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.

The Board of Directors (the “Board”) of the Company previously approved, subject to stockholder approval, amendments to the 2012 Plan that would, among other changes, (1) increase the limit on the aggregate number of shares of common stock that may be delivered pursuant to awards granted under the 2012 Plan by 2,400,000 shares to a new aggregate share limit of 5,301,366 shares; (2) extend the ability to grant performance-based awards under the 2012 plan through the first annual meeting of shareholders that occurs in 2022; (3) extend the term of the 2012 Plan until March 17, 2027; (4) increase the annual limits on the number of different types of awards that may be granted to an individual under the 2012 Plan, so a participant may receive (a) a maximum of 200,000 stock options, 200,000 stock appreciation rights, 200,000 shares of restricted stock, 200,000 restricted stock units, 200,000 stock purchase rights and 200,000 share awards in any fiscal year of the Company, (b) in connection with their initial year of service, up to an additional 400,000 stock options, 400,000 stock appreciation rights, 400,000 shares of restricted stock, 400,000 restricted stock units, 400,000 stock purchase rights and 400,000 share awards, and (c) a maximum of $1,000,000 in cash earned in connection with the grant of performance units in any fiscal year; and (5) require all awards granted under the Amended 2012 Plan to have a minimum vesting period of one year and no award may vest earlier than the first anniversary of the grant date of the award. The Company’s stockholders approved the amendments to the 2012 Plan on March 17, 2017.

As of September 30, 2016, the Company early adopted the new accounting guidance that simplifies several aspects of the accounting for share-based payments, including the Company's election to eliminate the requirements to estimate the number of awards that are expected to vest, and instead, account for forfeitures when they occur. The new standard requires the change be adopted using the modified retrospective approach. As such, the Company recorded a cumulative-effect adjustment of $0.2 million to decrease the September 30, 2016 accumulated deficit and common stock balances.

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 nine months ended June 30, 2017:



	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	(150,922	)	$3.27		$	887
Forfeited	(5,204	)	$4.99
Expired	(145,731	)	$19.46
Outstanding as of June 30, 2017	448,481		$20.69	1.81	$	585
Exercisable as of June 30, 2017	396,712		$22.78	0.97	$	276
Vested and expected to vest as of June 30, 2017	448,481		$20.69	1.81	$	585

(*) 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 nine months ended June 30, 2016, the intrinsic value of options exercised was $82,000.

As of June 30, 2017, there was approximately $0.1 million of unrecognized stock-based compensation expense related to non-vested stock options granted under the Equity Plans which is expected to be recognized over an estimated weighted average life of 3.0 years.

Valuation Assumptions

There were no stock option grants for the three and nine months ended June 30, 2017. The fair value of each stock option grant for the three and nine months ended June 30, 2016, excluding the adjustment for a special dividend paid in July 2016, 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 June 30,						For the nine months ended June 30,
	2017			2016			2017			2016
Black-Scholes weighted average assumptions:
Expected dividend rate	—		%	—		%	—		%	—		%
Expected stock price volatility rate	—		%	60.4		%	—		%	60.9		%
Risk-free interest rate	—		%	1.4		%	—		%	1.6		%
Expected term (in years)	—			6.0			—			6.0

Weighted average grant date fair value per share of stock options granted:	$	—		$	3.06		$	—		$	3.40

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.

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 nine months ended June 30, 2017:



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	307,509		$8.44
Vested	(351,489	)	$4.13
Forfeited	(33,771	)	$4.76
Non-vested as of June 30, 2017	800,665		$5.88

As of June 30, 2017, there was approximately $4.0 million of remaining unamortized stock-based compensation expense associated with RSUs, which will be expensed over a weighted average remaining service period of approximately 2.5 years. The 0.8 million outstanding non-vested and expected to vest RSUs have an aggregate intrinsic value of approximately $8.5 million and a weighted average remaining contractual term of 1.6 years. For the nine months ended June 30, 2017 and 2016, the intrinsic value of RSUs vested was approximately $3.3 million and $1.6 million, respectively. For the nine months ended June 30, 2016, the weighted average grant date fair value of RSUs granted was $5.55.

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 vest 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 granted will vest, if at all, on December 14, 2019.

The following table summarizes the activity related to PSUs for the nine months ended June 30, 2017:



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	(4,808	)	$13.36
Non-vested as of June 30, 2017	362,041		$8.27

As of June 30, 2017, there was approximately $1.9 million of remaining unamortized stock-based compensation expense associated with PSUs, which will be expensed over a weighted average remaining service period of approximately 1.5 years. The 0.4 million outstanding non-vested and expected to vest PSUs have an aggregate intrinsic value of approximately $3.9 million and a weighted average remaining contractual term of 1.5 years. For the nine months ended June 30, 2017 and 2016, there were no PSUs vested. There were no PSUs granted during the nine months ended June 30, 2016.

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 June 30,				For the nine months ended June 30,
(in thousands)	2017		2016		2017		2016
Employee stock options	$	12	$	9	$	34	$	25
Restricted stock awards and units	488		606		1,211		1,325
Performance stock units	410		—		1,049		—
Employee stock purchase plan	92		57		210		168
Outside director fees in common stock	78		55		168		185
Total stock-based compensation expense	$	1,080	$	727	$	2,672	$	1,703



Stock-based Compensation Expense - by expense type	For the three months ended June 30,				For the nine months ended June 30,
(in thousands)	2017		2016		2017		2016
Cost of revenue	$	113	$	81	$	353	$	263
Selling, general, and administrative	824		555		1,957		1,163
Research and development	143		91		362		277
Total stock-based compensation expense	$	1,080	$	727	$	2,672	$	1,703

The stock-based compensation expense above relates to continuing operations. Stock-based compensation within selling, general and administrative expense was higher for three and nine months ended June 30, 2017 due to stock-based compensation expense associated with the grants of PSUs. Included within discontinued operations is $11,000 and $(19,000) of stock based compensation expense for the three months ended June 30, 2017 and 2016, respectively. Included within discontinued operations is $0 and $(75,000) of stock based compensation expense for the nine months ended June 30, 2017 and 2016, 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 June 30, 2017 and 2016 was approximately $0.1 million. Our matching contribution in cash for the nine months ended June 30, 2017 and 2016 was approximately $0.4 million and $0.3 million, respectively.

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 June 30,					For the nine months ended June 30,
(in thousands, except per share)	2017			2016		2017			2016

Numerator:
Income from continuing operations	$	2,436		$	1,178	$	6,057		$	882
(Loss) income from discontinued operations	(11		)	123		(27		)	5,388
Undistributed earnings allocated to common shareholders for basic and diluted net income per share	2,425			1,301		6,030			6,270
Denominator:
Denominator for basic net income per share - weighted average shares outstanding	26,833			26,103		26,577			25,913
Dilutive options outstanding, unvested stock units and ESPP	983			166		971			273
Denominator for diluted net income per share - adjusted weighted average shares outstanding	27,816			26,269		27,548			26,186

Net income (loss) per basic share:
Continuing operations	$	0.09		$	0.05	$	0.23		$	0.04
Discontinued operations	(0.00		)	0.00		(0.00		)	0.20
Net income per basic share	$	0.09		$	0.05	$	0.23		$	0.24

Net income (loss) per diluted share:
Continuing operations	$	0.09		$	0.05	$	0.22		$	0.04
Discontinued operations	(0.00		)	0.00		(0.00		)	0.20
Net income per diluted share	$	0.09		$	0.05	$	0.22		$	0.24
Weighted average antidilutive options, unvested restricted stock units and awards, unvested performance stock units and ESPP shares excluded from the computation	370			522		400			528

Average market price of common stock	$	10.00		$	5.64	$	8.66		$	6.00

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 and nine months ended June 30, 2017, we excluded 0.4 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. For the three and nine months ended June 30, 2016, we excluded 0.5 million of weighted average outstanding stock options and RSUs from the calculation of diluted net income per share because their effect would have been anti-dilutive.

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 June 30, 2017, 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	448,481
Unvested restricted stock units	800,665
Unvested performance stock units	362,041
Purchases under the employee stock purchase plan	973,322
Issuance of stock-based awards under the Equity Plans	2,725,158
Purchases under the officer and director share purchase plan	88,741
Total reserved	5,398,408