Equity

Equity Plans

We provide long-term incentives to eligible officers, directors, and employees in the form of equity-based awards. We maintain three equity incentive compensation plans, collectively described below as our “Equity Plans”:


•	the 2000 Stock Option Plan,


•	the 2010 Equity Incentive Plan (“2010 Plan”), and


•	the 2012 Equity Incentive Plan (“2012 Plan”).

We issue new shares of common stock to satisfy awards issued under our Equity Plans.

Stock Options

Most of our stock options vest and become exercisable over a four to five year period and have a contractual life of 10 years. Certain stock options awarded are intended to qualify as incentive stock options pursuant to Section 422A of the Internal Revenue Code.

The following table summarizes stock option activity under the Equity Plans for the three months ended December 31, 2016:



	Number of Shares		Weighted Average Exercise Price	Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (*) (in thousands)
Outstanding as of September 30, 2016	750,338		$16.84
Granted	—		—
Exercised	(26,151	)	$3.99		$	120
Forfeited	(1,300	)	$4.11
Expired	(124,915	)	$19.91
Outstanding as of December 31, 2016	597,972		$16.79	2.44	$	1,101
Exercisable as of December 31, 2016	531,911		$18.30	1.67	$	832
Vested and expected to vest as of December 31, 2016	586,261		$17.03	2.31	$	1,054

(*) 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. For the three months ended December 31, 2015, the intrinsic value of options exercised was $80,000.

As of December 31, 2016, there was approximately $0.2 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested stock options granted under the Equity Plans which is expected to be recognized over an estimated weighted average life of 3.4 years.

Valuation Assumptions

There were no stock option grants for the three months ended December 31, 2016. The fair value of each stock option grant for the three months ended December 31, 2015, excluding the adjustment for the special dividend, was estimated on the date of grant using the Black-Scholes option valuation model, adhering to the straight-line attribution approach using the following weighted-average assumptions, of which the expected term and stock price volatility rate are highly subjective:



	For the three months ended December 31,
	2015
Black-Scholes weighted average assumptions:
Expected dividend rate	—		%
Expected stock price volatility rate	61.6		%
Risk-free interest rate	1.8		%
Expected term (in years)	6.0

Weighted average grant date fair value per share of stock options granted:	$	4.18

Expected Dividend Yield: The Black-Scholes valuation model calls for a single expected dividend rate as an input. Although we paid a special dividend in July 2016, no dividend rate was assumed in the valuation.

Expected Stock Price Volatility Rate: The fair values of stock-based payments were calculated using the Black-Scholes valuation method with a volatility factor based on our historical common stock prices.

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

Expected Term: Expected term represents the period that our 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 stock-based awards.

Estimated Pre-vesting Forfeitures: 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.

Restricted Stock

Restricted stock units (RSUs) granted to employees under the 2010 Plan and 2012 Plan typically vest over 3 to 4 years and are subject to forfeiture if employment terminates prior to the lapse of the restrictions. RSUs are not considered issued or outstanding common stock until they vest.

The following table summarizes the activity related to RSUs for the three months ended December 31, 2016:



Restricted Stock Activity	Restricted Stock Units
	Number of Shares		Weighted Average Grant Date Fair Value
Non-vested as of September 30, 2016	878,416		$4.25
Granted	145,919		$7.29
Vested	(5,206	)	$6.01
Forfeited	(933	)	$4.74
Non-vested as of December 31, 2016	1,018,196		$4.67

As of December 31, 2016, there was approximately $3.1 million of remaining unamortized stock-based compensation expense, net of estimated forfeitures, associated with RSUs, which will be expensed over a weighted average remaining service period of approximately 2.4 years. The 1.0 million outstanding non-vested RSUs have an aggregate intrinsic value of approximately $8.9 million and a weighted average remaining contractual term of 1.4 years. For the three months ended December 31, 2016 and 2015, the intrinsic value of RSUs vested was approximately $32,000 and $1,800, respectively. Of the 1.0 million outstanding non-vested RSUs at December 31, 2016, approximately 1.0 million are expected to vest and have an aggregate intrinsic value of approximately $8.4 million and a weighted average remaining contractual term of 1.3 years. For the three months ended December 31, 2015, the weighted average grant date fair value of RSUs granted was $7.82.

On October 18, 2016, the Company granted 70,000 RSUs with a grant date fair value of $0.4 million to its CEO, Jeffrey Rittichier, that will vest in 4 equal annual installments beginning on October 18, 2017.

Performance Stock

Performance based restricted stock units (PSUs) granted to employees under the 2012 Plan typically vest over 1 to 3 years and are subject to forfeiture if employment terminates prior to the lapse of the restrictions. PSUs are not considered issued or outstanding common stock until they vest. PSUs that are granted to our executive officers and key employees are provided as long-term incentive compensation that is based on relative total shareholder return, which measures our performance against that of our competitors.

On October 18, 2016, the Company granted our CEO, Mr. Rittichier, 100,000 target PSUs with a grant date fair value of $0.7 million and our CFO, Jikun Kim, 195,180 target PSUs with a grant date fair value of $1.4 million.

The PSUs issued will be based on a combination of the relative total shareholder return of EMCORE’S stock compared to the Russell Microcap Index and the executive's continued employment. The total number of shares to be issued to each individual ranges from zero (0) to 200% of the target PSUs granted. Between zero (0) and 200% of one third of the target PSUs will vest, if at all, on each of October 17, 2017, 2018 and 2019.

On December 14, 2016, the Company granted 71,669 target PSUs with a grant date fair value of $1.0 million to certain employees. The PSUs issued will vest based on a combination of the relative total shareholder return of EMCORE’s stock compared to the Russell Microcap Index and the employee's continued employment. The total number of shares to be issued to each individual may range from zero (0) to 200% of the target PSUs granted. Between zero (0) and 200% of the target PSUs will vest, if at all, on December 14, 2019.

The following table summarizes the activity related to PSUs for the three months ended December 31, 2016:



Performance Stock Activity	Performance Stock Units
	Number of Shares (at Target)	Weighted Average Grant Date Fair Value
Non-vested as of September 30, 2016	—	$0.00
Granted	366,849	$8.34
Vested	—	$0.00
Forfeited	—	$0.00
Non-vested as of December 31, 2016	366,849	$8.34

As of December 31, 2016, there was approximately $2.5 million of remaining unamortized stock-based compensation expense, net of estimated forfeitures, associated with PSUs, which will be expensed over a weighted average remaining service period of approximately 2.0 years. The 0.4 million outstanding non-vested PSUs have an aggregate intrinsic value of approximately $3.2 million and a weighted average remaining contractual term of 2.0 years. For the three months ended December 31, 2016 and 2015, there were no PSUs vested. Of the 0.4 million outstanding non-vested PSUs at December 31, 2016, approximately 0.3 million are expected to vest and have an aggregate intrinsic value of approximately $3.0 million and a weighted average remaining contractual term of 2.0 years. There were no PSUs granted during the three months ended December 31, 2015.

Stock-based compensation

The effect of recording stock-based compensation expense was as follows:



Stock-based Compensation Expense - by award type	For the three months ended December 31,
(in thousands)	2016		2015
Employee stock options	$	11	$	6
Restricted stock awards and units	354		266
Performance stock units	268		—
Employee stock purchase plan	52		55
Outside director fees in common stock	78		36
Total stock-based compensation expense	$	763	$	363



Stock-based Compensation Expense - by expense type	For the three months ended December 31,
(in thousands)	2016		2015
Cost of revenue	$	93	$	69
Selling, general, and administrative	570		188
Research and development	100		106
Total stock-based compensation expense	$	763	$	363

The stock-based compensation expense above relates to continuing operations. Stock-based compensation within selling, general and administrative expense was higher for three months ended December 31, 2016 due to stock-based compensation expense associated with the grants of PSUs. Included within discontinued operations is $9,000 and $24,000 of stock based compensation expense for the three months ended December 31, 2016 and 2015, respectively.

401(k) Plan

We have a savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under this savings plan, participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. Since June 2015, all employer contributions are made in cash. Our matching contribution in cash for the three months ended December 31, 2016 and 2015 was approximately $0.1 million.

Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) per share:



Basic and Diluted Net Income (Loss) Per Share	For the three months ended December 31,
(in thousands, except per share)	2016			2015

Numerator:
Income (loss) from continuing operations	$	1,766		$	(134	)
(Loss) income from discontinued operations	(9		)	1,121
Undistributed earnings allocated to common shareholders for basic and diluted net income per share	1,757			987
Denominator:
Denominator for basic net income per share - weighted average shares outstanding	26,279			25,697
Dilutive options outstanding, unvested stock units and ESPP	760			—
Denominator for diluted net income per share - adjusted weighted average shares outstanding	27,039			25,697

Net income per basic share:
Continuing operations	$	0.07		$	0.00
Discontinued operations	0.00			0.04
Net income per basic share	$	0.07		$	0.04

Net income (loss) per diluted share:
Continuing operations	$	0.07		$	0.00
Discontinued operations	0.00			$	0.04
Net income per diluted share	$	0.07		$	0.04
Weighted average antidilutive options, unvested restricted stock units and awards, unvested performance stock units and ESPP shares excluded from the computation	529			858

Average market price of common stock	$	6.88		$	6.93

For diluted income (loss) per share, the denominator includes all outstanding common shares and all potential dilutive common shares to be issued. For the three months ended December 31, 2016, we excluded 0.5 million of weighted average outstanding stock options, RSUs and PSUs from the calculation of diluted net income per share because their effect would have been anti-dilutive. The anti-dilutive stock options and unvested stock were excluded from the computation of diluted net income (loss) per share for the three months ended December 31, 2015 due to the Company incurring a net loss for that period.

Employee Stock Purchase Plan

We maintain an Employee Stock Purchase Plan (“ESPP”) that provides employees an opportunity to purchase common stock through payroll deductions. The ESPP is a 6-month duration plan with new participation periods beginning on February 25 and August 26 of each year. The purchase price is set at 85% of the average high and low market price of our common stock on either the first or last day of the participation period, whichever is lower, and annual contributions are limited to the lower of 10% of an employee's compensation or $25,000.

Future Issuances

As of December 31, 2016, we had common stock reserved for the following future issuances:



Future Issuances	Number of Common Stock Shares Available for Future Issuances
Exercise of outstanding stock options	597,972
Unvested restricted stock units	1,018,196
Unvested performance stock units	366,849
Purchases under the employee stock purchase plan	1,044,678
Issuance of stock-based awards under the Equity Plans	416,358
Purchases under the officer and director share purchase plan	88,741
Issuance of deferred stock-based awards under the Directors' Stock Award Plan, as amended	28,840
Total reserved	3,561,634