form10q.htm
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2009
or

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

Commission File Number 0-22175

 
 
EMCORE Corporation
(Exact name of registrant as specified in its charter)

New Jersey
(State or other jurisdiction of incorporation or organization)
22-2746503
(I.R.S. Employer Identification No.)
   
10420 Research Road, SE, Albuquerque, New Mexico
(Address of principal executive offices)
87123
(Zip Code)

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


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).  ¨ 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. (Check one):     ¨ 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   xNo

The number of shares outstanding of the registrant’s no par value common stock as of February 4, 2010 was 81,741,138.


 
 
 
 

CAUTIONARY STATEMENT
 FOR PURPOSES OF “SAFE HARBOR PROVISIONS”
OF THE PRIVATE SECURITIES LITIGATION ACT OF 1995


This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Exchange Act of 1934.  These forward-looking statements are largely based on our current expectations and projections about future events and financial trends affecting the financial condition of our business.  Such forward-looking statements include, in particular, projections about our future results included in our Exchange Act reports, statements about our plans, strategies, business prospects, changes and trends in our business and the markets in which we operate.  These forward-looking statements may be identified by the use of terms and phrases such as “anticipates”, “believes”, “can”, “could”, “estimates”, “expects”, “forecasts”, “intends”, “may”, “plans”, “projects”, “targets”, “will”, and similar expressions or variations of these terms and similar phrases.  Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, sales levels, expense levels and other statements regarding matters that are not historical are forward-looking statements. Management cautions that these forward-looking statements relate to future events or our future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of our business or our industry to be materially different from those expressed or implied by any forward-looking statements.  Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under Item 1A - Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.  The cautionary statements should be read as being applicable to all forward-looking statements wherever they appear in this Quarterly Report and they should also be read in conjunction with the consolidated financial statements, including the related footnotes.

Neither management nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements.  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 our Annual Report.  Certain information included in this Quarterly Report may supersede or supplement forward-looking statements in our other Exchange Act 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.

 
 
 


EMCORE Corporation
FORM 10-Q
For The Quarterly Period Ended December 31, 2009

TABLE OF CONTENTS


     
PAGE
       
Part I
 
Financial Information
 
  
 
Item 1.
Financial Statements
4
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
37
 
Item 4.
Controls and Procedures
38
   
 
  
Part II
 
 
Other Information
 
  
 
Item 1.
Legal Proceedings
39
 
Item 1A.
Risk Factors
41
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
42
 
Item 3.
Defaults Upon Senior Securities
42
 
Item 4.
Submission of Matters to a Vote of Security Holders
42
 
Item 5.
Other Information
42
 
Item 6.
Exhibits
43
   
 
  
   
SIGNATURES
44
 

 
 
 

PART I.
FINANCIAL INFORMATION
ITEM I.
Financial Statements


EMCORE CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Loss
For the three months ended December 31, 2009 and 2008
(in thousands, except loss per share)
(unaudited)


   
For the Three Months
Ended December 31,
   
2009
  
2008
                 
Product revenue
  
$
40,939
    
$
51,554
  
Service revenue 
    
1,462
      
2,502
  
Total revenue
    
42,401
      
54,056
  
                 
Cost of product revenue
    
33,229
      
50,772
  
Cost of service revenue
    
1,168
      
1,695
  
Total cost of revenue
    
34,397
      
52,467
  
                 
Gross profit
    
8,004
      
1,589
  
                 
Operating expenses:
                
Selling, general, and administrative
    
12,423
      
12,159
  
Research and development
    
7,513
      
8,110
  
Impairments
    
-
      
33,781
  
Total operating expenses
    
19,936
      
54,050
  
                 
Operating loss
    
(11,932
)
    
(52,461
)
                 
Other (income) expense:
                
Interest income
    
(2
)
    
(50
)
Interest expense
    
116
      
195
  
Foreign exchange loss
    
232
      
472
  
Loss from financing derivative instrument
    
1,360
      
-
  
Impairment of investment
    
-
      
367
  
                 
Total other expense
    
1,706
      
984
  
                 
Net loss
  
$
(13,638
)
  
$
(53,445
)
                 
Foreign exchange translation adjustment
    
79
      
108
  
                 
Comprehensive loss
  
$
(13,559
)
  
$
(53,337
)
                 
                 
Per share data:
                
Net loss per basic and diluted share
  
$
(0.17
)
  
$
(0.69
)
                 
Weighted-average number of basic and diluted shares outstanding
    
81,113
      
77,816
  

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


 
 
 


EMCORE CORPORATION
Condensed Consolidated Balance Sheets
As of December 31, 2009 and September 30, 2009
(in thousands)
(unaudited)


   
As of
December 31,
2009
  
As of
September 30,
2009
ASSETS
                
                 
Current assets:
                
Cash and cash equivalents
  
$
15,138
    
$
14,028
  
Restricted cash
    
4
      
1,521
  
Available-for-sale securities
    
1,350
      
1,350
  
Accounts receivable, net of allowance of $6,640 and $7,125, respectively
    
40,726
      
39,417
  
Inventory, net
    
31,454
      
34,221
  
Prepaid expenses and other current assets
    
4,550
      
4,712
  
                 
Total current assets
    
93,222
      
95,249
  
                 
Property, plant and equipment, net
    
52,719
      
55,028
  
Goodwill
    
20,384
      
20,384
  
Other intangible assets, net
    
12,424
      
12,982
  
Long-term restricted cash
    
163
      
163
  
Other non-current assets, net
    
720
      
753
  
                 
Total assets
  
$
179,632
    
$
184,559
  
                 
                 
LIABILITIES and SHAREHOLDERS’ EQUITY
                
                 
Current liabilities:
                
Borrowings from credit facility
  
$
10,678
    
$
10,332
  
Short-term debt
    
843
      
842
  
Accounts payable
    
28,632
      
24,931
  
Accrued expenses and other current liabilities
    
21,042
      
21,687
  
                 
Total current liabilities
    
61,195
      
57,792
  
                 
Warrant liability
    
1,132
      
-
  
Other long-term liabilities
    
103
      
104
  
                 
Total liabilities
    
62,430
      
57,896
  
                 
Commitments and contingencies
                
                 
Shareholders’ equity:
                
Preferred stock, $0.0001 par, 5,882 shares authorized; no shares outstanding
    
-
      
-
  
Common stock, no par value, 200,000 shares authorized;
81,900 shares issued and 81,741 shares outstanding as of December 31, 2009;
80,982 shares issued and 80,823 shares outstanding as of September 30, 2009
    
692,942
      
688,844
  
Accumulated deficit
    
(574,471
)
    
(560,833
)
Accumulated other comprehensive income
    
814
      
735
  
Treasury stock, at cost; 159 shares as of December 31, 2009 and September 30, 2009
    
(2,083
)
    
(2,083
)
Total shareholders’ equity
    
117,202
      
126,663
  
                 
Total liabilities and shareholders’ equity
  
$
179,632
    
$
184,559
  

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


 
 
 

EMCORE CORPORATION
Condensed Consolidated Statements of Cash Flows
For the three months ended December 31, 2009 and 2008
(in thousands)
(unaudited)

   
For the Three Months Ended December 31,
  
   
2009
  
2008
  
Cash flows from operating activities:
                  
                   
Net loss
  
$
(13,638
)
  
$
(53,445
)
  
Adjustments to reconcile net loss to net cash used in operating activities:
                  
Impairments
    
-
      
33,781
    
Stock-based compensation expense
    
3,186
      
2,150
    
Depreciation and amortization expense
    
3,117
      
4,293
    
Provision for inventory
    
(378
)
    
4,362
    
Provision for doubtful accounts
    
(434
)
    
922
    
Provision for product warranty
    
340
      
-
    
Impairment of investment
    
-
      
366
    
Loss on disposal of equipment
    
-
      
97
    
Compensatory stock issuances
    
200
      
18
    
Loss from financing derivative instrument
    
1,360
      
-
    
Total non-cash adjustments
    
7,391
      
45,989
    
                   
Changes in operating assets and liabilities:
                  
Accounts receivable
    
(1,004
)
    
(1,938
)
  
Inventory
    
3,143
      
(4,337
)
  
Other assets
    
173
      
225
    
Accounts payable
    
3,682
      
(6,806
)
  
Accrued expenses and other current liabilities
    
(987
)
    
(832
)
  
Total change in operating assets and liabilities
    
5,007
      
(13,688
)
  
                   
Net cash used in operating activities
    
(1,240
)
    
(21,144
)
  
                   
                   
Cash flows from investing activities:
                  
                   
Purchase of plant and equipment
    
(87
)
    
(597
)
  
Investments in patents
    
(158
)
    
-
    
Sale of available-for-sale securities
    
-
      
1,700
    
Release of restricted cash
    
1,517
      
27
    
                   
Net cash provided by investing activities
  
$
1,272
    
$
1,130
    
                   

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


 
 
 


EMCORE CORPORATION
Condensed Consolidated Statements of Cash Flows
For the three months ended December 31, 2009 and 2008
(in thousands)
(unaudited)


(Continued from previous page)
 
  
For the Three Months Ended December 31,
  
   
2009
  
2008
  
Cash flows from financing activities:
                  
                   
Proceeds from borrowings from credit facility
  
$
58,227
    
$
15,443
    
Payments on borrowings from credit facility
    
(57,881
)
    
-
    
Proceeds from borrowings on short-term debt
    
3
      
910
    
Payments on borrowings on short-term debt
    
(2
)
    
-
    
Proceeds from exercise of stock options
    
-
      
32
    
Proceeds from employee stock purchase plan
    
505
      
613
    
Payments on capital lease obligations
    
(2
)
    
-
    
                   
Net cash provided by financing activities
    
850
      
16,998
    
                   
Effect of foreign currency
    
228
      
107
    
                   
Net increase (decrease) in cash and cash equivalents
    
1,110
      
(2,909
)
  
                   
Cash and cash equivalents at beginning of period
    
14,028
      
18,227
    
                   
Cash and cash equivalents at end of period
  
$
15,138
    
$
15,318
    
                   
                   
                   
                   
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
                  
                   
Cash paid during the period for interest
  
$
76
    
$
132
    
                   
Cash paid during the period for income taxes
  
$
-
    
$
-
    
                   
                   
                   
NON-CASH INVESTING AND FINANCING ACTIVITIES
                  
                   
Acquisition of equipment under capital lease
  
$
-
    
$
-
    
                   
Issuance of common stock under financing derivative instrument
  
$
228
    
$
-
    
                   

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 
 
EMCORE Corporation
Notes to Consolidated Financial Statements


NOTE 1.  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of EMCORE Corporation and its subsidiaries (the “Company” or “EMCORE”). All intercompany accounts and transactions have been eliminated in consolidation.

These 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 footnotes required by U.S. GAAP for annual financial statements. In the opinion of management, 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, 2009 has been derived from the audited consolidated financial statements as of such date. For a more complete understanding of the Company’s financial position, operating results, risk factors and other matters, please refer to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

We have evaluated subsequent events from December 31, 2009 through February 9, 2010, the date that these financial statements were issued.


Use of Estimates.  The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period.  The accounting estimates that require our most significant, difficult, and subjective judgments include:

-  
valuation of inventory, goodwill, intangible assets, warrants, and stock-based compensation;
-  
assessment of recovery of long-lived assets;
-  
revenue recognition associated with the percentage of completion method; and,
-  
allowance for doubtful accounts and warranty accruals.

Management develops estimates based on historical experience and on various assumptions about the future that are believed to be reasonable based on the best information available. The Company’s reported financial position or results of operations may be materially different under changed conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies.  In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information.


Loss per Share. The Company’s loss per share was calculated by dividing net loss applicable to common stock by the weighted average number of common stock shares outstanding for the period and it is presented in the accompanying consolidated statements of operations.  For the three months ended December 31, 2009, and 2008, all stock options and warrants were excluded from the computation of diluted earnings per share since the Company incurred a net loss for these periods and any effect would have been anti-dilutive.


Liquidity and Capital Resources
As of December 31, 2009, cash, cash equivalents, available-for-sale securities and current restricted cash totaled approximately $16.5 million.

The Company incurred a net loss of $13.6 million for the three months ended December 31, 2009.  The Company’s operating results for future periods are subject to numerous uncertainties and it is uncertain if the Company will be able to reduce or eliminate its net losses for the foreseeable future.  Although the Company experienced year-over-year revenue growth in most years, in fiscal 2009, the Company had not been able to sustain historical revenue growth rates due to material adverse changes in market and economic conditions.

In the event that management is not able to increase revenue and/or manage operating expenses in line with revenue forecasts, the Company may not be able to achieve profitability.

Historically, the Company has consumed cash from operations.  During the three months ended December 31, 2009, the Company consumed cash from operations of approximately $1.2 million and, over the last three quarters, has only consumed $0.2 million in cash from operations due primarily to improved working capital management.
 
Management Actions and Plans
Historically, management has addressed liquidity requirements through a series of cost reduction initiatives, capital markets transactions, and the sale of assets.  Management anticipates that the current recession in the United States and internationally may continue to impose formidable challenges for the Company’s businesses in the near term.

Due to significant differences in operating strategy between the Company’s Fiber Optics and Photovoltaics businesses, the Company’s management and board of directors believes that they would provide greater value to shareholders if they were operated as two separate business entities.

In furtherance of this strategy, on February 3, 2010, the Company entered into a share purchase agreement to create a joint venture with Tangshan Caofeidian Investment Corporation (“TCIC”), a Chinese investment company located in the Caofeidian Industry Zone, Tangshan City, Hebei Province of China.  The agreement provides for TCIC to purchase a sixty percent (60%) interest in the Company’s Fiber Optics business (excluding its satellite communications and specialty photonics fiber optics product lines), which will be operated as a joint venture once the transaction is closed.  The Fiber Optics businesses included in this transaction are the Company’s telecom, enterprise, cable television (CATV), fiber-to-the-premises (FTTP), and video transport product lines. The Company will retain the satellite communications and specialty photonics fiber optics product lines as well as the satellite and terrestrial solar businesses.  See Footnote 17 – Subsequent Event for additional information related to this new joint venture.

During fiscal 2009, management implemented a series of measures and continues to evaluate opportunities intended to align the Company’s cost structure with its revenue forecasts.  Such measures included several workforce reductions, temporary salary reductions, the elimination of executive and employee merit increases and bonuses for fiscal 2009, and the elimination or reduction of certain discretionary expenses.  The Company has also significantly lowered its spending on capital expenditures and focused on improving the management of its working capital.  During the last twelve months ended December 31, 2009, the Company monetized approximately $25.5 million of inventory, generated $16.9 million in cash from lowering its accounts receivable balances and achieved positive cash flow from operations during the quarters ended June 30, 2009 and September 30, 2009.

In fiscal 2010, the Company continues to remain focused on maximizing cash flow from operations while developing additional sources of liquidity.

On October 1, 2009, the Company entered into an equity line of credit arrangement with Commerce Court Small Cap Value Fund, Ltd. (“Commerce Court”).  Upon issuance of a draw-down request by the Company, Commerce Court has committed to purchasing up to $25 million worth of shares of the Company’s common stock over the 24-month term of the purchase agreement, provided that the number of shares the Company may sell under the facility is limited to no more than 15,971,169 shares of common stock or that would result in the beneficial ownership of more than 9.9% of the then issued and outstanding shares of the Company’s common stock.
 
 

Conclusion

We believe that our existing balances of cash, cash equivalents, and available-for-sale securities, together with the cash expected to be generated from operations, amounts expected to be available under our revolving credit facility with Bank of America and the equity line of credit agreement with Commerce Court will provide us with sufficient financial resources to meet our cash requirements for operations, working capital, and capital expenditures for the next 12 months.  However, in the event of unforeseen circumstances, or unfavorable market or economic developments, we may have to raise additional funds by any one or a combination of the following: issuing equity, debt or convertible debt, or selling certain product lines and/or portions of our business. There can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all. A significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if or when it is required, especially if we experience disappointing operating results.  If adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition and results of operations may be adversely affected.



NOTE 2.  Recent Accounting Pronouncements

ASC 105 – Generally Accepted Accounting Principles.  On October 1, 2009, the Company adopted new authoritative guidance within ASC 105 which establishes the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) as the sole source of authoritative accounting principles recognized by the FASB to be applied by all nongovernmental entities in the preparation of financial statements in conformity with GAAP.  The adoption of this new guidance did not impact the Company’s results of operations or financial condition, but it revised the reference of accounting pronouncements within this Quarterly Report.


 
 
 

ASC 350 – Intangibles – Goodwill and Other.   On October 1, 2009, the Company adopted new authoritative guidance within ASC 350 which amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets and the period of expected cash flows used to measure the fair value of intangible assets under ASC 805, Business Combinations.  The adoption of this new guidance did not have any impact on the Company’s results of operations or financial condition.

ASC 470 – Debt. On October 1, 2009, the Company adopted new authoritative guidance within ASC 470 that requires the proceeds from the issuance of certain convertible debt instruments to be allocated between a liability component (issued at a discount) and an equity component. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. The change in accounting treatment is effective for the Company beginning in fiscal 2010, and it is required to be applied retrospectively to prior periods.  Management is currently assessing the potential impact upon adoption of this new guidance and expects it will have an effect on the Company’s fiscal 2008 statement of operations, but it should not have any effect on the fiscal 2008 ending equity account balances or the fiscal 2009 financial statements.

ASC 605 – Revenue Recognition.   In October 2009, the FASB issued new authoritative guidance on revenue recognition related to arrangements with multiple deliverables that will become effective in fiscal 2011, with earlier adoption permitted.  Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement can not be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition.  Management is currently assessing the potential impact that the adoption of this new guidance could have on the Company’s financial statements.
 
ASC 805 – Business Combinations.   On October 1, 2009, the Company adopted new authoritative guidance within ASC 805 which requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement.  It also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with this accounting principle).  In addition, the accounting principle’s requirement to measure the noncontrolling interest in the acquiree at fair value will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer. ASC 805 also requires the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. It also provides guidance on the impairment testing of acquired research and development intangible assets and assets that the acquirer intends not to use.  ASC 805 applies prospectively to business combinations for which the acquisition date is on or after October 1, 2009, therefore, the adoption of ASC 805 did not have any impact on the Company’s historical financial statements.

ASC 810 – Consolidation. – On October 1, 2009, the Company adopted new authoritative guidance within ASC 810 which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  ASC 810 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. ASC 810 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary.  The adoption of this new guidance did not have any impact on the Company’s results of operations or financial condition.



NOTE 3.  Equity

Stock Options

The Company provides long-term incentives to eligible officers, directors, and employees in the form of stock options.  Most of the stock options vest and become exercisable over four to five years and have a contractual life of ten years. The Company maintains two stock option plans: the 1995 Incentive and Non-Statutory Stock Option Plan (“1995 Plan”) and the 2000 Stock Option Plan (“2000 Plan” and, together with the 1995 Plan, the “Option Plans”). The 1995 Plan authorizes the grant of stock options up to 2,744,118 shares of the Company's common stock.  The 2000 Plan authorizes the grant of stock options up to 15,850,000 shares of the Company's common stock.  As of December 31, 2009, no stock options were available for issuance under the 1995 Plan and 2,252,014 stock options were available for issuance under the 2000 Plan.  Certain options under the Option Plans are intended to qualify as incentive stock options pursuant to Section 422A of the Internal Revenue Code.  The Company issues new shares of common stock to satisfy the issuance of shares under the Option Plans.


 
 
 

The following table summarizes the activity under the Option Plans:
 
  
 
 
 
 
Number of Shares
  
Weighted Average Exercise Price
  
Weighted Average
Remaining Contractual Life
(in years)
        
 
Outstanding as of September 30, 2009
    
10,788,174
    
$
4.85
                  
                             
Granted
    
24,000
      
1.02
                  
Exercised
    
-
      
-
                  
Forfeited
    
(95,913
)
    
3.37
                  
Cancelled
    
(762,494
)
    
5.57
                  
                                 
Outstanding as of December 31, 2009
    
9,953,767
    
$
4.78
      
7.78
          
                                 
Exercisable as of December 31, 2009
    
3,625,721
    
$
5.92
      
5.92
          
                                 
Vested and expected to vest as of December 31, 2009
    
5,883,866
    
$
5.05
      
7.10
          


As of December 31, 2009, there was approximately $5.5 million of total unrecognized compensation expense related to non-vested stock-based compensation arrangements granted under the Option Plans.  This expense is expected to be recognized over an estimated weighted average life of 2.8 years.

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.  There were no stock options exercised during the three months ended December 31, 2009.  The total intrinsic value related to stock options exercised during the three months ended December 31, 2008 totaled approximately $10,000.  The intrinsic value related to fully vested and expected to vest stock options as of December 31, 2009 totaled approximately $11,000 and there was no intrinsic value related to exercisable stock options as of December 31, 2009.
 

   
Number of Stock Options Outstanding
  
Options Exercisable
 
Exercise Price of Stock Options
  
Number Outstanding
  
Weighted Average Remaining Contractual Life (years)
  
Weighted- Average Exercise Price
  
Number Exercisable
  
Weighted- Average Exercise Price
<$5.00
  
5,104,908
  
8.02
  
$1.90
  
1,496,845
  
$2.98
>=$5.00 to <$10.00
  
4,729,939
  
7.66
  
7.55
  
2,035,056
  
7.41
>$10.00
  
118,920
  
2.64
  
18.53
  
93,820
  
20.47
             TOTAL
  
9,953,767
  
7.78
  
$4.78
  
3,625,721
  
$5.92


Stock-based compensation expense is measured at the stock option grant date, based on the fair value of the award, and is recorded to cost of sales; sales, general, & administrative; and research and development expense based on individual employee’s responsibility and function over the requisite service period.  Management has made an estimate of expected forfeitures and is recognizing compensation expense only for those equity awards expected to vest.   The effect of recording stock-based compensation expense was as follows:
 

 
(in thousands, except per share data)
 
  
For The Three Months
Ended December 31,
   
2009
  
2008
Stock-based compensation expense by award type:
                
Employee stock options
  
$
3,006
    
$
1,995
  
Employee stock purchase plan
    
180
      
155
  
                 
Total stock-based compensation expense
  
$
3,186
    
$
2,150
  
                 
Net effect on net loss per basic and diluted share
  
$
(0.04
)
  
$
(0.02
)
 
Surrender of Stock Options

On November 20, 2009, Mr. Markovich, the Company’s Chief Financial Officer, voluntarily surrendered stock options exercisable into 475,000 shares of common stock.  These stock options had an exercise price of $5.57 and were granted to Mr. Markovich on August 18, 2008.  Mr. Markovich received no consideration in exchange for the surrender of these stock options.  The surrender of his non-vested stock options resulted in an immediate non-cash charge of $1.3 million which was recorded in SG&A during the three months ended December 31, 2009.  The expense was due to the acceleration of all unrecognized stock-based compensation expense associated with that specific stock option grant.


Valuation Assumptions

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach using the following weighted-average assumptions.  The option-pricing model requires the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock.  The weighted-average grant date fair value of stock options granted during the three months ended December 31, 2009 and 2008 was $1.02 and $2.95, respectively.
 

 
Black-Scholes Weighted-Average Assumptions
 
Stock Options
  
 
For the Three Months
Ended December 31,
  
   
 
2009
  
2008
  
Expected dividend yield
    
-
%
    
-
%
  
Expected stock price volatility
    
96.4
%
    
92.4
%
  
Risk-free interest rate 
    
2.5
%
    
3.5
%
  
Expected term (in years)
    
3.8
      
6.1
    
Estimated pre-vesting forfeitures
    
32.6
%
    
25.1
%
  


Expected Dividend Yield:  The Black-Scholes valuation model calls for a single expected dividend yield as an input. The Company has not issued any dividends.

Expected Stock Price Volatility:  The fair values of stock-based payments were valued using the Black-Scholes valuation method with a volatility factor based on the Company’s historical stock price.

Risk-Free Interest Rate:  The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield that was currently available on U.S. Treasury zero-coupon notes with an equivalent remaining term. Where the expected term of stock-based awards do not correspond with the terms for which interest rates are quoted, the Company performed a straight-line interpolation to determine the rate from the available maturities.

Expected Term: Expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

Estimated Pre-vesting Forfeitures: When estimating forfeitures, the Company considers voluntary termination behavior as well as workforce reduction programs.


Common Stock

The Company’s Board of Directors has authorized a total of 200 million shares of common stock available for issuance.


Preferred Stock

The Company’s Restated Certificate of Incorporation authorizes the Board of Directors to issue up to 5,882,352 shares of preferred stock upon such terms and conditions having such rights, privileges, and preferences as the Board of Directors may determine.  As of December 31, 2009 and September 30, 2009, no shares of preferred stock were issued or outstanding.
 
 
 
 
 

Warrants

As of December 31, 2009, the Company had 3,000,003 warrants outstanding.

In October 2009, the Company entered into an equity line of credit arrangement and issued three warrants representing the right to purchase up to an aggregate of 1,600,000 shares of the Company’s common stock.  See Footnote 4 - Equity Facility, for additional information regarding this credit arrangement and warrants issued.

In February 2008, the Company also issued 1,400,003 warrants in conjunction with a private placement transaction.  The warrants grant the holder the right to purchase one share of our common stock at a price of $15.06 per share.  The warrants are immediately exercisable and remain exercisable until February 20, 2013.  Beginning two years after their issuance, the warrants may be called by the Company for a price of $0.01 per underlying share if the closing price of its common stock has exceeded 150% of the exercise price for at least 20 trading days within a period of any 30 consecutive trading days and other certain conditions are met.  In addition, in the event of certain fundamental transactions, principally the purchase of the Company’s outstanding common stock for cash, the holders of the warrants may demand that the Company purchase the unexercised portions of their warrants for a price equal to the Black-Scholes Value of such unexercised portions as of the time of the fundamental transaction.  Warrants issued to the investors were accounted for as an equity transaction with a value of $9.8 million recorded to common stock.


Employee Stock Purchase Plan

The Company maintains an Employee Stock Purchase Plan (“ESPP”) that provides employees of the Company an opportunity to purchase common stock through payroll deductions. The ESPP is a 6-month duration plan with new participation periods beginning the first business day of January and July of each year. The purchase price is set at 85% of the average high and low market price of the Company's common stock on either the first or last day of the participation period, whichever is lower, and contributions are limited to the lower of 10% of an employee's compensation or $25,000.  The Company issues new shares of common stock to satisfy the issuance of shares under this stock-based compensation plan.

The amounts of shares issued for the ESPP are as follows:
   
Number of Common Stock Shares
  
Purchase Price per Share of
Common Stock
                 
Amount of shares reserved for the ESPP
    
4,500,000
          
                 
Number of shares issued for calendar years 2000 through 2007
    
(1,123,857
)
    
$1.87 - $40.93
  
Number of shares issued for calendar year 2008
    
(592,589
)
    
$0.88 - $  5.62
  
Number of shares issued for calendar year 2009
    
(1,073,405
)
    
$0.88 - $  0.92
  
                 
Remaining shares reserved for the ESPP
    
1,710,149
          


Future Issuances
 
As of December 31, 2009, the Company had reserved a total of 16.9 million shares of its common stock for future issuances as follows:

   
Number of Common Stock Shares Available
         
For exercise of outstanding common stock options
    
9,953,767
  
For future issuances to employees under the ESPP
    
1,710,149
  
For future common stock option awards
    
2,252,014
  
For future exercise of warrants
    
3,000,003
  
         
Total reserved
    
16,915,933
  

 
 
 
 

NOTE 4.  Equity Facility

On October 1, 2009, the Company entered into a common stock purchase agreement (the “Purchase Agreement”) with Commerce Court Small Cap Value Fund, Ltd. (“Commerce Court”).  The Purchase Agreement provides that upon certain terms and conditions, and the issuance of a draw-down request by the Company, Commerce Court has committed to purchasing up to $25 million worth of shares of the Company’s common stock over the 24-month term of the Purchase Agreement; provided, however, in no event may the Company sell more than 15,971,169 shares of common stock under the Purchase Agreement, which is equal to one share less than twenty percent of the Company’s outstanding shares of common stock as of the closing date of the Purchase Agreement, less the number of shares of common stock the Company issued to Commerce Court on the closing date in partial payment of its commitment fee, or more shares that would result in the beneficial ownership or more than 9.9% of the then issued and outstanding shares of our common stock by Commerce Court.  
 
As payment of a portion of Commerce Court’s fees in connection with the Purchase Agreement, the Company agreed to issue to Commerce Court upon the execution of the Purchase Agreement, 185,185 shares of common stock and three warrants representing the right to purchase up to an aggregate of 1,600,000 shares of common stock, as follows: 

-  
a warrant, pursuant to which Commerce Court may purchase up to 666,667 shares of common stock at an exercise price of $1.69, which is equal to 125% of the average of the volume weighted average price of common stock for the three trading days immediately preceding the execution date of the Purchase Agreement,

-  
a warrant, pursuant to which Commerce Court may purchase from up to 666,667 shares of common stock at an exercise price of $2.02, which is equal to 150% of the average of the volume weighted average price of common stock for the three trading days immediately preceding the execution date of the Purchase Agreement, and

-  
a warrant, pursuant to which Commerce Court may purchase up to 266,666 shares of common stock at an exercise price of $2.36, which is equal to 175% of the average of the volume weighted average price of common stock for the three trading days immediately preceding the execution date of the Purchase Agreement.

The warrants may be exercised at any time or from time to time between April 1, 2010 and April 1, 2015.  The warrants may not be offered for sale, sold, transferred or assigned without our consent, in whole or in part, to any person other than an affiliate of Commerce Court.  If after April 1, 2010, the Company’s common stock trades at a price greater than 140% of the exercise price of any warrant for a period of 10 consecutive trading days and the Company meets certain equity conditions, then the Company has the right to effect a mandatory exercise of such warrant.
From time to time over the term of the Purchase Agreement, and at the Company’s sole discretion, the Company may present Commerce Court with draw down notices to purchase common stock over a ten consecutive trading day period or such other period mutually agreed upon by the Company and Commerce Court (the “draw down period”) with each draw down subject to limitations based on the price of the Company’s common stock and a limit of the amount in the applicable fixed amount request, or 2.5% of the Company’s market capitalization at the time of such draw down, whichever is less.

The Company has the right to present Commerce Court with up to 24 draw down notices during the term of the Purchase Agreement, with only one such draw down notice allowed per draw down period with a minimum of five trading days required between each draw down period.
 
Once presented with a draw down notice, Commerce Court is required to purchase a pro rata portion of the shares on each trading day during the trading period on which the daily volume weighted average price for the common stock exceeds a threshold price determined by the Company for such draw down. The per share purchase price for these shares will equal the daily volume weighted average price of the common stock on each date during the draw down period on which shares are purchased, less a discount of 5%. If the daily volume weighted average price of the common stock falls below the threshold price on any trading day during a draw down period, the Purchase Agreement provides that Commerce Court will not be required to purchase the pro-rata portion of shares of common stock allocated to that day. However, at its election, Commerce Court may buy the pro-rata portion of shares allocated to that day at the threshold price less the discount described above.
 
The Purchase Agreement also provides that, from time to time and at the Company’s sole discretion, the Company may grant Commerce Court the right to exercise one or more options to purchase additional shares of common stock during each draw down period for an amount of shares specified by the Company based on the trading price of the common stock. Upon Commerce Court’s exercise of such an option, the Company would sell to Commerce Court the shares of common stock subject to the option at a price equal to the greater of the daily volume weighted average price of the common stock on the day Commerce Court notifies the Company of its election to exercise its option or the threshold price for the option determined by the Company, less a discount calculated in the same manner as it is calculated in the draw down notice.
 
In addition to the issuance of shares of common stock to Commerce Court pursuant to the Purchase Agreement, a supplement to the Company’s shelf registration statement filed with the SEC also covers the sale of those shares from time to time by Commerce Court to the public.
 
 
 
The Company paid $45,000 of Commerce Court’s attorneys’ fees and expenses incurred by Commerce Court in connection with the preparation, negotiation, execution and delivery of the Purchase Agreement and related transaction documentation.  The Company has also agreed to pay up to $5,000 in certain fees and expenses incurred by Commerce Court in connection with any amendments, modifications or waivers of the Purchase Agreement, ongoing due diligence of our company and other transaction expenses associated with fixed requests made by the Company from time to time during the term of the Purchase Agreement, provided that the Company shall not be required to pay any reimbursement for any such expenses in any calendar quarter in which the Company provides a fixed request notice.

If the Company issues a draw down notice and fails to deliver the shares to Commerce Court on the applicable settlement date, and such failure continues for ten trading days, the Company has agreed to pay Commerce Court, at Commerce Court’s option, liquidated damages in cash or restricted shares of common stock.
 
Upon each sale of common stock to Commerce Court under the Purchase Agreement, the Company has also agreed to pay Reedland Capital Partners, an Institutional Division of Financial West Group, a placement fee equal to 1% of the aggregate dollar amount of common stock purchased by Commerce Court.


Financial Impact

The Purchase Agreement meets all of the criteria of a financial derivative instrument in accordance with the accounting literature in ASC 815, Derivatives and Hedging.  Derivative instruments should be measured initially at fair value; however, because the Purchase Agreement is based on the prevailing market price at a possible future transaction date, this variable-priced contract would not be expected to have a fair value other than zero.  The warrants issued by the Company were classified as a liability since the warrants met the classification requirements for liability accounting in accordance with ASC 815.

Costs incurred to enter into this derivative instrument were expensed as incurred.  During the three months ended December 31, 2009, the Company expensed the fair value of the common stock and warrants issued as a non-operating expense from a financing derivative instrument within the condensed consolidated statement of operations.

The fair value of the 185,185 shares of common stock issued was based on the closing price of $1.23 per share on October 1, 2009, or $0.2 million.  The fair value of each warrant was estimated using the Black-Scholes option valuation model using the weighted-average assumptions set forth below.  The option-pricing model requires the input of highly subjective assumptions, including the warrant’s expected life and the price volatility of the underlying stock, as outlined below:

Black-Scholes Assumptions
As of October 1, 2009
 
 
Warrant 1
 
Warrant 2
 
Warrant 3
 
   TOTAL
Grant date
10/1/09
10/1/09
10/1/09
  
Stock price
$1.23
$1.23
$1.23
  
Exercise price
$1.69
$2.02
$2.36
  
Expected term
5.5 years
5.5 years
5.5 years
  
Dividend yield
0%
0%
0%
  
Volatility
95%
95%
95%
  
Risk-free interest rate
2.2%
2.2%
2.2%
  
Black-Scholes value
$0.87
$0.84
$0.81
  
         
Number of warrants issued
666,667
666,667
266,666
1,600,000
 
Value of warrants
 
$580,000
 
$560,000
 
$216,000
 
$1,356,000


On October 1, 2009, the Company recorded $1.4 million in non-operating expense related to the issuance of these warrants.  The Company expects an impact to the consolidated statement of operations when it records an adjustment to fair value of the warrants at the end of each quarterly reporting period going forward.


 
 
 

As of December 31, 2009, the fair value of the warrants was estimated to be $1.1 million and the Company recorded a gain of $0.2 million on the change in fair value of the warrants since October 1, 2009.  The fair value of each warrant was estimated using the following weighted-average assumptions:

Black-Scholes calculation
As of December 31, 2009
 
 
Warrant 1
 
Warrant 2
 
Warrant 3
 
   TOTAL
Grant date
10/1/09
10/1/09
10/1/09
  
Stock price
$1.07
$1.07
$1.07
  
Exercise price
$1.69
$2.02
$2.36
  
Expected term
5.25 years
5.25 years
5.25 years
  
Dividend yield
0%
0%
0%
  
Volatility
95%
95%
95%
  
Risk-free interest rate
2.7%
2.7%
2.7%
  
Black-Scholes value
$0.73
$0.70
$0.67
  
         
Number of warrants issued
666,667
666,667
266,666
1,600,000
 
Value of warrants
 
$486,667
 
$466,667
 
$178,666
 
$1,132,000



NOTE 5.  Receivables

The components of accounts receivable consisted of the following:

(in thousands)
 
    
As of
December 31, 2009
    
As of
September 30, 2009
  
               
Accounts receivable
  
$
42,168
  
$
40,474
  
Accounts receivable – unbilled
    
5,198
    
6,068
  
               
Accounts receivable, gross
    
47,366
    
46,542
  
               
Allowance for doubtful accounts
    
(6,640
)
  
(7,125
)
               
Total accounts receivable, net
  
$
40,726
  
$
39,417
  


The Company records receivables from certain solar panel and solar power systems contracts using the percentage-of-completion method.  The term of the contracts associated with this type of receivable usually exceed a period of one year.  As of December 31, 2009, the Company had recorded $13.0 million of accounts receivable using the percentage of completion method.  Of this amount, $8.5 million was invoiced and $4.5 million was unbilled as of December 31, 2009.  Unbilled accounts receivable represents revenue recognized but not yet billed or accounts billed after the period ended.  Billings on contracts using the percentage-of-completion method usually occurs upon completion of predetermined contract milestones or other contract terms, such as customer approval.  The allowance for doubtful accounts specifically related to receivables recorded using the percentage-of-completion method totaled $2.5 million as of December 31, 2009.  The allowance is based on the age of receivables and a specific identification of receivables considered at risk of collection.

All of the Company’s accounts receivable as of December 31, 2009 is expected to be collected within the next twelve months.
 
 
The following table summarizes the changes in the allowance for doubtful accounts:

(in thousands)
 
  
For the Three Months Ended December 31,
  
   
2009
  
2008
  
                   
Balance at beginning of period
  
$
7,125
    
$
2,377
    
Provision adjustment – (recovery) expense
    
(434
)
    
922
    
Write-offs - deductions against receivables
    
(51
)
    
-
    
                   
Balance at end of period
  
$
6,640
    
$
3,299
    


NOTE 6.  Inventory

Inventory is stated at the lower of cost or market, with cost being determined using the standard cost method that includes material, labor, and manufacturing overhead costs.  The components of inventory consisted of the following:

(in thousands)
 
 
    
As of
December 31,2009
    
As of
September 30, 2009
  
               
Raw materials
  
$
28,237
  
$
27,607
  
Work-in-process
    
7,057
    
6,496
  
Finished goods
    
7,374
    
9,998
  
               
Inventory, gross
    
42,668
    
44,101
  
               
Less: valuation allowance
    
(11,214
)
  
(9,880
)
               
Total inventory, net
  
$
31,454
  
$
34,221
  


The following table summarizes the changes in the valuation allowance accounts:

(in thousands)
 
  
For the Three Months
Ended December 31,
  
   
2009
  
2008
  
                   
Balance at beginning of period
  
$
9,880
    
$
12,625
    
Provision adjustment – (recovery) expense
    
(378
)
    
5,507
    
Adjustments against inventory or provisions
    
1,712
      
(780
)
  
                   
Balance at end of period
  
$
11,214
    
$
17,352
    



NOTE 7.  Property, Plant, and Equipment

The components of property, plant, and equipment consisted of the following:

(in thousands)
 
    
As of
December 31, 2009
    
As of
September 30, 2009
  
               
Land
  
$
1,502
  
$
1,502
  
Building and improvements
    
34,922
    
34,922
  
Equipment
    
98,711
    
98,693
  
Furniture and fixtures
    
3,065
    
3,065
  
Computer hardware and software
    
2,655
    
2,660
  
Leasehold improvements
    
1,055
    
1,094
  
Construction in progress
    
3,144
    
3,031
  
               
Property, plant and equipment, gross
    
145,054
    
144,967
  
               
Less: accumulated depreciation and amortization
    
(92,335
)
  
(89,939
)
               
Total property, plant and equipment, net
  
$
52,719
  
$
55,028
  


As of December 31, 2009 and September 30, 2009, the Company did not have any significant capital lease agreements.

Depreciation expense was $2.4 million and $3.1 million for the three months ended December 31, 2009 and 2008, respectively.



NOTE 8.  Goodwill

As of September 30, 2009, the Company performed an impairment test on its goodwill based on revised operational and cash flow forecasts.  The impairment testing indicated that no impairment existed and that fair value exceeded carrying value by approximately 40%.  As of December 31, 2009, the Company performed an annual impairment test on its goodwill of $20.4 million related to its Photovoltaics reporting unit and the Company believes the carrying amount of the goodwill is not impaired.  There were no events or change in circumstances that would more likely than not reduce the fair value of the Photovoltaics reporting unit below its carrying amount.  However, if there is further erosion of the Company’s market capitalization or the Photovoltaics reporting unit is unable to achieve its projected cash flows, management may be required to perform additional impairment tests of its remaining goodwill.  The outcome of these additional tests may result in the Company recording goodwill impairment charges.


 
 
 

NOTE 9.  Intangible Assets

The following table sets forth changes in the carrying value of intangible assets by reporting segment:

(in thousands)
  
As of December 31, 2009
  
As of September 30, 2009
  
     
 Gross
Assets
    
Accumulated
Amortization
    
Net
Assets
    
Gross Assets
    
Accumulated
Amortization
    
Net
Assets
  
                                       
Fiber Optics
  
 $
24,522
  
$
(12,993
)
$
11,529
  
$
24,494
  
$
(12,341
)
$
12,153
  
Photovoltaics
    
1,589
    
(694
)
  
895
    
1,459
    
(630
)
  
829
  
                                       
Total
  
$
26,111
  
$
(13,687
)
$
12,424
  
$
25,953
  
$
(12,971
)
$
12,982
  


The Company believes the carrying amount of its long-lived assets and intangible assets as of December 31, 2009 are recoverable.  However, if there is further erosion of the Company’s market capitalization or the Company is unable to achieve its projected cash flows, management may be required to perform impairment tests of its remaining long-lived assets and intangible assets.  The outcome of these tests may result in the Company recording impairment charges.

Amortization expense related to intangible assets is generally included in SG&A on the consolidated statements of operations.  Amortization expense was $0.7 million and $1.1 million for the three months ended December 31, 2009 and 2008, respectively.

Based on the carrying amount of the intangible assets as of December 31, 2009, the estimated future amortization expense is as follows:
 
(in thousands)
  
Estimated Future Amortization Expense
         
Nine months ended September 30, 2010
  
$
2,133
  
Fiscal year ended September 30, 2011
    
2,463
  
Fiscal year ended September 30, 2012
    
2,139
  
Fiscal year ended September 30, 2013
    
1,804
  
Fiscal year ended September 30, 2014
    
1,269
  
Thereafter
    
2,616
  
         
Total future amortization expense
  
$
12,424
  




 
 
 

NOTE 10.  Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities consisted of the following:
 
(in thousands)
 
  
As of
December 31, 2009
  
As of
September 30, 2009
                 
Compensation-related
  
$
4,521
    
$
5,861
  
Warranty
    
4,417
      
4,287
  
Loss on firm commitments
    
-
      
3,821
  
Professional fees
    
2,046
      
1,839
  
Royalty
    
2,113
      
1,937
  
Self insurance
    
1,431
      
1,272
  
Deferred revenue and customer deposits
    
3,858
      
886
  
Income and other taxes
    
685
      
625
  
Accrued program loss
    
15
      
51
  
Restructuring accrual
    
342
      
395
  
Other
    
1,614
      
713
  
                 
Total accrued expenses and other current liabilities
  
$
21,042
    
$
21,687
  


The following table summarizes the changes in the product warranty accrual accounts:


(in thousands)
 
  
For the Three Months
Ended December 31,
  
   
2009
  
2008
  
                   
Balance at beginning of period
  
$
4,287
    
$
4,640
    
Provision adjustment – expense (recovery)
    
340
      
(133
)
  
Utilization of warranty accrual
    
(210
)
    
(395
)
  
                   
Balance at end of period
  
$
4,417
    
$
4,112
    



NOTE 11.  Restructuring Charges

In accordance with ASC 420, Exit or Disposal Cost Obligations, restructuring charges include costs associated with the integration of business acquisitions and overall cost-reduction efforts, all of which are generally included in SG&A on the consolidated statements of operations.

Restructuring charges consisted of the following:

(in thousands)
 
  
For the Three Months
Ended December 31,
  
   
2009
  
2008
  
                   
Employee severance-related expense
  
$
8
    
$
617
    
Other restructuring-related expense
    
-
      
-
    
                   
Total restructuring charges
  
$
8
    
$
617
    



 
 
 

The following table sets forth changes in the severance and restructuring-related accrual accounts:

(in thousands)
 
  
Severance-related
 Accrual
  
Restructuring-related
Accrual
  
Total
Balance as of September 30, 2009
  
$
226
    
$
395
    
$
621
  
                         
Additional accruals
    
8
      
-
      
8
  
Cash payments or otherwise settled
    
(223
)
    
(53
)
    
(276
)
                         
Balance as of December 31, 2009
  
$
11
    
$
342
    
$
353
  



NOTE 12.  Debt

Line of Credit

In September 2008, the Company closed a $25 million asset-backed revolving credit facility with Bank of America which can be used for working capital, letters of credit and other general corporate purposes.  Subsequently, the credit facility was amended resulting in a reduction in the total loan availability to $14 million.  The credit facility matures in September 2011 and is secured by virtually all of the Company’s assets.  The credit facility is subject to a borrowing base formula based on eligible accounts receivable and provides for prime-based borrowings.

As of December 31, 2009, the Company had a $10.7 million prime rate loan outstanding, with an interest rate of 8.25%, and approximately $2.9 million in outstanding standby letters of credit under this credit facility.

The facility is also subject to certain financial covenants.  On February 8, 2010, the Company and Bank of America entered into a Sixth Amendment to the Company’s revolving asset-backed credit facility, which (a) permits the Company to enter into foreign exchange hedging transactions pursuant to a separate facility with the bank, provided that available amounts under such facility shall be deducted from the maximum revolving loan limit under this facility; and (b) resets the EDITDA financial covenant for the first quarter of fiscal 2010 to place the Company in compliance with that covenant.


Short-term Debt

In December 2008, the Company borrowed $0.9 million from UBS Securities that is collateralized with $1.4 million of auction rate preferred securities.  The average interest rate on the loan is approximately 1.4% and the term of the loan is dependent upon the timing of the settlement of the auction rate securities with UBS Securities which is expected to occur by June 2010 at 100% par value.


Letters of credit

As of December 31, 2009, the Company had 8 standby letters of credit issued and outstanding which totaled approximately $3.1 million, of which $2.9 million was issued against the Company’s credit facility with Bank of America and the remaining $0.2 million in standby letters of credit are collateralized with other financial institutions and are listed on the Company’s balance sheet as restricted cash.



NOTE 13.  Commitments and Contingencies

The Company leases certain land, facilities, and equipment under non-cancelable operating leases. The 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.  Net facility and equipment rent expense under such leases totaled approximately $0.7 million and $0.6 million for the three months ended December 31, 2009 and 2008, respectively.


 
 
 

Estimated future minimum rental payments under the Company's non-cancelable operating leases with an initial or remaining term of one year or more as of December 31, 2009 are as follows:

(in thousands)
 
 
  
Estimated Future Minimum Lease Payments
         
Nine months ended September 30, 2010
  
$
1,444
  
Fiscal year ended September 30, 2011
    
1,814
  
Fiscal year ended September 30, 2012
    
1,072
  
Fiscal year ended September 30, 2013
    
799
  
Fiscal year ended September 30, 2014
    
76
  
Thereafter
    
2,699
  
         
Total minimum lease payments
  
$
7,904
  


Legal Proceedings

The Company is subject to various legal proceedings and claims that are discussed below. The Company is also subject to certain other legal proceedings and claims that have arisen in the ordinary course of business and which have not been fully adjudicated.  The Company does not believe it has a potential liability related to current legal proceedings and claims that could individually, or in the aggregate, have a material adverse effect on its financial condition, liquidity or results of operations. However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in any legal matters or should several legal matters be resolved against the Company in the same reporting period, then the operating results of that particular reporting period could be materially adversely affected.  In the past, the Company settled certain matters that did not individually, or in the aggregate, have a material impact on the Company’s results of operations.

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 significantly impacted by our ability to obtain intellectual property protection for our R&D 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. Additionally, on September 11, 2006, we filed a lawsuit against Optium Corporation, currently part of Finisar Corporation (Optium) in the U.S. District Court for the Western District of Pennsylvania for patent infringement of certain patents associated with our Fiber Optics segment. In the suit, the Company and JDS Uniphase Corporation (JDSU) allege that Optium is infringing on U.S. patents 6,282,003 and 6,490,071 with its Prisma II 1550nm transmitters. On March 14, 2007, following denial of a motion to add additional claims to its existing lawsuit, the Company and JDSU filed a second patent suit in the same court against Optium alleging infringement of JDSU's patent 6,519,374 ("the '374 patent").  On March 15, 2007, Optium filed a declaratory judgment action against the Company and JDSU. Optium sought in this litigation a declaration that certain products of Optium do not infringe the '374 patent and that the patent is invalid, but the District Court dismissed the action on January 3, 2008 without addressing the merits. The '374 patent is assigned to JDSU and licensed to the Company.

On December 20, 2007, the Company was served with a complaint in another declaratory relief action which Optium had filed in the Federal District Court for the Western District of Pennsylvania.  This action seeks to have U.S. patents 6,282,003 and 6,490,071 declared invalid or unenforceable because of certain conduct alleged to have occurred in connection with the grant of these patents.  These allegations are substantially the same as those brought by Optium by motion in the Company’s own case against Optium, which motion had been denied by the Court.  On August 11, 2008, both actions pending in the Western District of Pennsylvania were consolidated before a single judge, and a trial date of October 19, 2009 was set.  On February 18, 2009, the Company’s motion for a summary judgment dismissing Optium’s declaratory relief action was granted, and on March 11, 2009, the Company was notified that Optium intended to file an appeal of this order. In October 2009 the consolidated matters were tried before a jury, which found that all patents asserted against Optium were valid, that all claims asserted were infringed, and that such infringement by Optium was willful where willfulness was asserted.  The jury awarded EMCORE and JDSU monetary damages totaling approximately $3.4 million.

 
 
 


b) Avago-related Litigation

On July 15, 2008, the Company was served with a complaint filed by Avago Technologies and what appear to be affiliates thereof in the United States District Court for the Northern District of California, San Jose Division (Avago Technologies U.S., Inc., et al., Emcore Corporation, et al., Case No.:  C08-3248 JW).  In this complaint, Avago asserts claims for breach of contract and breach of express warranty against Venture Corporation Limited (one of the Company’s customers) and asserts a tort claim for negligent interference with prospective economic advantage against the Company.

On December 5, 2008, the Company was also served with a complaint by Avago Technologies filed in the United States District Court for the Northern District of California, San Jose Division alleging infringement of two patents by the Company’s VCSEL products. (Avago Technologies Singapore et al., Emcore Corporation, et al., Case No.:  C08-5394 EMC).  This matter has been stayed pending resolution of the International Trade Commission matter described immediately below.

On March 5, 2009, the Company was notified that, based on a complaint filed by Avago alleging the same patent infringement that formed the basis of the complaint previously filed in the Northern District of California, the U.S. International Trade Commission had determined to begin an investigation titled “In the Matter of Certain Optoelectronic Devices, Components Thereof and Products Containing the Same”, Inv. No. 337-TA-669.  This matter was tried before an administrative law judge of the International Trade Commission from November 16-20, 2009, and final briefings have been completed but no decision has yet been rendered.

The Company intends to vigorously defend against the allegations of all of the Avago complaints.

c) Green and Gold related litigation

On December 23, 2008, Plaintiffs Maurice Prissert and Claude Prissert filed a purported stockholder class action (the “Prissert Class Action”) pursuant to Federal Rule of Civil Procedure 23 allegedly on behalf of a class of Company shareholders against the Company and certain of its present and former directors and officers (the “Individual Defendants”) in the United States District Court for the District of New Mexico captioned, Maurice Prissert and Claude Prissert v. EMCORE Corporation, Adam Gushard, Hong Q. Hou, Reuben F. Richards, Jr., David Danzilio and Thomas Werthan, Case No. 1:08cv1190 (D.N.M.).  The Complaint alleges that Company and the Individual Defendants violated certain provisions of the federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934, arising out of the Company’s disclosure regarding its customer Green and Gold Energy (“GGE”) and the associated backlog of GGE orders with the Company’s Photovoltaics business segment.  The Complaint in the Class Action seeks, among other things, an unspecified amount of compensatory damages and other costs and expenses associated with the maintenance of the Action.

On or about February 12, 2009, a second purported stockholder class action (Mueller v. EMCORE Corporation et al., Case No. 1:09cv 133 (D.N.M.)) (the “Mueller Class Action”) was filed in the United States District Court for the District of New Mexico against the same defendants named in the Prissert Class Action, based on substantially the same facts and circumstances, containing substantially the same allegations and seeking substantially the same relief.  Plaintiffs in both class actions have moved to consolidate the matters into a single action, and several alleged EMCORE shareholders have moved to be appointed lead class plaintiff of the to-be consolidated action.  Selection of a lead plaintiff in this matter is currently pending before the Court.

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

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

The Stearns Derivative Action and the Thomas Derivative action have been consolidated before a single judge in Somerset County, New Jersey, and have been stayed pending the Prissert and Mueller Class Actions.

The Company intends to vigorously defend against the allegations of both the Class Actions and the Derivative Action.

d) Securities Matters

-  
SEC Communications.  On or about August 15, 2008, the Company received a letter from the Denver office of the Enforcement Division of the Securities and Exchange Commission wherein it sought the Company's voluntary production of documents relating to, among other things, the Company's business relationship with Green and Gold Energy, Inc., its licensees, and the Photovoltaics segment backlog the Company reported to the public.  Since that time, the Company has provided documents to the staff of the SEC and met with the staff on December 12, 2008 to address this matter.  On June 10, 2009, the SEC staff requested that the Company voluntarily provide documentary backup for certain information presented at the December 2008 meeting, which was provided on July 17, 2009, and arrange for a telephone interview with one former employee, which has been completed.  On August 24, 2009, in a telephone call with the Company’s counsel, the staff posed certain questions relating to the material provided on July 17, 2009, which were answered via the production of additional information and documentation on October 9, 2009.

-  
NASDAQ Communication.  On or about November 13, 2008, the Company received a letter from the NASDAQ Listings Qualifications group (“NASDAQ”) concerning the Company's removal of $79 million in backlog attributable to GGE which the Company announced on August 8, 2008 and the remaining backlog exclusive of GGE. The Company advised NASDAQ that it would cooperate with its inquiry.  To date, the Company has received three additional requests for information from NASDAQ (the latter 2 of which requested updates on the SEC matter).  The Company has complied with each of NASDAQ’s requests.  In early November 2009 the NASDAQ orally requested to be advised of developments in the SEC matter.

As of December 31, 2009 and the filing date of this Quarterly Report on Form 10-Q, no amounts have been accrued for any litigation item discussed above since no estimate of loss can be made at this time.

See Footnote 17 – Subsequent Event for additional commitments and contingencies related to the Tangshan agreements announced on February 3, 2010.



NOTE 14.  Income Taxes

During the three months ended December 31, 2009 and 2008, there were no material increases or decreases in unrecognized tax benefits and management does not anticipate any material increases or decreases in the amounts of unrecognized tax benefits over the next twelve months.  As of December 31, 2009, the Company had approximately $0.2 million of interest and penalties accrued as tax liabilities on the balance sheet.

A reconciliation of the beginning and ending amount of unrecognized gross tax benefits is as follows:

(in thousands)
 
    
Balance as of September 30, 2009
  
$
374
  
         
Subtractions based on tax positions related to the current year
    
(17
)
Subtractions for tax positions of prior years
    
(19
)
         
Balance as of December 31, 2009
  
$
338
  


 
 
 
 
The Company files income tax returns in the U.S. federal, state, and local jurisdictions and, currently, no federal, state, and local income tax returns are under examination.  The following tax years remain open to income tax examination for each of the more significant jurisdictions where the Company is subject to income taxes: after fiscal year 2006 for U.S. federal; after fiscal year 2005 for the state of California and after fiscal year 2006 for the state of New Mexico.



NOTE 15.  Segment Data and Related Information

The Company has five operating segments: (1) EMCORE Digital Fiber Optics Products, (2) EMCORE Broadband Fiber Optics Products, and (3) EMCORE Hong Kong, which are aggregated as a separate reporting segment, Fiber Optics, and (4) EMCORE Photovoltaics and (5) EMCORE Solar Power, which are aggregated as a separate reporting segment, Photovoltaics.  Fiber Optics revenue is derived primarily from sales of optical components and subsystems for CATV, FTTP, enterprise routers and switches, telecom grooming switches, core routers, high performance servers, supercomputers, and satellite communications data links.   Photovoltaics revenue is derived primarily from the sales of solar power conversion products for the space and terrestrial markets, including solar cells, coverglass interconnected solar cells, satellite solar panels, concentrator solar cells and concentrating photovoltaic (“CPV”) receiver assemblies and systems.  The Company evaluates its reportable segments in accordance with ASC 280, Segment Reporting. The Company’s Chief Executive Officer is the Chief Operating Decision Maker pursuant to ASC 280, and he allocates resources to segments based on their business prospects, competitive factors, net revenue, operating results and other non-GAAP financial ratios.  Operating income or expense that is not specifically related to an operating segment is charged to a separate unallocated corporate division.

The following table sets forth the revenue and percentage of total revenue attributable to each of the Company’s reporting segments.

Segment Revenue
(in thousands)
  
For the Three Months Ended
December 31,
  
   
2009
  
2008
  
   
Revenue
  
% of Revenue
  
Revenue
  
% of Revenue
  
Fiber Optics
  
$
25,608
      
60
%
  
$
39,166
      
72
%
  
Photovoltaics
    
16,793
      
40
      
14,890
      
28
    
Total revenue
  
$
42,401
      
100
%
  
$
54,056
      
100
%
  


The following table sets forth the Company’s consolidated revenue by geographic region with revenue assigned to geographic regions based on our customers’ billing address.

Geographic Revenue
(in thousands)
  
For the Three Months Ended
December 31,
  
   
2009
  
2008
  
   
Revenue
  
% of Revenue
  
Revenue
  
% of Revenue
  
United States
  
$
34,361
      
81
%
  
$
31,715
      
58
%
  
Asia
    
6,196
      
15
      
19,208
      
36
    
Europe
    
1,277
      
3
      
2,797
      
5
    
Other
    
567
      
1
      
336
      
1
    
Total revenue
  
$
42,401
      
100
%
  
$
54,056
      
100
%
  


The following table sets forth our significant market sectors, defined as product line sales that represented greater than 10% of total consolidated revenue, by reporting segment.

Significant Market Sectors
As a percentage of total consolidated revenue
  
For the Three Months Ended December 31,
  
   
2009
  
2008
  
Fiber Optics – related:
                  
Cable Television Products
    
21
%
    
14
%
  
Parallel Optical Transceiver / Cable Products
    
10
%
    
-
    
Enterprise Products
    
-
      
15
%
  
Telecom Optical Products
    
-
      
14
%
  
 
Photovoltaics – related:
                  
Satellite Solar Power Generation
    
38
%
    
26
%
  



 
 
 

The following table sets forth our significant customer, defined as customers that represented greater than 10% of total consolidated revenue, by reporting segment.


Significant Customers
As a percentage of total consolidated revenue
  
For the Three Months Ended December 31,
  
   
2009
  
2008
  
Fiber Optics – related customer:
                  
Cisco Systems, Inc.
    
14
%
    
17
%
  
 
Photovoltaics – related customer:
                  
Loral Space & Communications
    
15
%
    
14
%
  


The following table sets forth operating losses attributable to each of the Company’s reporting segments and Corporate division.

Statement of Operations Data
(in thousands)
 
  
For the Three Months Ended December 31,
  
   
2009
  
2008
  
Operating loss:
                  
Fiber Optics segment
  
$
(8,407
)
  
$
(48,423
)
  
Photovoltaics segment
    
(3,525
)
    
(4,035
)
  
Corporate division
    
-
      
(3
)
  
Operating loss
  
$
(11,932
)
  
$
(52,461
)
  


The following table sets forth the depreciation and amortization attributable to each of the Company’s reporting segments and Corporate division.

Segment Depreciation and Amortization
(in thousands)
 
  
For the Three Months Ended December 31,
  
   
2009
  
2008
  
Fiber Optics segment
  
$
1,764
    
$
2,852
    
Photovoltaics segment
    
1,353
      
1,441
    
Total depreciation and amortization
  
$
3,117
    
$
4,293
    


Long-lived assets consist primarily of property, plant, and equipment and also goodwill and intangible assets.  The following table sets forth long-lived assets for each of the Company’s reporting segments and Corporate division.

Long-lived Assets
(in thousands)
 
  
As of December 31, 2009
  
As of
September 30, 2009
                 
Fiber Optics segment
  
$
35,676
    
$
37,399
  
Photovoltaics segment
    
49,027
      
50,169
  
Corporate division
    
824
      
826
  
Total long-lived assets
  
$
85,527
    
$
88,394
  




 
 
 

NOTE 16.  Fair Value Accounting

ASC 820, Fair Value Measurements and Disclosures, establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The 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 which are the following:

-  
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 asset or liability, 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 and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the Company’s financial assets and liabilities, consisting of the following types of instruments, measured at fair value on a recurring basis:

 (in thousands)
  
As of December 31, 2009
   
 
 
Quoted Prices in Active Markets for Identical Assets
 
[Level 1]
  
 
Significant Other Observable Remaining Inputs
 
[Level 2]
  
 
 
 
Significant Unobservable Inputs
 
[Level 3]
  
 
 
 
 
 
Total
Assets
                                
Money market fund deposits
  
$
15,138
    
$
-
    
$
-
    
$
15,138
  
Restricted fund deposits
    
167
      
-
      
-
      
167
  
Asset-backed auction rate securities
    
-
      
1,350
      
-
      
1,350
  
                                 
Total assets measured at fair value
  
$
15,305
    
$
1,350
    
$
-
    
$
16,655
  
                                 
Liabilities