sale of Photovoltaics Business : On December 10, 2014 , we completed the sale of our Photovoltaics Business for $150.0 million in cash prior to working capital adjustments of $0.1 million .

Sale of Digital Products Business : On January 2, 2015 , we completed the sale of our Digital Products Business for $1.5 million in cash and an adjusted Promissory Note balance of $15.5 million . On April 17, 2015 , NeoPhotonics paid in full the outstanding balance of the Promissory Note of $15.5 million , plus accrued interest of $0.2 million .


8


Credit Facility : On November 11, 2010, we entered into a Credit and Security Agreement (credit facility) with Wells Fargo Bank, National Association ("Wells Fargo"). The credit facility, as it has been amended through its seventh amendment on November 10, 2015 , currently provides us with a revolving credit line of up to $15.0 million through November 2018 that can be used for working capital requirements, letters of credit, and other general corporate purposes. The credit facility is secured by the Company's assets and is subject to a borrowing base formula based on the Company's eligible accounts receivable, inventory, and machinery and equipment accounts. See Note 9 - Credit Facilities for additional information.


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 March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 introduces targeted amendments intended to simplify the accounting for stock compensation. Specifically, the ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The new guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The new standard will be effective for our fiscal year beginning October 1, 2017 and early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our Condensed Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 introduces a lessee model that requires recognition of assets and liabilities arising from qualified leases on the consolidated balance sheets and consolidated statements of operations and disclosure of qualitative and quantitative information about lease transactions. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. The new standard will be effective for our fiscal year beginning October 1, 2019 and early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our Condensed Consolidated Financial Statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Under this guidance, organizations that present a classified balance sheet are required to classify all deferred taxes as non-current assets or non-current liabilities. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The new standard will be effective for our fiscal year beginning October 1, 2018 and early adoption is permitted. We do not expect this accounting standard update to have an impact on our Condensed Consolidated Financial Statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory . This standard requires inventory to be measured at the lower of cost and net realizable value. The guidance clarifies that net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The new standard will be effective for our fiscal year beginning October 1, 2017 and early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our Condensed Consolidated Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers which will supersede most current U.S. GAAP guidance on this topic. I n April 2016, the FASB issued ASU No. 2016-10 , R evenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing to clarify two aspects of the guidance within ASU No. 2014-09 on identifying performance obligations and the licensing implementation guidance. Under the new standards, recognition of revenue occurs when the seller satisfies a performance obligation by transferring to the customer promised goods or services in an amount that reflects the consideration the entity expects to receive for those goods or services. The new standard, as amended in August 2015, will be effective for our fiscal year beginning October 1, 2018 and early adoption is permitted as of October 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. We anticipate this standard will not have a material impact on our Condensed Consolidated Financial Statements.



9


NOTE 3.
Discontinued Operations

Sale of Photovoltaics Business

On September 17, 2014 , EMCORE entered into the Photovoltaics Agreement with SolAero pursuant to which the Company agreed to sell the Photovoltaics Business for $150.0 million in cash, prior to a working capital adjustment of $0.1 million . On December 10, 2014 , EMCORE completed the Photovoltaics Asset Sale.

In connection with this transaction, we sold net assets of $60.3 million to SolAero and incurred transaction costs of $2.7 million . During the three months ended December 31, 2014, we recognized a gain of $56.8 million , net of tax on the sale of the Photovoltaics Business which was recorded within discontinued operations in the consolidated statements of operations and comprehensive income.

On December 22, 2015 , we settled all of the outstanding rights and obligations of a solar power venture in Spain, including outstanding non-current receivables, for a payment of $0.7 million . The outstanding non-current receivables had a net book value of $0 at the time of settlement as they were fully allowed for previously. The resulting gain was recorded in the discontinued operations of the Photovoltaics Business for the three months and six months ended March 31, 2016.

No assets and liabilities of the Photovoltaics Business that were sold remain on the condensed consolidated balance sheet as of March 31, 2016 and September 30, 2015 . The financial results of the Photovoltaics Business are reported as discontinued operations for the three and six months ended March 31, 2016 and 2015 , respectively.

The following table presents the statements of operations for the discontinued operations of the Photovoltaics Business:

 
For the three months ended March 31,
 
For the six months ended March 31,
(in thousands)
2016
 
2015
 
2016
 
2015
Revenue
$

 
$

 
$

 
$
12,614

Cost of revenue

 

 

 
8,245

Gross profit

 

 

 
4,369

Operating (income) expense
(34
)
 
(272
)
 
(821
)
 
2,431

Other income

 

 

 
779

Gain on sale of discontinued operations

 

 

 
87,022

Income from discontinued operations before income tax
34

 
272

 
821

 
89,739

Income tax (expense) benefit
(19
)
 
277

 
(28
)
 
(29,926
)
Income from discontinued operations, net of tax
$
15

 
$
549

 
$
793

 
$
59,813


Included in discontinued operations during the three and six months ended March 31, 2016 were $9,200 and $0.1 million , respectively, of New Mexico incentive tax credits received. The credits received resulted in cash refunds. There were no incentive tax credits received during the three and six months ended March 31, 2015 .

Sale of Digital Products Business
On October 22, 2014 , EMCORE entered into an Asset Purchase Agreement with NeoPhotonics, pursuant to which the Company sold certain assets, and transferred certain liabilities, of the Company's telecommunications business to NeoPhotonics for an aggregate purchase price of $17.5 million , subject to certain adjustments. On January 2, 2015 , EMCORE completed the sale of the Digital Products Business for $1.5 million in cash and an adjusted Promissory Note balance of $15.5 million . On April 17, 2015 , NeoPhotonics paid in full the outstanding balance of the Promissory Note of $15.5 million , plus accrued interest of $0.2 million .

During the three months ended March 31, 2015 , we recognized a gain of $2.0 million on the sale of the Digital Products Business which was recorded within discontinued operations in the condensed consolidated statements of operations and comprehensive income.


10


In December 2015 , we entered into an agreement to terminate our lease and related obligations associated with a facility in Newark, California we abandoned effective February 2016 following the sale of the Digital Products Business for a payment of $0.2 million . As a result of this agreement, we recorded a gain of $0.3 million on the lease termination in the discontinued operations of the Digital Products Business during the three and six months ended March 31, 2016. Also see Note 8 - Accrued Expenses and Other Current Liabilities .

Included in cost of revenue for the three and six months ended March 31, 2016 is $0.4 million due to a reduction in expected product warranty liabilities from a settlement agreement associated with the Digital Products Business.

During the three and six months ended March 31, 2016 , we recognized the deferred gain of $3.4 million and reversal of other liabilities of $0.4 million , that had been recorded as of September 30, 2015 , resulting in a credit of $3.8 million to deferred gain on sale of assets within discontinued operations of the Digital Products Business as the result of the favorable ruling from the SEI arbitration. Also see Note 11 - Commitments and Contingencies .

No assets or liabilities from the Digital Products Business remain on the condensed consolidated balance sheet as of March 31, 2016 and September 30, 2015 . The financial results of the Digital Products Business are reported as discontinued operations for the three and six months ended March 31, 2016 and 2015 .

The following table presents the statements of operations for the discontinued operations of the Digital Products Business:

 
For the three months ended March 31,
 
For the six months ended March 31,
(in thousands)
2016
 
2015
 
2016
 
2015
Revenue
$

 
$
40

 
$

 
$
11,855

Cost of revenue
(445
)
 
(1
)
 
(494
)
 
9,111

Gross profit
445

 
41

 
494

 
2,744

Operating (income) expense
(32
)
 
446

 
(330
)
 
3,158

Recognition of previously deferred gain on sale of assets
3,804

 

 
3,804

 

Gain on sale of discontinued operations

 
1,994

 

 
1,994

Income from discontinued operations before income tax
4,281

 
1,589

 
4,628

 
1,580

Income tax (expense) benefit
(152
)
 
1,870

 
(156
)
 
1,873

Income from discontinued operations
$
4,129

 
$
3,459

 
$
4,472

 
$
3,453




11


NOTE 4.
Fair Value Accounting

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

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly, through market corroboration, for substantially the full term of the financial instrument.

Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets or liabilities at fair value.

Classification of an asset or liability within this hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs.

Cash consists primarily of bank deposits or, highly liquid short-term investments with a maturity of three months or less at the time of purchase. Restricted cash represents temporarily restricted deposits held as compensating balances against short-term borrowing arrangements.

The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate fair value because of the short maturity of these instruments.


NOTE 5.
Accounts Receivable

The components of accounts receivable consisted of the following:


As of

As of
(in thousands)
March 31,
2016

September 30, 2015
Accounts receivable, gross
$
19,429

 
$
17,781

Allowance for doubtful accounts
(103
)
 
(462
)
Accounts receivable, net
$
19,326

 
$
17,319


The allowance for doubtful accounts is based on the age of receivables and a specific identification of receivables considered at risk of collection.


NOTE 6.
Inventory

The components of inventory consisted of the following:

 
As of
 
As of
(in thousands)
March 31,
2016
 
September 30, 2015
Raw materials
$
11,026

 
$
9,261

Work in-process
3,099

 
3,207

Finished goods
2,667

 
4,662

Inventory
$
16,792

 
$
17,130



NOTE 7.
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,
2016
 
September 30, 2015
Equipment
$
25,969

 
$
24,913

Furniture and fixtures
1,109

 
1,109

Computer hardware and software
2,369

 
2,177

Leasehold improvements
1,520

 
1,480

Construction in progress
1,867

 
875

Property, plant, and equipment, gross
32,834

 
30,554

Accumulated depreciation
(22,606
)
 
(21,629
)
Property, plant, and equipment, net
$
10,228

 
$
8,925




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,
2016

September 30, 2015
Compensation
$
2,753

 
$
3,036

Warranty
1,102

 
1,664

Termination fee
2,775

 
2,775

Professional fees
643

 
1,147

Customer deposits
26

 
133

Deferred revenue
22

 
65

Self insurance
277

 
606

Income and other taxes
974

 
1,038

Severance and restructuring accruals
611

 
1,448

Other
676

 
1,190

Accrued expenses and other current liabilities
$
9,859

 
$
13,102


Self-insurance : Prior to December 31, 2015, the Company provided health benefits to its employees under a self-insured (stop-loss) plan whereby the Company was responsible for substantially all amounts incurred by the provider related to the benefits provided to members of the plan. Effective January 1, 2016, the Company provides health benefits to its employees through a premium policy based plan and is only responsible for the premium payments for each employee insured under the plan. The balance as of March 31, 2016 relates to the amounts the Company is liable for prior to discontinuing the self-insurance plan.

Income and other taxes : For the three months ended March 31, 2016 , the Company recorded income tax benefit from continuing operations of approximately $0.2 million , and $0.2 million of income tax expense within income from discontinued operations. For the six months ended March 31, 2016 , the Company recorded income tax benefit from continuing operations of approximately $0.2 million , and $0.2 million of income tax expense within income from discontinued operations. Also see Note 10 - Income and other Taxes .

Severance and restructuring accruals : In the fourth quarter of fiscal year 2014, the Company’s former CEO announced his resignation which became effective in the second quarter of fiscal year 2015. The Company entered into a separation agreement with the individual that provided for among other things, the continuation of his base salary for up to 86 weeks, benefits for 18 months, outplacement services for a period of not more than one year and with a value not in excess of $15,000 and immediate vesting of all his outstanding non-vested equity awards. These payments were not contingent upon any future service by the individual. The Company recorded a charge of approximately $0.8 million in the fiscal year ended September 30, 2014 related to this separation agreement.

In the first quarter of fiscal year 2015, the Company’s former Chief Administrative Officer and General Counsel and Secretary announced their resignations which became effective in the first quarter and second quarter of fiscal year 2015, respectively. The Company entered into separation agreements with each individual that provided for among other things, the continuation of their base salary (74 weeks for the Chief Administrative Officer and 68 weeks for the General Counsel and Secretary), benefits for 18 months, outplacement services for a period of not more than one year and with a value not in excess of $15,000 and immediate vesting of all their outstanding non-vested equity awards. These payments were not contingent upon any future service by either individual. The Company recorded charges of approximately $1.1 million in the six months ended March 31, 2015 related to these separation agreements.

In connection with the abandonment of our Newark, California facility following the closing of the sale of the Digital Products Business, we accrued for the remaining lease costs through the lease termination of May 2016 . In December 2015 , we entered into an agreement to terminate this lease and related obligations, including asset retirement obligations ("ARO"), as of February 2016 for a payment of $0.2 million . As a result of the agreement, we recorded a gain of $0.3 million on the lease termination. The resulting gain has been recorded in the discontinued operations of the Digital Products Business for the six months ended March 31, 2016. Also see Note 3 - Discontinued Operations .

12



Our severance and restructuring-related accruals specifically relate to the separation agreements discussed above and non-cancelable obligations associated with an abandoned leased facility. Expense related to severance and restructuring accruals is included in selling, general, and administrative expense on our statement of operations and comprehensive income. The following table summarizes the changes in the severance and restructuring-related accrual accounts:

(in thousands)
Severance-related accruals
 
Restructuring- related accruals
 
Total
Balance as of September 30, 2015
$
1,110

 
$
338

 
$
1,448

Expense - charged to accrual

 

 

Payments and accrual adjustments
(506
)
 
(331
)
 
(837
)
Balance as of March 31, 2016
$
604

 
$
7

 
$
611


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

Product Warranty Accruals
For the three months ended March 31,
 
For the six months ended March 31,
(in thousands)
2016
 
2015
 
2016
 
2015
Balance at beginning of period
$
1,564

 
$
2,435

 
$
1,664

 
$
2,816

Provision for product warranty - expense
88

 
113

 
234

 
515

Adjustments and utilization of warranty accrual
(550
)
 
(624
)
 
(796
)
 
(1,407
)
Balance at end of period
$
1,102

 
$
1,924

 
$
1,102

 
$
1,924

Current portion
$
1,102

 
$
1,723

 
$
1,102

 
$
1,723

Non-current portion

 
201

 

 
201

Product warranty liability at end of period
$
1,102

 
$
1,924

 
$
1,102

 
$
1,924


As of March 31, 2015 , the non-current portion of product warranty accruals included Terrestrial Solar Power Generation warranty liabilities retained by EMCORE as part of the Photovoltaics Asset Sale, which were settled during the fiscal year ended September 30, 2015 . See Note 3 - Discontinued Operations for additional information.



13


NOTE 9.
Credit Facilities

On November 11, 2010, we entered into a Credit and Security Agreement (credit facility) with Wells Fargo Bank, National Association ("Wells Fargo"). The credit facility is secured by the Company's assets and is subject to a borrowing base formula based on the Company's eligible accounts receivable, inventory, and machinery and equipment accounts.

On November 10, 2015 , we entered into a Seventh Amendment of the credit facility, which extended the maturity date of the facility to November 2018 and adjusted the interest rate to LIBOR plus 2.5% . The credit facility currently provides us with a revolving credit line of up to $15.0 million that can be used for working capital requirements, letters of credit, and other general corporate purposes.

As of March 31, 2016 , there were no amounts outstanding under this credit facility and the Company was in compliance with all financial covenants. Also, as of March 31, 2016 , the credit facility had approximately $0.7 million reserved for two stand-by letters of credit and $5.9 million available for borrowing. As of May 5, 2016 , there was no outstanding balance under this credit facility.


NOTE 10.
Income and other Taxes

For the three months ended March 31, 2016 , the Company recorded income tax benefit from continuing operations of approximately $0.2 million , and $0.2 million of income tax expense within income from discontinued operations. For the six months ended March 31, 2016 , the Company recorded income tax benefit from continuing operations of approximately $0.2 million , and $0.2 million of income tax expense within income from discontinued operations. Income tax expense is comprised of estimated alternative minimum tax allocated between continuing operations and discontinued operations as prescribed by ASC 740.

For the three months ended March 31, 2015 , the Company recorded $0.4 million of income tax benefit from continuing operations losses and $2.1 million of income tax benefit within income from discontinued operations. For the six months ended March 31, 2015 , the Company recorded $2.3 million of income tax benefit from continuing operations losses and $28.1 million of income tax expense within income from discontinued operations. The income tax expense within discontinued operations included estimated alternative minimum tax and other adjustments prescribed by ASC 740 in allocating expected annual income tax expense (benefit) between continuing operations and discontinued operations.

For the three months ended March 31, 2016 and 2015 , the effective tax rate on continuing operations was 48.9% and 29.3% , respectively. The higher tax rate for the three months ended March 31, 2016 was primarily due to permanent differences, state tax benefits and foreign rate differentials.

For the six months ended March 31, 2016 and 2015 , the effective tax rate on continuing operations was 34.1% and 36.1% respectively. The lower tax rate for the six months ended March 31, 2016 was primarily due to permanent differences, state tax benefits and foreign tax rate differentials. The Company uses estimates to forecast the results from continuing operations for the current fiscal year as well as permanent differences between book and tax accounting.
We have not provided for U.S. federal and state income taxes on non-U.S. subsidiaries' undistributed earnings as of March 31, 2016 because we plan to indefinitely reinvest the unremitted earnings of our non-U.S. subsidiaries.
All deferred tax assets have a full valuation allowance at March 31, 2016 and the Company expects all remaining deferred tax assets to have a full valuation allowance at September 30, 2016 . However, on a quarterly basis, the Company will evaluate the positive and negative evidence to assess whether the more likely than not criteria, mandated by ASC 740, has been satisfied in determining whether there will be further adjustments to the valuation allowance.

During the three and six months ended March 31, 2016 and 2015 , there were no material increases or decreases in unrecognized tax benefits. As of March 31, 2016 and September 30, 2015 , we had approximately $0.4 million and $0.3 million , respectively, of interest and penalties accrued as tax liabilities on our balance sheet.



14


NOTE 11.
Commitments and Contingencies

Operating Lease Obligations : We lease certain land, facilities, and equipment under non-cancelable operating leases. Operating lease amounts exclude renewal option periods, property taxes, insurance, and maintenance expenses on leased properties. Our facility leases typically provide for rental adjustments for increases in base rent (up to specific limits), property taxes, insurance, and general property maintenance that would be recorded as rent expense. Rent expense was approximately $0.3 million and $0.3 million for the three months ended March 31, 2016 and 2015 , respectively and approximately $0.6 million and $0.7 million for the six months ended March 31, 2016 and 2015 , respectively. There are no off-balance sheet arrangements other than our operating leases.

Asset Retirement Obligations ("ARO") : We have known conditional asset retirement conditions, such as certain asset decommissioning and restoration of rented facilities to be performed in the future. Our ARO's include assumptions related to renewal option periods for those facilities where we expect to extend lease terms. The Company recognizes its estimate of the fair value of its ARO's in the period incurred in long-term liabilities. The fair value of the ARO is also capitalized as property, plant and equipment.

In future periods, the ARO is accreted for the change in its present value and capitalized costs are depreciated over the useful life of the related assets. If the fair value of the estimated ARO changes, an adjustment will be recorded to both the ARO and the asset retirement capitalized cost. Revisions in estimated liabilities can result from revisions of estimated inflation rates, changes in estimated retirement costs, and changes in the estimated timing of settling ARO's. The fair value of our ARO 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 4.20% . There were no ARO's settled during the three and six months ended March 31, 2015 . See discussion below regarding ARO settlements during the first quarter of fiscal 2016. Accretion expense of $15,000 and $52,000 was recorded during the three months ended March 31, 2016 and 2015 , respectively. Accretion expense of $30,000 and $67,000 was recorded during the six months ended March 31, 2016 and 2015 , respectively.

EMCORE leases a major facility in Alhambra, California covering six buildings where manufacturing, research and development, and general and administrative work is performed . Several leases related to these facilities expired in 2011, and were being maintained on a month-to-month basis. In November 2014, a new lease for four of the six buildings was signed, which was retroactively effective on October 1, 2014 . The new lease extended the terms of the lease for three years plus a three year option to extend the lease and clarified the obligations and restoration work necessary to restore the buildings back to the requirements in the lease.

The Company’s ARO consists of legal requirements to return the existing leased facilities to their original state and certain environmental work to be performed due to the presence of a manufacturing fabrication operation and significant changes to the facilities over the past thirty years.

During the first quarter of fiscal 2015, the Company completed an analysis of the new Alhambra lease and revised its estimated future cash flows of its ARO's. The analysis required estimating the probability that the Company will be required to remove certain infrastructure and restore the leased properties as set forth in the new lease, and the timing and amount of those future costs. The analysis resulted in the downward revision of the Company’s ARO liability. This change in the estimated cash flows resulted in a reduction in the ARO liability by $ 2.9 million with an offsetting reduction to property, plant, and equipment, net of $2.1 million , and a gain from change in estimate of ARO liability of $ 0.8 million . The Company first reduced the net leasehold improvement asset to the extent of the carrying amount of the related asset initially recorded when the ARO's were established. The amount of the remaining reduction to the ARO's was recorded as a reduction to operating expenses.

15



During the three months ended December 31, 2015, the Company entered into an agreement to terminate the lease and related obligations, including ARO, in Newark, California for a one-time settlement payment of $0.2 million . As a result of this agreement and payment, the Company reduced its ARO's associated with the Newark facility by $0.3 million . The following table summarizes ARO activity:

Asset Retirement Obligations
March 31,
(in thousands)
2016
Balance at September 30, 2015
$
1,774

Accretion expense
30

Payments and revision in estimated cash flows
(264
)
Balance at March 31, 2016
$
1,540


Indemnifications : We have agreed to indemnify certain customers against claims of infringement of the intellectual property rights of others in our sales contracts with these customers. Historically, we have not paid any claims under these indemnification obligations. On September 19, 2013 , we received written notice from a customer of our broadband products requesting indemnification relating to a lawsuit brought against them alleging patent infringement of a system incorporating our product. As of March 31, 2016 , there has been no resolution to this claim.

In March 2012, we entered into a Master Purchase Agreement with SEI, pursuant to which we agreed to sell certain assets and transfer certain obligations. Under the terms of the Master Purchase Agreement, we agreed to indemnify SEI for up to $3.4 million of potential claims and expenses for the two -year period following the sale and we recorded this amount as a deferred gain on our balance sheet as a result of these contingencies.

On September 23, 2014 , SEI filed for arbitration against EMCORE, as required under the Master Purchase Agreement between the parties. SEI was seeking $47.5 million from EMCORE, relating to numerous claims. On April 12, 2016 , the International Court of Arbitration tribunal rejected SEI's claims. The panel ruled that EMCORE owes SEI none of the amounts SEI sought in the arbitration and that the Company is entitled to collect the $1.9 million held in escrow. The Company is also entitled to recover $2.6 million in fees and costs from SEI. During the three and six months ended March 31, 2016 , we recognized a gain associated with the release of the $3.4 million and reversal of other liabilities of $0.4 million , resulting in a credit of $3.8 million to recognition of previously deferred gain on sale of assets within discontinued operations of the Digital Products Business. The $2.6 million recovery of fees and costs incurred by EMCORE will be recorded when received from SEI, and the $1.9 million held in escrow will be reclassified to cash once the funds are released to EMCORE. Also see Note 3 - Discontinued Operations .


Legal Proceedings : We are subject to various legal proceedings, claims, and litigation, either asserted or unasserted that arise in the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect the resolution of these matters 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.


16


a) Intellectual Property Lawsuits

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

b) Mirasol Class Action

On December 15, 2015, Plaintiff Christina Mirasol (“Mirasol”), on her own behalf and on behalf of a putative class of similarly situated individuals composed of current and former non-exempt employees of the Company working in California since December 15, 2011, filed a complaint against the Company in the Superior Court of California, Los Angeles County. The complaint alleges seven causes of action related to: (1) failure to pay overtime; (2) failure to provide meal periods; (3) failure to pay minimum wages; (4) failure to timely pay wages upon termination; (5) failure to provide compliant wage statements; and (6) unfair competition under the California Business and Professions Code § 17200 et seq. The claims are premised primarily on the allegation that Mirasol and the putative class members were not provided with their legally required meal periods. Mirasol seeks recovery on her own behalf and on behalf of the putative class in an unspecified amount for compensatory and liquidated damages as well as for declaratory relief, injunctive relief, statutory penalties, pre-judgment interest, costs and attorneys’ fees.

In March 2016, the Company offered current employees the opportunity to receive a one-time cash payment in exchange for a release of all potential claims related to the Mirasol lawsuit. The Company estimates that its potential future liability related to all potential putative class members may range from $0.1 million to $4.3 million , including penalties and fines associated with the claims at March 31, 2016 . Based on the preliminary responses received, the Company has accrued $0.1 million at March 31, 2016 , which represents the best estimate within the range. This amount has been recorded within Operating Expense for the three and six months ended March 31, 2016 .

NOTE 12.
Equity

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

the 2000 Stock Option Plan,
the 2010 Equity Incentive Plan, and
the 2012 Equity Incentive Plan.

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

The Board of Directors (the “Board”) of the Company previously approved, subject to stockholder approval, amendments to the 2012 Plan that would, among other changes, (1) increase the limit on the aggregate number of shares of common stock that may be delivered pursuant to awards granted under the 2012 Plan by 500,000 shares to a new aggregate share limit of 2,500,000 shares; (2) make shares exchanged or withheld by the Company to satisfy any purchase price and tax withholding obligations related to options or “full value awards” (such as restricted stock or stock unit awards), and the total number of shares subject to stock appreciation rights (whether or not issued) count against the 2012 Plan’s share limit and no longer available for new grants under the 2012 Plan; (3) implement a maximum grant date fair value limit for awards granted to non-employee directors under the 2012 Plan during any one calendar year of $250,000 (or $350,000 in the case of awards to a non-employee director serving as Chairman of the Board or Lead Independent Director at the time of grant, or to a newly elected or appointed non-employee director during the first calendar year of service), (4) expressly allow the administrator to permit or require participants to defer awards granted under the 2012 Plan, (5) extend the term of the 2012 Plan until March 11, 2026 ; and (6) extend the performance-based award feature of the 2012 Plan through the first annual meeting of stockholders that occurs in 2021 . The Company’s stockholders approved the amendments to the 2012 Plan on March 11, 2016 . As a result of the approval of the amendments to the 2012 Plan by the Company's stockholders, no more shares may be granted under the 2007 Directors' Stock Award Plan.

17



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, 2016 :


Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average
Remaining Contractual Life
(in years)
 
Aggregate Intrinsic Value (*) (in thousands)
Outstanding as of September 30, 2015
696,459

 
$22.47
 
 
 
 
Granted
16,700

 
$6.37
 
 
 
 
Exercised
(37,413
)
 
$4.98
 
 
 
$
80

Forfeited
(5,700
)
 
$6.35
 
 
 
 
Expired
(52,099
)
 
$31.22
 
 
 
 
Outstanding as of March 31, 2016
617,947

 
$22.51
 
2.76
 
$
97

Exercisable as of March 31, 2016
567,172

 
$23.97
 
2.18
 
$
97

Vested and expected to vest as of March 31, 2016
607,534

 
$22.79
 
2.65
 
$
97


(*) Intrinsic value for stock options represents the “in-the-money” portion or the positive variance between a stock option's exercise price and the underlying stock price. For the six months ended March 31, 2015, the intrinsic value of options exercised was $95,000 .

As of March 31, 2016 , there was approximately $0.2 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested stock options granted under the Equity Plans which is expected to be recognized over an estimated weighted average life of 4.0 years.

On December 10, 2014 , in connection with the sale of the Photovoltaics Business, which constituted a change in control, the terms of approximately 56,000 stock options for approximately 80 employees were modified to include accelerated vesting effective as of that date. The total incremental benefit resulting from the modifications was approximately $0.2 million and is included in the Company's income from discontinued operations, net of tax, for the six months ended March 31, 2015.


18


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,
 
2016
 
2015
 
2016
 
2015
Black-Scholes weighted average assumptions:
 
 
 
 
 
 
 
Expected dividend rate
%
 
%
 
%
 
%
Expected stock price volatility rate
61.0
%
 
72.7
%
 
61.3
%
 
76.0
%
Risk-free interest rate 
1.5
%
 
1.7
%
 
1.6
%
 
1.8
%
Expected term (in years)
6.0

 
6.0

 
6.0

 
6.0

 
 
 
 
 
 
 
 
Weighted average grant date fair value per share of stock options granted:
$2.97
 
$
3.51

 
$
3.64

 
$
3.55


Restricted Stock

Restricted stock units (RSUs) granted to employees under the 2010 Plan and 2012 Plan typically vest over 3 years and are subject to forfeiture if employment terminates prior to the lapse of the restrictions. RSUs are not considered issued or outstanding common stock until they vest.

The following table summarizes the activity related to RSUs for the six months ended March 31, 2016 :

Restricted Stock Activity
 
Restricted Stock Units
 
 
Number of Shares
 
Weighted Average Grant Date Fair Value
Non-vested as of September 30, 2015
 
570,231

 
$5.26
Granted
 
280,650

 
$5.22
Vested
 
(251,970
)
 
$5.14
Forfeited
 
(7,916
)
 
$5.15
Non-vested as of March 31, 2016
 
590,995

 
$5.30

As of March 31, 2016 , there was approximately $2.6 million of remaining unamortized stock-based compensation expense, net of estimated forfeitures, associated with RSUs, which will be expensed over a weighted average remaining service period of approximately 2.2 years. The 0.6 million outstanding non-vested RSUs have an aggregate intrinsic value of approximately $3.0 million and a weighted average remaining contractual term of 1.5 years. For the six months ended March 31, 2016 and 2015 , the intrinsic value of RSUs vested was approximately $1.4 million and $4.4 million , respectively. Of the 0.6 million outstanding non-vested RSUs at March 31, 2016 , approximately 0.5 million are expected to vest and have an aggregate intrinsic value of approximately $2.7 million and a weighted average remaining contractual term of 1.5 years.

On December 10, 2014 , in connection with the sale of the Photovoltaics Business, which constituted a change in control, the terms of approximately 147,000 RSUs for approximately 80 employees were modified to include accelerated vesting effective as of that date. The total incremental expense resulting from the modifications was approximately $49,000 and is included in the Company's income from discontinued operations, net of tax, for the six months ended March 31, 2015. In total, approximately 0.3 million RSU's vested due to change in control provisions.


19


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)
2016
 
2015
 
2016
 
2015
Employee stock options
$
10

 
$
7

 
$
16

 
$
184

Restricted stock awards and units
453

 
797

 
719

 
2,056

Employee stock purchase plan
56

 
14

 
111

 
64

401(k) match in common stock

 
144

 

 
224

Outside director fees in common stock
94

 
72

 
130

 
280

Total stock-based compensation expense
$
613

 
$
1,034

 
$
976

 
$
2,808



Stock-based Compensation Expense - by expense type
For the three months ended March 31,
 
For the six months ended March 31,
(in thousands)
2016
 
2015
 
2016
 
2015
Cost of revenue
$
113

 
$
81

 
$
182

 
$
185

Selling, general, and administrative
420

 
849

 
608

 
2,414

Research and development
80

 
104

 
186

 
209

Total stock-based compensation expense
$
613

 
$
1,034

 
$
976

 
$
2,808


The stock based compensation expense above relates to continuing operations. Stock based-compensation within selling, general and administrative expense was higher for three and six months ended March 31, 2015 due to stock-based compensation expense associated with the sale of the Photovoltaics and Digital Products Businesses. Included within discontinued operations is $0.9 million of stock based compensation expense for the six months ended March 31, 2015 .

401(k) Plan
We have a savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under this savings plan, participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. All employer contributions were made in common stock through June 30, 2015 and since then have been made in cash. Our matching contribution in cash for the three and six months ended March 31, 2016 was approximately $0.1 million and $0.2 million , respectively. For the three and six months ended March 31, 2015 , we contributed approximately $0.1 million and $0.2 million , respectively, in common stock to the savings plan. All participant accounts had their holdings in company stock liquidated as of December 3, 2015 .



20



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)
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
   Loss from continuing operations
 
$
(162
)
 
$
(956
)
 
$
(296
)
 
$
(4,086
)
   Income from discontinued operations
 
4,144

 
4,008

 
5,265

 
63,266

Undistributed earnings allocated to common shareholders for basic and diluted net (loss) income per share
 
3,982

 
3,052

 
4,969

 
59,180

Denominator:
 
 
 
 
 
 
 
 
Denominator for basic and diluted net income (loss) per share - weighted average shares outstanding
 
25,942

 
32,077

 
25,818

 
31,640

 
 
 
 
 
 
 
 
 
Net income (loss) per basic and diluted share:
 
 
 
 
 
 
 
 
   Continuing operations
 
$
(0.01
)
 
$
(0.03
)
 
$
(0.01
)
 
$
(0.13
)
   Discontinued operations
 
0.16

 
0.13

 
0.20

 
2.00

Net income per basic and diluted share
 
$
0.15

 
$
0.10

 
$
0.19

 
$
1.87

 
 
 
 
 
 
 
 
 
Weighted average antidilutive options, unvested restricted stock units and awards, warrants and ESPP shares excluded from the computation
 
721

 
2,214

 
794

 
2,434

 
 
 
 
 
 
 
 
 
Average market price of common stock
 
$
5.44

 
$
5.34

 
$
6.19

 
$
5.32


The antidilutive stock options, unvested stock and warrants were excluded from the computation of diluted net income (loss) per share due to the Company incurring a net loss for the periods presented.

Employee Stock Purchase Plan
We maintain an Employee Stock Purchase Plan ("ESPP") that provides employees an opportunity to purchase common stock through payroll deductions. The ESPP is a 6-month duration plan with new participation periods beginning on February 25 and August 26 of each year. The purchase price is set at 85% of the average high and low market price of our common stock on either the first or last day of the participation period, whichever is lower, and annual contributions are limited to the lower of 10% of an employee's compensation or $25,000 .

21



Future Issuances  

As of  March 31, 2016 , 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
617,947

Unvested restricted stock units
590,995

Purchases under the employee stock purchase plan
881,706

Issuance of stock-based awards under the Equity Plans
837,887

Purchases under the officer and director share purchase plan
88,741

Issuance of deferred stock-based awards under the Directors' Stock Award Plan, as amended
22,163

Total reserved
3,039,439



NOTE 13.
Geographical Information

Following the sale of the Photovoltaics Business on December 10, 2014 , the Company has one remaining reportable segment: Fiber Optics. See also Note 3 - Discontinued Operations for additional disclosures.

We evaluate our reportable segment pursuant to ASC 280, Segment Reporting. The Company's Chief Executive Officer is the chief operating decision maker and he assesses the performance of the operating segment and allocates resources to the segment based on its business prospects, competitive factors, net revenue, operating results, and other non-GAAP financial ratios. Based on this evaluation, the Company operates as a single reportable segment.
Revenue : The following tables set forth revenue by geographic region with revenue assigned to geographic regions based on our customers’ billing address.

Revenue by Geographic Region
For the three months ended March 31,
 
For the six months ended March 31,
(in thousands)
2016
 
2015
 
2016
 
2015
United States
$
15,369

 
$
13,063

 
$
29,182

 
$
26,413

Asia
4,638

 
3,901

 
10,977

 
6,598

Europe
1,371

 
1,950

 
3,534

 
4,027

Other
154

 
143

 
329

 
435

Total revenue
$
21,532

 
$
19,057

 
$
44,022

 
$
37,473


Significant Customers : Significant customers are defined as customers representing greater than 10% of our consolidated revenue. Revenue from two of our significant customers represented 51% of our consolidated revenue for the three months and six months ended March 31, 2016 . Revenue from three of our significant customers represented 54% of our consolidated revenue for the three months ended March 31, 2015 and revenue from four of our significant customers represented 62% of our consolidated revenue for the six months ended March 31, 2015 .

Long-lived Assets : Long-lived assets consist of property, plant, and equipment. As of March 31, 2016 and September 30, 2015 , approximately 50% and 38% , respectively, of our long-lived assets were located in the United States. The remaining long-lived assets are primarily located in China.



22


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 within this Quarterly Report. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See Cautionary Statement Regarding Forward-Looking Statements.

Business Overview

EMCORE Corporation and its subsidiaries (referred to herein as the “Company”, “we”, “our”, or “EMCORE”) designs and manufactures Indium Phosphide (InP) optical chips, components, subsystems and systems for the broadband and specialty fiber optics market. EMCORE was the pioneer in linear fiber optic transmission technology, and today is a leader in optical components, as well as a provider of complete end-to-end solutions for high-speed communications network infrastructures, enabling systems and service providers to meet growing demand for bandwidth and connectivity. EMCORE’s advanced optical technologies are designed for cable television (CATV) and fiber-to-the-premise (FTTP) networks, telecommunications and data centers, satellite communications, aerospace and defense, wireless networks, and broadcast and professional audio/video systems. With its world-class InP semiconductor wafer fabrication facility, EMCORE has fully vertically-integrated manufacturing capability and also provides contract design, foundry and component packaging services.

Sumitomo Electric Industries Ltd.
In March 2012, we entered into a Master Purchase Agreement with SEI, pursuant to which we agreed to sell certain assets and transfer certain obligations. Under the terms of the Master Purchase Agreement, we agreed to indemnify SEI for up to $3.4 million of potential claims and expenses for the two -year period following the sale and we recorded this amount as a deferred gain on our balance sheet as a result of these contingencies.

On September 23, 2014 , SEI filed for arbitration against EMCORE, as required under the Master Purchase Agreement between the parties. SEI was seeking $47.5 million from EMCORE, relating to numerous claims. On April 12, 2016 , the International Court of Arbitration tribunal rejected SEI's claims. The panel ruled that EMCORE owes SEI none of the amounts SEI sought in the arbitration and that the Company is entitled to collect the $1.9 million held in escrow. The Company is also entitled to recover $2.6 million in fees and costs from SEI. During the three and six months ended March 31, 2016 , we recognized a gain associated with the release of the $3.4 million and reversal of other liabilities of $0.4 million , resulting in a credit of $3.8 million to recognition of previously deferred gain on sale of assets within discontinued operations of the Digital Products Business. The $2.6 million recovery of fees and costs incurred by EMCORE will be recorded when received from SEI, and the $1.9 million held in escrow will be reclassified to cash once the funds are released to EMCORE. Also see Note 3 - Discontinued Operations in the notes to the condensed consolidated financial statements for more information.

Sale of Photovoltaics and Digital Products Businesses

On September 17, 2014 , EMCORE entered into an Asset Purchase Agreement (the “Photovoltaics Agreement”) with SolAero Technologies Corporation ("SolAero") (formerly known as Photon Acquisition Corporation) pursuant to which SolAero acquired substantially all of the assets, and assumed substantially all of the liabilities, primarily related to or used in connection with the Company's photovoltaics business, including EMCORE's subsidiaries EMCORE Solar Power, Inc. and EMCORE IRB Company, LLC (collectively, the "Photovoltaics Business" and, the sale of the Photovoltaics Business, the "Photovoltaics Asset Sale") for $150.0 million in cash, prior to a $0.1 million working capital adjustment pursuant to the Photovoltaics Agreement finalized and paid by EMCORE during the fiscal year ended September 30, 2015 . On December 10, 2014 , EMCORE completed the Photovoltaics Asset Sale.

On October 22, 2014 , EMCORE entered into an Asset Purchase Agreement (the "Digital Products Agreement") with NeoPhotonics Corporation, a Delaware corporation ("NeoPhotonics"), pursuant to which the Company sold certain assets, and transferred certain liabilities, of the Company's telecommunications business (the "Digital Products Business") to NeoPhotonics for an aggregate purchase price of $17.5 million , subject to certain adjustments.


23


On January 2, 2015 , EMCORE completed the sale of the Digital Products Business for $1.5 million in cash and an adjusted Promissory Note balance of $15.5 million . On April 17, 2015 , NeoPhotonics paid in full the outstanding balance of the Promissory Note of $15.5 million , plus accrued interest of $0.2 million .

The Photovoltaics Asset Sale and Digital Products Asset Sale are reported as discontinued operations. Also see Note 3 - Discontinued Operations in the notes to the condensed consolidated financial statements for additional disclosures.

Strategic Plan

In addition to organic growth and development of our existing fiber optics business, we intend to pursue other strategies to enhance shareholder value. The Strategy and Alternatives Committee of the Company's Board of Directors (the "Strategy Committee"), which was established in December 2013, is charged with evaluating strategic opportunities for the Company that may enhance shareholder value. The Strategy Committee may from time to time consider strategic opportunities to enhance shareholder value, which may include acquisitions, investments in joint ventures, partnerships, and other strategic alternatives such as dispositions, reorganizations, recapitalizations or other similar transactions, the repurchase of shares of our outstanding common stock or payment of dividends to our shareholders, and may engage financial and other advisors to assist it in these efforts. Accordingly, the Strategy Committee of the Board of Directors and our management may from time to time be engaged in evaluating potential strategic opportunities and we may enter into definitive agreements with respect to such transactions or other strategic alternatives. However, there is no assurance that the Strategy Committee will identify further strategic opportunities that the Company will determine to pursue, or that the consideration of any such opportunity would result in the completion of a strategic transaction.

Results of Operations

The following table sets forth our consolidated condensed statements of operations data expressed as a percentage of revenue: 

 
For the three months ended March 31,
 
For the six months ended March 31,
 
2016
 
2015
 
2016
 
2015
Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenue
67.4

 
66.5

 
67.2

 
69.2

Gross profit
32.6

 
33.5

 
32.8

 
30.8

Operating expense (income):
 
 
 
 
 
 
 
Selling, general, and administrative
22.4

 
31.3

 
21.9

 
38.9

Research and development
11.9

 
10.6

 
11.6

 
11.2

Gain from change in estimate on ARO obligation

 

 

 
(2.3
)
Loss on sale of assets

 

 

 
0.6

Total operating expense
34.3

 
41.9

 
33.5

 
48.4

Operating loss
(1.7
)
 
(8.4
)
 
(0.7
)
 
(17.6
)
Other income (expense):
 
 
 
 
 
 
 
Interest income, net
0.1

 
0.8

 

 
0.1

Foreign exchange gain (loss)
0.1

 

 
(0.2
)
 
0.1

Change in fair value of financial instruments

 
0.5

 

 
0.3

Total other income (expense)
0.2

 
1.3

 
(0.2
)
 
0.5

Loss from continuing operations before income tax benefit
(1.5
)
 
(7.1
)
 
(0.9
)
 
(17.1
)
Income tax benefit
0.8

 
2.1

 
0.2

 
6.2

Loss from continuing operations
(0.7
)%
 
(5.0
)%
 
(0.7
)%
 
(10.9
)%
Income from discontinued operations, net of tax
19.2
 %
 
21.0
 %
 
12.0
 %
 
168.8
 %
Net income
18.5
 %
 
16.0
 %
 
11.3
 %
 
157.9
 %

24


Comparison of Financial Results for the Three Months Ended March 31, 2016 and 2015

(in thousands, except percentages)
For the three months ended March 31,

2016

2015

$ Change

% Change
Revenue
$
21,532


$
19,057


$
2,475


13.0%
Cost of revenue
14,510


12,678


1,832


14.5%
Gross profit
7,022

 
6,379


643


10.1%
Operating expense (income):
 
 
 
 
 
 
 
Selling, general, and administrative
4,825


5,954


(1,129
)

(19.0)%
Research and development
2,564


2,022


542


26.8%
Total operating expense
7,389


7,976

 
(587
)
 
(7.4)%
Operating loss
(367
)
 
(1,597
)
 
1,230


77.0%
Other income (expense):










Interest income, net
25


165


(140
)

(84.8)%
Foreign exchange gain (loss)
25


(6
)

31


516.7%
Change in fair value of financial instruments


86


(86
)

(100.0)%
Total other income
50


245


(195
)

(79.6)%
Loss from continuing operations before income tax benefit
(317
)

(1,352
)

1,035


76.6%
Income tax benefit
155


396


(241
)

(60.9)%
Loss from continuing operations
(162
)
 
(956
)
 
794


83.1%
Income from discontinued operations, net of tax
4,144


4,008


136


3.4%
Net income
$
3,982


$
3,052

 
$
930


30.5%

Revenue

EMCORE offers a broad portfolio of compound semiconductor-based products for the broadband and specialty fiber optics market. EMCORE provides optical components, subsystems, and systems for CATV and FTTP networks, as well as products for satellite communications, video transport, and specialty photonics technologies for defense and homeland security applications.

For the three months ended March 31, 2016 , revenue increased 13.0% compared to the same period during the prior year driven by higher sales of our chip level devices primarily to customers in Asia and our CATV products primarily to U.S. customers. Sales of our CATV products, which include our quadrature amplitude modulation transmitters and receivers, represented the largest percentage of our total revenue during the three-month period. Sales of our chip level device products, which include our avalanche photodiodes, distributed feedback lasers (DFBs) and gain chips, increased as EMCORE expanded its sales.

Gross Profit

Our cost of revenue consists of raw materials, compensation expense including non-cash stock-based compensation expense, depreciation expense and other manufacturing overhead costs, expenses associated with excess and obsolete inventories, and product warranty costs. Historically, our cost of revenue as a percentage of revenue, which we refer to as our gross margin, has fluctuated significantly due to product mix pricing, manufacturing yields and sales volumes, and inventory and specific product warranty charges.

Consolidated gross margins were 32.6% and 33.5% for the three months ended March 31, 2016 and 2015 , respectively.

Stock-based compensation expense within cost of revenue totaled approximately $0.1 million during the three months ended March 31, 2016 and 2015 .


25


For the three months ended March 31, 2016 , gross margins decreased when compared to the same period during the prior year. The decrease in gross margins for the three months ended March 31, 2016 was primarily due to higher expenses.


Selling, General and Administrative (SG&A)

SG&A consists primarily of compensation expense including non-cash stock-based compensation expense related to executive, finance, and human resources personnel, as well as sales and marketing expenses, professional fees, legal and patent-related costs, and other corporate-related expenses.

Stock-based compensation expense within SG&A totaled approximately $0.4 million and $0.8 million during the three months ended March 31, 2016 and 2015 , respectively.

SG&A expense for the three months ended March 31, 2016 was lower than the amount reported in the same period during the prior year primarily due to lower stock-based compensation and compensation expense associated with the sale of the Digital Products Business in the prior year.

As a percentage of revenue, SG&A expenses were 22.4% and 31.3% for the three months ended March 31, 2016 and 2015 , respectively.


Research and Development (R&D )

R&D consists primarily of compensation expense including non-cash stock-based compensation expense, as well as engineering and prototype costs, depreciation expense, and other overhead expenses, as they related to the design, development, and testing of our products. Our R&D costs are expensed as incurred. We believe that in order to remain competitive, we must invest significant financial resources in developing new product features and enhancements and in maintaining customer satisfaction worldwide.

Stock-based compensation expense within R&D totaled approximately $0.1 million during the three months ended March 31, 2016 and 2015 .

R&D expense for the three months ended March 31, 2016 was higher than the amounts reported in the same period during the prior year primarily due to higher compensation costs.

As a percentage of revenue, R&D expenses were 11.9% and 10.6% for the three months ended March 31, 2016 and 2015 , respectively.


Operating Loss

Operating loss represents revenue less the cost of revenue and direct operating expenses incurred. Operating loss is a measure of profit and loss that executive management uses to assess performance and make decisions. As a percentage of revenue, our operating loss was 1.7% and 8.4% for the three months ended March 31, 2016 and 2015 , respectively.


Other Income (Expense)

Interest income, net
During the three months ended March 31, 2015 , we recorded $0.2 million of interest income earned on the Promissory Note from NeoPhotonics. See Note 3 - Discontinued Operations in the notes to the condensed financial statements for additional information.

26



Foreign Exchange
Gains and losses from foreign currency transactions denominated in currencies other than the U.S. dollar, both realized and unrealized, are recorded as foreign exchange gain (loss) on our consolidated statements of operations and comprehensive income. A majority of the gains or losses recorded relate to the change in value of the yuan renminbi relative to the U.S. dollar.

Change in Fair Value of Financial Instruments
As of March 31, 2015 warrants representing the right to purchase 400,001 shares of our common stock were outstanding. The warrants expired on April 1, 2015.


Income Tax Benefit (Expense)

For the three months ended March 31, 2016 , the Company recorded income tax benefit from continuing operations of approximately $0.2 million , and $0.2 million of income tax expense within income from discontinued operations.

For the three months ended March 31, 2015 , the Company recorded $0.4 million of income tax benefit from continuing operations losses and $2.1 million of income tax benefit within income from discontinued operations. The income tax expense within discontinued operations includes estimated alternative minimum tax and other adjustments prescribed by ASC 740 in allocating expected annual income tax (expense) benefit between continuing operations and discontinued operations.


Income from Discontinued Operations, Net of Tax

(in thousands, except percentages)
For the three months ended March 31,
 
2016
 
2015
 
$ Change
 
% Change
Revenue
$

 
$
40

 
$
(40
)
 
(100.0)%
Cost of revenue
(445
)
 
(1
)
 
(444
)
 
(44,400.0)%
Gross profit
445

 
41

 
404

 
985.4%
Operating (income) expense
(66
)
 
174

 
(240
)
 
(137.9)%
Recognition of previously deferred gain on sale of assets
3,804

 

 
3,804

 
N/A
Gain on sale of discontinued operations

 
1,994

 
(1,994
)
 
(100.0)%
Income from discontinued operations before income tax (expense) benefit
4,315

 
1,861

 
2,454

 
131.9%
Income tax (expense) benefit
(171
)
 
2,147

 
(2,318
)
 
(108.0)%
Income from discontinued operations, net of tax
$
4,144

 
$
4,008

 
$
136

 
3.4%

During the three months ended March 31, 2016 , we recorded income from discontinued operations from the Photovoltaics Business and Digital Products Business of $15,000 and $4.1 million , respectively.

Included in cost of revenue for the three months ended March 31, 2016 is $0.4 million due to a reduction in expected product warranty liabilities from a settlement agreement associated with the Digital Products Business.

During the three months ended March 31, 2016 , we recognized a gain associated with the release of the $3.4 million deferred gain and reversal of other liabilities of $0.4 million , that had been recorded as of September 30, 2015 , resulting in a credit of $3.8 million to recognition of previously deferred gain on sale of assets within discontinued operations of the Digital Products Business as the result of the favorable ruling from the SEI arbitration. Also see Note 11 - Commitments and Contingencies in the notes to the condensed consolidated financial statements for additional information.

During the three months ended March 31, 2015 , we recognized a gain of $2.0 million on the sale of the Digital Products Business, which was recorded within income from discontinued operations under the caption "gain on sale of discontinued operations". During the three months ended March 31, 2015 , we recorded income from discontinued operations from the Photovoltaics Business and Digital Products Business of $0.5 million and $3.5 million , respectively.


27



Comparison of Financial Results for the Six Months Ended March 31, 2016 and 2015

(in thousands, except percentages)
For the six months ended March 31,
 
2016
 
2015
 
$ Change
 
% Change
Revenue
$
44,022

 
$
37,473

 
$
6,549

 
17.5%
Cost of revenue
29,599

 
25,915

 
3,684

 
14.2%
Gross profit
14,423

 
11,558

 
2,865

 
24.8%
Operating expense:
 
 


 
 
 
 
Selling, general, and administrative
9,646

 
14,581

 
(4,935
)
 
(33.8)%
Research and development
5,124

 
4,196

 
928

 
22.1%
Gain from change in estimate on ARO obligation

 
(845
)
 
845

 
100.0%
Loss on sale of assets

 
228

 
(228
)
 
(100.0)%
Total operating expense
14,770

 
18,160

 
(3,390
)
 
(18.7)%
Operating loss
(347
)
 
(6,602
)
 
6,255

 
94.7%
Other (expense) income:
 
 


 
 
 
 
Interest income, net
8

 
35

 
(27
)
 
(77.1)%
Foreign exchange (loss) gain
(110
)
 
51

 
(161
)
 
(315.7)%
Change in fair value of financial instruments

 
122

 
(122
)
 
(100.0)%
Total other (expense) income
(102
)
 
208

 
(310
)
 
(149.0)%
Loss from continuing operations before income tax benefit
(449
)
 
(6,394
)
 
5,945

 
93.0%
Income tax benefit
153

 
2,308

 
(2,155
)
 
(93.4)%
Loss from continuing operations
(296
)
 
(4,086
)
 
3,790

 
92.8%
Income from discontinued operations, net of tax
5,265

 
63,266

 
(58,001
)
 
(91.7)%
Net income
$
4,969

 
$
59,180

 
$
(54,211
)
 
(91.6)%

Revenue

For the six months ended March 31, 2016 , revenue increased 17.5% compared to the same period during the prior year driven by significantly higher sales of our chip level devices primarily to customers in Asia, and our CATV products and specialty photonic products primarily to U.S. customers. Sales of our chip level device products, which include our avalanche photodiodes, distributed feedback lasers (DFBs) and gain chips, increased as EMCORE expanded its sales to customers.


Gross Profit

Consolidated gross margins were 32.8% and 30.8% for the six months ended March 31, 2016 and 2015 , respectively.

Stock-based compensation expense within cost of revenue totaled approximately $0.2 million during the six months ended March 31, 2016 and 2015 .

For the six months ended March 31, 2016 , gross margins increased when compared to the same period during the prior year. The increase in gross margins for the six months ended March 31, 2016 was primarily due to higher sales volume and higher utilization of the manufacturing facility, as we significantly increased production output, resulting in higher levels of absorption.



28


Selling, General and Administrative (SG&A)

SG&A consists primarily of compensation expense including non-cash stock-based compensation expense related to executive, finance, and human resources personnel, as well as sales and marketing expenses, professional fees, legal and patent-related costs, and other corporate-related expenses.

Stock-based compensation expense within SG&A totaled approximately $0.6 million and $2.4 million during the six months ended March 31, 2016 and 2015 , respectively.

SG&A expense for the six months ended March 31, 2016 was lower than the amount reported in the same period during the prior year primarily due to higher stock-based compensation, severance and compensation expense associated with the sale of the Photovoltaics and Digital Products Businesses in the prior year.

As a percentage of revenue, SG&A expenses were 21.9% and 38.9% for the six months ended March 31, 2016 and 2015 , respectively.


Research and Development (R&D )

R&D consists primarily of compensation expense including non-cash stock-based compensation expense, as well as engineering and prototype costs, depreciation expense, and other overhead expenses, as they related to the design, development, and testing of our products. Our R&D costs are expensed as incurred. We believe that in order to remain competitive, we must invest significant financial resources in developing new product features and enhancements and in maintaining customer satisfaction worldwide.

Stock-based compensation expense within R&D totaled approximately $0.2 million during the six months ended March 31, 2016 and 2015 .

R&D expense for the six months ended March 31, 2016 was higher than the amounts reported in the same period during the prior year primarily due to higher compensation costs.

As a percentage of revenue, R&D expenses were 11.6% and 11.2% for the six months ended March 31, 2016 and 2015 , respectively.


Gain from Change in Estimate on Asset Retirement Obligations ("ARO")

As a result of the revision in the estimated amount and timing of cash flows for ARO's during the six months ended March 31, 2015, the Company reduced the ARO liability by $ 2.9 million with an offsetting reduction to property, plant, and equipment, net of $2.1 million , and recorded a gain from change in estimate on ARO liability of $ 0.8 million . The Company first reduced the net leasehold improvement asset to the extent of the carrying amount of the related asset initially recorded when the ARO's were established. The amount of the remaining reduction to the ARO was recorded as a reduction to operating expenses. Also see Note 11 - Commitments and Contingencies in the notes to the condensed consolidated financial statements for additional information.


Operating Loss

Operating loss represents revenue less the cost of revenue and direct operating expenses incurred. Operating loss is a measure of profit and loss that executive management uses to assess performance and make decisions. As a percentage of revenue, our operating loss was 0.7% and 17.6% for the six months ended March 31, 2016 and 2015 , respectively.



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Other (Expense) Income

Interest income, net
During the six months ended March 31, 2015