EMCORE (EMKR) - 2020 Q2 - Quarterly Report

Part I: Financial Information This section provides unaudited financial statements and management's analysis for the period ended March 31, 2020 Item 1. Financial Statements (Unaudited) Unaudited financial statements show revenue growth from the SDI acquisition, continued net losses, increased assets from new lease standards, and negative operating cash flow Condensed Consolidated Statements of Operations and Comprehensive Loss Revenue increased for both three and six-month periods, reaching $23.9 million and $49.3 million respectively, while net losses persisted but narrowed for the six-month period Consolidated Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $23,850 | $21,745 | $49,332 | $45,746 | | Gross Profit | $6,427 | $5,809 | $13,901 | $11,617 | | Operating Loss | $(4,981) | $(5,507) | $(6,434) | $(11,311) | | Net Loss | $(5,081) | $(4,994) | $(6,416) | $(10,532) | | Net Loss Per Share | $(0.18) | $(0.18) | $(0.22) | $(0.38) | Condensed Consolidated Balance Sheets Total assets increased to $110.9 million due to new lease accounting, while total liabilities rose and shareholders' equity decreased Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | September 30, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $22,030 | $21,574 | | Total current assets | $74,312 | $71,969 | | Property, plant, and equipment, net | $20,894 | $37,223 | | Total Assets | $110,914 | $109,562 | | Total current liabilities | $21,870 | $30,719 | | Total Liabilities | $38,101 | $32,816 | | Total Shareholders' Equity | $72,813 | $76,746 | Condensed Consolidated Statements of Cash Flows Operating activities used $7.5 million in cash, while investing activities provided $12.5 million, primarily from asset sales, leading to a net cash increase Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(7,528) | $(7,061) | | Net cash provided by (used in) investing activities | $12,486 | $(5,576) | | Net cash (used in) provided by financing activities | $(4,853) | $44 | | Net increase (decrease) in cash | $113 | $(12,558) | Notes to our Condensed Consolidated Financial Statements Notes detail the SDI acquisition, segment reorganization, a sale-leaseback transaction, and the subsequent receipt of a $6.5 million PPP loan - The company completed the acquisition of Systron Donner Inertial, Inc. (SDI) on June 7, 2019, for a total purchase price of approximately $25.0 million; SDI contributed $14.4 million in net revenue and a net loss of $0.8 million for the six months ended March 31, 2020[42][43] - On February 10, 2020, the company completed a sale and leaseback of its Concord, California property, receiving net proceeds of $12.8 million and recognizing a gain of approximately $0.3 million[59] - Effective in fiscal year 2020, the company has two reportable segments: Aerospace and Defense, and Broadband; for the six months ended March 31, 2020, Aerospace and Defense revenue was $26.7 million, and Broadband revenue was $22.6 million[97][100] - Subsequent to the quarter end, on May 3, 2020, the company received a loan of approximately $6.5 million under the Paycheck Protection Program (PPP)[105] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue growth driven by Aerospace and Defense, offset by Broadband declines, COVID-19 impacts, strategic initiatives, and liquidity assessment Business Overview and Recent Developments The company's segments face COVID-19 disruptions, while it integrates the SDI acquisition, completed a sale-leaseback, and transitions CATV manufacturing to a contract model - The COVID-19 pandemic has disrupted global supply chains and logistics, causing some delays in Aerospace and Defense product shipments in late Q2 2020 and delaying the transfer of CATV manufacturing equipment to Hytera in Thailand[113][116][118] - As part of a move to a variable cost model, the company entered an agreement to sell CATV manufacturing equipment to Hytera for approximately $5.54 million and entered a five-year contract manufacturing agreement with them[123][125] - The company completed a sale and leaseback of its Concord, CA real estate on February 10, 2020, for a total purchase price of $13.2 million, receiving net proceeds of $12.8 million[127] Results of Operations Total revenue increased for both three and six-month periods, driven by Aerospace and Defense growth offsetting Broadband declines, with improved six-month operating loss Revenue by Segment - Three Months Ended March 31 (in thousands) | Segment | 2020 | 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Aerospace and Defense | $13,013 | $6,872 | $6,141 | 89.4% | | Broadband | $10,837 | $14,873 | $(4,036) | -27.1% | | Total Revenue | $23,850 | $21,745 | $2,105 | 9.7% | - The increase in Aerospace and Defense revenue for the three months ended March 31, 2020, was primarily driven by $6.3 million in revenue from the acquired SDI business[135] Revenue by Segment - Six Months Ended March 31 (in thousands) | Segment | 2020 | 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Aerospace and Defense | $26,717 | $11,012 | $15,705 | 142.6% | | Broadband | $22,615 | $34,734 | $(12,119) | -34.9% | | Total Revenue | $49,332 | $45,746 | $3,586 | 7.8% | - SG&A expense for the six months ended March 31, 2020 decreased by 10.7% YoY to $13.0 million, primarily due to lower attorneys' fees and litigation costs[155][165] Liquidity and Capital Resources The company maintains $22.1 million in cash and $52.4 million in working capital, with investing activities providing cash, and sufficient liquidity for the next twelve months - As of March 31, 2020, the company held $22.1 million in cash and cash equivalents and had net working capital of approximately $52.4 million[177] Cash Flow Summary - Six Months Ended March 31 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(7,528) | $(7,061) | | Net cash provided by (used in) investing activities | $12,486 | $(5,576) | | Net cash (used in) provided by financing activities | $(4,853) | $44 | - The company has a credit facility with Wells Fargo providing a revolving line of up to $15.0 million, maturing in November 2021, with $8.0 million available for borrowing as of May 4, 2020[178] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from foreign currency, interest rates, and increased credit market volatility due to the COVID-19 pandemic - The company is exposed to foreign currency risk due to its operations in China, where the functional currency is the Yuan Renminbi, and does not currently hedge this exposure[200][204][205] - Interest rate risk is considered insignificant, as a hypothetical 50 basis point increase would not materially impact interest expense[206] - The COVID-19 pandemic has led to disruption and volatility in global capital markets, potentially impacting the company's future access to capital[208] Item 4. Controls and Procedures Management concluded disclosure controls were effective, and the company is integrating internal controls of the acquired SDI business - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2020[209][211] - The company is reviewing and integrating the internal controls of Systron Donner Inertial, Inc. (SDI), acquired on June 7, 2019[212] Part II: Other Information This section provides information on legal proceedings, risk factors, and exhibits filed with the report Item 1. Legal Proceedings The company is involved in various legal proceedings, notably resolving an arbitration and patent claims with Phoenix Navigation Components, LLC - Details regarding legal proceedings are disclosed in Note 13 to the condensed consolidated financial statements[214] - In October 2019, the company paid approximately $4.5 million to Phoenix Navigation Components, LLC to satisfy an arbitration award for damages, attorneys' fees, and interest[86] - In December 2019, the company settled remaining patent claims with Phoenix for a total of $0.4 million, payable in installments through July 2020[87] Item 1A. Risk Factors The company identifies the COVID-19 pandemic as a significant risk, potentially impacting operations, supply chain, customer demand, and capital access - The COVID-19 pandemic is identified as a major risk factor with uncertain and potentially material adverse effects on the business[216][217] - Key COVID-19 related risks include: - Supply Chain Disruption: Many suppliers have ceased or limited operations, and shortages in air freight capacity have made procurement more difficult and costly[220] - Operational Impact: Facility closures or work slowdowns could occur, and facilities are not operating at full staffing, potentially delaying deliveries[223] - Customer Demand: The company could see reduced customer orders, and delays in inspection, acceptance, and payment from customers[224] - Capital Markets: Disruption and volatility in global capital markets could impact future capital resources and liquidity[225] Item 6. Exhibits This section lists exhibits filed, including agreements for acquisitions, asset sales, leases, the PPP loan, and CEO/CFO certifications - The exhibits filed with this report include key agreements such as the Asset Purchase Agreement with Hytera, the Sale and Leaseback agreement for the Concord property, and the Paycheck Protection Program Promissory Note[227]