The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
1. BASIS OF PRESENTATION
Interim financial data
The accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by GAAP for complete consolidated financial statements and should be read in conjunction
with Rubicon Technology, Inc.’s (the “Company”) annual report filed on Form 10-K for the fiscal year ended December 31,
2017. In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring nature) considered
necessary for a fair presentation of the results of operations have been included. Consolidated operating results for the three
and nine month periods ended September 30, 2018, are not necessarily indicative of results that may be expected for the year
ending December 31, 2018.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Rubicon Technology Worldwide LLC, Rubicon Technology BP LLC, Rubicon Sapphire Technology
(Malaysia) SDN BHD and Rubicon Technology Hong Kong Limited. All intercompany transactions and balances have been eliminated in
consolidation.
Investments
The Company invests available cash primarily in U.S. Treasury
securities, investment grade commercial paper, FDIC guaranteed certificates of deposit, common stock and corporate notes. Investments
classified as available-for-sale securities are carried at fair 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 Statement of Operations. Investments in which the Company
has the ability and intent, if necessary, to liquidate 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 statement of operations.
Accounts receivable
The majority of the Company’s accounts receivable is due
from defense subcontractors, industrial manufacturers, fabricators and resellers. Credit is extended based on an evaluation of
the customer’s financial condition. Accounts receivable are due based on contract terms and at stated amounts due from customers,
net of an allowance for doubtful accounts. Losses from credit sales are provided for in the financial statements.
Accounts outstanding longer than the contractual payment terms
are considered past due. The Company determines its allowance by considering a number of factors, including length of time a customer’s
account is past due, the customer’s 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 the allowance. The following table shows the activity of the allowance for doubtful accounts:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
7
|
|
|
$
|
31
|
|
Charges to costs and expenses
|
|
|
1
|
|
|
|
(20
|
)
|
Accounts charged off, less recoveries
|
|
|
—
|
|
|
|
(4
|
)
|
Ending balance
|
|
$
|
8
|
|
|
$
|
7
|
|
Inventories
Inventories are valued at the lower of cost or net realizable
value. Raw materials cost is determined using the first-in, first-out method, and work-in-process and finished goods costs are
determined on a standard cost basis, which includes materials, labor and manufacturing 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 Company’s method of estimating excess
and obsolete inventory has remained consistent for all periods presented.
Inventories consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
469
|
|
|
$
|
476
|
|
Work-in-process
|
|
|
1,875
|
|
|
|
2,334
|
|
Finished goods
|
|
|
218
|
|
|
|
220
|
|
|
|
$
|
2,562
|
|
|
$
|
3,030
|
|
Property and equipment
Property and equipment consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(in thousands)
|
|
Leasehold improvements
|
|
$
|
3,620
|
|
|
$
|
4,624
|
|
Machinery, equipment and tooling
|
|
|
3,293
|
|
|
|
6,105
|
|
Buildings
|
|
|
1,686
|
|
|
|
—
|
|
Information systems
|
|
|
819
|
|
|
|
819
|
|
Land and land improvements
|
|
|
594
|
|
|
|
—
|
|
Furniture and fixtures
|
|
|
8
|
|
|
|
8
|
|
Total cost
|
|
|
10,020
|
|
|
|
11,556
|
|
Accumulated depreciation and amortization
|
|
|
(7,247
|
)
|
|
|
(10,741
|
)
|
Property and equipment, net
|
|
$
|
2,773
|
|
|
$
|
815
|
|
A
ssets held for sale and long-lived assets
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 asset’s 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 connection with the Company’s decision in 2016 to
limit its focus to the optical and industrial sapphire markets and exit the LED market, the Company developed a plan to close
its Malaysia facility, scale down and consolidate remaining operations in the U.S. and sell additional assets that would not
be needed. The Company evaluated its U.S. and Malaysia asset portfolios to identify assets needed for its current business
strategy and excess assets that were no longer needed. The Company determined it had excess machinery, equipment and
facilities. Excess U.S. and Malaysia assets were evaluated based on assuming an orderly liquidation plan, which considers
economic obsolescence and sales of comparable equipment, as it is the Company’s intention to sell these assets.
Additionally, the Company evaluated its U.S. assets continuing to be used in operations using a cost and market approach to
determine the current fair value.
As a result, for the year ended December 31, 2017, the
Company recorded an impairment charge of $1.0 million on lower than expected sales prices for certain machinery and equipment
held for sale, and identification of assets that will not be needed to support the Company’s current operations.
Additionally, for the year ended December 31, 2017, the Company recorded an impairment charge of $4.0 million on its U.S. and
Malaysia land and building assets on lower than expected sale price. At September 30, 2018, and at the end of the two
preceding fiscal quarters, the Company reviewed the current fair value of its assets and concluded no 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
value.
In September 2018, the Company completed the sale of its 134,400
square-foot manufacturing and office facility located in Batavia, Illinois, with the net book value of $5.9 million. The selling
price for the property was $6.7 million. The Company realized net proceeds of approximately $6.4 million after the payment of real
estate taxes, brokerage and legal fees, transfer taxes and other expenses, and recorded a gain on sale of this asset of $504,000.
In the nine months ended September 30, 2018, the Company completed
individual sales and held auctions for equipment and consumable assets located at each of its U.S. properties, resulting in the
sale of a significant amount of its excess U.S. assets, which had a total net book value of $1.6 million. In the beginning of 2018,
the Company intended to sell a certain number of its crystal growth furnaces. Due to the Company’s changed needs and business
plan, it reduced the number of furnaces it wanted to sell. The difference in the number of furnaces it originally intended to sell
and the number it actually disposed of, had a net book value of $236,000. The additional furnaces that the Company decided to retain
were reclassified from current assets held for sale to fixed assets held and used at September 30, 2018. Additionally, in the nine
months ended September 30, 2018, the Company completed sales of Malaysia equipment with a total net book value of $131,000. Based
on these sales, a gain on disposal of equipment and consumable assets of $2.2 million was recorded for the nine months ended September
30, 2018. Unsold excess Malaysia equipment continued to be classified as current assets held for sale at September 30, 2018.
The Company is actively pursuing the sale of a parcel of land
it owns in Batavia, Illinois, and the sale or lease of its 65,000 square-foot facility located in Penang, Malaysia. Although the
Company cannot assure the timing of these sales, it is the Company’s intention to complete these sales within the next twelve-month
period, hence, these properties were classified as current assets held for sale at September 30, 2018, and December 31, 2017.
The Company cannot guarantee that it will be able to successfully
complete the sale or lease of any assets.
In September 2018, the Company completed the purchase of a property
located in Bensenville, Illinois. The purchase price for the property was $2.3 million. Previously, the Bensenville property was
leased by the Company and it was the headquarters of its operations and one of its growth facilities. Going forward, this will
be the Company’s sole operating facility and will also be used for its fabrication operations. The Company used its cash
on hand to purchase the property.
Revenue recognition
The Company recognizes revenue in accordance with ASC Topic
606,
Revenue From Contracts with Customers
(“Topic 606”) which was adopted on January 1, 2018, using the full
retrospective transition method. Adoption of Topic 606 had no impact on periods reported. Under Topic 606, the Company recognizes
revenue when performance obligations under a purchase order or signed quotation are satisfied. Revenue is recognized when products
are shipped and title and risk of loss transfer to a customer. The Company’s business practice commits the Company to manufacture
and deliver product upon acceptance of a customer’s purchase order or signed quotation (“agreement”). The agreement
with the customer includes specifications of the product to be delivered, price, expected ship date and payment terms. The Company’s
agreements generally do not contain variable, financing, rights of return or non-cash components. There are no up-front costs to
develop the production process. The performance obligation is satisfied at the point in time (single performance obligation) when
the product is manufactured to the customer’s specification, as performance does not create an asset with an alternative
use to the Company. Accordingly, the Company recognizes revenue when title and risk of loss have been transferred to the customer,
generally at the time of shipment of product. The Company grants credit terms considering normal collection risk. If there is doubt
about collection, full prepayment for the order is required. Any payments received prior to shipment are recorded as deferred revenue
and included in Advance Payments in the Consolidated Balance Sheets.
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 to produce large-area sapphire windows on a cost plus fixed fee basis. The deliverables
under the contract included development of machinery and technology to be able to produce large area sapphire windows, prove the
concept of growing large windows with that equipment and delivery of large-area sapphire windows. The Company records research
and development revenue on a gross basis as costs are incurred, plus a portion of the fixed fee over a period of time as the obligations
(machinery, proof of concept and finished windows) are completed following the input method of measuring progress which recognizes
revenue as resources are consumed, labor hours expended and costs are incurred. To date, the Company has recorded $4.7 million
in revenue and the total value of the contract is $4.7 million. As the Company has completed its government contract, no additional
revenue attributable to this contract was recorded in the three months ended September 30, 2018, and the total revenue recorded
in the nine months ended September 30, 2018, was $56,000. For the three and nine months ended September 30, 2017, $273,000
and $301,000 of revenue was recorded, respectively. At December 31, 2017, the estimated costs to complete the contract were in
excess of the contract value. For the year ended December 31, 2017, the Company recorded estimated costs expected to be incurred
in excess of this contract value of $243,000. No additional adjustments for the excess contract costs were recorded for the three
and nine months ended September 30, 2018. In reviewing its current estimates, the Company expects its remaining payments to be
less than $200,000.
The Company does not provide maintenance or other services and
it does not have sales that involve multiple elements or deliverables.
Net income (loss) per common share
Basic net income (loss) per common share is computed by dividing
net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per
common share is computed by dividing net income (loss) by the weighted-average number of diluted common shares outstanding during
the period. Diluted shares outstanding are calculated by adding to the weighted-average shares (a) any outstanding stock options
based on the treasury stock method and (b) restricted stock units (“RSU”).
Diluted net income (loss) per share was the same as basic net
income (loss) per share for the three and nine months ended September 30, 2018 and 2017, because the effects of potentially
dilutive securities did not have a material impact on the calculation of diluted net income (loss) per share. The Company had
outstanding options exercisable into 26,812 shares of the Company’s common stock that were deemed anti-dilutive at September
30, 2018.
New accounting pronouncements adopted
In January 2016, the FASB issued ASU No. 2016-01 (“ASU
2016-01”),
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities
. Further clarifications were made in February 2018 with the issuance of ASU No. 2018-03 (“ASU
2018-03”). The amended guidance requires certain equity investments that are not consolidated and not accounted for under
the equity method to be measured at fair value with changes recognized in net income rather than as a component of accumulated
other comprehensive income (loss). It further states that an entity may choose to measure equity investments that do not have readily
determinable fair values using a quantitative approach, or measurement alternative, which is equal to its cost minus impairment,
if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment
of the same issuer. The adoption of ASU 2016-01 and ASU 2018-03 did not have a material impact on the Company’s 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 entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after
December 15, 2017. 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. In September 2017, the FASB issued additional amendments providing clarification
and implementation guidance. The Company’s 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 as they closely align with the new standards principles
relating to the measurement of revenue and timing of recognition. The Company adopted Topic 606 effective January 1, 2018, using
the full retrospective transition method. As the underlying principles of the new standard, relating to the measurement of revenue
and the timing of recognition, are closely aligned with the Company’s current business model and practices, the adoption
of ASU 2014-09 did not have a material impact on the consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15 (“ASU
2016-15”),
Statement of Cash Flows (Topic 230): 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’s adoption
of ASU 2016-15 did not have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18 (“ASU
2016-18”),
Statement of Cash Flows (Topic 230): Restricted Cash.
The standard requires that amounts generally described
as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period
and end-of-period total amount shown on the statement of cash flows. In addition, the standard requires disclosure of the nature
of restrictions on cash balances and how the statement of cash flows reconciles to the balance sheet in any situation in which
the balance sheet includes more than one line item of cash, cash equivalents and restricted cash. ASU 2016-18 is effective for
the interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company’s adoption
of ASU 2016-18 did not have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02 (“ASU
2018-02),
Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated
Comprehensive Income
. The new guidance allows companies to reclassify stranded tax effects resulting from the Tax Act, from
accumulated other comprehensive income to retained earnings. The guidance also requires certain new disclosures regardless of the
election. Early adoption is permitted. The Company’s adoption of ASU 2018-02 did not have a material impact on its consolidated
financial statements.
Recent accounting pronouncements
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 interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted.
The Company is evaluating the impact, if any, of adopting ASU 2016-02 on its financial statements.
In March 2018, the FASB issued ASU No. 2018-05 (“ASU 2018-05),
Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
. This standard
amends ASC 740,
Income Taxes
, to provide guidance on accounting for tax effects of the Tax Cuts and Jobs Act (the “Tax
Act”) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740 within
one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Company has decided
to follow the guidance provided by ASU 2018-05 and will leave the one-year measurement period open to evaluate the impact of the
Tax Act.
In June 2018, the FASB issued ASU No. 2018-07 (“ASU 2018-07”),
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.
These amendments
expand the scope of Topic 718,
Compensation – Stock Compensation
which currently only includes share-based payments
to employees to include share-based payments issued to non-employees for goods or services. Consequently, the accounting for share-based
payments to non-employees and employees will be substantially aligned. ASU 2018-07 supersedes Subtopic 505-50,
Equity –
Equity-Based Payments to Non-Employees
. The guidance is effective for public companies for the interim and annual periods beginning
after December 15, 2018. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606,
Revenue
from Contracts with Customers
. At this time, the Company does not recognize the existence of any non-employee relationships
involving share-based payments. The Company will continue to assess applicability of ASU 2018-07 prior to adoption.
3. INVESTMENTS
The Company invests its available cash primarily in U.S. Treasury
securities, investment grade commercial paper, FDIC guaranteed certificates of deposit, common stock and corporate notes. The Company’s
investments are classified as available-for-sale securities and are carried at fair value with unrealized gains and losses recorded
in accumulated other comprehensive income (loss).
The following table presents the amortized cost and gross unrealized
losses on all securities at September 30, 2018:
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
(in thousands)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
10,137
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
10,135
|
|
Commercial paper
|
|
|
4,445
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
$
|
4,444
|
|
Total short-term investments
|
|
$
|
14,582
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
14,579
|
|
The following table presents the amortized cost and gross unrealized
losses on all securities at December 31, 2017:
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
(in thousands)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
4,994
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
4,993
|
|
Corporate notes / bonds
|
|
|
1,458
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,458
|
|
Total short-term investments
|
|
$
|
6,452
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
6,451
|
|
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 1—Quoted prices in active markets for identical assets or liabilities.
|
|
●
|
Level 2—Inputs 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 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The Company’s fixed income available-for-sale securities
consist of U.S. Treasury securities, high-quality investment grade commercial paper, FDIC guaranteed certificates of deposit, common
stock and corporate notes. 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 Company’s
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 Company’s financial
assets measured at fair value on a recurring basis as of September 30, 2018:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
2,505
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,505
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities — current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
—
|
|
|
|
10,135
|
|
|
|
—
|
|
|
|
10,135
|
|
Commercial paper
|
|
|
—
|
|
|
|
4,444
|
|
|
|
—
|
|
|
|
4,444
|
|
Total
|
|
$
|
2,505
|
|
|
$
|
14,579
|
|
|
$
|
—
|
|
|
$
|
17,084
|
|
The following table summarizes the Company’s financial
assets measured at fair value on a recurring basis as of December 31, 2017:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
4,575
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,575
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities — current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
—
|
|
|
|
4,993
|
|
|
|
—
|
|
|
|
4,993
|
|
Corporate notes / bonds
|
|
|
—
|
|
|
|
1,458
|
|
|
|
—
|
|
|
|
1,458
|
|
Total
|
|
$
|
4,575
|
|
|
$
|
6,451
|
|
|
$
|
—
|
|
|
$
|
11,026
|
|
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 $7.6 million and $6.9 million of time deposits included in cash and cash equivalents as of September 30, 2018,
and December 31, 2017, respectively.
4. SIGNIFICANT CUSTOMERS
For the three months ended September 30, 2018, the Company
had four customers individually that accounted for approximately 32%, 12%, 12% and 10% of revenue. For the three months ended September 30,
2017, the Company had four customers individually that accounted for approximately 17%, 12%, 11% and 11% of revenue.
For the nine months ended September 30, 2018, the Company
had four customers that accounted for approximately 21%, 11%, 11% and 10% of revenue. For the nine months ended September 30,
2017, the Company had four customers individually that accounted for approximately 17%, 13%, 11% and 10% of revenue. No other customer
accounted for 10% or more of the Company’s revenues during the three and nine months ended September 30, 2018 and 2017.
Customers individually representing more than 10% of trade receivables
accounted for approximately 77% and 69% of accounts receivable as of September 30, 2018, and December 31, 2017, respectively.
5. STOCKHOLDERS’ EQUITY
Common shares reserved
As of September 30, 2018, the Company had reserved 113,643
shares of common stock for issuance upon the exercise of outstanding common stock options and vesting of restricted stock units
(“RSUs”). Also, 303,443 shares of the Company’s common stock were reserved for future grants of stock options
and RSUs (or other similar equity instruments) under the Rubicon Technology, Inc. 2016 Stock Incentive Plan (the “2016 Plan”)
as of September 30, 2018.
Preferred stock
At the Company’s annual meeting of stockholders held on
May 10, 2018, the Company’s stockholders approved an amendment to the Company’s Eighth Amended and Restated Certificate
of Incorporation (as amended, the “Certificate of Incorporation”) to decrease the Company’s authorized number
of shares of preferred stock from 5,000,000 shares to 1,000,000 shares. The Company filed with the Secretary of State of the State
of Delaware a Certificate of Amendment to decrease the authorized number of preferred shares, consequently reducing the number
of total authorized shares from 13,200,000 to 9,200,000.
6. STOCK INCENTIVE PLANS
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, RSUs, performance
awards and bonus shares. The maximum number of shares that could be awarded under the 2007 Plan was 440,769 shares. Options granted
under the 2007 Plan entitle the holder to purchase shares of the Company’s common stock at the specified option exercise
price, which could not be less than the fair 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.
In June 2016, the Company’s 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 Board administers the 2016 Plan. The committee determines the type of award to be granted, the fair 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, 222,980 shares of the Company’s
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 Company uses the Black-Scholes option pricing model to value
stock options. The Company uses a three-year historical stock price average to determine 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 is based upon the vesting term of the Company’s options, a review of a peer group of companies,
and expected exercise behavior. The forfeiture rate of 24.43% is based on the history of forfeited options. The expense is allocated
using the straight-line method. For the three and nine months ended September 30, 2018, the Company recorded $8,000 and $38,000,
respectively, of stock option compensation expense. For the three and nine months ended September 30, 2017, the Company recorded
$20,000 and $258,000, respectively, of stock option compensation expense. As of September 30, 2018, the Company had $56,000
of total unrecognized compensation cost related to non-vested stock option awards granted under the Company’s stock-based
plans that it expects to recognize over a weighted-average period of 1.17 years.
Pursuant to an employment agreement in March 2017, which was
subsequently amended on May 12, 2017, the Company granted 30,902 and 59,098 RSUs to a key executive in the nine months ended September
30, 2018 and 2017, respectively.
The following table summarizes the award vesting terms for the
RSUs granted on January 1, 2018:
Number of RSUs
|
|
Target
price
|
|
902
|
|
$
|
11.00
|
|
15,000
|
|
$
|
12.50
|
|
15,000
|
|
$
|
14.00
|
|
The following table summarizes the award vesting terms for the
RSUs granted on March 17, 2017:
Number of RSUs
|
|
Target
price
|
|
15,000
|
|
$
|
6.50
|
|
15,000
|
|
$
|
8.00
|
|
15,000
|
|
$
|
9.50
|
|
14,098
|
|
$
|
11.00
|
|
The RSUs vest in the amounts set forth below on the first date
the 15-trading day average closing price of the Company’s common stock equals or exceeds the corresponding target price for
the common stock before May 12, 2021. At the time the negotiation of the terms of the employment agreement began, the closing price
of the common stock was $5.50. On the date of grant, the closing price of the common stock was $6.30.
The Company used a Monte Carlo simulation model valuation technique
to determine the fair value of RSUs granted because the awards vest based upon achievement of market price targets. The Monte Carlo
simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated
in the award and calculates the fair value of each RSU. The Company used the following assumptions in determining the fair value
of the RSUs:
|
|
Granted
|
|
|
|
January
2018
|
|
|
March
2017
|
|
Daily expected stock price volatility
|
|
|
4.2806
|
%
|
|
|
4.4237
|
%
|
Daily expected mean return on equity
|
|
|
(0.2575
|
)%
|
|
|
(0.2226
|
)%
|
Daily expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Average daily risk-free interest rate
|
|
|
0.0078
|
%
|
|
|
0.0063
|
%
|
The daily expected stock price volatility is based on a four-year
historical volatility of the Company’s common stock. The daily expected dividend yield is based on annual expected dividend
payments. The average daily risk-free interest rate is based on the three-year treasury yield as of the grant date. Each of the
tranches is calculated to have its own fair value and requisite service period. The fair value of each tranche is amortized over
the requisite or derived service period which is up to four years. The RSUs granted in January 2018 and March 2017 had a grant
date fair value of $209,000 and $323,000, respectively.
The following table summarizes the activity of the stock incentive
and equity plans as of September 30, 2018, and changes during the nine months then ended:
|
|
Shares
available
for grant
|
|
|
Number of
options
outstanding
|
|
|
Weighted-
average
option
exercise
price
|
|
|
Number of
restricted
stock and
board
shares
issued
|
|
|
Number of
RSUs
outstanding
|
|
At January 1, 2018
|
|
|
274,494
|
|
|
|
125,564
|
|
|
$
|
19.53
|
|
|
|
97,692
|
|
|
|
22,384
|
|
Granted
|
|
|
(36,953
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1,878
|
|
|
|
35,075
|
|
Exercised/issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,477
|
)
|
Cancelled/forfeited
|
|
|
65,902
|
|
|
|
(62,919
|
)
|
|
|
32.64
|
|
|
|
—
|
|
|
|
(2,983
|
)
|
At September 30, 2018
|
|
|
303,443
|
|
|
|
62,645
|
|
|
$
|
12.54
|
|
|
|
99,570
|
|
|
|
50,999
|
|
The Company’s aggregate intrinsic value is calculated
as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock.
Based on the fair value of the common stock at September 30, 2018 and 2017, there was no intrinsic value for options outstanding.
A summary of the Company’s non-vested options during the
nine months ended September 30, 2018, is presented below:
|
|
Options
|
|
|
Weighted-
average
exercise
price
|
|
Non-vested options at January 1, 2018
|
|
|
46,842
|
|
|
$
|
8.26
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(7,942
|
)
|
|
|
6.97
|
|
Forfeited
|
|
|
(23,813
|
)
|
|
|
9.07
|
|
Non-vested options at September 30, 2018
|
|
|
15,087
|
|
|
$
|
7.66
|
|
For the three and nine months ended September 30, 2018,
the Company recorded $50,000 and $256,000, respectively, of RSU expense. For the three and nine months ended September 30,
2017, the Company recorded $94,000 and $418,000, respectively, of RSU expense. As of September 30, 2018, there was $46,000
of unrecognized compensation cost related to the non-vested RSUs. This cost is expected to be recognized over a weighted-average
period of 0.37 years.
A summary of the Company’s RSUs during the nine months
ended September 30, 2018, is presented below:
|
|
RSUs
outstanding
|
|
|
Weighted average
price at
time of
grant
|
|
|
Aggregate intrinsic
value
|
|
Non-vested RSUs as of January 1, 2018
|
|
|
22,384
|
|
|
$
|
4.65
|
|
|
|
|
|
Granted
|
|
|
35,075
|
|
|
|
7.89
|
|
|
|
|
|
Vested
|
|
|
(3,477
|
)
|
|
|
7.05
|
|
|
|
|
|
Cancelled
|
|
|
(2,983
|
)
|
|
|
8.88
|
|
|
|
|
|
Non-vested RSUs at September 30, 2018
|
|
|
50,999
|
|
|
$
|
6.46
|
|
|
$
|
329,614
|
|
For the three and nine months ended September 30, 2018,
the Company recorded $4,000 and $65,000, respectively, of stock compensation expense related to restricted stock. For the
three and nine months ended September 30, 2017, the Company recorded $49,000 and $110,000, respectively, of stock compensation
expense related to restricted stock.
The Company’s board of directors are compensated partially
in cash and partially in restricted stock. As such, for the nine months ended September 30, 2018, 1,878 shares of restricted common
stock were issued to outside directors.
An analysis of restricted stock issued is as follows:
Non-vested restricted stock as of January 1, 2018
|
|
|
4,904
|
|
Granted
|
|
|
1,878
|
|
Vested
|
|
|
(4,328
|
)
|
Non-vested restricted stock as of September 30, 2018
|
|
|
2,454
|
|
7. COMMITMENTS AND CONTINGENCIES
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, will have a material
adverse effect on the financial condition or results of operations of the Company.
On October 31, 2018, the Company received a summons from Bartmann,
Perales & Dolter, LLC, the former lessor of the Franklin Park, Illinois, property the Company leased previously, alleging that
the Company owes $175,000 in overdue rent payments, property taxes and restoration costs. The Company intends to vigorously defend
the allegation and intends to assert a counterclaim pursuant to the terms of the lease agreement for reimbursement of costs and
expenses to maintain the condition and repair for said property.
8. INCOME TAXES
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs
Act (the “Act”) which, among other provisions, reduced the U.S. corporate tax rate form 35% to 21% effective January
1, 2018. The SEC issued guidance on accounting for the tax effects of the Act. The guidance allows the Company to record provisional
amounts for those impacts, with the requirement that the accounting be completed in a period not to exceed one year from the date
of enactment. The Company has not completed its accounting for the tax effects of enactment of the Act; however, the Company has
made reasonable estimates of the effects on its existing deferred tax balances and the transition tax or deemed repatriation tax.
Estimates will true up within the measurement period with the completion of filing of the federal and state tax returns.
The Company is subject to income taxes in the U.S. and Malaysia.
On a quarterly basis, the Company assesses the recoverability of deferred tax assets and the need for a valuation allowance. Such
evaluations involve the application of significant judgment, and multiple factors, both positive and negative, are considered.
For the period ended September 30, 2018, a valuation allowance has been included in the 2018 forecasted effective tax rate.
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. Under the accounting
standards, objective verifiable evidence is given greater weight than subjective evidence such as the Company’s projections
for future growth. Based on an evaluation in accordance with the accounting standards, as of December 31, 2015, a valuation
allowance has been recorded against the net U.S. 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 available evidence. At September 30, 2018, the Company
continues to be in a three-year cumulative loss position, therefore, 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. and Malaysia
tax benefits or tax expense recorded on the Company’s 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 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 tax provision for the nine months ended September 30, 2018,
is based on an estimated combined statutory effective tax rate. The Company recorded for the three and nine months ended September 30,
2018, a tax expense of $6,000 and $19,000, respectively, for an effective tax rate of 0.8% and 2.2%, respectively. For the three
and nine months ended September 30, 2018, the difference between the Company’s effective tax rate and the U.S. federal 21%
statutory rate and state 6.2% (net of federal benefit) statutory rate was primarily related to U.S. and Malaysia valuation allowances,
Malaysia foreign tax rate differential, and Malaysia withholding taxes on intercompany loan interest.