Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ☐ No ☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes ☒ No ☐
Indicate by
check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K
is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K
or any amendment to this Form
10-K ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule
12b-2
of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes ☐ No ☒
As of June 30, 2016, there were 24,064,398 shares of common stock outstanding held by nonaffiliates of the registrant, with an aggregate
market value of the common stock (based upon the closing price of these shares on the NASDAQ Global Market) of approximately $16,363,791.
The number of shares of the registrants common stock outstanding as of the close of business on March 9, 2017 was 26,878,891.
Portions of the Registrants Proxy Statement for its 2017 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Annual Report on Form
10-K
provided, that if such Proxy Statement is not filed with the Commission within 120 days after the end of the fiscal year covered by this Form
10-K,
an amendment to this Form
10-K
shall be filed no later than the end of such
120-day
period.
PA
RT I
All statements, other than statements of historical facts, included in this Annual Report on Form
10-K
including statements regarding our estimates, expectations, beliefs, intentions, projections or strategies for the future, results of operations, financial position, net sales, projected costs, prospects and plans and objectives of management for
future operations may be forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations
and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These
forward-looking statements can be identified by the use of terms and phrases such as believe, plan, intend, anticipate, target, estimate, expect,
forecast, prospects, goals, potential, likely, and the like, and/or future-tense or conditional constructions such as will, may, could,
should, etc. (or the negative thereof). Items contemplating or making assumptions about actual or potential future sales, market size and trends or operating results also constitute forward-looking statements.
Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our
management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statements we may make. Before investing in our common stock, investors should be aware that the occurrence of the risks, uncertainties and events described in the section entitled Risk Factors and elsewhere in this Annual Report could
have a material adverse effect on our business, results of operations and financial condition. These risks and uncertainties include the adoption of sapphire as a material in new applications, our successful development and the markets
acceptance of new products; our ability to sell certain assets, including those in Malaysia and underutilized assets in the U.S., and the prices we receive therefor; our ability to make effective acquisitions and successfully integrate newly
acquired businesses into existing operations; our ability to effectively utilize net loss carryforwards; dependence on key customers; our ability to secure new business and retain customers; changes in demand or the average selling prices of
sapphire products; the failure to achieve the margins we expect, whether due to our own operations or changes in the market for our products; our ability to successfully qualify our products with customers and potential customers; potential
disruptions in our supply of electricity; changes in our product mix; the outcome of the testing of new products and processes or the testing of our existing products for new applications; the failure of third parties performing services for us to
do so successfully; our ability to protect our intellectual property rights; the competitive environment; and the cost of compliance with environmental standards. Although we believe that the expectations reflected in the forward-looking statements
are reasonable, forward-looking statements are inherently subject to known and unknown risks, including business, economic and other risks and uncertainties that may cause actual results to be materially different from those discussed in these
forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We assume no obligation to update any forward-looking statements in order to
reflect any event or circumstance that may arise after the date of this Annual Report, other than as may be required by applicable law or regulation. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove
incorrect, our actual results may vary materially from those expected or projected.
You should read this Annual Report and the documents
that we reference in this Annual Report and have filed with the Securities and Exchange Commission (the SEC) as exhibits with the understanding that our actual future results, levels of activity, performance and events and circumstances
may be materially different from what we expect.
Unless otherwise indicated, the terms Rubicon, the Company,
we, us, and our refer to Rubicon Technology, Inc. and our consolidated subsidiaries.
1
ITEM 1.
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BUSI
NESS OVERVIEW
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We are a vertically integrated, advanced
materials provider specializing in monocrystalline sapphire for applications in optical and industrial systems. We design, assemble and maintain our own proprietary crystal growth furnaces to grow high-purity,
low-stress,
ultra-low-defect-density
sapphire crystals. We apply our proprietary crystal growth technology to produce
high-quality sapphire products to meet our customers exacting specifications. Sapphire is a desirable material for high-performance applications due to its hardness and strength, transparency in the visible and IR spectrum, thermal conductivity,
thermal shock resistance, abrasion resistance, high melting point and chemical inertness. As a result, it is ideally suited for extreme environments in a range of industries where material durability is just as important as optical clarity.
Historically, we have also provided sapphire products to the LED and mobile device markets, which are the largest markets for sapphire. The
LED and mobile device markets for sapphire have attracted significant investment in sapphire production in China, which has resulted in oversupply and low pricing. We had been trying to stay in the LED substrate market by limiting our product
offering to
six-inch
diameter wafers and working hard to reduce cost to make this product profitable. While we made significant progress on that front, the continual decline of prices made the prospects of
becoming profitable in the LED substrate market unlikely for the foreseeable future. As a result, in September 2016, we announced our decision to limit our focus to the optical and industrial sapphire markets and exit the LED and mobile device
markets. While these are smaller markets, we believe that due to more challenging customer requirements, competition is more limited and margin opportunities are greater. We believe our high quality crystal, strong and developing U.S. customer base,
and optical finishing capability are strong differentiators from our competitors in the optical and industrial sapphire markets, and we believe there may be emerging applications in these markets.
With the decision to exit the LED market, we transitioned our patterning equipment to a strategic customer and subsequently closed our plant
in Penang, Malaysia and are attempting to sell the real estate and equipment located there. We stopped production activities in November 2016 and ceased all operations in Penang, Malaysia in December 2016. Our wafer patterning equipment in Penang,
Malaysia was sold in the fourth quarter of 2016 for $4.5 million, and we have structured and begun an auction process to attempt to sell the polishing and fabrication equipment. Additionally, our Malaysia real estate is currently on the market.
The timing of the sale of the real estate is difficult to predict.
Focusing on smaller optical and industrial sapphire markets also means
that we now have excess crystal growth and fabrication capacity in the U.S. We are in the process of consolidating operations into our leased spaces in Bensenville, Illinois and Franklin Park, Illinois and vacating our largest owned facility in
Batavia, Illinois. The relocation is now near completion and we are planning a second auction for the excess equipment in the Batavia plant in the next 60 days. The plant itself is a special purpose facility with extensive enhancements to power and
water-cooling systems required for crystal growth production. We are also actively selling this property and our initial focus is to seek a buyer that is interested in both the building and improved infrastructure. Timing on the sale of this real
estate is also difficult to predict.
With the shutdown of our Malaysia operations and downsizing of our U.S. operations, we have reduced
overall company headcount from 220 at September 30, 2016 to 40 at February 28, 2017. However, we have been careful to maintain the employee knowledge base in our strategic markets built over the past 15 years.
Historically, we sold sapphire cores into the mobile device market and sapphire cores and wafers into the LED market. With the cessation of
our
LED-related
production activities at our Malaysia facility, in future periods we expect our LED revenue will cease. We anticipate that our sales will be almost exclusively from optical and industrial
sapphire components. The following table summarizes optical revenue for each of the last three years:
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Year ended December 31,
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Optical revenue
(in thousands)
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% of total
revenue
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2016
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$
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4,568
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23
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%
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2015
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$
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5,086
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21
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%
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2014
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$
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7,057
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15
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%
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We operate in an extremely volatile market, so our ability to expand our optical and industrial business and
acceptance of new product offerings is difficult to predict.
In addition, our optical and industrial sapphire business serves smaller
markets than our historical undertakings, so we are actively evaluating the acquisition of profitable companies both in and outside of the sapphire market in order to accelerate growth and to utilize our substantial net tax loss carry-forwards.
Because acquisitions are being given greater consideration, in February 2017, we commenced a search for a new Chief Executive Officer (CEO) with more extensive experience in mergers and acquisitions. On March 16, 2017, we announced
the appointment of Timothy E. Brog as our new President and CEO, effective as of March 17, 2017. Mr. Brog has served on our Board of Directors since May 2016 and will continue to serve as a director of the Company.
2
We are a Delaware corporation incorporated on February 7, 2001. Our common stock is listed
on the NASDAQ Capital Market under the symbol RBCN.
INDUSTRY OVERVIEW
Sapphire is utilized in optical and industrial applications. It is used for windows and optics for aerospace, sensor, medical, semiconductor,
instrumentation, electronics and laser applications due to its wide-band transmission, superior strength, chemical and scratch resistance and high
strength-to-weight
ratio. Sapphires physical and optical properties also make it very well suited for defense applications such as electro-optical and sensor suite windows for military fighter jets, helicopters, unmanned air vehicles and ships, forward-looking
infrared windows for commercial and business aircrafts as well as missile domes, submarine windows and components and transparent armor for military vehicles. These markets are growing as new applications for sapphire emerge for larger size and
higher quality sapphire components and also due to the availability of more cost effective sapphire part production.
TECHNOLOGY
Our proprietary crystal growth technique, which we refer to as ES2, produces high-quality sapphire crystals for use in our sapphire products.
ES2 is derived from the standard Kyropoulos method of crystal growth. We developed this technique with the goal of establishing greater control over the crystal growth process while maintaining minimal temperature variations. Unlike other
techniques, during the ES2 technique, the growing sapphire crystal exists in an unconstrained, low stress environment inside a closed growth chamber. The closed system allows for enhanced control of the melt, resulting in higher quality crystals.
The temperature gradient between the melt and the crystal in the ES2 technique is significantly lower than in other crystal growth techniques. These aspects of the ES2 technique enable us to grow crystals that have a significantly lower dislocation
density, higher crystal purity and greater uniformity than sapphire crystals grown using other techniques. The ES2 technique provides an inherent annealing process once the crystal is fully grown. This thermal annealing is an integral means of
relieving stress in the crystal during the ES2 process. We have demonstrated the ability to readily scale our ES2 technology in a production environment while maintaining high crystal quality even as crystal boule size is increased.
We have automated the crystal growth process of our proprietary ES2 technique. Our furnace environments are controlled by closed-loop control
systems and the overall crystal growth process is run with minimal operator intervention, which reduces the potential for human error. In addition, a single operator can supervise the control of multiple ES2 furnaces simultaneously, which reduces
costs.
We have now completed crystal growth development for our Large Area Net Shaped Crystal Extraction (LANCE) technology,
which is a technology designed to produce very large, thick sapphire windows. This technology was developed with government funding under a contract with the Air Force Research Laboratory. We have now completed the window blank deliverables on this
project, including the largest size sapphire window available in the world at 36 x 18 x 1 inch dimensions. While the project will not be fully completed until our subcontractors complete the polishing of the windows, we have received permission from
the government to begin selling and commercializing LANCE sapphire products. We will continue to refine the process to improve yield; however, our main focus now is the development of the market for these larger windows. The product has been
displayed at trade shows and has attracted interest both from military and industrial product developers.
We also continue development of
our family of aluminum oxide-based, clear optical coatings for glass and quartz parts that provide most of the durability of sapphire at a lower cost. We have branded the coatings SapphirEX. We have provided samples of coated glass and quartz to a
number of prospective customers for products in the retail scanner, semiconductor processing, defense and consumer electronics markets. We continue to work on active qualification for use in the point of sale (POS) scanner market with
some of our samples being tested in stores. We feel that initially we are more likely to find a number of niche markets, such as POS scanners, but also believe there is potential to address larger markets, such as smart phones and tablets and we are
providing samples for smart-phone after-market cover glass as well as the OEM market for ruggedized mobile applications. We are focusing on building contract manufacturing relationships that we can rely on for production volumes in order to avoid
major capital expenditures.
PRODUCTS
We believe the developing optical and industrial segments of the market require large diameter sapphire products, high quality sapphire and
ultra-thin double side polished windows and wafers which many sapphire producers do not have the capability to provide. In addition, military applications often require a U.S. based source for sapphire. We believe we continue to have a reputation
for producing the highest quality sapphire in the market. We also have the ability to maintain that crystal quality while growing crystal in very large formats, we have a strong and developing U.S. customer base, and we have the ability to provide
very high performance ultra-thin double side polished sapphire products, which we believe position us well in these markets.
3
We provide optical and industrial sapphire products in various shapes and sizes, including round
and rectangular windows and blanks, domes, tubes and rods. These optical sapphire products are qualified and used in equipment for a wide variety of end markets and high performance applications including defense and aerospace, specialty lighting,
instrumentation, sensors and detectors, semiconductor process equipment, electronic substrates, medical and laser applications.
We
believe we offer the industrys largest sapphire windows and highest quality, ultra-thin, double side polished windows and substrates. Our product lines include very thin, double-side polished windows as thin as 300 microns for 6 optical
windows, and also very large-area blanks and polished windows. We offer round
C-plane
sapphire windows up to 11 in diameter and
A-plane
windows up to 18in
diameter with UV grade windows up to 13.5 in diameter. We also have produced sapphire window blanks at 18 x 36 x 1 dimensions.
RESEARCH AND DEVELOPMENT
Our research
and development (R&D) activity plays a vital role in supporting our technology, product and revenue roadmaps. In 2016 and 2015, our R&D expenses totaled $2.5 million and $2.2 million, respectively. However, the scope of
R&D projects has recently been reduced, and we expect R&D expenses to be significantly lower in 2017. These expenses generally do not include costs incurred in connection with our R&D activities under the LANCE government contract.
However, in 2016 we recorded estimated costs of $217,000 in excess of the contract value at December 31, 2016.
Activities under the
LANCE government contract up to the contract value are accounted for as revenue and cost of goods sold. We record R&D revenue associated with the LANCE government contract as costs are incurred plus a fixed fee. For each of the years ended
December 31, 2016 and 2015 revenue from R&D accounted for less than 10% of our revenue. Since 2012, we have recorded $4.3 million in revenue and the total value of the contract is $4.7 million. As LANCE is largely complete, we
expect our R&D revenue as a percentage of total revenue to be significantly lower in 2017, despite overall revenue being lower due to our exit from the LED market.
MANUFACTURING
The process of growing the
crystal begins by heating the raw material, aluminum oxide, until it reaches an ideal temperature above its melting point. This ideal temperature is essential for our process because it allows us to produce high-purity crystals with very low defect
rates. Following the heating, a seed rod is inserted in the melted material as the material is being cooled to crystallize into a boule. Following the growth process, each boule is rigorously inspected by using polarized lighting and magnification
to find imperfections, such as bubbles, dislocations and granular deposits within the crystal.
We then drill the resulting boules into
cylindrical cores using our custom high-precision crystal orientation equipment and proprietary processes. For many of our parts, the cores are then finished through an outsourcing model using trusted partners.
We are dedicated to quality assurance throughout our entire operation. We employ detailed material traceability from raw material to finished
product. Our quality system is certified as ISO9001:2000.
All of our long-lived assets are located in the U.S. and Malaysia. While there
are long-lived assets in Malaysia, we are attempting to sell them, as that facility is shut-down and is not an active part of our operations. For more information see Note 2 Segment Information to our Consolidated Financial Statements
included in this Annual Report on Form
10-K.
SALES AND MARKETING
We market and sell our products through our direct sales force to customers. Our direct sales force includes experienced and technically
sophisticated sales professionals and engineers who are knowledgeable in the development, manufacturing and use of sapphire windows and other optical materials. Our sales staff works with customers during all stages of the manufacturing process,
from developing the precise composition of the parts through manufacturing and processing the parts to the customers specifications.
A key component of our marketing strategy is developing and maintaining strong relationships with our customers. We achieve this by working
closely with our customers to optimize our products for their production processes. In addition, we are able to develop long-term relationships with key customers by offering product specification assistance, providing direct access to enable them
to evaluate and audit our operations, delivering high-quality products and providing superior customer service. We believe that maintaining close relationships with senior management and providing technical support improves customer satisfaction.
In order to increase brand recognition of our products and our Company in general, we publish technical articles, distribute promotional
materials and participate in industry trade shows and conferences.
4
CUSTOMERS
Our principal customers have been semiconductor device manufacturers and wafer polishing companies. A substantial portion of our sales have
been to a small number of customers. In 2016 our top customer accounted for approximately 60% of our revenue and in 2015, the top two customers accounted for a combined approximately 31% of our revenue. Our revenue from the optical and industrial
markets also tends to be concentrated, with three customers accounting for approximately 19%, 13%, and 11% of the optical revenue for the year ended December 31, 2016 and four customers accounting for approximately 20%, 14%, 10% and 10% of the
optical revenue for the year ended December 31, 2015. Although we are attempting to diversify and expand our customer base, we expect our sales to continue to be concentrated among a small number of customers. However, we also expect that our
significant customers may change from time to time. No other customer accounted for 10% or more of our revenues during 2016 or 2015.
INTELLECTUAL
PROPERTY
Our ability to protect our proprietary technologies and other confidential information is a key factor in our ability to
compete successfully. We rely primarily upon a combination of patent, trade secret laws and
non-disclosure
agreements with employees, customers and potential customers to protect our intellectual property. We
have seven patents issued by the U.S. Patent and Trademark office expiring between 2027 and 2030. In addition, we have twelve pending patent applications with the U.S. Patent and Trademark Office and twenty patent applications pending with various
other foreign countries. The patents and patent applications mostly cover aspects of our core production, wafer grinding and lapping technologies. However, we believe that factors such as the technological and innovative abilities of our personnel,
the success of our ongoing product development efforts and our efforts to maintain trade secret protection are more important than patents in maintaining our competitive position. We pursue the registration of certain of our trademarks in the U.S.
and currently have three registered trademarks.
COMPETITION
The markets for high-quality sapphire products are very competitive and have been characterized by rapid technological change. The products we
produce must meet certain demanding requirements to succeed in the marketplace. Although we are a well-established sapphire producer, we face significant competition from other established providers of similar products as well as from new and
potential entrants into our markets.
We have several competitors that compete directly with us. We believe that the key competitive
factors in our markets are:
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consistently producing high-quality products in the desired size, orientation and finish;
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providing a low total
cost-of-ownership
for customers;
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driving innovation through focused research and development efforts;
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offering solutions through collaborative efforts with customers;
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producing large format high-quality crystal for certain applications;
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providing U.S.-based source of sapphire for military applications; and
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financial stability of the companies.
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We believe the developing optical and industrial
segments of the market require cost effective high quality sapphire, large diameter sapphire products and ultra-thin double side polished windows and wafers, which we have the capabilities to provide while many other sapphire producers do not. In
addition, defense applications often require a U.S. based source for sapphire. We believe we continue to have a reputation for producing the highest quality sapphire in the market. We believe this positions us well with competitive advantages in the
markets for optical and industrial sapphire.
ENVIRONMENTAL REGULATION
In our manufacturing process, we use water, oils, slurries, acids, adhesives and other industrial chemicals. We are subject to a variety of
federal, state and local laws regulating the discharge of these materials into the environment or otherwise relating to the protection of the environment. These include statutory and regulatory provisions under which we are responsible for the
management of hazardous materials we use and the disposition of hazardous wastes resulting from our manufacturing processes. Failure to comply with such provisions, whether intentional or inadvertent, could result in fines and other liabilities to
the government or third parties, injunctions requiring us to suspend or curtail operations or other remedies, which could have a material adverse effect on our business. The cost of complying with environmental regulation is not material.
5
EMPLOYEES
As of December 31, 2016, we had 52 full-time employees and one part-time employee, of which 34 full time employees worked in technology
and operations. None of our employees are represented by a labor union. We consider our employee relations to be good.
OTHER INFORMATION
You may access, free of charge, our reports filed with the SEC (for example, our Annual Reports on
Form 10-K,
our Quarterly Reports on Form
10-Q
and our Current Reports on Form
8-K
and any amendments to those forms) over
the Internet at the SECs website at http://www.sec.gov. You may also read and copy any document we file at the SECs public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330
for further information on the public reference room. Our SEC filings are also available through our Internet website
(www.rubicontechnology.com). Reports filed with or furnished to the SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC. Alternatively, if you would like a paper copy of any such SEC report
(without exhibits) or document, write to Investor Relations, Rubicon Technology, Inc., 900 East Green Street, Bensenville, Illinois 60106, and a copy of such requested document will be provided to you, free of charge. The information found on our
website is not part of this or any other report filed with or furnished to the SEC.
6
You should carefully read the risk factors
set forth below, together with the financial statements, related notes and other information contained in this Annual Report on Form
10-K.
Our business is subject to a number of important risks and
uncertainties, some of which are described below. The risks described below, however, are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also impair our
business operations. Any of these risks may have a material adverse effect on our business, financial condition, results of operations and cash flows. Please refer to the discussion of forward-looking statements on page one of this
Annual Report on Form
10-K
in connection with your consideration of the risk factors and other important factors that may affect future results described below.
We have incurred significant losses in prior periods and may incur losses in the future.
We have incurred significant losses in prior periods and may continue to incur significant losses for the foreseeable future. These losses may
have an adverse effect on our ability to attract new customers or retain existing customers. As of December 31, 2016, we had an accumulated deficit of $312.3 million. While we had net income of $38.1 million in 2011 and
$29.1 million in 2010, we incurred net losses of $62.9 million, $77.8 million, $44.0 million, $30.4 million and $5.5 million in 2016, 2015, 2014, 2013 and 2012, respectively. There can be no assurance that we will have
sufficient revenue growth to achieve profitability in future periods.
We are exploring, evaluating and have begun implementing alternatives with a
goal of providing greater value to our stockholders. There can be no assurance that we will be successful in identifying additional alternatives or implementing any alternative, or that any alternative will yield additional value for stockholders.
Our management and Board of Directors are continuing to review alternatives with a goal of providing greater value to our
stockholders. These alternatives could result in, among other things, modifying or eliminating certain of our operations, selling material assets or business segments, seeking additional financing, selling the business, effecting a merger,
consolidation or other business combination, partnering or other collaboration agreements, or potential acquisitions or recapitalizations, in one or more transactions. In connection with the Board of Directors continuing review of
alternatives, on September 12, 2016, the Board of Directors determined to shut down production activities and close our facility in Penang, Malaysia, and to sell our assets relating to the Malaysian operations. Production activities at the
Malaysia facility have ceased. Also on September 12, 2016, we announced the Board of Directors decision to limit our focus on the optical and industrial sapphire markets and to exit the LED and mobile device markets. In the fourth quarter
2016, we developed a plan to scale down our U.S. operations. We evaluated our U.S. asset portfolio for the assets continuing to be used in operations and determined there were excess U.S. assets that we intend to sell. There is no assurance that we
will be able to successfully expand our optical and industrial sapphire business or that we will obtain market acceptance for any new product offerings in these markets. There is no assurance that we will be able to sell our assets in Malaysia
or the U.S. at prices favorable to us, or at all. Additionally, there can be no assurance that our continued exploration of alternatives will result in the identification of additional alternatives or that any transaction will be consummated.
The process of exploring alternatives may be costly and may be time consuming, distracting to management and disruptive to our business operations. If we are unable to effectively manage the process, our business, financial condition and
results of operations could be adversely affected. We also cannot provide assurance that any potential transaction or other alternative identified, evaluated and consummated, will provide greater value to our stockholders than that reflected in the
current stock price. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, the interest of third parties in our business and the
availability of financing to us or potential buyers on reasonable terms.
We may acquire other businesses, products or technologies; if we do, we may
be unable to integrate them with our business effectively or at all, which may adversely affect our business, financial condition and operating results.
If we find appropriate opportunities and have adequate funding, we may acquire other businesses, product lines or technologies. However, if we
acquire a business, product line or technology, the process of integration may produce unforeseen operating difficulties and expenditures and may absorb significant attention of our management that would otherwise be available for the ongoing
development of our business. Further, the acquisition of a business may result in the assumption of unknown liabilities or create risks with respect to our existing relationships with suppliers and customers. If we make acquisitions, we may issue
shares of stock that dilute other stockholders, expend cash, incur debt, assume contingent liabilities or create additional expenses related to amortizing intangible assets, any of which may adversely affect our business, financial condition or
operating results.
If we are unable to raise additional capital when needed, we may not be able to execute our business plan and may be forced to
delay, reduce or eliminate our product research and development programs or delay the introduction of new products or the acquisition of other businesses.
We may require additional capital to fund operations, capital expenditures, additional product research and development efforts, and the
introduction of new products or acquisition of other businesses. We may finance future cash needs through public or private equity offerings, debt financings, corporate collaborations or licensing arrangements. Additional funds may not be available
when we
7
need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our product research and
development programs or acquisition opportunities. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience dilution, and debt financing, if available, may involve restrictive covenants. To the
extent that we raise additional funds through corporate collaborations or licensing arrangements, it may be necessary to relinquish some rights to our technologies or our new products or grant licenses on terms that may not be favorable to us. We
may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. Introducing newly developed products to the market often requires investment
before revenue is generated from those products. We currently have no commitments or arrangements for any additional financing to fund our product research and development programs. However, we may need to raise substantial additional capital in the
future to complete the development and commercialization of our new products or to acquire new businesses or technology.
We believe our
existing cash, cash equivalents and short-term investments and interest thereon, will be sufficient to fund our projected operating requirements for at least the next twelve months. However, if our success in generating sufficient operating cash
flow or our use of cash in the next twelve months were to significantly adversely change, we may not have enough funds available to continue operating at our current level in future periods. A limitation of funds available may raise concerns about
our ability to continue to operate. Such concerns may limit our ability to obtain financing and some customers may not be willing to do business with us.
Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:
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the amount and growth rate of our revenues and ability to be operationally cash flow positive;
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the extent to which we acquire or invest in businesses, products or technologies;
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the level of capital expenditures required to maintain or expand our operations;
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the initiation, progress, timing, costs and results of studies and trials required for our new products;
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the number and characteristics of new products that we pursue;
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the terms and timing of any future collaboration, licensing or other arrangements that we may establish;
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the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
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the effect of competing technological and market developments; and
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the cost of establishing sales, marketing and distribution capabilities for any new products.
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We rely on
third parties for certain finishing steps for our products, including the slicing and polishing of our sapphire crystal.
In order to
reduce product costs and improve cash flow, we use third parties for certain finishing functions for our products, including the slicing and polishing of our sapphire crystal inventory. These types of services are only available from a limited
number of third parties. Our ability to successfully outsource these finishing functions will substantially depend on our ability to develop, maintain and expand our strategic relationship with these third parties. Any impairment in our
relationships with the third parties performing these functions, in the absence of a timely and satisfactory alternative arrangement, could have a material adverse effect on our business, results of operations, cash flow and financial
condition. In addition, we do not control any of these third parties or the operation of their facilities, and we may not be able to adequately manage and oversee the third parties performing our finishing functions. Accordingly, any
difficulties encountered by these third parties that result in product defects, delays or defaults on their contractual commitments to us could adversely affect our business, financial condition and results of operations. In addition, their
facilities may be vulnerable to damage or interruption from natural disasters, inclement weather conditions, power loss, acts of terrorism and similar events. A decision to close a facility without adequate notice as a result of these or other
unanticipated problems at the facility could result in lengthy interruptions in their services to us; and any loss or interruption of these services could significantly increase our expenses, cause us to default on our obligations to our customers
and/or otherwise adversely affect our business. Furthermore, the outsourcing of our finishing steps, such as slicing and polishing of wafers, may not continue to be available at reasonable prices or on commercially reasonable terms, or at all.
Our gross margins could fluctuate as a result of changes in our product mix and other factors, which may adversely impact our operating results.
We anticipate that our gross margins will fluctuate from period to period as a result of the mix of products that we sell in any given period.
We are working to increase sales of higher margin products, introduce new differentiated products and lower our costs. There can be no assurance that we will be successful in improving our gross margin mix. If we are not successful, our overall
gross margin levels and operating results in future periods would continue to be adversely impacted. Increased competition and the adoption of alternatives to our products, more complex engineering requirements, lower demand and other factors may
lead to a further downward shift in our product margins, leading to price erosion and lower revenues for us in the future.
8
The markets in which we operate are very competitive, and many of our competitors and potential competitors
are larger, more established and better capitalized than we are.
The markets for selling high-quality sapphire products are very
competitive and have been characterized by rapid technological change. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses, and failure to increase, or the loss of, market share
or expected market share, any of which would likely seriously harm our business, operating results and financial condition.
Some of our
competitors and potential competitors are substantially larger and have greater financial, technical, marketing and other resources than we do. Given their capital resources, the large companies with which we compete, or may compete in the future,
are in a better position to substantially increase their manufacturing capacity and research and development efforts or to withstand any significant reduction in orders by customers in our markets. Such larger companies typically have broader
product lines and market focus and thus are not as susceptible to downturns in a particular market. Some of our competitors also receive government subsidies, which could create a competitive advantage. We would be at a competitive disadvantage if
our competitors bring their products to market earlier, if their products are more technologically capable than ours, or if any of our competitors products or technologies becomes preferred in the industry. Moreover, we cannot assure you that
existing or potential customers will not develop their own products, or acquire companies with products that are competitive with our products. Any of these competitive threats could have a material adverse effect on our business, operating results
or financial condition.
The average selling prices of sapphire products have historically been volatile and in recent years sapphire product prices
have been increasingly depressed.
Historically, our industry has experienced volatility in product demand and pricing. However, in
the last three years, the sales prices for our sapphire products have trended downward due to an over-supply of products in the market. In some countries, government programs support sapphire producers who would otherwise be unprofitable; in such
circumstances, sapphire may be sold at prices below cost for an extended period of time, depressing market prices, to the detriment of our gross margins. This has had a significant adverse impact on our profitability and our results of operations.
Moreover, changes in average selling prices of our products as a result of competitive pricing pressures increased sales discounts and new product introductions by our competitors could have a significant impact on our profitability. Although we
attempt to optimize our product mix, introduce new products, reduce manufacturing costs and pass along certain increases in costs to our customers in order to lessen the effect of decreases in selling prices, we may not be able to successfully do so
in a timely manner or at all, and our results of operations and business may be harmed.
We rely on a limited number of outsource providers and
suppliers for raw materials and key components.
From time to time, we depend on a small number of suppliers for certain raw
materials, components, services and equipment used in manufacturing our products. We generally purchase these items with purchase orders, and we have no guaranteed supply arrangements with such suppliers. We also outsource some of our production
processes. We are subject to variations in the cost of these goods and services from period to period. We do not control the time and resources that these suppliers or service providers devote to our business, and we cannot be sure that these
suppliers or service providers will perform their obligations to us or do so on a timely basis. In addition, some of these third parties are located in regions of the world that may experience periods of political or economic instability, which
could inhibit their ability to supply necessary materials or services to us.
Any significant delay in product delivery or production
processes, or other interruption or variation in supply or services from our key suppliers and providers could prevent us from meeting demand for our products and from obtaining future business. If we were to lose key suppliers or service providers
or if they were unable to support our demand, our manufacturing operations could be interrupted and we could be required to attempt to establish supply arrangements with other suppliers or service providers. In addition, the inability of our
suppliers to support our demand could be indicative of a market wide scarcity of materials, which could result in even longer or deeper interruptions. Any such delay or interruption would impair our ability to meet our customers needs and,
therefore, could damage our customer relationships and have a material adverse effect on our business and operating results.
Our future operating
results may fluctuate significantly, which makes our future results difficult to predict and could cause our operating results for particular periods to fall below expectations.
Our revenues and operating results have fluctuated in the past and are likely to fluctuate in the future. These fluctuations are due to a
number of factors, many of which are beyond our control. In connection with the Board of Directors continuing review of alternatives with a goal of providing greater value to our stockholders, on September 12, 2016, we announced the
Boards decision to limit our business focus to the optical and industrial sapphire markets and to exit the LED and mobile device markets. The optical and industrial sapphire markets are smaller markets than our historical undertakings and
there is no assurance that we will be able to successfully expand our optical and industrial sapphire business, or that such shift in focus will ultimately improve our profitability or operating results. Our annual revenue from optical and
industrial products over the past three years has been between $4.5 million and $7.1 million, representing 15% to 23% of our total revenue in those years.
9
Some of the factors that will affect operating results include, among others:
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the amount and timing of costs relating to the expansion of our operations in the optical and industrial markets;
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our ability to attract new customers;
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gain or loss of significant customers;
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timing and size of orders from and shipments to customers;
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volatility of sapphire product prices;
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our ability to develop, introduce and market new products and technologies on a timely basis;
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our ability to meet customer specifications for products;
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market acceptance of our optical and industrial sapphire products and our customers products;
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our ability to retain key relationships with suppliers and contractor third parties, including for the slicing and polishing functions for our sapphire crystal;
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performance of suppliers, contractors and other third parties on whom we depend;
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fluctuations in gross margins as a result of changes in capacity utilization, raw material costs, product mix or other factors;
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our ability to reduce costs commensurate to our scaled down operations;
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the need to pay higher labor costs;
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competitive market conditions, including pricing actions by our competitors and our customers competitors;
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announcements of technological innovations, new products or upgrades to existing products by us or our competitors;
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additions or departures of key personnel, which could be affected by our recent announcements to shift our business focus and consolidate our operations;
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general economic conditions in the optical and industrial sapphire markets;
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developments in trade secrets, patent or other proprietary rights by us or our competitors;
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interruption of operations at our manufacturing facilities or the facilities of our suppliers;
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rapid changes in market conditions that result in financial hardship for some or all of our customers, resulting in reduced orders and/or accounts receivable write-offs in the future;
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potential seasonal fluctuations in our customers business activities; and
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natural disasters, such as floods, hurricanes and earthquakes, as well as interruptions in power supply resulting from such events or due to other causes.
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The foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our quarterly or
annual operating results. Likewise, if we acquire any new business, whether or not in the sapphire market, the operating results of that business will be subject to the same risks as are listed above. If our revenues or operating results fall below
the expectations of investors or any securities analysts that may publish research on our Company, the price of our common stock would likely decline.
We depend on a few customers for a major portion of our sales and our results of operations would be adversely impacted if they reduce their order volumes.
Historically, we have earned, and believe that in the future we will continue to earn, a substantial portion of our revenue from a
small number of customers. In 2016 our top customer accounted for approximately 60% of our revenue and in 2015 our top two customers accounted for approximately 31% of our revenue. Our revenue from the optical and industrial markets also tends to be
concentrated, with three customers accounting for approximately 19%, 13%, and 11% of the optical revenue for the year ended December 31, 2016 and four customers accounting for approximately 20%, 14%, 10% and 10% of the optical revenue for the
year ended December 31, 2015. If we were to lose one of our major customers or have a major customer significantly reduce its volume of business with us, our revenues and profitability would be materially reduced unless we are able to replace
such demand with other orders promptly. We expect to continue to be dependent on our major customers, the number and identity of which may change from period to period.
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We generally sell our products on the basis of purchase orders. Thus, most of our customers could
cease purchasing our products with little or no notice and without significant penalties. In addition, delays in product orders could cause our quarterly revenue to vary significantly. A number of factors could cause our customers to cancel or defer
orders, including interruptions to their operations due to a downturn in their industries, natural disasters, delays in manufacturing their own product offerings into which our products are incorporated, securing other sources for the products that
we manufacture or developing such products internally.
Our products must meet exacting specifications and undetected defects may cause customers to
return or stop buying our products.
Our customers establish demanding specifications for quality, performance and reliability that
our products must meet. While we inspect our products before shipment, they still may contain undetected defects. If defects occur in our products, we could experience lost revenue, increased costs, delays in, or cancellations or rescheduling of
orders or shipments, product returns or discounts, or damage to our reputation, any of which would harm our operating results and our business.
If the
market acceptance of newly developed products does not meet our expectations or our efforts to enhance existing products are not successful, our future operating results may be harmed.
The development of new products may require substantial investment in development efforts. If our newly developed products do not achieve
market acceptance, we may be unable to generate anticipated revenue and our operating results could be harmed.
Our continuing efforts to
enhance our current products and to develop new products involve several risks, including:
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our ability to anticipate and respond in a timely manner to changes in customer requirements;
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the significant research and development investment that we may be required to make before market acceptance of a particular new or enhanced product;
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the possibility that the industry may not accept our new or enhanced products after we have invested a significant amount of resources in development; and
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competition from new technologies, processes and products introduced by our current and/or future competitors.
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If we are unable to attract or retain qualified personnel, our business and product development efforts could be harmed.
Our success depends on our continued ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial,
manufacturing, administrative and sales and marketing personnel. Competition for these individuals is intense, and we may not be able to successfully recruit, assimilate or retain sufficiently qualified personnel. In particular, we may encounter
difficulties in recruiting and retaining a sufficient number of qualified technical personnel. The inability to attract and retain necessary technical, managerial, manufacturing, administrative and sales and marketing personnel could harm our
ability to obtain new customers and develop new products and could adversely affect our business and operating results. In addition, the loss of the services, or distraction, of our senior management for any reason could adversely affect our
business, operating results and financial condition.
We are subject to risks from international sales that may harm our operating results.
In 2016 and 2015, revenue from international sales for our optical and industrial markets products was approximately 35% and 28%,
respectively, of our total optical and industrial markets revenue. We expect that revenue from international sales will continue to be a portion of our total revenue for the foreseeable future. Our international sales are subject to a variety of
additional risks, including risks arising from:
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sales variability as a result of transacting our foreign sales in U.S. dollars as prices for our products become less competitive in countries with currencies that are low or are declining in value against the U.S.
dollar and more competitive in countries with currencies that are high or increasing in value against the U.S. dollar;
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trading restrictions, tariffs, trade barriers and taxes;
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differing intellectual property laws;
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economic and political risks, wars, acts of terrorism, political unrest, pandemics, boycotts, curtailments of trade and other business restrictions;
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the difficulty of enforcing contracts and collecting receivables through some foreign legal systems;
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unexpected changes in regulatory requirements and other governmental approvals, permits and licenses; and
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periodic foreign economic downturns.
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Our future success will depend on our ability to
anticipate and effectively manage these and other risks associated with our international sales. Our failure to manage any of these risks could harm our operating results.
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Our gross margins and profitability may be adversely affected by energy costs.
Most of our power consumption takes place in our crystal growth facility in the U.S. Electricity prices could increase due to overall changes
to the price of energy due to conditions in the Middle East, natural gas shortages in the U.S. and other economic conditions and uncertainties regarding the outcome and implications of such events. Once our current purchase agreements expire, if
electricity prices increase significantly, we may not be able to pass these price increases through to our customers on a timely basis, if at all, which could adversely affect our gross margins and results of operations.
Our contracts for electricity require us to purchase certain minimum amounts in order to retain the pricing under the contract. If the amount
we use is less than the required minimum, the difference is resold at the then prevailing market price and, if the resale price is lower than our contract price, we will experience a loss on that resale, which could adversely affect our gross
margins and operating results.
Our manufacturing processes may be interrupted or our production may be delayed if we or our outsource providers cannot
maintain sufficient electrical supply, which could adversely affect our business, financial condition and operating results.
Our
manufacturing process requires a stable source of electricity. From time to time, we have experienced limited disruptions in our supply of electricity. Such disruptions, depending upon their duration, could result in a significant drop in throughput
and yield of
in-process
crystal boules and create delays in our production. Although we use generators and other
back-up
sources of electricity, these replacement
sources of electricity are only capable of providing effective
back-up
for limited periods of time. We cannot assure you that we will be successful in avoiding future disruptions in power or in mitigating the
effects of such disruptions. Any material disruption in electrical supply could delay our production and could adversely affect our business, financial condition and operating results.
In addition, we outsource some of the finishing steps for our products and any interruption in the operations of third parties to whom we
outsource could adversely impact our ability to deliver certain products. Such an interruption could adversely affect our business, financial condition and operating results.
Our proprietary intellectual property rights may not adequately protect our products and technologies, and the failure to protect such rights could harm
our competitive position and adversely affect our operating results.
To protect our technology, we have chosen to rely primarily on
trade secrets and to a lesser extent publicly filed patents. Trade secrets are inherently difficult to protect. While we believe we use reasonable efforts to protect our trade secrets, our directors, employees, consultants or contractors may
unintentionally or willfully disclose our information to competitors, whether during or after the termination of their services to our Company. If we were to seek to enforce a claim that a third party had illegally obtained and was using our trade
secrets, it would be expensive and time consuming, and the outcome would be unpredictable.
In addition, courts outside the U.S. are
sometimes less willing to protect trade secrets than U.S. courts. Moreover, if our competitors independently develop equivalent knowledge, methods and
know-how,
it will be more difficult for us to protect our
intellectual property and our business could be harmed.
We have seven issued patents covering our products and technologies and
twenty-two
patent applications pending. There can be no assurance that our pending patents will be issued or that any patents issued will be of significant value to our business. Our commercial success will depend
on obtaining and maintaining trade secret, patent and other intellectual property protection of our products and technologies. We will only be able to protect products and technologies from unauthorized use by third parties to the extent that valid,
protectable and enforceable trade secrets, patents or other intellectual property rights cover them.
If we are not able to defend the
trade secret or patent protection positions of our products and technologies, then we may not be able to successfully compete with competitors developing or marketing competing products and we may not generate enough revenue from product sales to
justify the cost of development of our products and to achieve or maintain profitability.
The protection of our intellectual property rights and the
defense of claims of infringement against us by third parties may subject us to costly litigation.
Other companies might allege that
we are infringing certain of their patents or other rights. If we are unable to resolve these matters satisfactorily, or to obtain licenses on acceptable terms, we may face litigation. Any litigation to enforce patents issued to us, to protect trade
secrets or
know-how
possessed by us or to defend us or indemnify others against claimed infringement of the rights of others could have a material adverse effect on our financial condition and operating
results. Regardless of the validity or successful outcome of any such intellectual property claims, we may need to expend significant time and expense to protect our intellectual property rights or to defend against claims of infringement by third
parties, which could have a material adverse effect on us. If we lose any such litigation where we are alleged to infringe the rights of others, we may be required to:
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pay substantial damages;
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seek licenses from others; or
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change, or stop manufacturing or selling, some or all of our products.
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Any of these outcomes
could have an adverse effect on our business, results of operations or financial condition.
We may be subject to confidential information theft or
misuse, which could harm our business and results of operations.
We face attempts by others to gain unauthorized access to our
information technology systems on which we maintain proprietary and other confidential information. Our security measures may be breached as the result of industrial or other espionage actions of outside parties, employee error, malfeasance or
otherwise, and as a result, an unauthorized party may obtain access to our systems. Additionally, outside parties may attempt to access our confidential information through other means, for example by fraudulently inducing our employees to disclose
confidential information. We actively seek to prevent, detect and investigate any unauthorized access, which sometimes occurs. We might be unaware of any such access or unable to determine its magnitude and effects. The theft and/or unauthorized use
or publication of our trade secrets and other confidential business information as a result of such an incident could adversely affect our competitive position and the value of our investment in research and development could be reduced. Our
business could be subject to significant disruption and we could suffer monetary or other losses.
We are subject to numerous environmental laws and
regulations, which could expose us to environmental liabilities, increase our manufacturing and related compliance costs or otherwise adversely affect our business and operating results.
In our manufacturing process, we use water, oils, slurries, acids, adhesives and other industrial chemicals. We are subject to a variety of
foreign, federal, state and local laws and regulations governing the protection of the environment. These environmental laws and regulations include those relating to the use, storage, handling, discharge, emission, disposal and reporting of toxic,
volatile or otherwise hazardous materials used in our manufacturing processes. These materials may have been or could be released into the environment at properties currently or previously operated by us, at other locations during the transport of
the materials, or at properties to which we send substances for treatment or disposal. If we were to violate or become liable under environmental laws and regulations or become
non-compliant
with permits
required at some of our facilities, we could be held financially responsible and incur substantial costs, including investigation and cleanup costs, fines and civil or criminal sanctions, third-party property damages or personal injury claims. In
addition, new laws and regulations or stricter enforcement of existing laws and regulations could give rise to additional compliance costs and liabilities.
Potential changes in trade relations or fiscal and tax policies implemented by the new presidential administration could have a material adverse effect on
our business and results of operations.
Revenue from international sales constitutes a material portion of our total revenue and we
anticipate it will continue to for the foreseeable future. The recent presidential election has created uncertainty with respect to trade relations between the United Sates and many of its trade partners. The current administration has suggested
that it is not supportive of certain existing international trade agreements. At this time, it remains unclear what actions may be taken with respect to these international trade agreements. If the United States takes action to withdraw from or
materially modify certain international trade agreements, our business, financial condition and results of operations could be adversely affected. Additionally, if tariffs or other restrictions are imposed on products imported from countries in
which we make sales, or relations with such countries otherwise deteriorate, such countries could retaliate by imposing similar tariffs or restrictions on products imported into those countries and it could cause negative sentiments toward the
United States by our customers in those countries, either of which could result in the loss of customers and revenue from international sales. If our revenues generated from international sales decline significantly, it could have a material adverse
effect on our business and results of operations.
The new administration has also called for substantial change to fiscal and tax
policies, which may include comprehensive tax reform. We cannot predict the impact, if any, of these changes on our business. However, it is possible that these changes could adversely affect our business. Until we know what changes are enacted, we
will not know whether in total we benefit from, or are negatively affected by, the changes.
Our operations are concentrated in two facilities, and the
unavailability of one or both of these facilities could harm our business.
Our manufacturing, research and development, sales and
marketing, and administrative activities are concentrated in two facilities in the Chicago metropolitan area. Should a casualty, natural disaster, inclement weather, an act of terrorism, an outbreak of disease, power loss, an act of terrorism or
similar event affect the Chicago area, our operations could be significantly impacted. We may not be able to replicate the manufacturing capacity and other operations of our Chicago facilities or such replication could take significant time and
resources to accomplish. The disruption from such an event could adversely affect or interrupt entirely our ability to conduct our business.
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Our U.S. net operating loss carryforwards may expire or could be substantially limited if we experience an
ownership change as defined in the Internal Revenue Code.
We have significant U.S. net operating loss carryforwards (the Tax
Attributes). Under federal tax laws, we can carry forward and use our Tax Attributes to reduce our future U.S. taxable income and tax liabilities until such Tax Attributes expire in accordance with the Internal Revenue Code of 1986, as amended
(the IRC). Section 382 and Section 383 of the IRC provide an annual limitation on our ability to utilize our Tax Attributes, as well as certain
built-in-losses,
against future U.S. taxable income in the event of a change in ownership, as defined under the IRC. We may experience a change in ownership in the
future as a result of changes in our stock ownership, and any such subsequent changes in ownership for purposes of the IRC could further limit our ability to use our Tax Attributes. Accordingly, any such occurrences could adversely affect our
financial condition, operating results and cash flows.
Global economic conditions could negatively impact on our business, financial condition and
results of operations.
The global financial crisis that began in late 2007 caused extreme disruption in the financial markets.
Although the disruption in the financial markets moderated thereafter, the global financial markets continue to reflect uncertainty about a sustained economic recovery. Uncertainty about global economic conditions could result in slow economic
activity, concerns about inflation and energy costs, decreased business and consumer confidence, reduced capital spending and adverse business conditions, as well as diminished liquidity and credit availability in many financial markets. In
addition, these economic and business conditions could cause reduced spending in our target markets and make it difficult for our customers and us to accurately forecast and plan future business activities. Continued weak economic conditions and
further adverse trends in general economic conditions, consumer confidence, employment levels, business conditions, interest rates, availability of credit, inflation and taxation have in the past and may again in the future cause consumer spending
to decline further, reduce demand for and prices of our products and our customers products, affect the prices and availability of raw materials, and limit our ability to obtain financing for our operations. Furthermore, our customers may be
unable to access capital efficiently, or at all, which could adversely affect our financial condition by resulting in product delays, increased defaults in accounts receivables and increased inventory exposures. Any unfavorable economic or market
conditions could have a material adverse effect on our business, financial condition and results of operations.
RISKS RELATED TO OWNERSHIP OF OUR
COMMON STOCK
Our common stock could be delisted from NASDAQ if the closing bid price remains below $1.00 per share.
On April 19, 2016, when our common stock was listed on the NASDAQ Global Market, we received notice from the Listing Qualifications
Department of The NASDAQ Stock Market LLC (NASDAQ) indicating that we no longer complied with the minimum bid price requirement because the closing bid price for our stock had been below $1.00 for 30 consecutive business days. In
accordance with the NASDAQ listing rules, we had an initial grace period of 180 calendar days to regain compliance with the minimum bid price requirement. On October 18, 2016, we received approval from NASDAQ to transfer the listing of our
common stock from the NASDAQ Global Market to the NASDAQ Capital Market. This transfer was effective at the opening of business on October 20, 2016. As a result of this transfer, we were granted an additional
180-day
grace period to regain compliance with NASDAQs minimum bid price requirement. To regain compliance and qualify for continued listing on the NASDAQ Capital Market, the bid price per share of our
common stock must be at least $1.00 for at least ten consecutive business days during the additional
180-day
grace period, which will end on April 17, 2017. NASDAQ may, in its discretion, require our
common stock to maintain a bid price per share of at least $1.00 for a period in excess of ten consecutive business days, but generally no more than 20 consecutive business days, before determining that we have demonstrated an ability to maintain
long-term compliance. If we fail to regain compliance by April 17, 2017, we expect that NASDAQ will provide written notification to us that our common stock will be delisted. At that time, we may appeal the delisting determination to a
NASDAQ Hearings Panel and our common stock would remain listed pending the panels decision. There can be no assurance that, if we appeal the delisting determination, such appeal would be successful. There is no assurance that our common stock
will not be delisted. If our common stock is delisted, additional sales practice requirements would be imposed on broker-dealers who sell our securities. The additional burdens imposed upon broker-dealers by these requirements could discourage
broker-dealers from effecting transactions in our common stock. This would significantly affect the ability of investors to trade our securities and would significantly negatively affect the value and liquidity of our common stock. These factors
could contribute to lower prices and larger spreads in the bid and ask prices for our common stock. In addition, if our common stock is delisted, it could make it significantly more difficult for us to raise capital and adversely affect the market
liquidity for the offered securities. In connection with the transfer of our common stock to the NASDAQ Capital Market, we provided written notice to NASDAQ of our intention to cure the minimum bid price deficiency during the additional grace
period, including by carrying out a reverse stock split, if necessary. If we seek to implement a reverse stock split in order to remain listed on
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NASDAQ, the announcement and/or implementation of a reverse stock split could significantly negatively affect the price of our common stock. Failure of our stockholders to approve a proposed
reverse stock split, or any delay in receiving stockholder approval of a proposed reverse stock split, may hinder our ability to regain compliance with the minimum bid price requirement.
The trading price of our common stock has been and will likely continue to be volatile due to various factors, some of which are beyond our
control, and each of which could adversely affect our stockholders value.
From our initial public offering through
March 9, 2017, the trading price of our common stock has ranged from a low of $0.46 to a high of $35.90.
Factors related to our
Company and our business, as well as broad market and industry factors, may adversely affect the market price of our common stock, regardless of our actual operating performance. Such factors that could cause fluctuations in our stock price include,
among other things:
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changes in market valuations of other companies in our industry;
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changes in financial guidance or estimates by us, by investors or by any financial analysts who might cover our stock or our industry;
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our ability to meet the performance expectations of financial analysts or investors;
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our ability to develop and market new and enhanced products on a timely basis;
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announcements by us or our competitors of significant products, contracts, acquisitions or strategic partnerships;
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general market and economic conditions; and
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the size of the public float of our stock.
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Our certificate of incorporation, bylaws and Delaware law may
discourage takeovers and business combinations that our stockholders might consider in their best interests.
A number of provisions
in our certificate of incorporation and bylaws, as well as anti-takeover provisions of Delaware law, may have the effect of delaying, deterring, preventing or rendering more difficult a change in control of Rubicon that our stockholders might
consider in their best interests. These provisions include:
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establishment of a classified Board of Directors;
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granting to the Board of Directors sole power to set the number of directors and to fill any vacancy on the Board of Directors, whether such vacancy occurs as a result of an increase in the number of directors or
otherwise;
|
|
|
|
limitations on the ability of stockholders to remove directors;
|
|
|
|
the ability of our Board of Directors to designate and issue one or more series of preferred stock without stockholder approval, the terms of which may be determined at the sole discretion of the Board of Directors;
|
|
|
|
prohibition on stockholders from calling special meetings of stockholders;
|
|
|
|
prohibition on stockholders from acting by written consent; and
|
|
|
|
establishment of advance notice requirements for stockholder proposals and nominations for election to the Board of Directors at stockholder meetings.
|
These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a
bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.
The foregoing provisions of our certificate of incorporation and bylaws may also make it difficult for stockholders to replace or remove our
management. These provisions may facilitate management entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in the best interests of our stockholders.
15
We are subject to litigation risks, including securities class action litigation, which may be costly to
defend.
All industries, including ours, are subject to legal claims, including securities litigation. When the market price of a
stock declines significantly, due to factors such as trends in the stock market in general, broad market and industry fluctuations or operating performance, holders of that stock have sometimes instituted securities class action litigation against
the company that issued the stock. This sort of litigation can be particularly costly and may divert the attention of our management and our resources in general. We have been subject to securities class action litigation in the past, as disclosed
in our previous filings with the SEC. Due to the inherent uncertainty of the litigation process, the resolution of any particular legal claim or proceeding (including by settlement) could have a material effect on our business, financial condition,
results of operations or cash flows. Further, uncertainties resulting from the initiation and continuation of securities or other litigation could harm our ability to obtain credit and financing for our operations and to compete in the marketplace.
Our Board of Directors does not intend to declare or pay any dividends to our stockholders in the foreseeable future.
The declaration, payment and amount of any future dividends will be made at the discretion of our Board of Directors and will depend upon,
among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors the Board of Directors considers relevant. There is no plan to pay dividends in the foreseeable future, and
if dividends are paid, there can be no assurance with respect to the amount of any such dividend.
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
Disclosure under this item is not
required, as the registrant is a smaller reporting company.
Our executive, research and development and
manufacturing functions are located on properties that we lease or own. We lease properties in Franklin Park, Illinois and Bensenville, Illinois. These facilities total approximately 62,000 square feet in three buildings, which includes 30,000
square feet in our Bensenville, Illinois facility. The Franklin Park, Illinois facility is primarily used for manufacturing. The Bensenville, Illinois facility houses crystal growth, research and development and our corporate executive offices. The
leases for these facilities terminate in July 2018 and June 2019.
Future minimum payments under these leases, in the aggregate are as follows:
|
|
|
|
|
Year ending December 31,
|
|
Lease
Payments
(in
thousands)
|
|
2017
|
|
$
|
577
|
|
2018
|
|
|
457
|
|
2019
|
|
|
145
|
|
In addition, we own a 134,400 square foot facility in Batavia, Illinois previously used for crystal
growth, manufacturing, research and development and office space. We also own a parcel of extra land in Batavia, Illinois which was acquired in 2012 for future expansion. In addition, we own a 65,000 square foot facility in Penang, Malaysia
previously used for manufacturing operations. The Batavia, Illinois and Penang, Malaysia land and facilities are currently available for sale.
16
ITEM 3.
|
LEG
AL PROCEEDINGS
|
From time to time, we, our subsidiaries
and/or our directors and officers may be named in claims arising in the ordinary course of business. Management believes that there are no pending legal proceedings involving us or any of our subsidiaries that will, individually or in the aggregate,
have a material adverse effect on our consolidated results of operations or financial condition.
ITEM 4.
|
MINE SAF
ETY DISCLOSURES
|
Not applicable.
17
The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
Rubicon
Technology, Inc., a Delaware corporation (the Company), is a vertically integrated, advanced materials provider specializing in monocrystalline sapphire for applications in optical and industrial systems. The Company sells its products
on a global basis to customers in Asia, Australia, North America and Europe. The Company maintains its operating facilities in the Chicago metropolitan area.
Principles of consolidation
The
Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries, Rubicon Worldwide LLC, Rubicon Sapphire Technology (Malaysia) SDN BHD, Rubicon Technology Hong Kong Limited and Rubicon Technology Korea Yuhan
Hosea. All intercompany transactions and balances have been eliminated in consolidation.
A summary of the Companys significant
accounting policies applied in the preparation of the accompanying Consolidated Financial Statements follows.
Cash and cash equivalents
The Company considers all unrestricted highly liquid investments immediately available to be cash equivalents. Cash equivalents primarily
consist of time deposits with banks, unsettled trades and brokerage money market accounts.
Restricted cash
A summary of the Companys restricted cash at December 31, 2016 and 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Certificates of deposit
|
|
$
|
5
|
|
|
$
|
5
|
|
Flexible spending funds
|
|
|
2
|
|
|
|
2
|
|
Fixed deposit pledge
|
|
|
156
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
163
|
|
|
$
|
170
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation and transactions
Rubicon Worldwide LLC, Rubicon Technology Hong Kong Limited and Rubicon Technology Korea Yuhan Hoseas assets and liabilities are
translated into U.S. dollars at exchange rates existing at the respective balance sheet dates and capital accounts at historical exchange rates. The results of operations are translated into U.S. dollars at the average exchange rates during the
respective period. Translation adjustments resulting from fluctuations in exchange rates for Rubicon Worldwide LLC, Rubicon Technology Hong Kong Limited and Rubicon Technology Korea Yuhan Hosea are recorded as a separate component of accumulated
other comprehensive income (loss) within stockholders equity.
The Company has determined that the functional currency of Rubicon
Sapphire Technology (Malaysia) SDN BHD is the U.S. dollar. Rubicon Sapphire Technology (Malaysia) SDN BHDs assets and liabilities are translated into U.S. dollars using the remeasurement method.
Non-monetary
assets are translated at historical exchange rates and monetary assets are translated at exchange rates existing at the respective balance sheet dates. Translation adjustments for Rubicon Sapphire
Technology (Malaysia) SDN BHD are included in determining net income (loss) for the period. The results of operations are translated into U.S. dollars at the average exchange rates during the respective period. The Company records these gains and
losses in other income (expense).
F-8
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
Foreign currency transaction gains and losses are generated from the effects of exchange rate
changes on transactions denominated in a currency other than the functional currency of the Company, which is the U.S. dollar. Gains and losses on foreign currency transactions are generally required to be recognized in the determination of net
income (loss) for the period. The Company records these gains and losses in other income (expense).
Investments
The Company invests available cash primarily in investment grade commercial paper, FDIC guaranteed certificates of deposit, common stock,
corporate notes and government securities. Investments classified as
available-for-sale
securities are carried at fair market value with unrealized gains and losses
recorded in accumulated other comprehensive income (loss). Investments in trading securities are reported at fair value, with both realized and unrealized gains and losses recorded in other income (expense), in the consolidated statements of
operations. Investments in which the Company has the ability and intent, if necessary, to liquidate in order to support its current operations, are classified as short-term.
The Company reviews its
available-for-sale
securities
investments at the end of each quarter for other-than-temporary declines in fair value based on the specific identification method. The Company considers various factors in determining whether an impairment is other-than-temporary, including the
severity and duration of the impairment, changes in underlying credit ratings, forecasted recovery, its ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value and the
probability that the scheduled cash payments will continue to be made. When the Company concludes that an other-than-temporary impairment has resulted, the difference between the fair value and carrying value is written off and recorded as a charge
on the consolidated statements of operations. As of December 31, 2016 and 2015, no impairment was recorded.
Treasury stock
The Company records treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock.
Accounts receivable
The majority of
the Companys accounts receivable is due from manufacturers serving the light-emitting diodes (LED) and optical systems and specialty devices industries. Credit is extended based on an evaluation of the customers financial
condition. Accounts receivable are due based on contract terms and at stated amounts due from customers, net of an allowance for doubtful accounts.
Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a
number of factors, including the length of time a customers account is past due, the customers current ability to pay and the condition of the general economy and industry as a whole. The Company writes off accounts receivable when they
are deemed uncollectible and such write-offs, net of payments received, are recorded as a reduction to bad debt expense.
F-9
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
The following table shows the activity of the allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
389
|
|
|
$
|
140
|
|
Charges to costs and expenses
|
|
|
(235
|
)
|
|
|
235
|
|
Accounts write offs, less recoveries
|
|
|
(123
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
31
|
|
|
$
|
389
|
|
|
|
|
|
|
|
|
|
|
Inventories
Inventories are valued at the lower of cost or market. Raw materials cost is determined using the
first-in,
first-out
method, and
work-in-process
and finished goods costs are determined
on a weighted-average cost basis which includes materials, labor and overhead. The Company reduces the carrying value of its inventories for differences between the cost and the estimated net realizable value, taking into account usage, expected
demand, technological obsolescence and other information.
The Company establishes inventory reserves when conditions exist that suggest
inventory may be in excess of anticipated demand or is obsolete based on customer specifications. The Company evaluates the ability to realize the value of its inventory based on a combination of factors, including forecasted sales, estimated
current and future market value and changes in customers product specifications. The Companys method of estimating excess and obsolete inventory has remained consistent for all periods presented.
At times in 2016 and 2015, the Company has accepted sales orders for core and wafer products at prices lower than cost. Based on these sales
prices, the Company has recorded for the years ended December 31, 2016 and 2015, a lower of cost or market adjustment which reduced inventory and increased cost of goods sold by $1.1 million and $3.9 million, respectively.
The continual decline of prices and worldwide over supply of material has significantly limited the sales of the Companys
two-inch
diameter core. Therefore,
two-inch
diameter core is considered to be in excess. Since it can be recycled and used as raw material to grow new crystals,
two-inch
diameter core material has been written down to raw material value and for the year ended December 31, 2016, an excess and obsolete adjustment was recorded which reduced inventory and increased cost of
goods sold by $2.3 million.
With the decision to exit the LED market, the discontinuation of polished and patterned wafer production
will result in a significant decrease in crystal growth production and thus impact the amount of raw material needed for future production. Accordingly, raw material in excess of the amount needed for future production has been written down and for
the year ended December 31, 2016, an excess and obsolete adjustment was recorded which reduced inventory and increased cost of goods sold by $4.0 million.
Inventories are composed of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
3,112
|
|
|
$
|
7,346
|
|
Work-in-process
|
|
|
4,251
|
|
|
|
9,920
|
|
Finished goods
|
|
|
637
|
|
|
|
4,067
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,000
|
|
|
$
|
21,333
|
|
|
|
|
|
|
|
|
|
|
F-10
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
Other inventory supplies
The Companys other inventory supplies include stock of consumable and spare parts used in the manufacturing process. With the decision to
focus on optical and industrial products, the Company determined it had consumable parts stock that was obsolete and recorded for the year ended December 31, 2016 a consumable stock write-down of $3.2 million.
Property and equipment
Property and
equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Land and land improvements
|
|
$
|
|
|
|
$
|
4,133
|
|
Buildings
|
|
|
|
|
|
|
26,097
|
|
Machinery, equipment and tooling
|
|
|
17,769
|
|
|
|
50,364
|
|
Leasehold improvements
|
|
|
4,624
|
|
|
|
7,141
|
|
Information systems
|
|
|
991
|
|
|
|
1,105
|
|
Furniture and fixtures
|
|
|
699
|
|
|
|
816
|
|
Construction in progress
|
|
|
263
|
|
|
|
1,327
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
24,346
|
|
|
|
90,983
|
|
Accumulated depreciation and amortization
|
|
|
(17,236
|
)
|
|
|
(33,414
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
7,110
|
|
|
$
|
57,569
|
|
|
|
|
|
|
|
|
|
|
Property and equipment are carried at cost and depreciated over their estimated useful lives using the
straight-line method. The cost of maintenance and repairs is charged to expense as incurred. Significant renewals and improvements are capitalized. Depreciation and amortization expense associated with property and equipment was $6.1 million
and $11.4 million for the years ended December 31, 2016 and 2015, respectively.
Construction in progress includes costs
associated with the construction of furnaces and deposits made on equipment purchases.
The estimated useful lives are as follows:
|
|
|
Asset description
|
|
Life
|
Buildings
|
|
39 years
|
Machinery, equipment and tooling
|
|
3-10 years
|
Leasehold improvements
|
|
Lesser of life of lease or economic life
|
Furniture and fixtures
|
|
7 years
|
Information systems
|
|
3 years
|
Other assets
The Companys other assets include overhaul costs that are accounted for using the deferral method. These overhaul costs are recorded at
cost on the balance sheet as other assets and are amortized over terms in accordance with their respectful useful lives.
F-11
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
Warranty cost
The Companys sales terms include a warranty that its products will meet certain specifications. The Company records a current liability
for the expected cost of warranty-related claims at the time of sale. The warranty reserve is included in accrued and other current liabilities on the Consolidated Balance Sheets.
The following table presents changes in the Companys product warranty liability:
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Balance, beginning of period
|
|
$
|
73
|
|
|
$
|
97
|
|
Charged to cost of sales
|
|
|
(1
|
)
|
|
|
90
|
|
Actual product warranty expenditures
|
|
|
(45
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
27
|
|
|
$
|
73
|
|
|
|
|
|
|
|
|
|
|
Fair value of financial instruments
The Companys financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, and
accounts payable. The carrying values of these assets and liabilities approximate their fair values due to the short-term nature of these instruments at December 31, 2016 and 2015.
Concentration of credit risks and other risks and uncertainties
Financial instruments that could potentially subject the Company to concentrations of credit risk consist principally of cash and cash
equivalents and accounts receivable. At December 31, 2016 and 2015, the Company had $525,000 and $419,000, respectively, on deposit at foreign financial institutions. At December 31, 2016 and 2015, the Company had $6.0 million and
$2.9 million, respectively, on deposit at financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation and other foreign governmental insurance agencies. The Company performs a periodic evaluation of these
institutions for relative credit standing. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant risk of loss on these balances.
The Company currently depends on a small number of suppliers for certain raw materials, components, services and equipment, including key
materials such as aluminum oxide powder and certain furnace components. If the supply of these components were to be disrupted or terminated, or if these suppliers were unable to supply the quantities of raw materials required, the Company may have
difficulty in finding, or may be unable to find, alternative sources for these items. The Company also uses third parties for certain finishing functions for its products, including the slicing and polishing of its sapphire crystal
inventory. These types of services are only available from a limited number of third parties. The Companys ability to successfully outsource these finishing functions will substantially depend on its ability to develop, maintain and
expand its strategic relationship with these third parties. As a result, the Company may be unable to meet the demand for its products, which could have a material adverse impact on the Company.
Concentration of credit risk related to revenue and accounts receivable is discussed in Note 4.
F-12
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
Revenue recognition
Revenues recognized include product sales and billings for costs and fees for government contracts.
Product Sales
The
Company recognizes revenue from product sales when earned. Revenue is recognized when, and if, evidence of an arrangement is obtained and the other criteria to support revenue recognition are met, including:
|
|
|
Persuasive
evidence
of
an
arrangement
exists
. The Company requires evidence of a purchase order with the customer specifying the terms and specifications of the product to
be delivered, typically in the form of a signed quotation or purchase order from the customer;
|
|
|
|
Title
has
passed
and
the
product
has
been
delivered.
Title passage and product delivery generally occur when the product is delivered to a common
carrier or per terms of a consignment agreement;
|
|
|
|
The
price
is
fixed
or
determinable
. All terms are fixed in the signed quotation or purchase order received from the customer. The purchase orders do not contain rights of
cancellation, return, exchange or refund; and
|
|
|
|
Collection
of
the
resulting
receivable
is
reasonably
assured.
The Companys standard arrangement with customers includes payment terms. Customers are
subject to a credit review process that evaluates each customers financial position and its ability to pay. Collectability is determined by considering the length of time the customer has been in business and history of collections. If it is
determined that collection is not probable, no product is shipped and no revenue is recognized unless cash is received in advance.
|
Government Contracts
The Company recognizes research and development revenue in the period during which the related costs are incurred over the contractually
defined period. In July 2012, the Company signed a contract with the Air Force Research Laboratory (the LANCE government contract) to produce large-area sapphire windows on a cost plus fixed fee basis. The Company records revenue on a gross basis as
costs are incurred plus a portion of the fixed fee. For the years ended December 31, 2016 and 2015, $289,000 and $661,000, respectively, of revenue were recorded. At December 31, 2016, the estimated costs to complete the contract were in
excess of the contract value. For the year ended December 31, 2016, the Company accrued $217,000 for the estimated costs of completion. To date, the Company has recorded $4.3 million in revenue and the total value of the contract is
$4.7 million.
The Company does not provide maintenance or other services and it does not have sales that involve multiple elements
or deliverables.
Shipping and handling costs
The Company records costs incurred in connection with shipping and handling of products as cost of goods sold. Amounts billed to customers in
connection with these costs are included in revenue and are not material for any of the periods presented in the accompanying financial statements.
Sales tax
The Company collects and
remits sales taxes on products sold to customers and reports such amounts under the net method in its Consolidated Statements of Operations and records a liability until remitted to the respective tax authority.
F-13
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
Stock-based compensation
The Company requires all share-based payments to employees, including grants of employee stock options to be measured at fair value and
expensed in the Consolidated Statements of Operations over the service period (generally the vesting period) of the grant. Expense is recognized in the Consolidated Statements of Operations for these share-based payments.
Research and development
Research and
development costs are expensed as incurred. Research and development expense was $2.5 million and $2.2 million for the years ended December 31, 2016 and 2015, respectively.
Accounting for uncertainty in income taxes
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood
of being realized upon settlement. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for
the years ended December 31, 2016 and 2015.
The Company is subject to taxation in the U.S., Japan and in a state jurisdiction. The
Company is exempt from Malaysian income tax for a five year period beginning in 2009 with a five year renewal. As of the December 31, 2016, the Company requested the Malaysian government to modify the tax holiday to allow it to extend through
2016 even though the Company did not meet the original requirements. Due to the uncertainty of the modification being granted, at December 31, 2016 the Company recorded a current income tax provision for Malaysia income taxes with the
expectation that the holiday will not be granted. Due to the existence of net operating loss carryforwards, tax years ended December 31, 2001 through 2006, 2008, 2009 and 2011 through 2015 are open to examination by tax authorities for Federal
purposes. Due to net operating loss carryforwards at the State level, tax years ended 2004 through 2006 and 2008 through 2015 are open to examination by state tax authorities. Tax years 2013 through 2015 are open to examination by tax authorities in
Malaysia.
Income taxes
Deferred tax
assets and liabilities are provided for temporary differences between financial reporting and income tax bases of assets and liabilities, and are measured using the enacted tax rates and laws expected to be in effect when the differences will
reverse. Deferred income taxes also arise from the future benefits of net operating loss carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Full valuation
allowances on net deferred tax assets are maintained until an appropriate level of profitability that generates taxable income is deemed sustainable or until a tax strategy is developed that would enable the Company to conclude that it is more
likely than not that a portion of the deferred tax assets will be realizable. Based on an evaluation in accordance with the accounting standards, as of December 31, 2016 and 2015, a valuation allowance has been recorded against the net U.S. and
Malaysia deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence.
Use of estimates
The preparation of
financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
F-14
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
Other comprehensive loss
Comprehensive loss is defined as the change in equity of a business enterprise from transactions and other events from
non-owner
sources. Comprehensive loss includes net loss and other
non-owner
changes in equity that bypass the statement of operations and are reported in a separate component
of equity. A summary of the components of comprehensive loss for the years ended December 31, 2016 and 2015 follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Reclassification of unrealized gain included in net loss
|
|
$
|
|
|
|
$
|
|
|
Unrealized loss on investments, net of tax
|
|
|
(12
|
)
|
|
|
(17
|
)
|
Unrealized loss on currency translation
|
|
|
(18
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(30
|
)
|
|
$
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period.
Diluted net loss per common share is computed by dividing net loss by the weighted average number of diluted common shares outstanding during the period. Diluted shares outstanding are calculated by adding to the weighted shares outstanding any
common stock equivalents, outstanding stock options and warrants based on the treasury stock method.
Diluted net loss per common share is
the same as basic net loss per common share for the years ended December 31, 2016 and 2015 because the effects of potentially dilutive securities are anti-dilutive.
As of December 31, 2016 and 2015, diluted shares outstanding were the same as basic shares outstanding.
New accounting pronouncements adopted
In
August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2014-15
(ASU
2014-15),
Presentation
of
Financial
StatementsGoing
Concern
(Subtopic
205-40):
Disclosure
of
Uncertainties
about
an
Entitys
Ability
to
Continue
as
a
Going
Concern
. The standard requires management to evaluate whether there is substantial doubt about an entitys ability to continue as a going
concern and to provide related footnote disclosures. Management must evaluate whether it is probable that known conditions or events, considered in the aggregate, would raise substantial doubt about the entitys ability to continue as a going
concern within one year after the date that the financial statements are issued. If such conditions or events are identified, the standard requires managements mitigation plans to alleviate the doubt or a statement of the substantial doubt
about the entitys ability to continue as a going concern to be disclosed in the financial statements. The Company adopted ASU
2014-15
at December 31, 2016. Under ASU
2014-15,
the Companys negative financial trends of recurring operating losses and negative cash flow from operating activities are considered conditions or events that raise substantial doubt about the
Companys ability to continue as a going concern. The Company has plans in place that are considered as probable to effectively mitigate the adverse conditions. Activities around the Companys restructuring and mitigation plans are more
fully disclosed in Note 5 Asset Impairment Charges.
Recent accounting pronouncements
In July 2015, the FASB issued ASU
No. 2015-11
(ASU
2015-11),
Inventory
(Topic
330):
Simplifying
the
Measurement
of
Inventory
. The amendments in this ASU require an entity to measure
in-scope
inventory at the lower of cost or net realizable value, further clarifying consideration for net realizable value as estimated selling prices in the ordinary course of business less reasonably predictable
costs of completion, disposal and transportation. This ASU more closely aligns the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). For public business entities, ASU
2015-11
is effective for annual periods and interim periods beginning after December 15, 2016. The amendments in this ASU are prospectively applied with early adoption permitted. The Company is evaluating the
impact, if any, of adopting ASU
2015-11
on its financial statements and does not believe the adoption will significantly impact the presentation of its financial condition, results of operations and
disclosures.
In January 2016, the FASB issued ASU
No. 2016-01
(ASU
2016-01),
Financial
InstrumentsOverall
(Subtopic
825-10):
Recognition
and
Measurement
of
Financial
Assets
and
Financial
Liabilities.
The standard requires equity investments (except those
F-15
accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income,
requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and
form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at
amortized cost. These changes become effective for fiscal years beginning after December 15, 2017. The Company is evaluating the impact, if any, of adopting ASU
2016-01
on its financial statements.
In February 2016, the FASB issued ASU
No. 2016-02
(ASU
2016-02),
Leases
(Topic
842)
which modifies the lease recognition requirements and requires entities to recognize the assets and liabilities arising from leases on the balance sheet.
ASU
2016-02
requires entities to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. ASU
2016-02
is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact, if any, of adopting ASU
2016-02
on its financial statements.
In March 2016, the FASB issued ASU
No. 2016-09
(ASU
2016-09),
CompensationStock
Compensation
(
Topic
718):
Improvements
to
Employee
Share-Based
Payment
Accounting
which modifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and
classification on the statement of cash flows. ASU
2016-09
is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. The Company is evaluating the impact,
if any, of adopting ASU
2016-09
on its financial statements.
In April 2016, the FASB issued ASU
No. 2016-10 (ASU
2016-10),
Revenue
from
Contracts
with
Customers
(Topic
606):
Identifying
Performance
Obligations
and
Licensing.
This update clarifies how an entity identifies performance obligations related to customer contracts as well as helps to improve the operability and understanding of the
licensing implementation guidance. The amendments in this update affect the guidance in ASU
No. 2014-09,
(ASU
2014-09),
Revenue
from
Contracts
with
Customers
(Topic
606),
which supersedes most of the current revenue recognition requirements. The underlying principle is that an entity will recognize revenue to depict the transfer of
goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major
provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances.
The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entitys contracts with customers. The guidance is effective for the interim and annual periods
beginning on or after December 15, 2017 (early adoption is not permitted). The guidance permits the use of either a retrospective or cumulative effect transition method. In May 2016, the FASB issued ASU
No. 2016-12, (ASU
2016-12),
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This update
clarifies the objectives of collectability, sales and other taxes, noncash consideration, contract modifications at transition, completed contracts at transition and technical correction. The amendments in this update affect the guidance in ASU
2014-09.
While the Company is currently assessing the impact of the new standards, the Companys revenue is primarily generated from the sale of finished products to customers. Sales predominantly contain a
single delivery element and revenue is recognized at a single point in time when ownership, risks, and rewards transfer. These are largely unaffected by the new standard. The Company does not expect this new guidance to have a material impact on the
amount of overall sales recognized; however, the timing of sales on certain projects may be affected. The Company has not yet quantified this potential impact.
In August 2016, the FASB issued ASU
No. 2016-15
(ASU
2016-15),
Statement
of
Cash
Flows
(Topic230):
Classification
of
Certain
Cash
Receipts
and
Cash
Payments
which
adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The standard addresses eight specific cash flow issues with the objective of reducing diversity in practice. ASU
2016-15
is effective for the interim and annual periods beginning after December 15, 2017 with early adoption permitted. The Company is in the process of performing its initial assessment of the potential
impact on its Consolidated Financial Statements and has not decided on its adoption methodology. The Company is evaluating the impact, if any, of adopting ASU
2016-15
on its financial statements.
In January 2017, the FASB issued ASU
No. 2017-01
(ASU
2017-01),
Business
Combinations
(Topic
805):
Clarifying
the
Definition
of
a
Business
. This update clarifies the definition of a
business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposal) of assets or businesses. The update provides new guidance to determine when an integrated
set of assets and activities (collectively referred to as a set) is not a business. The guidance requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single
identifiable asset or a group of similar identifiable assets, the set is not a business. ASU
2017-01
is effective for the interim and annual periods beginning after December 15, 2017 with early adoption
permitted. The Company is evaluating the impact, if any, of adopting ASU
2017-01
on its financial statements.
F-16
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
2. SEGMENT INFORMATION
The Company has determined that it operates in only one segment as it only reports profit and loss information on an aggregate basis to its
chief operating decision maker.
Revenue is attributed by geographic region based on
ship-to
location of the Companys customers. The following table summarizes revenue by geographic region:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
Germany
|
|
$
|
8,945
|
|
|
$
|
3,718
|
|
United States
|
|
|
3,364
|
|
|
|
4,894
|
|
Malaysia
|
|
|
2,880
|
|
|
|
|
|
Korea
|
|
|
1,486
|
|
|
|
3,646
|
|
Canada
|
|
|
876
|
|
|
|
522
|
|
Taiwan
|
|
|
847
|
|
|
|
3,490
|
|
Australia
|
|
|
509
|
|
|
|
913
|
|
Israel
|
|
|
398
|
|
|
|
785
|
|
China
|
|
|
222
|
|
|
|
5,499
|
|
Other
|
|
|
103
|
|
|
|
351
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
19,630
|
|
|
$
|
23,818
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes sales by product type:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
Wafer
|
|
$
|
13,121
|
|
|
$
|
6,627
|
|
Optical
|
|
|
4,568
|
|
|
|
5,086
|
|
Core
|
|
|
1,652
|
|
|
|
11,444
|
|
Research & development
|
|
|
289
|
|
|
|
661
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
19,630
|
|
|
$
|
23,818
|
|
|
|
|
|
|
|
|
|
|
F-17
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
The following table summarizes assets by geographic region:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
United States
|
|
$
|
47,171
|
|
|
$
|
88,916
|
|
Malaysia
|
|
|
5,811
|
|
|
|
30,276
|
|
Other
|
|
|
31
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
53,013
|
|
|
$
|
119,242
|
|
|
|
|
|
|
|
|
|
|
3. INVESTMENTS
The Company invests available cash primarily in FDIC guaranteed certificates of deposits and corporate notes. The Companys investments
are classified as
available-for-sale
securities and are carried at fair market value with unrealized gains and losses recorded in accumulated other comprehensive income
(loss). The Company did not have any short-term investments as of December 31, 2016.
The following table presents the amortized
cost, and gross unrealized gains and losses on all securities at December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FDIC guaranteed certificates of deposit
|
|
$
|
1,920
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,920
|
|
Corporate notes/bonds
|
|
|
6,980
|
|
|
|
|
|
|
|
5
|
|
|
|
6,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
8,900
|
|
|
$
|
|
|
|
$
|
5
|
|
|
$
|
8,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
The Company values its investments at fair value, defined as the price that would be received
to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to
measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last
unobservable, that may be used to measure fair value which are the following:
|
|
|
Level 1Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
Level 2Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The Companys fixed income
available-for-sale
securities
consist of high-quality, investment grade commercial paper, FDIC guaranteed certificates of deposits, corporate notes and government securities. The Company values these securities based on pricing from pricing vendors, who may use quoted prices in
active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. The valuation techniques used to measure the fair value of the
Companys financial instruments having Level 2 inputs were derived from
non-binding
market consensus prices that are corroborated by observable market data, quoted market prices for similar
instruments, or pricing models, such as discounted cash flow techniques.
The following table summarizes the Companys financial
assets measured at fair value on a recurring basis as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
10,949
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,949
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sales
securitiescurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FDIC guaranteed certificates of deposit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes/bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,949
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
The following table summarizes the Companys financial assets measured at fair value on
a recurring basis as of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
17,702
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17,702
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sales
securitiescurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FDIC guaranteed certificates of deposit
|
|
|
|
|
|
|
1,920
|
|
|
|
|
|
|
|
1,920
|
|
Corporate notes/bonds
|
|
|
|
|
|
|
6,975
|
|
|
|
|
|
|
|
6,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,702
|
|
|
$
|
8,895
|
|
|
$
|
|
|
|
$
|
26,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There are no terms or conditions restricting the Company from redeeming any of its investments.
In addition to the debt securities noted above, the Company had approximately $6.7 million and $3.5 million of time deposits
included in cash and cash equivalents as of December 31, 2016 and 2015, respectively.
4. SIGNIFICANT CUSTOMERS
For the year ended December 31, 2016, the Company had one customer that accounted for approximately 60% of its revenue. For the year ended
December 31, 2015, the Company had two customers that accounted for approximately 16% and 15% of its revenue.
Customers individually
representing more than 10% of trade receivables accounted for approximately 75% and 48% of accounts receivable as of December 31, 2016 and 2015, respectively. The Company grants credit to customers based on an evaluation of their financial
condition. Losses from credit sales are provided for in the financial statements.
F-20
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
5. ASSET IMPAIRMENT CHARGES
When circumstances, such as adverse market conditions, indicate that the carrying value of a long-lived asset may be impaired, the Company
performs an analysis to review the recoverability of the assets carrying value. The Company makes estimates of the undiscounted cash flows (excluding interest charges) from the expected future operations of the asset. These estimates consider
factors such as expected future operating income, operating trends and prospects, as well as the effects of demand, competition and other factors. If the analysis indicates that the carrying value is not recoverable from future cash flows, an
impairment loss is recognized to the extent that the carrying value exceeds the estimated fair value. The estimated fair value of assets is determined using appraisal techniques which assume the highest and best use of the asset by market
participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date. Any impairment losses are recorded as operating expenses, which reduce net income.
In the third quarter of 2015, the overall outlook for the sapphire market continued to be depressed as industry analysts reported significant
worldwide over capacity and pricing of sapphire products reached historical lows. The Company at that time evaluated its long-lived assets using a cost and market approach to determine the current fair market value. Based on this analysis, an
impairment to these assets was indicated, as the recoverable amount of undiscounted cash flows did not exceed the carrying amount of these assets. At December 31, 2015, the Company recorded an asset impairment charge on U.S. and Malaysia
machinery, equipment and facilities of $39.6 million.
In September 2016, due to the continual decline of prices that has made the
prospects of becoming profitable in the LED substrate market unlikely for the foreseeable future, the Company announced its decision to limit its focus to the optical and industrial sapphire markets and to exit the LED market. This resulted in
closing of the Malaysia facility. In the fourth quarter of 2016, the Company developed a plan to scale down the remaining operations and sell additional assets that would not be needed. In this regard, the Company identified excess U.S. machinery,
equipment and facilities. The Company engaged an independent valuation company to assist in the determination of the fair market value of assets to provide an updated valuation of the U.S. and Malaysia machinery and equipment. The Company evaluated
its U.S. asset portfolio for the assets continuing to be used in operations using a cost and market approach to determine the current fair market value. The Company evaluated its Malaysia asset portfolio and excess U.S. assets based on assuming an
orderly liquidation plan which considers economic obsolescence and sales of comparable equipment, as it is the Companys intention to sell these assets. Based on this review, the Company recorded for the year ended December 31, 2016 an
asset impairment charge on U.S. and Malaysia machinery and equipment of $12.3 million.
The Company is actively pursuing the sale of
a 134,400 square foot manufacturing and office facility in Batavia, Illinois, a parcel of extra land the Company owns in Batavia, Illinois, and a 65,000 square foot facility in Penang, Malaysia. Since the expected sale price is below the book
value of these properties, for the year ended December 31, 2016, an impairment charge of $14.3 million was recorded. These properties have a combined book value of $14.8 million and, since it is the Companys intention to
complete the sale within the next twelve-month period, these properties were reclassified as current assets held for sale at December 31, 2016.
At December 31, 2016, the Company reviewed the current fair market value of the Malaysia assets and concluded no additional adjustments
were needed. The Company will continue to assess its long-lived assets to ensure the carrying amount of these assets is still appropriate given any changes in the asset usage, marketplace and other factors used in determining the current fair market
value.
The table below summarizes the
non-financial
assets that were measured and recorded at
fair value on a
non-recurring
basis as of December 31, 2016 and loss recorded during the twelve months ended December 31, 2016 on those assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
value at
December 31,
2016
|
|
|
Quoted
prices in
active
markets
for
identical
assets
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
Loss for
twelve
months
ended
December 31,
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Long lived assets held and used
|
|
$
|
7,110
|
|
|
$
|
|
|
|
$
|
7,110
|
|
|
$
|
|
|
|
$
|
12,264
|
|
Long lived assets held for sale
|
|
|
14,761
|
|
|
|
|
|
|
|
14,761
|
|
|
|
|
|
|
|
14,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonrecurring for value measurements
|
|
$
|
21,871
|
|
|
$
|
|
|
|
$
|
21,871
|
|
|
$
|
|
|
|
$
|
26,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
The table below summarizes the
non-financial
assets that
were measured and recorded at fair value on a
non-recurring
basis as of December 31, 2015 and loss recorded during the twelve months ended December 31, 2015 on those assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
value at
December 31,
2015
|
|
|
Quoted
prices in
active
markets
for
identical
assets
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
Loss for
twelve
months
ended
December 31,
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Long lived assets held and used
|
|
$
|
57,569
|
|
|
$
|
|
|
|
$
|
57,569
|
|
|
$
|
|
|
|
$
|
39,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. STOCKHOLDERS EQUITY
Common stock
As of December 31, 2016
the Company had reserved 2,661,244 shares of common stock for issuance upon the exercise of outstanding common stock options and vesting of restricted stock units. Also, 2,432,184 shares of the Companys common stock were reserved for future
grants of stock options and restricted stock units (or other similar equity instruments) under the Rubicon Technology, Inc. 2016 Stock Incentive Plan (the 2016 Plan) as of December 31, 2016. In addition, 24,380 shares of the
Companys common stock were reserved for future exercise of outstanding warrants as of December 31, 2015.
Warrants
At December 31, 2015, the Company had outstanding 24,380 warrants to purchase shares of common stock at an exercise price of $3.65 per
share. The warrants were issued in conjunction with the issuance of convertible promissory notes issued by the Company to investors from August 2005 through October 2005. The warrants were immediately exercisable and expired 10 years from the date
of issuance. These warrants expired during the year ended December 31, 2016.
Treasury stock
The treasury shares are accounted for using the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. The
Board of Directors approved an arrangement to pay to one of its directors in cash
one-half
of the fees payable to him for director services in the fourth quarter of 2016; this resulted in the disposition to
the Company of 33,476 shares of restricted stock previously granted to the director in exchange for a cash payment of $21,093, which represented the then-current fair market value of the shares. The Company did not repurchase any shares for the
twelve months ended December 31, 2015.
F-22
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
7. STOCK INCENTIVE PLANS
The Company sponsored a stock option plan, the Rubicon Technology, Inc. 2001 Equity Plan, as amended (the 2001 Plan), which allowed
for the granting of incentive and nonqualified stock options for the purchase of common stock. The maximum number of shares that could be awarded or sold under the 2001 Plan was 1,449,667 shares. Each option granted under the 2001 Plan entitled the
holder to purchase one share of common stock at the specified option exercise price. The exercise price of each incentive stock option granted could not be less than the fair market value on the grant date. Management and the Board of Directors
determined vesting periods and expiration dates at the time of the grant. On August 2, 2011, the 2001 Plan expired. Any existing options under the 2001 Plan remain outstanding in accordance with their current terms under the 2001 Plan.
In August 2007, the Company adopted the Rubicon Technology Inc. 2007 Stock Incentive Plan, which was amended and restated effective in March
2011 (the 2007 Plan), and which allowed for the grant of incentive stock options,
non-statutory
stock options, stock appreciation rights, restricted stock, restricted stock units
(RSUs), performance awards and bonus shares. The maximum number of shares that could be awarded under the 2007 Plan was 4,407,692 shares. Options granted under the 2007 Plan entitle the holder to purchase shares of the Companys
common stock at the specified option exercise price, which could not be less than the fair market value of the common stock on the grant date. On June 24, 2016, the plan terminated with the adoption of the Rubicon Technology, Inc. 2016 Stock
Incentive Plan, (the 2016 Plan). Any existing awards under the 2007 Plan remain outstanding in accordance with their current terms under the 2007 Plan.
On June 24, 2016, the Company stockholders approved adoption of the 2016 Plan effective as of March 17, 2016, which allows for
the grant of incentive stock options,
non-statutory
stock options, stock appreciation rights, restricted stock, RSUs, performance awards and bonus shares. The Compensation Committee of the Companys Board
of Directors administers the 2016 Plan. The committee determines the type of award to be granted, the fair market value, the number of shares covered by the award, and the time when the award vests and may be exercised.
Pursuant to the 2016 Plan, 2,229,803 shares of the Companys common stock plus any shares subject to outstanding awards under the
2007 Plan that subsequently expire unexercised, are forfeited without the delivery of shares or are settled in cash, will be available for issuance under the 2016 Plan. The 2016 Plan will automatically terminate on March 17, 2026, unless the
Company terminates it sooner.
The following table summarizes the activity of the stock incentive and equity plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
available
for grant
|
|
|
Number of
options
outstanding
|
|
|
Weighted-
average
option
exercise price
|
|
|
Number of
restricted
stock shares
issued
|
|
|
Number of
restricted
stock units
outstanding
|
|
Outstanding at January 1, 2015
|
|
|
1,772,529
|
|
|
|
2,238,286
|
|
|
$
|
10.31
|
|
|
|
140,653
|
|
|
|
134,731
|
|
Granted
|
|
|
(1,457,826
|
)
|
|
|
992,684
|
|
|
|
1.40
|
|
|
|
60,802
|
|
|
|
404,340
|
|
Exercised
|
|
|
|
|
|
|
(5,692
|
)
|
|
|
0.78
|
|
|
|
|
|
|
|
(29,432
|
)
|
Canceled/forfeited
|
|
|
417,567
|
|
|
|
(373,710
|
)
|
|
|
10.02
|
|
|
|
|
|
|
|
(55,618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
732,270
|
|
|
|
2,851,568
|
|
|
|
7.07
|
|
|
|
201,455
|
|
|
|
454,021
|
|
Authorized
|
|
|
1,900,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(1,537,692
|
)
|
|
|
943,620
|
|
|
|
0.63
|
|
|
|
594,072
|
|
|
|
|
|
Exercised/issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(133,685
|
)
|
Canceled/forfeited
|
|
|
1,337,606
|
|
|
|
(1,259,783
|
)
|
|
|
8.96
|
|
|
|
(30,701
|
)
|
|
|
(194,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
2,432,184
|
|
|
|
2,535,405
|
|
|
$
|
3.73
|
|
|
|
764,826
|
|
|
|
125,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth option grants made during 2016 and 2015 with intrinsic value calculated based
on grant date fair value.
|
|
|
|
|
|
|
|
|
|
|
Date of grant
|
|
Number of
options
granted
|
|
|
Exercise
price
|
|
Intrinsic
value
per share
|
|
March July 2015
|
|
|
92,600
|
|
|
$2.43 - $4.04
|
|
|
|
|
September December 2015
|
|
|
900,084
|
|
|
$1.00 - $1.35
|
|
|
|
|
January April 2016
|
|
|
51,120
|
|
|
$0.73 - $1.14
|
|
|
|
|
September 2016
|
|
|
892,500
|
|
|
$0.61
|
|
|
|
|
There is no intrinsic value because the exercise price per share of each option was equal to the fair value of
the common stock on the date of grant.
F-23
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
At December 31, 2016, the exercise prices of outstanding options were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise price
|
|
Number of
options
outstanding
|
|
|
Average
remaining
contractual life
(years)
|
|
|
Number of
options
exercisable
|
|
$0.61 - $0.73
|
|
|
874,250
|
|
|
|
9.74
|
|
|
|
|
|
$1.00 - $1.35
|
|
|
725,019
|
|
|
|
8.86
|
|
|
|
196,438
|
|
$2.43 - $5.20
|
|
|
548,439
|
|
|
|
5.90
|
|
|
|
467,564
|
|
$6.11 - $12.16
|
|
|
206,692
|
|
|
|
2.89
|
|
|
|
200,567
|
|
$15.00 - $19.49
|
|
|
132,476
|
|
|
|
2.85
|
|
|
|
132,476
|
|
$20.20 - $32.67
|
|
|
48,529
|
|
|
|
3.76
|
|
|
|
48,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,535,405
|
|
|
|
7.62
|
|
|
|
1,045,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of the options that became vested in the years ended 2016 and 2015
was $928,000 and $1.3 million, respectively.
The following table summarizes the activity of
non-vested
options:
|
|
|
|
|
|
|
|
|
|
|
Non-vested
options
|
|
|
Weighted-
average option
exercise
price
|
|
Non-vested
at January 1, 2015
|
|
|
628,733
|
|
|
$
|
5.93
|
|
Granted
|
|
|
992,684
|
|
|
|
1.40
|
|
Vested
|
|
|
(200,402
|
)
|
|
|
6.64
|
|
Cancelled
|
|
|
(169,054
|
)
|
|
|
5.86
|
|
|
|
|
|
|
|
|
|
|
Non-vested
at December 31, 2015
|
|
|
1,251,961
|
|
|
|
2.23
|
|
Granted
|
|
|
943,620
|
|
|
|
0.63
|
|
Vested
|
|
|
(330,115
|
)
|
|
|
2.81
|
|
Cancelled
|
|
|
(375,635
|
)
|
|
|
2.51
|
|
|
|
|
|
|
|
|
|
|
Non-vested
at December 31, 2016
|
|
|
1,489,831
|
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
The Companys aggregate intrinsic value is calculated as the difference between the exercise price of the
underlying stock options and the fair value of the Companys common stock. Based on the fair market value of the common stock at December 31, 2016 and 2015, there was no aggregate intrinsic value for options outstanding and exercisable.
For the years ended December 31, 2016 and 2015, the Company used historical stock prices as the basis for its volatility
assumptions. The assumed risk-free rates were based on U.S. Treasury rates in effect at the time of grant with a term consistent with the expected option lives. The expected term for the year ended December 31, 2016 and 2015 is based upon the
Companys median average life of its options. The forfeiture rate is based on past history of forfeited options. The expense is being allocated using the straight-line method. For the years ended December 31, 2016 and 2015 the Company
recorded $527,000 and $731,000, respectively, of stock option compensation expense. As of December 31, 2016, the Company has $780,000 of total unrecognized compensation cost related to
non-vested
options
granted under the Companys stock-based plans that it expects to recognize over a weighted-average period of 2.86 years.
F-24
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
For the years ended December 31, 2016 and 2015, the assumptions used for the estimated
fair value at the date of option grant using the Black-Scholes option-pricing model were as follows:
|
|
|
|
|
|
|
2016
|
|
2015
|
Weighted average fair value per share of option
|
|
$0.63
|
|
$1.40
|
Expected term
|
|
5.1 years
|
|
5.5 years
|
Risk free interest rate
|
|
1.24% -1.73%
|
|
1.41% -1.70%
|
Volatility
|
|
65%
|
|
65%
|
Dividend yield
|
|
None
|
|
None
|
Forfeiture rate
|
|
23.1%
|
|
18.56%
|
The Company continues to account for options issued prior to January 1, 2006 under the intrinsic value
method.
A summary of the Companys RSUs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
outstanding
|
|
|
Weighted average price at
time of grant
|
|
|
Aggregate intrinsic
value
|
|
Non-vested
restricted stock units as of January 1,
2015
|
|
|
134,731
|
|
|
$
|
5.41
|
|
|
|
|
|
Granted
|
|
|
404,340
|
|
|
|
1.48
|
|
|
|
|
|
Vested
|
|
|
(29,432
|
)
|
|
|
5.44
|
|
|
|
|
|
Cancelled
|
|
|
(55,618
|
)
|
|
|
5.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested
restricted stock units as of December 31,
2015
|
|
|
454,021
|
|
|
|
1.92
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(133,685
|
)
|
|
|
1.60
|
|
|
|
|
|
Cancelled
|
|
|
(194,497
|
)
|
|
|
2.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested
at December 31, 2016
|
|
|
125,839
|
|
|
$
|
1.60
|
|
|
$
|
75,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each RSU is the market price on the date of grant and is being recorded as compensation
expense ratably over the vesting terms. For the years ended December 31, 2016 and 2015, the Company recorded $262,000 and $224,000 of RSU expense, respectively. The RSUs are forfeited by a participant upon termination for any reason and there
is no proportionate or partial vesting in the periods between the vesting dates. As of December 31, 2016, there was $168,000 of unrecognized compensation cost related to the
non-vested
restricted stock
units. This cost is expected to be recognized over a weighted-average period of 1.53 years.
An analysis of restricted stock issued is as
follows:
|
|
|
|
|
Non-vested
restricted stock as of January 1,
2015
|
|
|
12,207
|
|
Granted
|
|
|
60,802
|
|
Vested
|
|
|
(57,809
|
)
|
|
|
|
|
|
Non-vested
restricted stock as of December 31,
2015
|
|
|
15,200
|
|
Granted
|
|
|
594,072
|
|
Vested
|
|
|
(413,870
|
)
|
Cancelled/Forfeited
|
|
|
(30,701
|
)
|
|
|
|
|
|
Non-vested
restricted stock as of December 31,
2016
|
|
|
164,701
|
|
|
|
|
|
|
F-25
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
For the years ended December 31, 2016 and 2015, the Company recorded $559,000 and
$295,000, respectively, of stock compensation expense related to restricted stock.
In 2013, the Board of Directors awarded 47,050 shares
of restricted stock and 70,365 stock options to key executives at a price of $7.97, the closing price of the shares on the date of the grant. Vesting of the shares was subject to achievement of specified targets by December 31, 2013 and
March 31, 2014. All of the milestones were achieved by the specified dates. As of December 31, 2014, 20,911 restricted shares and 31,274 stock options were cancelled. As of December 31, 2015, the remaining restricted shares were
vested.
8. INCOME TAXES
Components
of income before income taxes and the income tax provision are as follows:
(Loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
U.S.
|
|
$
|
(50,689
|
)
|
|
$
|
(67,254
|
)
|
Foreign
|
|
|
(12,413
|
)
|
|
|
(10,602
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(63,102
|
)
|
|
$
|
(77,856
|
)
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Current
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
331
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Total current income tax expense
|
|
|
331
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(554
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax (benefit)
|
|
|
(554
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit)
|
|
$
|
(223
|
)
|
|
$
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
The reconciliation of income tax computed at the federal statutory rate to income before taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
U.S. Federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State taxes net of federal benefit
|
|
|
(4.1
|
)
|
|
|
(4.4
|
)
|
Foreign rate differential and transactional tax
|
|
|
1.8
|
|
|
|
1.2
|
|
Impact of foreign tax holiday
|
|
|
(0.9
|
)
|
|
|
3.4
|
|
Valuation allowance
|
|
|
36.6
|
|
|
|
33.3
|
|
Other
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amount of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
F-26
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
Significant components of the Companys net deferred income taxes are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
12
|
|
|
$
|
152
|
|
Inventory reserves
|
|
|
3,855
|
|
|
|
3,289
|
|
Accrued liabilities
|
|
|
11
|
|
|
|
382
|
|
Warrant interest expense
|
|
|
269
|
|
|
|
269
|
|
Stock compensation expense
|
|
|
2,774
|
|
|
|
2,478
|
|
State net operating lossnet of tax
|
|
|
9,189
|
|
|
|
7,456
|
|
Net operating loss carryforward
|
|
|
50,284
|
|
|
|
40,417
|
|
Tax credits
|
|
|
825
|
|
|
|
671
|
|
Depreciation
|
|
|
4,995
|
|
|
|
|
|
Valuation allowance
|
|
|
(72,199
|
)
|
|
|
(52,286
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
15
|
|
|
|
2,828
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
(3,320
|
)
|
Prepaid expenses
|
|
|
(15
|
)
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
|
|
|
$
|
(554
|
)
|
|
|
|
|
|
|
|
|
|
The Company adopted the guidance in ASU
No. 2015-17,
Income
Taxes
(Topic
740):
Balance
Sheet
Classification
of
Deferred
Taxes
, which requires that all deferred tax assets and liabilities, along with any related valuation allowance,
be classified as noncurrent in the balance sheet. As a result, each jurisdiction has one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that only permits offsetting within a jurisdiction.
Companies are still prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The change in accounting principle did not have an impact on the Companys results of operations,
cash flows or stockholders equity.
In accordance with ASC740 Accounting for Income Taxes (ASC740), the
Company evaluates its deferred income tax assets quarterly to determine if valuation allowances are required or should be adjusted. ASC740 requires that companies assess whether valuation allowances should be established against their deferred tax
assets based on consideration of all available evidence, both positive and negative, using a more likely than not standard. The Company is in a cumulative loss position for the past three years which is considered significant negative
evidence that is difficult to overcome on a more likely than not standard through objectively verifiable data. Based on an evaluation in accordance with the accounting standards, as of December 31, 2016 and 2015, a valuation
allowance of $72.2 million and $52.3 million, respectively has been recorded against the net U.S. and Malaysia deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized
based on the weight of all the available evidence. Until an appropriate level of profitability is attained, the Company expects to maintain a full valuation allowance on its U.S. and Malaysia net deferred tax assets. Any U.S. or Malaysia tax
benefits or tax expense recorded on the Companys Consolidated Statement of Operations will be offset with a corresponding valuation allowance until such time that the Company changes its determination related to the realization of deferred tax
assets. In the event that the
F-27
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
Company changes its determination as to the amount of deferred tax assets that can be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision for
income taxes in the period in which such determination is made. The net deferred tax liabilities at December 31, 2015 are related to tax liabilities that will reverse after the expiration of the Malaysia tax holiday as discussed below.
At December 31, 2016, the Company had separate Federal and Illinois net operating loss carryforwards (NOL) of
$148.1 million and $179.6 million, respectively, which begin to expire in 2021 and 2019, respectively. The Company has not recorded a deferred tax asset for NOL, included in the aforementioned amounts, attributable to stock option
exercises in the amount of $21.7 million for federal purposes and $26.4 million for state purposes because the Company cannot record these excess tax benefit stock option deductions until the benefit has been realized by actually reducing
taxes payable. Last, the Company has recorded an uncertain tax position of $2.6 million that further reduces the net operating loss deferred tax assets reported in the financial statements. In addition, at December 31, 2016, the Company
had Federal and Illinois research and development credits and investment tax credits of $668,000, $68,600 and $174,000, respectively which begin to expire in 2017. Tax credits are accounted for using the flow through method and therefore are taken
in the year earned.
The Company completed an analysis of the utilization of net operating losses subject to limits based upon certain
ownership changes as of December 31, 2016. The results of this analysis indicated no ownership change limiting the utilization of net operating losses and tax credits.
The Company prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken, or expected to be taken, in a tax return. At December 31, 2016 and 2015, the Company had unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded on the Companys financial statements
of $1.1 million that are related to tax positions taken in 2012. It is not reasonably possible that the amount will change in the next twelve months.
A reconciliation of the beginning and ending balance of the unrecognized tax benefit follows (in thousands):
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
1,141
|
|
Decrease related to prior year positions
|
|
|
|
|
Tax position related to current year
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
1,141
|
|
|
|
|
|
|
There were no interest or penalties related to income taxes that have been accrued or recognized as of and for
the years ended December 31, 2016 and 2015. Included in the balance of total unrecognized tax benefits at December 31, 2015, are potential benefits of $1.0 million that if recognized, would affect the effective tax rate in the year
recognized.
F-28
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
The Company files income tax returns in the United States federal jurisdiction and in a state
jurisdiction. During 2009, the Company began foreign operations in Malaysia and Japan and is subject to local income taxes in both jurisdictions. The Company is exempt from Malaysian income tax for a five-year period beginning in 2009 with a five
year renewal. Due to the continual decline in prices in the sapphire market, the Company ceased production activities in the Rubicon Sapphire Technology (Malaysia) SDN BHD (Rubicon Malaysia) facility effective November 30, 2016. The
Company requested the Malaysian government to modify the tax holiday to allow it to extend through 2016 even though the Company did not meet the original requirements. Due to the uncertainty of the modification being granted, at December 31,
2016 the Company recorded a current income tax provision of $42,000 of Malaysia income tax with the expectation that the holiday will not be granted. The impact of this tax holiday decreased foreign taxes for the year ended December 31, 2015 by
approximately $147,000 and the benefit on net income per share (diluted) for the year ended December 31, 2015 was $0.01. The Companys Malaysia tax returns for the periods ended December 31, 2010 through 2012 have been audited by the
Malaysia Inland Revenue Board with no changes made to the taxable income for those years. All other tax years in Malaysia are open to examination by tax authorities.
The Companys federal tax returns for the periods ended December 31, 2010, 2008 and 2007 have been audited by the Internal Revenue
Service (IRS) with no changes made to the Companys taxable losses for those years. The Companys state tax returns for the periods ended December 31, 2009 through 2012 have been audited by the Illinois Department of Revenue with no
changes made to the Companys taxable losses for those years. Due to the existence of net operating loss carryforwards, tax years ended December 31, 2001 through 2006, 2008, 2009 and 2011 through 2015 are open to examination by tax
authorities for Federal purposes. Due to net operating loss carryforwards at the State level, tax years ended 2004 through 2006 and 2008 through 2015 are open to examination by state tax authorities.
Due to the closing of the Rubicon Malaysia operations, the Company no longer considers the undistributed earnings of Rubicon Malaysia to be
indefinitely reinvested. Upon liquidation of Rubicon Malaysia, it is anticipated any cash left after the liquidation will be brought back to the U.S. via a payment of principal towards the intercompany loan. A withholding tax will be payable to the
Malaysian government on the interest portion of the loan. At December 31, 2016, the Company accrued the withholding tax on the interest balance of the loan in the amount of $274,000, which represents the incremental tax.
9. CREDIT FACILITY
On January 2,
2013, the Company entered into a three-year term agreement with a bank to provide the Company with a senior secured credit facility of up to $25.0 million. The agreement provided for the Company to borrow up to 80% of eligible accounts
receivable and up to 35% of domestically held raw material and finished goods inventory. Advances against inventory were limited to 40% of the aggregate outstanding on the revolving line of credit and $10.0 million in aggregate. The Company had
the option to borrow at an interest rate of LIBOR plus 2.75% or the Wall Street Journal prime rate plus 0.50%. If the Company maintained liquidity of $20.0 million or greater with the lending institution, then the borrowing interest rate
options were LIBOR plus 2.25% or the Wall Street Journal prime rate. There was an unused revolving line facility fee of 0.375% per annum. The facility was secured by a first priority interest in substantially all of the Companys personal
property, excluding intellectual property. The Company was required to maintain an adjusted quick ratio of 1.40 to 1.00, maintain operating and other deposit accounts with the bank or banks affiliates of 25% of the Companys total
worldwide cash, securities and investments, and the Company could pay dividends or repurchase capital stock only with the banks consent during the three-year term. In August 2015, the Company entered into an amended agreement with the bank to
extend the senior secured facility through January 2, 2018. Under the amended agreement, advances against inventory were limited to the lesser of 45% of the aggregate outstanding principal on the revolving line of credit and $10.0 million
and the rate on the facility fee on the unused portion of the revolving line was adjusted to 0.50% per annum. All other terms and conditions remained the same. The agreement contained a subjective acceleration clause and required the Company to
maintain a lockbox. As a result, the Company classified the debt as a current liability on its balance sheet.
On September 9, 2016,
the Company voluntarily terminated the loan agreement. Pursuant to the
pay-off
letter for termination of the loan agreement, upon payment of the
pay-off
amount, all
obligations under the loan agreement were paid and discharged in full, all unfunded commitments by the bank to make credit extensions to the Company under the loan agreement were terminated, all security interests granted to or held by the bank
under the loan agreement were released, and all guaranties supporting the loan agreement were released. The Company did not incur any early termination penalties in connection with the termination.
For the years ended December 31, 2016 and 2015, the Company recorded interest expense of $99,000 and $109,000, respectively related to
the credit facility which includes $92,000 and $107,000, respectively of interest expense charged on the unused portion of the facility.
F-29
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
10. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases
buildings used for manufacturing and offices. The leases provide for payment of the Companys proportionate share of operating expenses and real estate taxes.
Net rent expense under operating leases in 2016 and 2015 amounted to $598,900 and $653,400, respectively.
Future minimum payments under all leases are as follows:
|
|
|
|
|
Year ending December 31,
|
|
Operating
leases
(in
thousands)
|
|
2017
|
|
$
|
592
|
|
2018
|
|
|
468
|
|
2019
|
|
|
145
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
1,205
|
|
|
|
|
|
|
Purchase Commitments
The Company has entered into agreements for electricity. These agreements will result in the Company purchasing electricity for a total cost of
approximately $771,000 with deliveries occurring through December 2017.
Litigation
From time to time, the Company experiences routine litigation in the normal course of its business. The management of the Company does not
believe any pending litigation, other than as set forth below, will have a material adverse effect on the financial condition or results of operations of the Company.
On April 30, 2015, Firerock Global Opportunity Fund LP filed a complaint in the Northern District of Illinois asserting federal
securities claims against the Company, certain officers, its directors and the underwriters in the Companys March 2014 stock offering. The complaint sought as a remedy either money damages or rescission of the March 2014 offering, plus
attorneys fees. On October 29, 2015, after mediation and subsequent discussions, the parties reached a settlement agreement in principle. On January 27, 2016, the United States District Court for the Northern District of Illinois
granted a motion for preliminary approval of the agreement, and on May 20, 2016, a final judgment and order of dismissal was granted. The settlement included a release of all defendants, and dismissal of the case against all defendants with
prejudice. The Company recorded for the year ended December 31, 2015 an expense of $1.1 million of which $900,000 is the amount the Company contributed to the settlement and paid on February 17, 2016. The remaining costs of the
settlement were covered by the Companys insurance carriers.
On November 19, 2015, the Carolyn Piper Smithhisler Living Trust,
derivatively on behalf of Rubicon Technology Inc., filed a complaint in the Eighteenth Judicial Circuit of Illinois against the Companys Board of Directors and certain senior officers seeking to remedy alleged breaches of fiduciary duties and
other violations of the law, failure to implement an effective system of internal controls, and failure to oversee the public statements made by the Company and certain individual defendants. The complaint sought as a remedy to recover damages
against the individual defendants for the benefit of the Company and to require the Company to reform and improve its corporate governance and internal procedures plus attorneys fees. After extensive discussions, the parties informed the court
on May 2, 2016 that they had reached a settlement agreement in principle. On May 23, 2016, the court issued an order granting preliminary approval of the proposed settlement. On July 11, 2016, plaintiffs unopposed motion for
final approval of stockholder derivative settlement fee and expense amount and service award was filed. On August 1, 2016, the court issued a final judgment approving the settlement and an order of dismissal was granted. The settlement provided
for the Company to adopt certain governance changes and to pay certain amounts. The Companys insurance carriers covered substantially all of the settlement payments and related expenses, including legal fees.
F-30
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements(Continued)
11. BENEFIT PLAN
The Company sponsors a 401(k) savings plan (the Plan). Employees are eligible to participate in the Plan upon reaching 18 years of
age. Employees make contributions to the Plan through payroll deferrals and employer matching contributions are discretionary. There were no employer matching contributions for the years ended December 31, 2016 and 2015.
12. QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly
Financial Data (Unaudited)
Summary quarterly results for the two years ended December 31, 2016 are as follows (in thousands,
other than share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Full year
|
|
2016
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Revenue
|
|
$
|
4,287
|
|
|
$
|
3,535
|
|
|
$
|
7,086
|
|
|
$
|
4,722
|
|
|
$
|
19,630
|
|
Gross loss
|
|
$
|
(5,419
|
)
|
|
$
|
(4,051
|
)
|
|
$
|
(11,646
|
)
|
|
$
|
(4,891
|
)
|
|
$
|
(26,008
|
)
|
Loss from operations
|
|
$
|
(8,156
|
)
|
|
$
|
(8,150
|
)
|
|
$
|
(24,769
|
)
|
|
$
|
(21,642
|
)
|
|
$
|
(62,717
|
)
|
Loss before income taxes
|
|
$
|
(7,484
|
)
|
|
$
|
(8,383
|
)
|
|
$
|
(25,017
|
)
|
|
$
|
(22,218
|
)
|
|
$
|
(63,102
|
)
|
Net loss
|
|
$
|
(7,333
|
)
|
|
$
|
(8,209
|
)
|
|
$
|
(24,801
|
)
|
|
$
|
(22,536
|
)
|
|
$
|
(62,879
|
)
|
Basic and diluted loss per common share
|
|
$
|
(0.28
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.94
|
)
|
|
$
|
(0.85
|
)
|
|
$
|
(2.39
|
)
|
Weighted average common shares outstanding used in computing net loss per common share, basic and
diluted:
|
|
|
26,226,614
|
|
|
|
26,296,398
|
|
|
|
26,374,516
|
|
|
|
26,527,909
|
|
|
|
26,356,359
|
|
|
|
|
|
|
Three months ended
|
|
|
Full year
|
|
2015
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Revenue
|
|
$
|
8,910
|
|
|
$
|
7,106
|
|
|
$
|
5,346
|
|
|
$
|
2,456
|
|
|
$
|
23,818
|
|
Gross loss
|
|
$
|
(5,109
|
)
|
|
$
|
(5,155
|
)
|
|
$
|
(3,891
|
)
|
|
$
|
(8,988
|
)
|
|
$
|
(23,143
|
)
|
Loss from operations
|
|
$
|
(7,948
|
)
|
|
$
|
(8,322
|
)
|
|
$
|
(47,370
|
)
|
|
$
|
(12,309
|
)
|
|
$
|
(75,949
|
)
|
Loss before income taxes
|
|
$
|
(8,312
|
)
|
|
$
|
(8,529
|
)
|
|
$
|
(48,859
|
)
|
|
$
|
(12,156
|
)
|
|
$
|
(77,856
|
)
|
Net loss
|
|
$
|
(8,348
|
)
|
|
$
|
(8,580
|
)
|
|
$
|
(48,196
|
)
|
|
$
|
(12,706
|
)
|
|
$
|
(77,830
|
)
|
Basic and diluted loss per common share
|
|
$
|
(0.32
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(1.84
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(2.98
|
)
|
Weighted average common shares outstanding used in computing net loss per common share, basic and
diluted:
|
|
|
26,129,276
|
|
|
|
26,142,261
|
|
|
|
26,160,308
|
|
|
|
26,192,838
|
|
|
|
26,156,170
|
|
F-31