EMCORE (EMKR) - 2024 Q2 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements concerning future results, plans, and business trends, subject to numerous risks and uncertainties that could cause actual results to differ materially from projections - Key risk factors highlighted include the company's ability to continue as a going concern, risks related to the Chips Transaction and the Forbearance Agreement with its new lenders, costs and benefits of restructuring, potential loss of personnel, and challenges in commercializing new products[9] PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) The unaudited condensed consolidated financial statements for the quarter ended March 31, 2024, reflect a net loss of $8.5 million, reduced cash, and reclassification of the chips business, with notes detailing strategic shifts and going concern doubt Condensed Consolidated Financial Statements The financial statements for the quarter ended March 31, 2024, show a net loss of $8.5 million, reduced cash, a decrease in total assets from $143.9 million to $121.0 million, and quarterly revenue of $19.6 million, down from $24.3 million Condensed Consolidated Balance Sheet Data (in thousands) | | March 31, 2024 | September 30, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $11,495 | $26,211 | | Total current assets | $73,782 | $92,386 | | Total assets | $120,997 | $143,913 | | Total current liabilities | $22,543 | $28,791 | | Total liabilities | $53,662 | $63,623 | | Total shareholders' equity | $67,335 | $80,290 | Condensed Consolidated Statements of Operations (in thousands, except per share data) | | Three Months Ended Mar 31, 2024 | Three Months Ended Mar 31, 2023 | | :--- | :--- | :--- | | Revenue | $19,634 | $24,250 | | Gross profit | $3,247 | $4,861 | | Operating loss | $(7,623) | $(9,134) | | Net loss from continuing operations | $(7,775) | $(9,366) | | Net loss | $(8,495) | $(12,228) | | Net loss per share, basic and diluted | $(0.95) | $(2.70) | Condensed Consolidated Statements of Cash Flows (in thousands) | | Six Months Ended Mar 31, 2024 | Six Months Ended Mar 31, 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(12,691) | $(22,789) | | Net cash provided by investing activities | $739 | $9,480 | | Net cash (used in) provided by financing activities | $(2,764) | $12,012 | | Net decrease in cash, cash equivalents, and restricted cash | $(14,716) | $(1,159) | Notes to Condensed Consolidated Financial Statements The notes detail the company's transition to an Inertial Navigation business, substantial doubt about its going concern ability, the Forbearance Agreement with Hale Capital, a 10-for-1 reverse stock split, and the Resilience Litigation settlement of approximately $1.8 million - The company has completed its multi-year transition to an inertial navigation company following the sales of its cable TV, wireless, sensing, defense optoelectronics, and chips business lines[23] - Substantial doubt exists about the company's ability to continue as a going concern, citing a net loss of $8.5 million for the quarter and net cash outflows from continuing operations of $9.7 million for the six months ended March 31, 2024[27][28] - On April 30, 2024, the company sold its discontinued chips business line to HieFo Corporation for $2.92 million in cash and assumption of certain liabilities, following the October 2023 divestiture of its cable TV, wireless, and other business lines to Photonics Foundries, Inc.[35][39] - A 10-for-1 reverse stock split of the company's common stock became effective on April 1, 2024, with all share figures in the report presented on a post-split basis[83] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's transformation into an aerospace and defense provider, detailing recent divestitures, a reverse stock split, and a new Forbearance Agreement, with operations showing a 19% revenue decline but reduced operating loss due to cost-cutting, while addressing going concern risk and liquidity measures Business Overview and Recent Developments EMCORE finalized its shift to an Inertial Navigation business, marked by a 10-for-1 reverse stock split, a Forbearance Agreement with Hale Capital, the sale of its chips business to HieFo for $2.92 million, and the divestiture of broadband businesses to Photonics Foundries as part of a major restructuring - A 10-for-1 reverse stock split was effective on April 1, 2024[104] - On April 29, 2024, the company entered into a Forbearance Agreement with new lender Hale Capital, which acquired its credit facility, providing temporary relief from certain defaults, setting a fixed interest rate of 12%, and allowing for payment-in-kind interest[107] - The company sold its discontinued chips business line to HieFo Corporation for $2.92 million in cash on April 30, 2024[114] - The April 2023 restructuring program included the shutdown of the Broadband business segment, resulting in the elimination of approximately 24% of the total workforce and a 25% reduction in facility footprint[120][141] Results of Operations For the three months ended March 31, 2024, revenue decreased 19.0% to $19.6 million due to program termination, gross profit fell 33.2% to $3.2 million, but cost reductions led to a 22.3% decrease in operating expenses, resulting in a smaller operating loss of $7.6 million Results of Operations Comparison (in thousands) | | Three Months Ended Mar 31, 2024 | Three Months Ended Mar 31, 2023 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $19,634 | $24,250 | $(4,616) | (19.0)% | | Gross profit | $3,247 | $4,861 | $(1,614) | (33.2)% | | Total operating expense | $10,870 | $13,995 | $(3,125) | (22.3)% | | Operating loss | $(7,623) | $(9,134) | $1,511 | 16.5% | - The $4.6 million (19.0%) decrease in quarterly revenue was primarily due to a $3.9 million reduction from Budd Lake operations following the termination of the TAIMU program by a customer[127] - SG&A expenses decreased by $3.1 million (33.6%) and R&D expenses decreased by $1.2 million (23.7%) for the quarter, driven by headcount reductions and cost management[132][135] Liquidity and Capital Resources The company faces significant liquidity pressure with cash at $12.0 million, leading to substantial doubt about its going concern ability, despite actions like the Forbearance Agreement, Chips Transaction proceeds, and a $15.6 million equity offering aimed at securing resources for the next 12 months - As of March 31, 2024, cash and cash equivalents totaled $12.0 million, including $0.5 million in restricted cash[139] - The company has taken several actions to manage liquidity, including entering the Forbearance Agreement, completing the Chips Transaction for $2.92 million in cash, and raising $15.6 million in an August 2023 equity offering[140] - Despite liquidity actions, substantial doubt about the company's ability to continue as a going concern exists, and failure to execute its plans or comply with its credit agreement could impair operations[141] Controls and Procedures Management concluded that as of March 31, 2024, disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting related to ineffective communication for new business arrangements, with remediation efforts underway - A material weakness in internal control over financial reporting was identified, stemming from ineffective communication that failed to ensure new or novel arrangements were reviewed for proper technical accounting[153] - This control deficiency resulted in a correctable error related to the accounting for certain insurance premium and supplier financing agreements, which did not cause a material misstatement in previously filed financial statements[154] - Remediation efforts are underway and focus on clarifying company policies and training employees on the importance of elevating new arrangements for technical accounting oversight[154] PART II. OTHER INFORMATION Legal Proceedings This section refers to Note 12 of the financial statements, detailing legal matters, primarily the Resilience Litigation which was settled in April 2023 with payments totaling approximately $1.8 million - The company is subject to various legal proceedings arising in the ordinary course of business[76][156] - The Resilience Litigation was settled in April 2023, requiring EMCORE to make payments totaling approximately $1.8 million, which were completed by December 2023[81] Risk Factors The company highlights new risks associated with its secured credit facility, where restrictive covenants and the temporary Forbearance Agreement expiring May 31, 2024, create a significant risk of default and debt acceleration, potentially threatening its going concern ability - The company's secured credit facility contains financial and restrictive covenants that, if violated, could result in the acceleration of outstanding debt[158] - A Forbearance Agreement with the new lender, Hale, is in effect but expires on May 31, 2024, and failure to comply with its terms or extend it could allow the lender to exercise default remedies[160] Other Information The company states that during the three months ended March 31, 2024, no director or officer adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement for company securities - No director or officer of the Company adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter[162] Exhibits This section lists all exhibits filed with the 10-Q report, including the Asset Purchase Agreement with HieFo Corporation, the Forbearance Agreement with Hale Capital, and required Sarbanes-Oxley Act certifications - Key exhibits filed with this report include the Asset Purchase Agreement for the Chips Transaction, the Forbearance Agreement and Second Amendment to the Credit Agreement, and officer certifications[164]