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EMCORE CORP – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations
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You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included in Financial Statements and Supplementary Data under Item 8 within this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in Risk Factors under Item IA . Business Overview We are a provider of compound semiconductor-based products for the broadband, fiber optic, satellite, and solar power markets. We were established in 1984 as aNew Jersey corporation and we have two reporting segments: Fiber Optics and Photovoltaics. Our Fiber Optics segment offers optical components, subsystems, and systems that enable the transmission of video, voice, and data over high-capacity fiber optics cables for high-speed data and telecommunications, cable television (CATV), and fiber-to-the-premises (FTTP) networks. Our Photovoltaics segment provides solar products for both satellite and terrestrial applications. For satellite applications, we offer high-efficiency compound semiconductor-based gallium arsenide (GaAs) multi-junction solar cells, covered interconnected cells (CICs), and fully integrated solar panels. For terrestrial applications, we offer concentrating photovoltaic (CPV) power systems for commercial and utility scale solar applications as well as our high-efficiency GaAs solar cells and integrated CPV components for use in other solar power concentrator systems. Our headquarters and principal executive offices are located at10420 Research Road, SE ,Albuquerque, New Mexico , 87123, and our main telephone number is (505) 332-5000. For specific information about us, our products or the markets we serve, please visit our website at http://www.emcore.com. The information contained in or linked to our website is not a part of, nor incorporated by reference into, this Annual Report on Form 10-K or a part of any other report or filing with theSecurities and Exchange Commission (SEC).
See Explanatory Note on page 4 for a discussion associated with the impact of the floods in
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America (U.S. GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. The accounting estimates that require our most significant, difficult, and/or subjective judgments include:
• the valuation of inventory, goodwill, intangible assets, warrants, and
stock-based compensation;
• assessment of recovery of long-lived assets;
• asset retirement obligations and litigation contingencies;
• revenue recognition associated with the percentage of completion method; and,
• the allowance for doubtful accounts and warranty accruals.
We develop estimates based on historical experience and on various assumptions about the future that are believed to be reasonable based on the best information available to us. Our reported financial position 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. A listing and description of our critical accounting policies includes the following:
Accounts Receivable
We regularly evaluate the collectability of our accounts receivable and maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to meet their financial obligations to us. The allowance is based on the age of receivables and a specific identification of receivables considered at risk of collection. We classify charges associated with the allowance for doubtful accounts as sales, general, and administrative expense. If the financial condition of our customers 45
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were to deteriorate, impacting their ability to pay us, additional allowances may be required. See Footnote 5 - Receivables in the notes to the consolidated financial statements for additional information related to our receivables.
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, which approximates weighted average cost. We write-down inventory once it has been determined that conditions exist that may not allow the inventory to be sold for its intended purpose or the inventory is determined to be excess or obsolete based on our forecasted future revenue. The charge related to inventory write-downs is recorded as a cost of revenue. The majority of the inventory write-downs are related to estimated allowances for inventory whose carrying value is in excess of net realizable value and on excess raw material components resulting from finished product obsolescence. In most cases where we sell previously written down inventory, it is typically sold as a component part of a finished product. The finished product is sold at market price at the time resulting in higher average gross margin on such revenue. We do not track the selling price of individual raw material components that have been previously written down or written off, since such raw material components usually are only a portion of the finished products and related sales price. We evaluate inventory levels at least quarterly against sales forecasts on a significant part-by-part basis, in addition to determining its overall inventory risk. We have incurred, and may in the future incur charges to write-down our inventory. See Footnote 6 - Inventory in the notes to the consolidated financial statements for additional information related to our inventory.
Goodwill
The Company's goodwill of approximately$20.4 million is associated with our Photovoltaics segment. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the identifiable assets acquired and liabilities assumed. As required by ASC 350, Intangibles - Goodwill and Other, we evaluate our goodwill for impairment on an annual basis, or whenever events or changes in circumstances indicate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Pursuant to ASC 350, circumstances that could trigger an interim impairment test include but are not limited to:
• Macroeconomic conditions such as a deterioration in general economic
conditions, limitations on accessing capital, fluctuations in foreign
exchange rates, or other developments in equity and credit markets; • Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics
(considered in both absolute terms and relative to peers), a change in the
market for an entity's products or services, or a regulatory or political
development;
• Cost factors such as increases in raw materials, labor, or other costs
that have a negative effect on earnings and cash flows;
• Overall financial performance such as negative or declining cash flows or
a decline in actual or planned revenue or earnings compared with actual
and projected results of relevant prior periods;
• Other relevant entity-specific events such as changes in management, key
personnel, strategy, or customers; contemplation of bankruptcy; or litigation;
• Events affecting a reporting unit such as a change in the composition or
carrying amount of its net assets, a more-likely-than-not expectation of
selling or disposing all, or a portion, of a reporting unit, the testing
for recoverability of a significant asset group within a reporting unit,
or recognition of a goodwill impairment loss in the financial statements
of a subsidiary that is a component of a reporting unit; and, • If applicable, a sustained decrease in share price (considered in both absolute terms and relative to peers). In performing goodwill impairment testing, we determine the fair value of each reporting unit using a weighted combination of a market-based approach and a discounted cash flow (DCF) approach. The market-based approach relies on values based on market multiples derived from comparable public companies. In applying the DCF approach, management forecasts cash flows over the remaining useful life of its primary asset using assumptions of current economic conditions and future expectations of earnings. This analysis requires the exercise of significant judgment, including judgments about appropriate discount rates based on the assessment of risks inherent in the amount and timing of projected future cash flows. The derived discount rate 46
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may fluctuate from period to period as it is based on external market conditions. All of these assumptions are critical to the estimate and can change from period to period. Updates to these assumptions in future periods, particularly changes in discount rates, could result in different results of goodwill impairment tests. See Footnote 8 - Goodwill in the notes to the consolidated financial statements for additional disclosures related to our goodwill.
Valuation of Long-lived Assets
Long-lived assets consist primarily of property, plant, and equipment and intangible assets. Because most of our long-lived assets are subject to amortization, we review these assets for impairment in accordance with the provisions of ASC 360, Property, Plant, and Equipment. We review long-lived assets for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Our impairment testing of long-lived assets consists of determining whether the carrying amount of the long-lived asset (asset group) is recoverable, in other words, whether the sum of the future undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group) exceeds its carrying amount. The determination of the existence of impairment involves judgments that are subjective in nature and may require the use of estimates in forecasting future results and cash flows related to an asset or group of assets. In making this determination, we use certain assumptions, including estimates of future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, the length of service that assets will be used in our operations, and estimated salvage values. See Footnote 7 - Property, Plant, and Equipment and Footnote 9 - Intangible Assets in the notes to the consolidated financial statements for additional disclosures related to our long-lived assets.
Revenue Recognition
Revenue is recognized upon shipment, provided persuasive evidence of a contract exists, the price is fixed, the product meets our customer's specifications, title and ownership have transferred to the customer, and there is reasonable assurance of collection of the sales proceeds. The majority of our products have shipping terms that are free on board or free carrier alongside (FCA) shipping point, which means that we fulfill our delivery obligation when the goods are handed over to the freight carrier at our shipping dock. This means the buyer bears all costs and risks of loss or damage to the goods from that point. In certain cases, we ship our products cost insurance and freight. Under this arrangement, revenue is recognized under FCA shipping point terms, but we pay (and invoice the customer) for the cost of shipping and insurance to the customer's designated location. We account for shipping and related transportation costs by recording the charges that are invoiced to customers as revenue, with the corresponding cost recorded as cost of revenue. In those instances where inventory is maintained at a consigned location, revenue is recognized only when our customer pulls product for use and after title and ownership has transferred to the customer. Revenue from time and material contracts is recognized at contractual rates as labor hours and direct expenses are incurred. Any warranty cost and remaining obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized. Distributors. We use a number of distributors around the world and recognize revenue upon shipment of product to these distributors. Title and risk of loss pass to the distributors upon shipment, and our distributors are contractually obligated to pay us on standard commercial terms, just like our other direct customers. We do not sell to our distributors on consignment and, except in the event of product discontinuance, do not give distributors a right of return.Solar Panel and Solar Power Systems Contracts. Pursuant to ASC 605-35, Revenue Recognition - Construction-Type and Production, we record revenue on long-term solar panel and solar power system contracts using either the percentage-of-completion method or the completed contract method. In general, the performance of these types of contracts involves the design, development, and manufacture of complex aerospace or electronic equipment to our customer's specifications. The percentage-of-completion method is used in circumstances in which all the following conditions exist: • the contract includes enforceable rights regarding goods or services to be provided to the customer, the consideration to be exchanged, and the manner and terms of settlement; • both the Company and the customer are expected to satisfy all of the contractual obligations; and, • reasonably reliable estimates of total revenue, total cost, and the progress towards completion can be made. 47
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The percentage-of-completion method recognizes estimates for contract revenue and costs in progress as work on the contract continues. Estimates are revised as additional information becomes available. If estimates of costs to complete a contract indicate a loss, a provision is made at that time for the total loss anticipated on the contract. We use the completed contract method if reasonably dependable estimates cannot be made or for which inherent hazards make estimates doubtful. Under the completed contract method, contract revenue and costs in progress are deferred as work on the contract continues. If a loss becomes evident on the contract, a provision is made at that time for the total loss anticipated on the contract. Total contract revenue and related costs are recognized upon the completion of the contract.Government Research and Development Contracts. Revenue from research and development contracts represents reimbursement by various U.S. government entities, or their contractors, to aid in the development of new technology. The applicable contracts generally provide that we may elect to retain ownership of inventions made in performing the work, subject to a non-exclusive license retained by the U.S. government to practice the inventions for governmental purposes. The research and development contract funding may be based on a cost-plus, cost reimbursement, or a firm fixed price arrangement. The amount of funding under each research and development contract is determined based on cost estimates that include both direct and indirect costs. Cost-plus funding is determined based on actual costs plus a set margin. As we incur costs under cost reimbursement type contracts, revenue is recorded. Contract costs include material, labor, special tooling and test equipment, subcontracting costs, as well as an allocation of indirect costs. A research and development contract is considered complete when all significant costs have been incurred, milestones have been reached, and any reporting obligations to the customer have been met. These contracts may be modified or terminated at the convenience of the U.S. government and may be subject to governmental budgetary fluctuations. We also participate in cost-sharing research and development arrangements. Under such arrangements in which the actual costs of performance are split between the U.S. government and us on a best efforts basis, no revenue is recorded and our research and development expense is reduced for the amount of the cost-sharing receipts. Multiple-Element Arrangements. Contracts with our customers usually relate to either the delivery of product or the completion of technology or engineering research and development contracts. In a very limited number of cases, a research contract may involve the creation and delivery of a customer-designed product sample based upon the research and development efforts completed. Pursuant to ASC 605-25-25-5, Revenue Recognition - Multiple-Element Arrangements, we have concluded that product revenue should not be considered a unit of accounting separate from the service revenue for these types of research contracts. Contract Manufacturers. In our Fiber Optics segment, prior to certain customers accepting product that is manufactured at one of our contract manufacturers, these customers require that they first qualify the product and manufacturing processes at our contract manufacturer. The customers' qualification process determines whether the product manufactured at our contract manufacturer achieves their quality, performance, and reliability standards. After a customer completes the initial qualification process, we receive approval to ship qualified product to that customer. As part of the manufacturing process at our contract manufacturers, the finished product is tested prior to shipment to the customer using the same criteria that our customer uses to test product it receives. Revenue is recognized upon shipment of customer-qualified product, provided persuasive evidence of a contract exists, the price is fixed, the product meets our customer's specifications, title and ownership have transferred to the customer, and there is reasonable assurance of collection of the sales proceeds. Product Warranty Reserves We provide our customers with limited rights of return for non-conforming shipments and warranty claims for certain products. Pursuant to ASC 450, Contingencies, we make estimates of product warranty expense using historical experience rates as a percentage of revenue and/or costs of revenue and accrue estimated warranty expense as a cost of revenue. We estimate the costs of our warranty obligations based on historical experience of known product failure rates and anticipated rates if warranty claims, use of materials to repair or replace defective products, and service delivery costs incurred in correcting product issues. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Should our actual experience relative to these factors differ from our estimates, we may be required to record additional warranty reserves. Alternatively, if we provide more reserves than needed, we may reverse a portion of such provisions in future periods. See Footnote 10 - Accrued Expenses and Other Current Liabilities in the notes to the consolidated financial statements for additional disclosures related to our product warranty reserves. 48
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Stock-Based Compensation
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, and administrative, and research and development expense based on an employee's responsibility and function over the requisite service period. We use the Black-Scholes option-pricing model and the straight-line attribution approach to determine the fair value of stock-based awards in accordance with ASC 718, Compensation. This option-pricing model requires the input of highly subjective assumptions, including the option's expected life, the price volatility of the underlying stock, and expected forfeitures. Expected term represents the period that stock-based awards are expected to be outstanding and is 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. The expected stock price volatility is based on our historical stock prices. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. If we use different assumptions for estimating stock-based compensation expense in future periods or if actual forfeitures differ materially from our estimated forfeitures, the change in our non-cash stock-based compensation expense could adversely affect our results of operations. See Footnote 15 - Equity in the notes to the consolidated financial statements for additional disclosures related to our stock-based compensation. Litigation Contingencies We are subject to various legal proceedings, claims, and litigation, either asserted or unasserted that arise in the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect the resolution of these matters will have a material adverse effect on our business, financial position, results of operations, or cash flows. However, the results of these matters cannot be predicted with certainty. Professional legal fees are expensed when incurred. We accrue for contingent losses when such losses are probable and reasonably estimable. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information. Should we fail to prevail in any legal matter or should several legal matters be resolved against the Company in the same reporting period, then the financial results of that particular reporting period could be materially affected. See Footnote 14 - Commitments and Contingencies in the notes to our consolidated financial statements for disclosures related to our legal proceedings.
Warrant Valuation
As ofSeptember 30, 2011 and 2010, warrants representing 3,000,003 shares of our common stock were outstanding. All of our warrants are classified as a liability since the warrants meet the classification requirements for liability accounting pursuant to ASC 815, Derivatives and Hedging. Each quarter, we expect an impact on our statement of operations when we record the change in fair value of our outstanding warrants using theMonte Carlo option valuation model. TheMonte Carlo option valuation model is used since it allows the valuation of each warrant to factor in the value associated with our right to affect a mandatory exercise of each warrant. The valuation model requires the input of highly subjective assumptions, including the warrant's expected life and the price volatility of the underlying stock. The change in the fair value of the warrants is primarily due to the change in the closing price of our common stock. See
Footnote 4 - Fair Value Accounting in the notes to the consolidated financial statements for additional disclosures related to our valuation of our outstanding warrants.
Asset Retirement Obligations Pursuant to ASC 410, Asset Retirement and Environmental Obligations, an asset retirement obligation is recorded when there is a legal obligation associated with the retirement of a tangible long-lived asset and the fair value of the liability can reasonably be estimated. Upon initial recognition of an asset retirement obligation, a company increases the carrying amount of the long-lived asset by the same amount as the liability. Over time, the liabilities are accreted for the change in their present value through charges to operations costs. The initial capitalized costs are depleted over the useful lives of the related assets through charges to depreciation, depletion, and/or amortization. If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the asset retirement cost. Revisions in estimated liabilities can result from revisions of estimated inflation rates, escalating retirement costs, and changes in the estimated timing of settling asset retirement obligations. 49
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We have known conditional asset retirement conditions, such as certain asset decommissioning and restoration of rented facilities to be performed in the future. During the three months endedSeptember 30, 2011 , we completed a review of our asset retirement and environmental obligations and we recorded an asset retirement obligation with an offset to fixed assets totaling$4.8 million . See Footnote 14 - Commitments and Contingencies in the notes to the consolidated financial statements for additional disclosures related to our asset retirement obligations. *** The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, U.S. GAAP specifically dictates the accounting treatment of a particular transaction. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. For a complete discussion of our accounting policies, recently adopted accounting pronouncements, and other required U.S. GAAP disclosures, we refer you to the accompanying footnotes to our consolidated financial statements in this Annual Report.
Results of Operations
The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue. Statement of Operations For the Fiscal Years Ended September 30, 2011 2010 2009 Revenue 100.0 % 100.0 % 100.0 % Cost of revenue 78.7 73.5 103.6 Gross profit (loss) 21.3 26.5 (3.6 ) Operating expenses (income): Selling, general, and administrative 17.7 22.3 26.4 Research and development 16.4 15.4 15.4 Impairments 4.0 - 34.5 Litigation settlements, net (0.6 ) - - Total operating expenses 37.5 37.7 76.3 Operating loss (16.2 ) (11.2 ) (79.9 ) Other income (expense): Interest income - - - Interest expense (0.3 ) (0.2 ) (0.3 ) Foreign exchange gain (loss) 0.4 (0.5 ) (0.1 ) Loss from equity method investment (0.9 ) - - Change in fair value of financial instruments - (0.3 ) - Impairment of investment - - (0.2 ) Gain from the sale of an unconsolidated affiliate - - 1.8 Other expense - (0.2 ) - Total other income (expense) (0.8 ) (1.2 ) 1.2 Net loss (17.0 )% (12.4 )% (78.7 )% 50
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Comparison of Financial Periods
Revenue (in thousands, except Fiscal 2011 vs Fiscal percentages) For the Fiscal Years Ended September 30, 2010 Fiscal 2010 vs Fiscal 2009 2011 2010 2009 $ Change % Change $ Change % Change Fiber Optics revenue $ 125,659 $ 121,724 $ 114,134 $ 3,935 3.2% $ 7,590 6.7% Photovoltaics revenue 75,269 69,554 62,222 5,715 8.2% 7,332 11.8% Total revenue $ 200,928 $ 191,278 $ 176,356 $ 9,650 5.0% $ 14,922 8.5% Fiber Optics Revenue: Our Fiber Optics segment offers optical components, subsystems, and systems for high-speed data and telecommunications, cable television (CATV), and fiber-to-the-premises (FTTP) networks within the following two distinct product lines:
• Broadband products, which includes cable television products,
fiber-to-the-premises products, satellite communication products, video
transport products, and defense and homeland security products; and,
• Digital products, which include telecom optical products, enterprise
products, laser/photodetector component products, parallel optical
transceiver and cable products, and fiber channel transceiver products.
Fiscal 2011 revenue from broadband products increased approximately 12% from fiscal 2010 which was primarily driven by increased unit shipments of our CATV and video transport products. The increase in CATV unit shipments was primarily driven by our quadrature amplitude modulation (QAM) transmitters and receivers. Fiscal 2010 revenue from broadband products increased 16% from fiscal 2009 which was primarily driven by increased unit shipments of our CATV, specialty, and satellite communication products. Sales of our CATV products represents the largest percentage of our total fiber optics-related revenue. Fiscal 2011 revenue from digital products decreased approximately 8% from fiscal 2010 which was primarily due to a reduction of approximately$13.7 million of revenue associated with sales of parallel optics device products primarily as a result of theU.S. International Trade Commission (ITC) ruling. See Footnote 14 - Commitments and Contingencies in the notes to the consolidated financial statements for additional information related to the ITC ruling. This was partially offset by increased shipments of telecom optical-related products, which includes tunable XFP, tunable 300-pin transponders, and integrated tunable laser assemblies (ITLAs), when compared to fiscal 2010. Our telecom optical-related product line represents the second largest percentage of our total fiber optics-related revenue. Fiscal 2010 revenue from digital products decreased approximately 3% from fiscal 2009 which was primarily driven by a decrease in unit shipments as well as a decline in average selling prices of our legacy zenpak datacom transceivers offset slightly by an increase in sales of our telecom optical-related products.
Our Fiber Optics segment accounted for 63%, 64%, and 65% of our consolidated revenue in the fiscal years ended
Photovoltaics Revenue: Our Photovoltaics segment provides products for both satellite and terrestrial applications. For satellite applications, we offer high-efficiency compound semiconductor-based gallium arsenide (GaAs) multi-junction solar cells, covered interconnected cells (CICs), and fully integrated solar panels. For terrestrial applications, we offer concentrating photovoltaic (CPV) power systems for commercial and utility scale solar applications as well as high-efficiency GaAs solar cells and integrated CPV components for use in other solar power concentrator systems. Fiscal 2011 revenue from satellite applications increased 6% from fiscal 2010. The increase was primarily driven by higher revenue from our government-related service contracts. Sales of our satellite solar cells and CICs products represents the largest percentage of our total photovoltaics-related revenue. Fiscal 2010 revenue from satellite applications increased 14% from fiscal 2009. Historically, revenue has fluctuated significantly in our Photovoltaics segment due to the completion of long-term contracts, varying shipment schedules on long-term supply agreements, and changes in product mix. 51
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Revenue from our terrestrial-related products was not significant as a percentage of total photovoltaics-related revenue.
Our Photovoltaics segment accounted for 37%, 36%, and 35% of our consolidated revenue in the fiscal years endedSeptember 30, 2011 , 2010, and 2009, respectively. Gross Profit (Loss) (in thousands, except For the Fiscal Years Ended September percentages) 30, Fiscal 2011 vs Fiscal 2010 Fiscal 2010 vs Fiscal 2009 2011 2010 2009 $ Change % Change $ Change % Change Fiber Optics gross profit (loss) $ 23,221 $ 28,174 $ (14,796 ) $ (4,953 ) (17.6)% $ 42,970 290.4% Photovoltaics gross profit 19,542 22,487 8,486 (2,945 ) (13.1)% 14,001 165.0% Total gross profit (loss) $ 42,763 $ 50,661 $ (6,310 ) $ (7,898 ) (15.6)% $ 56,971 902.9% Our cost of revenue consists of raw materials, compensation expense including non-cash stock-based compensation expense, depreciation expense and other manufacturing overhead costs, expenses associated with excess and obsolete inventories, and product warranty costs. Historically, our cost of revenue, as a percentage of revenue, has fluctuated largely due to inventory and product warranty charges. Our gross margins are also affected by product mix, manufacturing yields and volumes, and timing related to the completion of long-term contracts. Consolidated gross margin was 21.3%, 26.5%, and (3.6)% for the fiscal years endedSeptember 30, 2011 , 2010, and 2009, respectively. For the fiscal years endedSeptember 30, 2011 , 2010, and 2009, we recorded expense of approximately$5.3 million ,$4.3 million , and$16.1 million for excess and obsolete inventory. In fiscal 2009, a significant portion of the excess and obsolete inventory expense was related to inventory acquired from the fiscal 2008 acquisition ofIntel Corporation's Optical Platform Division. For the fiscal years endedSeptember 30, 2011 , 2010, and 2009, we recorded product warranty-related expense of approximately$1.0 million ,$1.2 million , and$2.6 million , respectively. In fiscal 2009, we also incurred specific contract losses totaling$8.5 million . Fiber Optics Gross Profit: Fiber Optics gross margin was 18.5%. 23.1%, and (13.0)% for the fiscal years endedSeptember 30, 2011 , 2010, and 2009, respectively. In fiscal 2011, gross margins decreased from both our broadband and digital product lines when compared to fiscal 2010 primarily due to an increase in expense associated with excess and obsolete inventories. In fiscal 2010, gross margins improved from both our broadband and digital product lines when compared to fiscal 2009 primarily due to less expense incurred related to excess and obsolete inventories and less losses recorded on inventory purchase contracts. Photovoltaics Gross Profit: Photovoltaics gross margin was 26.0%, 32.3%, and 13.6% for the fiscal years endedSeptember 30, 2011 , 2010, and 2009, respectively. In fiscal 2011, gross margins decreased from our satellite application product lines when compared to fiscal 2010 primarily due to product mix and lower manufacturing yields. In fiscal 2010, gross margins improved from our satellite application product lines when compared to fiscal 2009 primarily due to product mix and improved manufacturing yields. SG&A (in thousands, except For the Fiscal Years Ended percentages) September 30, Fiscal 2011 vs Fiscal 2010 Fiscal 2010 vs Fiscal 2009 2011 2010 2009 $ Change % Change $ Change % Change SG&A expense $ 35,582 $ 42,549 $ 46,775 $ (6,967 ) (16.4)% $ (4,226 ) (9.0)% Sales, General, and Administrative (SG&A): SG&A consists primarily of compensation expense including non-cash stock-based compensation expense related to executive, finance, and human resources personnel, as well as sales and marketing expenses, professional fees, amortization expense on intangible assets, legal and patent-related costs, and other corporate-related expenses. The decrease in SG&A expense in fiscal 2011 when compared to fiscal 2010 is attributable to less accounts receivable reserves and corporate charges incurred during the period. In fiscal 2011, we recorded approximately$30,000 related to accounts receivable reserves. During fiscal 2010, we recorded a$2.4 million reserve on accounts receivable related to a solar power 52
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system contract and we also incurred a$2.8 million termination fee related to a then-planned joint venture. In fiscal 2011 and 2010, we incurred$0.6 million and$4.7 million related to legal expenses associated with certain patent and other litigation, excluding legal settlement amounts discussed below. The decrease in SG&A expense in fiscal 2010 when compared to fiscal 2009 is also attributable to lower corporate-related adjustments. During fiscal 2009, we recorded$5.1 million of bad debt expense related to specific receivable accounts,$5.6 million of patent litigation and other corporate-related legal expense, and$2.0 million related to severance and other restructuring charges.
As a percentage of revenue, SG&A expenses were 17.7%, 22.3%, and 26.4% for the fiscal years ended
R&D
(in thousands, except For the Fiscal Years Ended Fiscal 2011 vs Fiscal Fiscal 2010 vs Fiscal percentages) September 30, 2010 2009 2011 2010 2009 $ Change %
Change $ Change % Change R&D expense
Research and Development (R&D): R&D consists primarily of compensation expense including non-cash stock-based compensation expense, as well as engineering and prototype costs, depreciation expense, and other overhead expenses, as they related to the design, development, and testing of our products. Our R&D costs are expensed as incurred. We believe that in order to remain competitive, we must invest significant financial resources in developing new product features and enhancements and in maintaining customer satisfaction worldwide.
The increase in R&D expense in fiscal 2011 when compared to fiscal 2010 is attributable to higher expenses incurred related to our development of our tunable XFP (TXFP) transceiver in our Fiber Optics segment and increased R&D expense incurred in our Photovoltaics segment related to our acquisition of Soliant Energy which was completed in
The increase in R&D expense in fiscal 2010 when compared to fiscal 2009 is attributable to higher expenses incurred related to our development of our tunable XFP (TXFP) transceiver in our Fiber Optics segment and increased R&D expense in our Photovoltaics segment related to our development of our CPV-related solar power components and systems.
As a percentage of revenue, R&D expenses were 16.4%, 15.4%, and 15.4% for the fiscal years ended
Other Operating Income and Expense Items (in thousands, except For the Fiscal Years Ended September percentages) 30, Fiscal 2011 vs Fiscal 2010 Fiscal 2010 vs Fiscal 2009 2011 2010 2009 $ Change % Change $ Change % Change Impairments $ 8,000 $ - $ 60,781 $ 8,000 -% $ (60,781 ) (100.0)% Litigation settlements, net $ (1,145 ) $ - $ - $ (1,145 ) -% $ - -% Impairments: Fiscal 2011: As ofSeptember 30, 2011 , we performed an impairment test of long-lived assets associated with our digital fiber optics product lines. The impairment test was triggered by a change in long-term financial and cash flow forecasts. The changes in financial and cash forecasts were not a result of the recent flooding inThailand . The financial impact from this natural disaster will be considered a fiscal 2012 first quarter event. As a result of our evaluation we determined that impairment existed and a charge of$8.0 million was recorded to write down long-lived assets to an estimated fair value which was determined using both the guideline public company valuation method and the discounted cash flow method. See Footnote 9 - Intangible Assets in the notes to the consolidated financial statements for additional information related to this impairment charge. 53
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Fiscal 2009: In fiscal 2009, we performed our annual goodwill impairment test as ofDecember 31, 2008 and based on this analysis, we determined that goodwill related to our Fiber Optics reporting units was fully impaired. As a result, we recorded a non-cash impairment charge of$31.8 million and our balance sheet no longer reflects any goodwill associated with our Fiber Optics reporting units. See Footnote 8 - Goodwill in the notes to the consolidated financial statements for additional information related to our impairment of goodwill. In fiscal 2009, we recorded a non-cash impairment charge totaling$2.0 million related to certain intangible assets that were acquired fromIntel Corporation that were abandoned. We also performed an evaluation of our Fiber Optics segment asset group for impairment of long-lived assets. The impairment test was triggered by a determination that it was more likely than not those certain assets would be sold or otherwise disposed of before the end of their previously estimated useful lives. As a result of the evaluation, we determined that impairment existed, and a charge of$27.0 million was recorded to write down the long-lived assets to an estimated fair value which was determined using both the guideline public company valuation method and the discounted cash flow method. Of the total impairment charge,$17.2 million related to plant and equipment and $9.8 million related to intangible assets. See Footnote 9 - Intangible Assets in the notes to the consolidated financial statements for additional information related to this impairment charge. Litigation Settlements, Net: During the three months endedMarch 31, 2011 , we received a cash payment of approximately$2.6 million , net of legal fees, in satisfaction of a judgment for damages awarded. During the three months endedJune 30, 2011 , we accrued $1.5 million for legal settlements considered probable. See Footnote 14 - Commitments and Contingencies in the notes to the consolidated financial statements for additional information related to our litigation proceedings. Operating Loss (in thousands, except percentages) For the Fiscal Years Ended September 30,
Fiscal 2011 vs Fiscal 2010 Fiscal 2010 vs Fiscal 2009
2011 2010 2009 $ Change % Change $ Change % Change Fiber Optics operating loss $ (30,276 ) $ (19,888 ) $ (126,830 ) $ (10,388 ) (52.2)% $ 106,942 84.3% Photovoltaics operating loss (2,251 ) (1,538 ) (14,136 ) (713 ) (46.4)% 12,598 89.1% Total operating loss $ (32,527 ) $ (21,426 ) $ (140,966 ) $ (11,101 ) (51.8)% $ 119,540 84.8% Operating Loss: Income (loss) from operations represents revenue less the cost of revenue and direct operating expenses incurred within the operating segments as well as allocated expenses such as shared service departments. Income (loss) from operations is a measure of profit and loss that executive management uses to assess performance and make decisions. As a percentage of revenue, our operating loss was (16.2)%, (11.2)%, and (79.9)% for the fiscal years endedSeptember 30, 2011 , 2010, and 2009, respectively. In fiscal 2009, we recorded non-cash impairment charges totaling$60.8 million related to goodwill, intangible assets, and fixed assets associated with our Fiber Optics segment. Other Income (Expense) (in thousands, except percentages) For the Fiscal Years Ended September 30,
Fiscal 2011 vs Fiscal 2010 Fiscal 2010 vs Fiscal 2009
2011 2010 2009 $ Change % Change $ Change % Change Interest income $ 2 $ 24 $ 84 $ (22 ) (91.7)% $ (60 ) (71.4)% Interest expense (642 ) (439 ) (542 ) (203 ) (46.2)% 103 19.0% Foreign exchange gain (loss) 735 (1,008 ) (154 ) 1,743 172.9% (854 ) (554.5)% Loss from equity method investment (1,842 ) - - (1,842 ) -% - -% Change in fair value of financial instruments 70 (475 ) - 545 114.7% (475 ) -% Impairment of investment - - (367 ) - -% 367 100.0% Gain from the sale of an unconsolidated affiliate - - 3,144 - -% (3,144 ) (100.0)% Other expense (15 ) (370 ) - 355 95.9% (370 ) -% Total other income (expense) $ (1,692 ) $ (2,268 ) $ 2,165 $ 576 25.4% $ (4,433 ) (204.8)% 54
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Foreign Exchange We recognize gains and losses due to the effect of exchange rate changes on foreign currency primarily due to our operations inSpain ,the Netherlands , and inChina . The assets and liabilities of our foreign operations are translated from their respective functional currencies into U.S. dollars at the rates in effect at the consolidated balance sheet dates, and the revenue and expense amounts are translated at the average rate during the applicable periods reflected on the consolidated statements of operations and comprehensive loss. Foreign currency translation adjustments are recorded as accumulated other comprehensive income. Gains and losses from foreign currency transactions denominated in currencies other than the U.S. dollar , both realized and unrealized, are recorded as foreign exchange gain (loss) on our consolidated statements of operations and comprehensive loss. A majority of the gain or losses recorded relates to the change in value of the euro and yuan renminbi relative to the U.S. dollar. Loss fromEquity Method Investment We entered into a joint venture agreement in fiscal 2010 with San'anOptoelectronics Co., Ltd. (San'an) for the purpose of engaging in the development, manufacturing, and distribution of CPV receivers, modules, and systems for terrestrial solar power applications under a technology license from us. The joint venture,Suncore Photovoltaic Technology Co., Ltd. (Suncore) was established inJanuary 2011 . To date, we have contributed$12.0 million in cash to Suncore as a capital contribution and have received$8.5 million of consulting fees from an affiliate of San'an. We have accounted for our investment in Suncore using the equity method of accounting and we have recorded the consulting fees as a reduction to our investment in Suncore. During fiscal 2011, we held a 40% registered ownership in Suncore and we recorded a$1.8 million loss from this equity method investment which was primarily related to start-up activities. See Footnote 17 - Suncore Joint Venture in the notes to the consolidated financial statements for additional information related to our Suncore joint venture. Change in Fair Value of Financial Instruments As ofSeptember 30, 2011 and 2010, warrants representing 3,000,003 shares of our common stock were outstanding. All of our warrants are classified as a liability since the warrants meet the classification requirements for liability accounting pursuant to ASC 815, Derivatives and Hedging. Each quarter, we expect an impact on our statement of operations and comprehensive loss when we record the change in fair value of our outstanding warrants using theMonte Carlo option valuation model. TheMonte Carlo option valuation model is used since it allows the valuation of each warrant to factor in the value associated with our right to affect a mandatory exercise of each warrant. The valuation model requires the input of highly subjective assumptions, including the warrant's expected life and the price volatility of the underlying stock. The change in the fair value of the warrants is primarily due to the change in the closing price of our common stock. See Footnote 4 - Fair Value Accounting in the notes to the consolidated financial statements for additional information related to our valuation of our outstanding warrants. Impairment of Investment InApril 2008 , we invested approximately$1.5 million inLightron Corporation , a Korean company that is publicly traded on theKorean Stock Market . Due to the decline in the market value of this investment and the expectation of non-recovery of this investment beyond its current market value, we recorded a$0.5 million "other than temporary" impairment loss on this investment as ofSeptember 30, 2008 and another$0.4 million "other than temporary" impairment loss on this investment as ofDecember 31, 2008 . During the quarter endedMarch 31, 2009 , we sold our interest inLightron Corporation , via several transactions, for a total of$0.5 million in cash. We recorded a gain on the sale of this investment of approximately$21,000 , after consideration of impairment charges recorded in previous periods, and we also recorded a foreign exchange loss of$0.1 million due to the conversion from Korean Won to U.S. dollars. Gain from the Sale of an Unconsolidated Affiliate InJanuary 2009 , we completed the sale of our remaining interests in a company formerly namedWorldWater & Solar Technologies Corporation , now namedEntech Solar, Inc. We sold our remaining shares of Entech Solar Series D Convertible Preferred Stock and warrants to a significant shareholder of both our Company andEntech Solar , for approximately$11.6 million , which included additional consideration of$0.2 million as a result of the termination of certain operating agreements withEntech Solar . We recognized a gain on the sale of this investment of approximately$3.1 million . Net Loss (in thousands, except percentages) For the Fiscal Years Ended September 30,
Fiscal 2011 vs Fiscal 2010 Fiscal 2010 vs Fiscal 2009
2011 2010 2009 $ Change % Change $ Change % Change Net loss $ (34,219 ) $ (23,694 ) $ (138,801 ) $ (10,525 ) (44.4)% $ 115,107 82.9% 55
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Net loss. The net loss per share for the fiscal years endedSeptember 30, 2011 , 2010, and 2009, was$(0.38) ,$(0.28) , and$(1.75) , respectively. In fiscal 2009, we recorded non-cash impairment charges totaling$60.8 million related to goodwill, intangible assets, and fixed assets associated with our Fiber Optics segment.
See Explanatory Note on page 4 for a discussion associated with the impact of the floods in
Liquidity and Capital Resources
Historically, we have consumed cash from operations and incurred significant net losses. For the years endedSeptember 30, 2011 , 2010 and 2009, we incurred net losses of$34.2 million ,$23.7 million and$138.8 million , respectively. We have managed our liquidity position through a series of cost reduction initiatives, borrowings under our line of credit agreement, capital markets transactions, and the sale of assets. As ofSeptember 30, 2011 , cash and cash equivalents was approximately$15.6 million and working capital totaled$24.3 million . Working capital, calculated as current assets minus current liabilities, is a financial metric we use that represents available operating liquidity. For the fiscal years endedSeptember 30, 2011 , 2010 and 2009 net cash provided by (used in) operating activities totaled$(6.3) million ,$3.4 million , and$(29.6) million , respectively. In addition, onOctober 24, 2011 , our primary contract manufacturer announced that, as a result of the flooding inThailand , it had suspended operations at its facility that is used to manufacture certain of our fiber optics products. Rising water penetrated the facility and submerged most of our manufacturing and test equipment as well as our inventory at the facility. We expect to write-off the carrying value of damaged equipment and inventory which is estimated to be in the range of$10 to $20 million .
We expect that flooding at our primary contract manufacturer in
As a result of the flood, certain inventory and fixed assets were damaged or destroyed. Our contract manufacturer is required under its production agreement with us to reimburse us for losses to fixed assets and inventory incurred while at the manufacturer's facilities. We are working with our contract manufacturer (and the contract manufacturer's insurance carrier) to receive insurance proceeds to cover the direct damages to our assets that were impacted by the flood. We are not a named beneficiary of our contract manufacturer's insurance policy. The timing and amounts of the recovery from the contract manufacturer, including insurance proceeds, are uncertain at this time.
Additionally, we claimed damages under our own insurance policy relating to business interruption due to the flooding. To date, we have collected
With respect to measures taken to improve liquidity:
• On
(credit facility) with
provides us with a three-year revolving credit of up to$35 million that can be used for working capital requirements, letters of credit, and other
general corporate purposes. The credit facility was initially secured by
the Company's accounts receivables and inventory assets and was subject to
a borrowing base formula based on the Company's eligible accounts receivable and inventory accounts. OnDecember 21, 2011 , we signed an amendment to our credit facility that increased our eligible borrowing base by up to$10 million by adding to the borrowing base formula 85% of the appraised value of the Company's equipment and 50% of the appraised value of the Company's real estate, for which the appraisals are currently in process. In addition,Wells Fargo reduced our restrictions under the excess availability financial covenant requirement from$7.5 million to$3.5 million throughDecember 2012 . The interest rate on outstanding borrowings was increased toLIBOR rate plus four percent. We now expect at least 70% of the total amount of credit under the credit facility to be available for use based on the revised borrowing base formula during fiscal year 2012, of which$17.6 million was borrowed atSeptember 30, 2011 . 56
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The credit facility contains customary representations and warranties, and affirmative and negative covenants, including, among other things, cash balance and excess availability requirements, minimum tangible net worth and EBITDA covenants and limitations on liens and certain additional indebtedness and guarantees. The covenants are written such that as long as we maintain the minimum cash balance and excess availability requirement of$7.5 million prior to the amendment, and$3.5 million following the amendment, the other covenants are not required to be met. As ofSeptember 30, 2011 , we were in compliance with the financial covenants contained in the credit facility since cash on deposit and excess availability exceeded the$7.5 million financial covenant requirement. The credit facility also contains certain events of default, including a subjective acceleration clause. Under this clause,Wells Fargo may declare an event of default if it believes in good faith that our ability to pay all or any portion of its indebtedness withWells Fargo or to perform any of its material obligations under the credit facility has been impaired, or if it believes in good faith that there has been a material adverse change in the business or financial condition of the Company. If an event of default is not cured within the grace period (if applicable), thenWells Fargo may, among other things, accelerate repayment of amounts borrowed under the credit facility, cease making advances under the credit facility or take possession of the Company's assets that secure its obligations under the credit facility. We do not anticipate at this time any change in the business or financial condition of the Company that could be deemed a material adverse change byWells Fargo .Wells Fargo has confirmed that they do not consider the flooding at our contract manufacturer to be a material adverse change in the business or financial condition of the Company.
• On
facility (2011 Equity Facility) with
Ltd. (Commerce Court) whereby Commerce Court has committed, upon issuance
of a draw-down request by us, to purchase up to
common stock over a two-year period, subject to our common stock trading
above$1 per share during the draw down period, unless a waiver is received. • InNovember 2011 , we implemented various cost reduction measures,
including temporary salary reduction, furlough, reduction of discretionary
spending including travel, capital expenditures, and development material
costs, and improve working capital management. We believe that our cost reduction activities will reduce the overall cost structure of our operations. We also entered into an agreement with our contract manufacturer whereby our contract manufacturer will purchase equipment to rebuild our affected manufacturing lines for which we will repay our contract manufacturer from insurance proceeds received from that contract manufacturer. Additionally, we restructured our outstanding payables owed to our contract manufacturer, which delayed payments to future dates to coincide with expected timing of insurance proceeds.
• In
which they will receive an allocation of our finished goods inventory as
well as a percentage of future output from our new production lines being
placed into service in fiscal 2012. As consideration, we have received
partial prepayments for future product shipments. These advanced payments
will be used to support our working capital requirements until we receive
the insurance proceeds.
We believe that our existing balances of cash and cash equivalents, the cash expected to be generated from operations, the agreement with our contract manufacturer to delay payment terms and purchase equipment, expected insurance proceeds, and amounts expected to be available under our credit facility withWells Fargo and our 2011 Equity Facility 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, unfavorable market or economic developments, unfavorable results from operations, or ifWells Fargo declares an event of default on the credit facility, 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 assurance that we will be able to raise additional funds on terms acceptable to us, or at all. A significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if or when it is required, especially if we experience negative operating results. If adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition, results of operations, and cash flows may be adversely affected.
See Explanatory Note on page 4 for a discussion associated with the impact of the floods in
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Net Cash Provided By (Used In) Operating Activities Operating Activities (in thousands, except percentages) For the Fiscal Years Ended September 30, Fiscal
2011 vs Fiscal 2010 Fiscal 2010 vs Fiscal 2009 2011 2010 2009 $ Change % Change $ Change % Change Net cash provided by (used in) operating activities $ (6,289 ) $ 3,411 $ (29,562 ) $
(9,700 ) (284.4)% $ 32,973 111.5% Fiscal 2011: Our operating activities consumed cash of$6.3 million in fiscal 2011 as a result of our net loss of$34.2 million and the net change in our current assets and liabilities (or working capital components) of$2.5 million ; partially offset by depreciation and amortization expense of$12.0 million , impairment charges of$8.0 million , stock-based compensation expense of$7.4 million , and the loss from our equity investment in our Suncore joint venture of$1.8 million . The change in our current assets and liabilities of$2.5 million was primarily the result of an increase in prepaid and other assets of$2.5 million , an increase in inventory of$0.9 million , and a decrease in accrued expenses and other current liabilities of$2.8 million ; partially offset by a decrease in accounts receivable of$3.3 million and an increase in accounts payable of$0.4 million . Fiscal 2010: Our operating activities provided cash of$3.4 million in fiscal 2010. Our net loss of$23.7 million was offset by the net change in our current assets and liabilities of$0.4 million and our non-cash expenses which included depreciation and amortization expense of$12.3 million , stock-based compensation expense of$9.9 million , provision for doubtful accounts of$2.2 million , and the provision for product warranty of$1.2 million . The change in our current assets and liabilities of$0.4 million was primarily the result of an increase in accrued expense and other current liabilities of$3.8 million , an increase in accounts payable of$1.2 million ; partially offset by an increase in accounts receivable of$3.3 million , and increase in prepaid and other assets of$0.9 million , and an increase in inventory of$0.4 million . Fiscal 2009: Our operating activities consumed cash of$29.6 million in fiscal 2009 as a result of our net loss of$138.8 million which was partially offset by the net change in our current assets and liabilities of$10.6 million and our non-cash expenses which included impairment charges of$60.8 million , depreciation and amortization expense of$16.1 million , stock-based compensation expense of$8.1 million , provision for doubtful accounts of$5.1 million , provision for product warranty of$2.6 million , and a provision of losses on firm commitments of$8.5 million . The change in our current assets and liabilities of$10.6 million was primarily the result of a decrease in inventory of$33.0 million , a decrease in accounts receivable of$16.0 million , and a decrease in prepaid and other assets of$1.6 million ; partially offset by a decrease in accounts payable of$27.4 million and a decrease of accrued expenses of$12.5 million .
Working Capital Components:
Accounts Receivable: We generally expect the level of accounts receivable at any given quarter to reflect the level of sales in that quarter. Our accounts receivable balances have fluctuated historically due to the timing of account collections, timing of product shipments, and/or change in customer credit terms. Inventory: We generally expect the level of inventory at any given quarter to reflect the change in our expectations of forecasted sales. Our inventory balances have fluctuated historically due to the timing of customer orders and product shipments, changes in our internal forecasts related to customer demand, as well as adjustments related to excess and obsolete inventory.
Accounts Payable: The fluctuation of our accounts payable balances is primarily driven by changes in inventory purchases as well as changes related to the timing of actual payments to vendors.
Accrued Expenses: Our largest accrued expense typically relates to compensation. Historically, fluctuations of our accrued expense accounts have primarily related to changes in the timing of actual compensation payments, receipt or application of advanced payments, adjustments to our warranty accrual, and accruals related to professional fees. 58
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Net Cash Provided By (Used In) Investing Activities Investing Activities (in thousands, except percentages) For the Fiscal Years Ended September 30, Fiscal 2011 vs Fiscal 2010 Fiscal 2010 vs Fiscal 2009 2011 2010 2009 $ Change % Change $ Change % Change Net cash provided by (used in) investing activities $ (15,286 ) $ (316 ) $ 13,267 $ (14,970 ) (4,737.3)% $ (13,583 ) (102.4)% Fiscal 2011: Our investing activities consumed$15.3 million of net cash in fiscal 2011 primarily due to a$12.0 million investment in our Suncore joint venture,$7.3 million related to capital expenditures,$1.0 million related to deposits on equipment orders,$0.8 million related to the purchase of Soliant rooftop CPV-related assets, and$0.4 million related to investment in patents; partially offset by$5.5 million in proceeds in the form of advanced payments for consulting fees received from an unconsolidated affiliate and$0.8 million related to the release of restricted cash. Fiscal 2010: Our investing activities consumed$0.3 million of net cash in fiscal 2010 primarily due to$1.4 million related to capital expenditures and$0.6 million related to investment in patents; partially offset by$1.3 million in proceeds from the sale of available-for-sale securities and$0.4 million related to the release of restricted cash. Fiscal 2009: Our investing activities provided$13.3 million of net cash in fiscal 2009 primarily from$11.0 million received from the sale of an unconsolidated affiliate,$2.7 million received from the sale of available-for-sale securities, and$0.7 million related to the release of restricted cash; partially offset by$1.3 million related to capital expenditures. Net Cash Provided By Financing Activities Financing Activities (in thousands, except percentages) For the Fiscal Years Ended September 30, Fiscal 2011 vs Fiscal 2010 Fiscal 2010 vs Fiscal 2009 2011 2010 2009 $ Change % Change $ Change % Change Net cash provided by financing activities $ 17,887 $ 2,365 $ 12,100 $ 15,522 656.3% $ (9,735 ) (80.5)% Fiscal 2011: Our financing activities provided$17.9 million of net cash in fiscal 2011 primarily from$9.7 million of proceeds from a private placement transaction,$7.0 million related to borrowings on our bank credit facility, and$1.9 million of proceeds received from our stock plans; partially offset by$0.6 million of payments on our capital lease obligations. Fiscal 2010: Our financing activities provided$2.4 million of net cash in fiscal 2010 primarily from$2.0 million of proceeds from our equity line financing facility,$1.0 million of proceeds received from our stock plans, and$0.2 million related to borrowings on our bank credit facility; partially offset by net payments on our short-term debt totaling$0.8 million . Fiscal 2009: Our financing activities provided$12.1 million of net cash in fiscal 2009 primarily from$10.3 million related to borrowings on our bank credit facility,$0.9 million of proceeds received from our stock plans, and$0.8 million related to other short-term debt borrowings. 59
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Contractual Obligations and Commitments
Our contractual obligations and commitments over the next five years are summarized in the table below: Contractual Obligations and Commitments (in thousands) For the Fiscal Years Ended September 30, 2017 Total 2012 2013 to 2014 2015 to 2016 and later Purchase obligations $ 27,977 $ 27,651 $ 235 $ 91 $ - Credit facility 17,557 17,557 - - - Asset retirement obligations 4,800 - 409 33 4,358 Operating lease obligations 5,154 1,234 1,069 302 2,549 Capital lease obligations 3,475 2,405 1,070 - - Total contractual obligations and commitments $ 58,963 $ 48,847 $ 2,783
$ 426
Interest payments are not included in the contractual obligations and commitments table above since they are insignificant to our consolidated results of operations.
Purchase Obligations Our purchase obligations represent agreements to purchase goods or services that are enforceable and legally binding, that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transactions. InNovember 2011 , we entered into an agreement with our contract manufacturer that was affected by the floods inThailand whereby our contract manufacturer will purchase equipment to rebuild our affected manufacturing lines. Additionally, we restructured our outstanding payables owed to our contract manufacturer which delayed payments to future dates to coincide with expected timing of insurance proceeds. Credit Facility As ofSeptember 30, 2011 , we had a$17.6 million LIBOR rate loan outstanding, with an interest rate of 3.38%, and approximately$2.6 million reserved under eight outstanding standby letters of credit under the credit facility. As ofNovember 2, 2011 , we paid off the outstanding loan with cash on hand. OnDecember 21, 2011 , we signed an amendment to our credit facility that increased our eligible borrowing base by up to$10 million by adding to the borrowing base formula 85% of the appraised value of the Company's equipment and 50% of the appraised value of the Company's real estate, for which the appraisals are currently in process. In addition,Wells Fargo Bank reduced our restrictions under the excess availability financial covenant requirement from$7.5 million to$3.5 million throughDecember 2012 . The interest rate on outstanding borrowings was increased toLIBOR rate plus four percent. We now expect at least 70% of the total amount of credit under the credit facility to be available for use based on the revised borrowing base formula during fiscal year 2012. See Footnote 11 - Credit Facilities for additional information related to our bank credit facility. Asset Retirement Obligations We have known conditional asset retirement conditions, such as certain asset decommissioning and restoration of rented facilities to be performed in the future. During the three months endedSeptember 30, 2011 , we completed a review of our asset retirement and environmental obligations and we recorded a long-term liability totaling$4.8 million . We increased the carrying amount of our long-lived assets by the same amount as the asset retirement obligation. The fair value was estimated by discounting projected cash flows over the estimated life of the related assets using credit adjusted risk-free rates which ranged from 3.25% to 5.78%. The asset retirement obligations in the table above includes assumptions related to renewal option periods where we expect to extend facility lease terms. In future periods, the asset retirement obligation is accreted for the change in its present value and capitalized costs are depreciated over the useful life of the related assets. If the fair value of the estimated asset retirement obligation changes, an adjustment will be recorded to both the asset retirement obligation and the asset retirement capitalized cost. Revisions in estimated liabilities can result from revisions of estimated inflation rates, escalating retirement 60
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costs, and changes in the estimated timing of settling asset retirement obligations. No liabilities associated with asset retirements were settled in fiscal years 2009, 2010, and 2011. No accretion expense was incurred in fiscal years 2009, 2010, and 2011. Operating and Capital Leases Operating leases include non-cancelable terms and exclude renewal option periods, property taxes, insurance and maintenance expenses on leased properties. There are no off-balance sheet arrangements other than our operating leases. Our capital lease obligation listed above includes$1.3 million of liability on our balance sheet as ofSeptember 30, 2011 as well as$2.2 million in commitments for additional equipment to be acquired under capital lease as of September 30, 2011. See Footnote 14 - Commitments and Contingencies in the notes to the consolidated financial statements for additional information related to our operating and capital lease obligations. See Footnote 20 - Subsequent Event for a discussion associated with the impact of the floods inThailand on our equipment which includes those under capital lease. Suncore Joint Venture The total registered capital of Suncore is$30 million , of which San'an has contributed$18 million in cash andEMCORE has contributed$12 million in cash. We are not required to contribute additional funds in excess of our initial$12 million investment, and at this time, we do not anticipate contributing any additional funds to Suncore. The joint venture agreement provides for any working capital needs to be provided by San'an. See Footnote 17 - Suncore Joint Venture in the notes to the consolidated financial statements for additional information related to this joint venture. Segment Data and Related Information See Footnote 16 - Segment Data and Related Information in the notes to the consolidated financial statements for disclosures related to business segment revenue, geographic revenue, significant customers, and operating loss by business segment. Recent Accounting Pronouncements See Footnote 3 - Recent Accounting Pronouncements in the notes to the consolidated financial statements for disclosures related to recent accounting pronouncements. Restructuring Accruals See Footnote 10 - Accrued Expenses and Other Current Liabilities in the notes to the consolidated financial statements for disclosures related to our severance and restructuring-related accrual accounts. Officers and Directors - Mr.Mark B. Weinswig was hired as the Company's Chief Financial Officer effectiveOctober 11, 2010 . - Dr.James A. Tegnelia joined the Company's Board of Directors onMarch 2, 2011 . 61
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NANO MASK, INC. – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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