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Cash burn causes Emcore viability doubts

The solar cell and optical communications component manufacturer outlines the steps it is taking to ensure its ongoing fiscal security.

Compound semiconductor industry stalwart Emcore has disclosed uncertainty about its future as continuing financial losses eat into its cash reserves.

Emcore s 2008 annual report, filed with the Nasdaq stock exchange on December 30, expressed “substantial doubt about the company s ability to continue as a going concern”.

Deloitte and Touche audited the report and made its own comments on the Albuquerque, New Mexico, headquartered company s ongoing viability. Nasdaq rules then forced Emcore to disclose this “going concern qualification” separately on January 6.

On September 30 the company s total available cash amounted to approximately $24.7 million. In the prior year s business Emcore made a $80.9 million net loss and consumed $41.9 million of cash.

“Although we expect our operating performance to improve in future periods, we anticipate that the recession may create a more challenging business environment for us,” the report said.

“Now is a difficult time for everybody, but we think we will be riding through this,” Emcore s CEO Hong Hou told analysts at the Needham Growth Stock Conference in New York on January 6.

“In fiber optics we have been gaining market share and in photovoltaics, because of our superior product performance and competitive cost structure, we have been gaining market share in both space and terrestrial markets.”

End-of-year sales
Since commencing operations in 1984 and evolving from an epitaxy equipment maker to an optoelectronic device manufacturer, Emcore has accumulated deficits of $424.8 million.

“We cannot assure you that we will not continue to experience net losses for the foreseeable future,” the company s annual report warns.

To reinforce its cash reserves, Emcore sold $5.7 million of equity investments after the end of its financial year in September. It intends to sell the same amount again in the current quarter.

The company also established a $25 million credit facility with Bank of America in October and sold $1.7 million of auction rate securities in November. Another $1.4 million worth of these securities, for which the market has been largely frozen since February 2008, is due to be sold by June 2010.

Management is in negotiation with buyers to take a minority stake in Emcore's high-profile GaAs-based solar business, in advance of an intended spin-out of this unit.

“Some strategic partners want to get closer to Emcore in terms of investment,” Hou explained. “We may form some joint ventures with them to address foreign markets where we do not have strong penetration.”

These moves come on top of redundancies and pay freezes that were announced simultaneously with the year-end results to minimize cash burn.

If these measures are not enough to keep Emcore's finances liquid, the company says that it will seek to obtain additional equity or debt financing.

“Due to the unpredictable nature of the capital markets, additional funding may not be available when needed, or on terms acceptable to Emcore,” it cautions in its annual report.

“If adequate funds are not available our ability to continue to fund expansion, develop and enhance products and services, or otherwise respond to competitive pressures may be severely limited.”

“Such a limitation could have a material adverse effect on Emcore s business, financial condition, results of operations, and cash flow.”

Solar backlog blues
While Hou is busy steering the company through choppy financial waters another potential obstacle, in the form of a class-action lawsuit, is beginning to emerge.

At least five legal companies are touting for investors wishing to get involved in a complaint that alleges that Emcore made misleading statements about its solar business.

Law firm Izard Nobel LLP explains that the suit focuses around the 23 percent fall in Emcore s stock that occurred on March 18, 2008. It says that was a response to news that Green and Gold Energy could not afford a deal that accounted for $78 million of Emcore s $86 million terrestrial solar backlog at the time.

In its annual report Emcore gives details of another deal that fell through in 2008 due to insufficient customer funding, with DI Semicon of Korea. However it says that the 20 MW deal was not officially included in its backlog.

Despite these fumbles, the company continues to be confident about the future - based on its own financial moves and the massive potential of the photovoltaic market. “I think Emcore s future looks bright, with our new Generation III array coming out in mid-2009, I think we will be just fine,” a spokesman said.

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