EMCORE Corporation

Good day, and thank you for standing by. And welcome to MCOR Corporation Fiscal 2024 First Quarter Results Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tom Minichiello, MCOR's Chief Financial Officer. Please go ahead.

Thank you, and good afternoon, everyone, and welcome to our conference call to discuss MCOR's fiscal 2024 first quarter results. The news release we issued this afternoon is posted on our website, MCOR.com. On this call, Jeff Redicher, MCOR's President and Chief Executive Officer, will begin with the discussion of our business highlights, and then I will update you on our financial results, and we'll conclude by taking questions. Before we begin, we would like to remind you that the information provided herein may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. These forward-looking statements are largely based on our current expectations and projections about future events and trends affecting the business. Such forward-looking statements include projections about future results, statements about plans, strategies, business prospects, and changes in trends in the business and the markets in which we operate. Management cautions that these forward-looking statements relate to future events or future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of the business or in our industry to be materially different from those expressed or implied by any forward-looking statements. We caution you not to rely on these statements and to also consider the risks and uncertainties associated with these statements in the business which are included in the company's filings available on the SEC's website located at sec.gov, including the sections entitled Risk Factors in the company's annual report on Form 10-K. The company assumes no obligation to update any forward-looking statements to conform statements to actual results or to changes in our expectations except as required by applicable law or regulation. In addition, references will be made during this call to non-GAAP financial measures, which we believe provide meaningful supplemental information to both management and investors. The non-GAAP measures reflect the company's core ongoing operating performance and facilitates comparisons across reporting periods. Investors are encouraged to read these non-GAAP measures, as well as the explanation and reconciliation of these measures to the most comparable GAAP measures included in our news release.

Now I'll turn the call over to Jeff. Thank you, Tom, and good afternoon, everyone. In Q1, inertial navigation revenue shifted substantially between facilities, totaling $24.1 million, with a gross margin of 29% non-GAAP. Chicago, Concord, and Alhambra revenue grew in quarter one, but not enough to make up for the revenue drop in Bud Lake. Tom will provide additional financial details in his remarks. Book to bill came in under 1.0 due to the shortened holiday season. However, none of those orders were lost and all are expected to book in the current quarter, combining to produce a book to bill significantly higher than 1.0. While our booking performance is expected to be quite strong this quarter, the requested ship dates are expected to extend out longer than normal. This strengthens the book for the out-quarters at the expense of near-term shipments, damping prospects for short-term growth. For example, we recently booked an order for $8 million that will be part of a very long-term contract. However, the customer's request dates will actually cover two full years, the net effect of which is to provide more predictable long-term performance at the expense of any short-term bump in revenue. At quarter's end, backlog in the business was approximately 51 million. Compared to the September quarter and adjusted for TAMU, this represents about a 10% reduction that we expect to fully resolve in the March quarter. As we work with interested buyers of our wafer fabrication facility in Alhambra, although we had expected to complete the sale by the end of December quarter, negotiations have taken longer than expected and we now have additional incoming interest. That said, we're working to close a transaction ASAP, but in the meantime, we continue to benefit from cash that the last time sales of chips to customers provide. Moving on to the business, I'll begin my comments by stating that although we had strong performance from Tinley Park, Concord, and Alhambra, Seasonal issues and holiday short and quarter presented headwinds that were bigger than expected, preventing us from backfilling for Bud Lake. In particular, delayed export licenses caused us to push out about $750,000 worth of shipments. And although we were able to bill nearly $800,000 in non-recurring engineering for another program, it did not count as revenue. The principal reason for this delay was a defective lot of circuit boards that could not be remanufactured before the supplier shut down for the holidays. Mix and margins held up well, and we expect similar margins in the March quarter. It has been widely reported in the press that actual cash funding to replace munitions and systems allocated to the Ukraine is dangerously low. This has contributed to some of the budget tug of war that's going on between the service branches and has contributed to some of the timing delays that we've seen in contracting times. Operating expenses were a bright spot. Sales and marketing and G&A came in as expected, but R&D was significantly reduced, showing nearly a $600,000 improvement. We are mindful of our high internally funded research and development, otherwise known as IRAD, spending, and expect to continue to drive this down in the coming quarters through NRE contracts from our customers. In October, we talked about the Kratos XQ58 Valkyrie, the Navy's Mark 48 torpedo business increase, and a few other programs that are continuing to progress nicely. This quarter, we are expecting several other long-term contracts to be released awarded in addition to the Navy's Mark 54 Mod 1 torpedo as it enters production. As we flagged in last quarter's comments, the delays in receiving circuit boards did impact shipments of an advanced IMU for Raytheon's EOIR pods, but we are now expecting to complete the full contract and all of our engineering obligations under that contract at the end of the quarter. We expect to complete the current phase of our MMS program along with several smaller programs roughly within the next six to 12 months. We continue to expect that non-recurring engineering funding from our customers to be at least $7 million in calendar 24 with additional growth expected starting in September and proceeding through FY25. I'd like to provide some additional insight into our integration programs and our continued work on optimization and consolidation, all of which are a key area of focus this year. We remain on track to complete the ERP upgrades for Alhambra and Concord, unifying the company's ERP systems. Beyond ERP, we should complete the product line management, product data management migration in Bud Lake in the March quarter, and this will complete the unification of product data. Manufacturing execution systems will be integrated into Concord and Chicago facilities starting this year. We've also made good progress on moving to a common IMU, INS architecture, having its roots in the former L3 aerospace and navigation team in Bud Lake. This common architecture will streamline our development programs and improve our ability to create new component technologies with less engineering expense. As I've said before, component technology differentiation is the key to gross margin and we are moving to design the next generation closed-loop fog components as well as new closed-loop QMEM sensors to improve cost, size, weight, and power for all of our products. Beyond engineering consolidation, we're working to reduce the amount of floor space we require. With the expected wafer fab sale, Alhambra is now moving all of its optical component assembly technology into a single Alhambra building that we now occupy. This is down from five buildings a year ago. Concord will have its footprint by approximately 50%, and we are working on a plan to right-size the Bud Lake facility. I wish the consolidation problem was as simple as cutting floor space and relocating processes and equipment. However, as I pointed out before, There are very expensive structural power, gas, and environmental systems required to support these moves, not all of which exist in some of our facilities. Customers also require significant requalification efforts to certify processes on new equipment and in new facilities. Requalification is typically done during block changes, and timing is driven by their schedules and the needs of end users, not ours. We've made good progress on reducing the amount of floor space that we require within the capital and requalification limits in the business and expect that effort to continue until we reach an optimal configuration. Finally, in turning now to guidance, the March quarter is expected to be flat compared to December with a range of $23 to $25 million. This is just largely due to order timing and some of the expected delivery dates that we're seeing on our order book. With that, I will turn the call back over to Tom.

Thank you, Jeff. First, a reminder that the results from our legacy business, namely the former broadband segment and the defense optoelectronic products, are reported in the income statement under discontinued operations. As previously reported, all of these operations, except for the Alhambra Indian Phosphide wafer fab and associated chip business, which remain on the balance sheet as assets held for sale, were sold in October. With that, I'll move to a discussion of the results from continuing operations, which is exclusively the inertial navigation business. Revenue in fiscal 1Q was 24.1 million compared to the prior quarter's 26.8 million. Tinley Park shipments continued on a path of continuous steady growth each quarter since the acquisition over a year ago. Concord and Alhambra, while up compared to the quarter before, fell short of our expectations, largely attributable to, as Jeff noted, export license and product delays towards the end of the quarter. Additionally, Bud Lake revenue is down primarily due to the TAMU loss we outlined on our last call. Let me now turn to the rest of the operating results, which will be on a non-GAAP basis. Gross margin held up at 29% in one queue despite the lower revenue. Contributing to the favorable margin was improved fixed overhead absorption in Tinley Park and Concord, and an overall favorable mix. Operating expenses were $9.5 million in fiscal 1Q compared to $10.1 million in fiscal 4Q. The improved OPEX was largely driven by an increase in customer-funded non-recurring engineering, or NRE, in which the associated engineering expense is moved to cost of goods sold to match up with the corresponding revenue. This lowered internally funded R&D or IRAD, which remains as part of OPEX. Operating loss in the December quarter was 2.6 million compared to the September quarter's 1.9 million. Negative adjusted EBITDA was 1.7 million compared to 900,000 last quarter. Net loss was 2.6 million or 3 cents per share. The sequential changes for all three of these metrics were all primarily attributable to the lower revenue. Turning to the balance sheet, reported cash was 21.1 million at December 31st, which temporarily included 2.2 million of third-party cash associated with the sale of the legacy business and a deposit on the potential sale of the wafer fab. Net of these items, MCOR cash was 19 million at the end of the quarter compared to 26.7 million at September 30th. The $7.7 million decrease during the quarter consisted of the following. Negative $1.7 million adjusted EBITDA, $1.5 million associated with discontinued operations, a $1.3 million litigation settlement, $2 million for financing activities, including a $1.7 million debt reduction on our revolving line of credit, $700,000 for severance, and a combined total of $500,000 for working capital, CapEx, and litigation-related costs. The litigation settlement was one time in nature, and going forward, we expect a significant drop-off in cash use for discontinued ops and severance. Total outstanding debt was reduced by $2 million during the quarter to $8.6 million when compared to $10.6 million at September 30th. The $8.6 million as of December 31st consisted of $4.6 million on the line of credit and a $4 million balance on the term loan component. There is currently about $3 million available for borrowing on the line. Before we get to the Q&A, as announced this past Tuesday, we plan to be at the Cowan Aerospace and Defense Conference next week on Wednesday, February 14th in Arlington, Virginia. including a presentation and investor meetings. A link to the live webcast of the presentation was included in Tuesday's announcement. With that, we are now opening up the call for your questions.

And thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And one moment for our first question. And our first question comes from Richard Shannon from Craig Hallam Capital. Your line is now open.

Well, hi, Jeff and Tom. Thanks for taking my questions. Let's just start off with a few tactical questions here kind of quickly here. So obviously the December quarter revenues were a bit low here, and you talked about some pushouts and some supply issues here. And I know you talked about some bookings that were a little bit farther out here, but I guess it would have seemed like that Bud Lake would have come back within this quarter here. It doesn't seem like that's represented in the numbers. I'm not sure if I'm reading this right here, but why wouldn't we see some of that come back? And then how does this help us think about, as you said in the press release, about returning to growth in the June quarter?

Yeah, sure. So let me tackle Bud Lake. So Bud Lake was the primary site that was working on TEMU, and a pretty significant fraction of their revenue was associated with that program. So in the very short term, and I'm talking about now over the next six months, there isn't another program to take its place. until the mass motion sensor, what we call MMS, hits production, and that will happen starting in early 24, right? So we'll be building all of the optical components here in Alhambra, integrating them here, and then over in Bud Lake, they will be doing all of the assembly and checkout. So, you know, effectively that program is you know, should do a pretty good job of replacing that revenue. So the name of the game really for us in the short term is replacing the lost penal revenue with other programs that are running in Concord, Tilley Park, and Alhambra. And, you know, just a little bit of timing issues on those. We're expecting... It's going to be a little bit hard to get some of those into production this quarter, which is why we pointed towards June as a resumption of growth. So in the short term before that mass motion sensor hits production, it's really about maximizing the revenue out of the other three facilities. Does that make sense?

Uh, yeah, I think so. Um, maybe just put this in bigger context of what you said last quarter, uh, where I think you were talking about a funnel that would support kind of 115 to 125 million for this. I believe it was referring to the fiscal year. Um, and I think that was already taking into account the loss of TAMU here. How does that, uh, how does that number sit with you now then?

Yeah, so I would say it's just pushed off approximately a quarter or two. So, you know, at some point when we have a little more certainty on exactly what's going on, we will update the yearly guidance. But it's just timing, right? And part of it is driven by this tug of war between the services. No programs have been lost. There's no... you know, competitive issues at the last minute or anything like it. It's just timing. And, you know, again, just to give you one example, the Mark 54 new version, the Mod 1, is supposed to go into production. It was supposed to go into production 18 months ago. And it was largely contracting delays getting into Raytheon that were responsible for, you know, them telling us, okay, you guys have to have a go button. So, you know, this is just sort of the macro environment that we find ourselves in right now. Fundamentally, all of the programs are doing well. There's been, you know, nothing to comment on as far as any losses. It's just, you know, uh the um it's it's just the short-term stuff i mean i could see a situation where you know we exit uh the march quarter with backlog that i think would be um a very very pleasant surprise the challenge is you've got to take a look at it okay well how much of this is due within the next day two quarters right we're not we're not worried about two to five months at all It's sort of filling the short-term gap from TAMU, and that's what's just proven to be a little bit more difficult from a timing perspective. That's all. Okay.

All right, fair enough. Let's see here, just quickly on the wafer fab sale here, is this something you expect to get done this quarter? I mean, you talked to, or Tom mentioned a deposit made here, so it seems like there's confidence to some degree on both sides here. Is that the confidence in closing this quarter, and what's the delay here? Anything you can share there?

Yeah, I think we've got a reasonable degree of confidence. We've now got multiple, you know, exclusivity was lost because of delays. And so, you know, there's now other inbound interest. And, you know, like the old saying goes, sometimes you need, you know, two deals to make the one go through. And so, you know, should we get it done this quarter? Gosh, you know, I hate to be the broken clock that's right twice a day. We are working to close it as quickly as we can.

Okay, fair enough. One or two quick questions here for Tom. How are we thinking about cash burn in the quarter? I think you kind of alluded to maybe that cash balance improving in this quarter based on working capital. It doesn't sound like it necessarily should change, but please tell me if your views are different there. And then what's included in terms of the cash burn for the wafer fab or the discontinued operations, should it be around for the full quarter?

Okay. So you may have noticed, Richard, that the cash balance at the end of December, we had talked about this on the last call, and we had forecasted a larger amount of cash use in the December quarter than what actually ended up happening. And part of that was we received some rather large collections from customers in advance. attributed to probably they're trying to close out the year and use some budget money perhaps. But a lot of that happened on December 29th, the last day of the quarter. And so that moved, that gave us a much more favorable working capital in December than we were anticipating. And so the other side of that is it's going to flip over into this quarter and impact this quarter in a way that, you know, we didn't foresee it. So there'll be, you know, the results based on the guidance we just gave is, as Jeff said, that to the December quarter. And, you know, you're likely to see similar results down the P&L and into adjusted EBITDA. We'll have more use of working capital this quarter. The other good news is that a lot of the discontinued op stuff which from a cash perspective was over a million dollars this past quarter, is likely to come down significantly, likely under half a million, maybe even a couple hundred thousand, even less than that, from our best estimates at this stage. And then the rest of it is CapEx and financing. So there will be a use this quarter based on the revenue that we're projecting. Just kind of giving you the major bullet points here, and I hope I answered your question.

Richard, one other thing. What you said was about cash use in the wafer fab. It's shut down, right? So it's really sort of maintenance-level stuff that's going on in there. And so there's no appreciable impact there. Again, we're going to get a few hundred thousand dollars a quarter on last time chip buys that helps to offset that, but it just doesn't show up in revenue, right? It's discontinued operations.

Okay. And maybe just to follow up to you specifically, Tom, here, you said it's going to, your cash will be down any, can you give us any sense of magnitude? I mean, it looks like it was down, you know, five and a half million, you know, in gross terms, September to December here with the deposit that came in. I mean, Are you going to be down more than $3 or $5 million in this quarter or just want to get a sense of what you're seeing?

Yeah, it's going to be – that's not a bad range to think about it, probably more towards the upper end of that range.

Okay. That is going to be exclusive of some of the things we're doing to try to go and drive working capital out of the Concord inventory. And so I think Tom's got a good handle on it. but we're going to try and do a fair bit better.

Okay. And that ending cash number here in this quarter, to what degree is that above or at the limits of your comfort level here as you need to operate the business?

Well, we like 20 million as a good comfort level, but we are operating below that, which is doable. And can sustain should, you know, as long as we meet our business goals.

Okay. Fair enough. Let me ask one question. I'll jump on the line and see if there's other questioners here. But just kind of looking at the top line here, Jeff, and as we talked about last quarter, you're trying to backfill the TAMU loss that's obviously substantial. And it seems like we've got some pushouts of some programs related to a number of issues here that really seem to be outside of your control. But how about in terms of adding things into the front side of that funnel or even getting towards the end of, you know, getting contracts awarded here? What's the visibility and how do we think about, you know, those opportunities here to see an acceleration to the end of the fiscal year?

Yeah. So, you know, one of the things, and I mentioned this, I'll give you a little more color on it. So for example, one of the export licenses that was delayed in December was for two units for an international customer that needs a lot of product. And they've got to run through what's a small incremental or delta qualification. And those things are still sitting on the loading dock right now because, you know, Department of Commerce is doing what they're doing. And so, you know, it's a case where there's just not a thing we can do about it. As soon as they give us a go, we can start producing this stuff. And, you know, sometimes it just happens that way. You can execute to your best level of ability And when you have outside factors that interfere, you know, your ability to respond is limited. There are other opportunities out there. And again, that's why I just, you know, here we are almost midway through the March quarter and it's just time necessary to build and chip the stuff more than, you know, again, any particular problems from a, know product demand standpoint and where we are i'm i'm not really concerned at all it's just timing okay fair enough i will jump out of line guys thank you and thank you and i'm showing no further questions i would not like to turn the call back over to jeff richard for closing remarks thank you um i'd also like to thank all of you for your interest in mcor um and a special recognition for production and engineering teams for the extraordinary effort they put in over the holidays. Guys were coming in to work through Christmas Eve and New Year's Eve to maximize shipments, and I just want to give you guys a big public thank you. Thank you all very much.

This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Bye. Thank you.

Thank you. Thank you.

Good day, and thank you for standing by. And welcome to MCOR Corporation Fiscal 2024 First Quarter Results Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tom Minichiello, MCOR's Chief Financial Officer. Please go ahead.

Thank you, and good afternoon, everyone, and welcome to our conference call to discuss MCOR's fiscal 2024 first quarter results. The news release we issued this afternoon is posted on our website, MCOR.com. On this call, Jeff Redicher, MCOR's President and Chief Executive Officer, will begin with the discussion of our business highlights, and then I will update you on our financial results, and we'll conclude by taking questions. Before we begin, we would like to remind you that the information provided herein may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. These forward looking statements are largely based on our current expectations and projections about future events and trends affecting the business. Such forward looking statements include projections about future results, statements about plans, strategies, business prospects, and changes in trends in the business and the markets in which we operate. Management cautions that these forward-looking statements relate to future events or future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of the business or in our industry to be materially different from those expressed or implied by any forward-looking statements. We caution you not to rely on these statements and to also consider the risks and uncertainties associated with these statements in the business which are included in the company's filings available on the SEC's website located at sec.gov, including the sections entitled Risk Factors in the company's annual report on Form 10-K. The company assumes no obligation to update any forward-looking statements to conform statements to actual results or to changes in our expectations except as required by applicable law or regulation. In addition, references will be made during this call to non-GAAP financial measures, which we believe provide meaningful supplemental information to both management and investors. The non-GAAP measures reflect the company's core ongoing operating performance and facilitates comparisons across reporting periods. Investors are encouraged to read these non-GAAP measures, as well as the explanation and reconciliation of these measures to the most comparable GAAP measures included in our news release. Now I'll turn the call over to Jeff.

Thank you, Tom, and good afternoon, everyone. In Q1, inertial navigation revenue shifted substantially between facilities, totaling $24.1 million, with a gross margin of 29% non-GAAP. Chicago, Concord, and Alhambra revenue grew in quarter one, but not enough to make up for the revenue drop in Bud Lake. Tom will provide additional financial details in his remarks. Book to bill came in under 1.0 due to the shortened holiday season. However, none of those orders were lost and all are expected to book in the current quarter, combining to produce a book to bill significantly higher than 1.0. While our booking performance is expected to be quite strong this quarter, the requested ship dates are expected to extend out longer than normal. This strengthens the book for the out-quarters at the expense of near-term shipments, damping prospects for short-term growth. For example, we recently booked an order for $8 million that will be part of a very long-term contract. However, the customer's request dates will actually cover two full years, the net effect of which is to provide more predictable long-term performance at the expense of any short-term bump in revenue. At quarter's end, backlog in the business was approximately 51 million. Compared to the September quarter and adjusted for TAMU, this represents about a 10% reduction that we expect to fully resolve in the March quarter. As we work with interested buyers of our wafer fabrication facility in Alhambra, although we had expected to complete the sale by the end of December quarter, negotiations have taken longer than expected and we now have additional incoming interest. That said, we're working to close a transaction ASAP, but in the meantime, we continue to benefit from cash that the last time sales of chips to customers provide. Moving on to the business, I'll begin my comments by stating that although we had strong performance from Tinley Park, Concord, and Alhambra, Seasonal issues and holiday short and quarter presented headwinds that were bigger than expected, preventing us from backfilling for Bud Lake. In particular, delayed export licenses caused us to push out about $750,000 worth of shipments. And although we were able to bill nearly $800,000 in non-recurring engineering for another program, it did not count as revenue. The principal reason for this delay was a defective lot of circuit boards that could not be remanufactured before the supplier shut down for the holidays. Mix and margins held up well, and we expect similar margins in the March quarter. It has been widely reported in the press that actual cash funding to replace munitions and systems allocated to the Ukraine is dangerously low. This has contributed to some of the budget tug of war that's going on between the service branches and has contributed to some of the timing delays that we've seen in contracting times. Operating expenses were a bright spot. Sales and marketing and G&A came in as expected, but R&D was significantly reduced, showing nearly a $600,000 improvement. We are mindful of our high internally funded research and development, otherwise known as IRAD, spending, and expect to continue to drive this down in the coming quarters through NRE contracts from our customers. In October, we talked about the Kratos XQ58 Valkyrie, the Navy's Mark 48 torpedo business increase, and a few other programs that are continuing to progress nicely. This quarter, we are expecting several other long-term contracts to be released awarded in addition to the Navy's Mark 54 Mod 1 torpedo as it enters production. As we flagged in last quarter's comments, the delays in receiving circuit boards did impact shipments of an advanced IMU for Raytheon's EOIR pods, but we are now expecting to complete the full contract and all of our engineering obligations under that contract at the end of the quarter. We expect to complete the current phase of our MMS program along with several smaller programs roughly within the next six to 12 months. We continue to expect that non-recurring engineering funding from our customers to be at least $7 million in calendar 24 with additional growth expected starting in September and proceeding through FY25. I'd like to provide some additional insight into our integration programs and our continued work on optimization and consolidation, all of which are a key area of focus this year. We remain on track to complete the ERP upgrades for Alhambra and Concord, unifying the company's ERP systems. Beyond ERP, we should complete the product line management, product data management migration in Bud Lake in the March quarter, and this will complete the unification of product data. Manufacturing execution systems will be integrated into Concord and Chicago facilities starting this year. We've also made good progress on moving to a common IMU, INS architecture, having its roots in the former L3 aerospace and navigation team in Bud Lake. This common architecture will streamline our development programs and improve our ability to create new component technologies with less engineering expense. As I've said before, component technology differentiation is the key to gross margin, and we are moving to design the next generation closed-loop fog components, as well as new closed-loop QMEM sensors to improve cost, size, weight, and power for all of our products. Beyond engineering consolidation, we're working to reduce the amount of floor space we require. With the expected wafer fab sale, Alhambra is now moving all of its optical component assembly technology into a single Alhambra building that we now occupy. This is down from five buildings a year ago. Concord will have its footprint by approximately 50%, and we are working on a plan to right-size the Bud Lake facility. I wish the consolidation problem was as simple as cutting floor space and relocating processes and equipment. However, as I pointed out before, There are very expensive structural power, gas, and environmental systems required to support these moves, not all of which exist in some of our facilities. Customers also require significant requalification efforts to certify processes on new equipment and in new facilities. Requalification is typically done during block changes and timing is driven by their schedules and the needs of end users, not ours. Nevertheless, we've made good progress on reducing the amount of floor space that we require within the capital and requalification limits in the business and expect that effort to continue until we reach an optimal configuration. Finally, and turning now to guidance, the March quarter is expected to be flat compared to December with a range of 23 to 25 million. This is just largely due to order timing and some of the expected delivery dates that we're seeing on our order book. With that, I will turn the call back over to Tom.

Thank you, Jeff. First, a reminder that the results from our legacy business, namely the former broadband segment and the defense optoelectronic products, are reported in the income statement under discontinued operations. As previously reported, all of these operations except for the Alhambra Indian Phosphide Wafer Fab and associated chip business, which remain on the balance sheet as assets held for sale, were sold in October. With that, I'll move to a discussion of the results from continuing operations, which is exclusively the inertial navigation business. Revenue in fiscal 1Q was $24.1 million compared to the prior quarter's $26.8 million. Tinley Park shipments continued on a path of continuous steady growth each quarter since the acquisition over a year ago. Concord and Alhambra, while up compared to the quarter before, fell short of our expectations, largely attributable to, as Jeff noted, export license and product delays towards the end of the quarter. Additionally, Bud Lake revenue is down primarily due to the TAMU loss we outlined on our last call. Let me now turn to the rest of the operating results, which will be on a non-GAAP basis. Gross margin held up at 29% in 1Q despite the lower revenue. Contributing to the favorable margin was improved fixed overhead absorption in Tinley Park and Concord and an overall favorable mix. Operating expenses were 9.5 million in fiscal 1Q compared to 10.1 million in fiscal 4Q. The improved OPEX was largely driven by an increase in customer-funded non-recurring engineering, or NRE, in which the associated engineering expense is moved to cost of goods sold to match up with the corresponding revenue. This lowered internally-funded R&D, or IRAD, which remains as part of OPEX. Operating loss in the December quarter was 2.6 million compared to the September quarter's 1.9 million, Negative adjusted EBITDA was 1.7 million compared to 900,000 last quarter. Net loss was 2.6 million or 3 cents per share. The sequential changes for all three of these metrics were all primarily attributable to the lower revenue. Turning to the balance sheet, reported cash was 21.1 million at December 31st, which temporarily included 2.2 million of third-party cash associated with the sale of the legacy business and a deposit on the potential sale of the wafer fab. Net of these items, MCOR cash was 19 million at the end of the quarter compared to 26.7 million at September 30th. The $7.7 million decrease during the quarter consisted of the following. Negative 1.7 million adjusted EBITDA, 1.5 million associated with discontinued operations, a $1.3 million litigation settlement $2 million for financing activities, including a $1.7 million debt reduction on our revolving line of credit, $700,000 for severance, and a combined total of $500,000 for working capital, CapEx, and litigation-related costs. The litigation settlement was one time in nature, and going forward, we expect a significant drop-off in cash use for discontinued ops and severance. Total outstanding debt was reduced by 2 million during the quarter to 8.6 million when compared to 10.6 million at September 30th. The 8.6 million as of December 31st consisted of 4.6 million on the line of credit and a $4 million balance on the term loan component. There is currently about 3 million available for borrowing on the line. Before we get to the Q&A, As announced this past Tuesday, we plan to be at the Cowan Aerospace and Defense Conference next week on Wednesday, February 14th in Arlington, Virginia, including a presentation and investor meetings. A link to the live webcast of the presentation was included in Tuesday's announcement. With that, we are now opening up the call for your questions.

And thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And one moment for our first question. And our first question comes from Richard Shannon from Craig Hallam Capital Group. Your line is now open.

Well, hi, Jeff and Tom. Thanks for taking my questions. Let's just start off with a few tactical questions here, kind of quickly here. So, obviously, the December quarter revenues were a bit low here, and you talked about some pushouts, some supply issues here. And I know you talked about some bookings that were a little bit farther out here, but I guess it would seem like that the Bud Lake would have come back within this quarter here. It doesn't seem like that's represented in the numbers. I'm not sure if I'm reading this right here, but Why wouldn't we see some of that come back, and then how does this help us think about, as you said in the press release, about returning to growth in the June quarter?

Yeah, sure. So let me tackle Bud Lake. So Bud Lake was the primary site that was working on TEMU, and a pretty significant fraction of their revenue was associated with that program. in the very short term, and I'm talking about now over the next six months, there isn't another program to take its place until the mass motion sensor, what we call MMS, hits production, and that will happen starting in early 24, right? So we'll be building all of the optical components here in Alhambra, integrating them here, and then over in Bud Lake, they will be doing all of the assembly and checkout. So, you know, effectively that program, you know, should do a pretty good job of replacing that revenue. So the name of the game really for us in the short term is replacing the lost penal revenue with other programs that are running in Concord, Tilley Park and Alhambra and you know, it's just a little bit of timing issues on those We're expecting It's going to be a little bit hard to get some of those into production this quarter Which is why we pointed towards June as a resumption of growth Okay, so in the short term before that mass motion sensor hits production It's really about maximizing the revenue out of the other three facilities Does that make sense?

Yeah, I think so. Maybe just put this in bigger context of what you said last quarter, where I think you were talking about a funnel that would support kind of $115 to $125 million for this, I believe it was referring to the fiscal year. And I think that was already taking into account the loss of TAMU here. How does that number sit with you now then?

Yeah, so I would say it's just pushed off approximately a quarter or two. So, you know, at some point when we have a little more certainty on exactly what's going on, we will update the yearly guidance. But it's just timing, right? And part of it is driven by this tug of war between the services. No programs have been lost. There's no... you know, competitive issues at the last minute or anything like it. It's just timing. And, you know, again, just to give you one example, the Mark 54 new version, the Mod 1, supposed to go into production, was supposed to go into production 18 months ago. And it was largely contracting delays getting into Raytheon that were responsible for, you know, them telling us, okay, you guys have to have a go button. So, you know, this is just sort of the macro environment that we find ourselves in right now. Fundamentally, all of the programs are doing well. There's been, you know, nothing to comment on as far as any losses. It's just, you know, uh the um it's it's just the short-term stuff i mean i could see a situation where you know we exit uh the march quarter with backlog that i think would be um a very very pleasant surprise the challenge is you've got to take a look at it okay well how much of this is due within the next day two quarters right we're not we're not worried about 25 months at all It's sort of filling the short-term gap from TAMU, and that's what's just proven to be a little bit more difficult from a timing perspective. That's all. Okay.

All right, fair enough. Let's see here, just quickly on the wafer fab sale here, is this something you expect to get done this quarter? I mean, you talked to, or Tom mentioned a deposit made here, so it seems like there's confidence to some degree on both sides here. Is that the confidence in closing this quarter, and what's the delay here? Anything you can share there?

Yeah, I think we've got a reasonable degree of confidence. We've now got multiple, you know, exclusivity was lost because of delays. And so, you know, there's now other inbound interest. And, you know, like the old saying goes, sometimes you need, you know, two deals to make the one go through. And so, you know, should we get it done this quarter? Gosh, you know, I hate to be the broken clock that's right twice a day. We are working to close it as quickly as we can.

Okay, fair enough. One or two quick questions here for Tom. How are we thinking about cash burn in the quarter? I think you kind of alluded to maybe that cash balance improving in this quarter based on working capital. It doesn't sound like it necessarily should change, but please tell me if your views are different there. And then what's included in terms of the cash burn for the wafer fab or the discontinued operations, should it be around for the full quarter? Okay.

So you may have noticed, Richard, that the cash balance at the end of December, we had talked about this on the last call, and we had forecasted a larger amount of cash use in the December quarter than what actually ended up happening. And part of that was we received some rather large collections from customers in advance. and attribute it to probably they're trying to close out the year and use some budget money perhaps. But a lot of that happened on December 29th, the last day of the quarter. And so that moved, that gave us a much more favorable working capital in December than we were anticipating. And so the other side of that is it's going to flip over into this quarter and impact this quarter in a way that, you know, we didn't foresee it. So there'll be, you know, the results based on the guidance we just gave is, as Jeff said, that to the December quarter. And, you know, you're likely to see similar results down the P&L and into adjusted EBITDA. We'll have more use of working capital this quarter. The other good news is that a lot of the discontinued op stuff which from a cash perspective was over a million dollars this past quarter, is likely to come down significantly, likely under half a million, maybe even a couple hundred thousand, even less than that, from our best estimates at this stage. And then the rest of it is CapEx and financing. So there will be a use this quarter based on the revenue that we're projecting. Just kind of giving you the major bullet points here, and I hope I answered your question.

Richard, one other thing I thought you said was about cash use in the wafer fab. It's shut down, right? So it's really sort of maintenance-level stuff that's going on in there. And so there's no appreciable impact there. Again, we're going to get a few hundred thousand dollars a quarter on last time chip buys that helps to offset that, but it just doesn't show up in revenue, right? It's discontinued operations.

Okay. And maybe just to follow up to you specifically, Tom, here, you said it's going to, cash will be down any, can you give us any sense of magnitude? I mean, it looks like it was down, you know, five and a half million, you know, in gross terms, September to December here with the deposit that came in. I mean, Are you going to be down more than $3 or $5 million in this quarter or just want to get a sense of what you're seeing?

Yeah, it's going to be – that's not a bad range to think about it, probably more towards the upper end of that range.

Okay. That is going to be exclusive of some of the things we're doing to try to go and drive working capital out of the Concord inventory. And so I think Tom's got a good handle on it. but we're going to try and do a fair bit better.

Okay. And that ending cash number here in this quarter, to what degree is that above or at the limits of your comfort level here as you need to operate the business?

Well, we like 20 million as a good comfort level, but we are operating below that, which is doable. And can sustain should, you know, as long as we meet our business goals.

Okay. Fair enough. Let me ask one question. I'll jump on the line and see if there's other questioners here, but just kind of looking at the top line here, Jeff, and as we talked about last quarter, you're trying to backfill the TAMU loss that's obviously substantial. It seems like we've got some pushouts of some programs related to a number of issues here that really seem to be outside of your control. But how about in terms of adding things into the front side of that funnel or even getting towards the end of, you know, getting contracts awarded here? What's the visibility and how do we think about, you know, those opportunities here to see an acceleration to the end of the fiscal year?

Yeah. So, you know, one of the things, and I mentioned this, I'll give you a little more color on it. So, for example, one of the export licenses that was delayed in December was for two units for an international customer that needs a lot of product. And, you know, they've got to run through what's, you know, a small incremental or delta qualification. And those things are still sitting on the loading dock right now because, you know... Department of Commerce is doing what they're doing. And so, you know, it's a case where there's just not a thing we can do about it. As soon as they give us a go, we can start producing this stuff. And, you know, sometimes it just happens that way. You can execute to your best level of ability And when you have outside factors that interfere, you know, your ability to respond is limited. There are other opportunities out there. And again, that's why I just, you know, here we are almost midway through the March quarter and it's just time necessary to build and chip the stuff more than, you know, again, any particular problems from a, you know, product demand standpoint and where we are, I'm not really concerned at all. It's just timing.

Okay, fair enough. I will jump out of line, guys. Thank you.

And thank you. And I am showing no further questions. I would now like to turn the call back over to Jeff Richard for closing remarks.

Thank you. I'd also like to thank all of you for your interest in MCOR. and a special recognition for production and engineering teams for the extraordinary effort they put in over the holidays. Guys were coming in to work through Christmas Eve and New Year's Eve to maximize shipments, and I just want to give you guys a big public thank you. Thank you all very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.