NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2019
1.
BASIS OF PRESENTATION
Interim
financial data
The accompanying unaudited condensed 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, 2018. The condensed consolidated balance sheet as of December 31, 2018 set forth therein was derived from
audited financial statements.
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 six-month periods ended June 30,
2019, are not necessarily indicative of results that may be expected for the year ending December 31, 2019.
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 DTP 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 debt securities are carried at fair
value with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Investments in equity securities
are reported at fair value, with both realized and unrealized gains and losses recorded as unrealized gain (loss) on investments
and realized gain on investments, in other income (expense), in the Consolidated Statements 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 debt 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.
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 customer’s account is past due, 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.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
The Company records treasury stock purchases
under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. In November 2018, the Company’s
Board of Directors authorized a program to repurchase up to $3 million of the Company’s common stock (“Common Stock”).
The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under the program,
shares may be repurchased in privately negotiated and/or open market transactions. The timing, price and volume of repurchases
are based upon market conditions, relevant securities laws and other factors. The stock repurchase plan expires on November 19,
2021 and may be terminated at any time.
On June 10, 2019, the Company acquired
12,818 shares of Common Stock at a price of $8.12 per share from Michael Mikolajczyk, the Company’s Chairman of the Audit
Committee and the Board of Directors. This purchase was unanimously approved by all of the disinterested directors of the Company.
It is included in the purchase activity set forth below.
Share
repurchase activity during the three months ended June 30, 2019, was as follows:
Periods
|
|
Total
number of
shares
purchased
|
|
|
Average
price
paid per
share
|
|
|
Total
number of
shares
purchased
as part of
publicly
announced
program
|
|
|
Approximate
dollar value
of shares
that may yet
be purchased
under the program
(in thousands)
|
|
April 1, 2019 to April 30, 2019
|
|
|
9,282
|
|
|
$
|
7.81
|
|
|
|
9,282
|
|
|
$
|
2,830
|
|
May 1, 2019 to May 31, 2019
|
|
|
35,350
|
|
|
|
7.94
|
|
|
|
35,350
|
|
|
|
2,549
|
|
June 1, 2019 to June 30, 2019
|
|
|
14,218
|
|
|
|
8.13
|
|
|
|
14,218
|
|
|
|
2,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
58,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
Inventories
are valued at the lower of cost or net realizable value. Net realizable value is determined based on an estimated selling price
in the ordinary course of business less reasonably predictable costs of completion and disposal. 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:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
468
|
|
|
$
|
468
|
|
Work-in-process
|
|
|
1,015
|
|
|
|
1,322
|
|
Finished goods
|
|
|
458
|
|
|
|
340
|
|
|
|
$
|
1,941
|
|
|
$
|
2,130
|
|
Property
and equipment
Property
and equipment consisted of the following:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(in thousands)
|
|
Machinery, equipment and tooling
|
|
$
|
3,340
|
|
|
$
|
3,293
|
|
Buildings
|
|
|
1,711
|
|
|
|
1,686
|
|
Information systems
|
|
|
820
|
|
|
|
819
|
|
Land and land improvements
|
|
|
594
|
|
|
|
594
|
|
Furniture and fixtures
|
|
|
8
|
|
|
|
8
|
|
Total cost
|
|
|
6,473
|
|
|
|
6,400
|
|
Accumulated depreciation and amortization
|
|
|
(3,757
|
)
|
|
|
(3,672
|
)
|
Property and equipment, net
|
|
$
|
2,716
|
|
|
$
|
2,728
|
|
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.
For
the year ended December 31, 2018, the Company reviewed the current fair value of its assets and concluded no adjustments were
needed. Additionally, no adjustments were recorded for the three and six months ended June 30, 2019. 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
the six months ended June 30, 2018, the Company completed individual sales and held auctions for assets located at each of its
U.S. properties, resulting in the sale of a portion of its excess U.S. equipment and consumables, which had a total net book value
of $1.5 million. Additionally, in the six months ended June 30, 2018, the Company completed sales of Malaysia equipment with a
total net book value of $131,000. Unsold excess equipment continued to be classified as current assets held for sale at June 30,
2018. Based on these sales, a gain on disposal of assets of $1.6 million was recorded for the six months ended June 30, 2018.
The
Company completed a sale of excess consumable assets in the amount of approximately $76,000 during the three months ended June
30, 2019. For the six months ended June 30, 2019, the Company sold $151,000 of excess consumable assets. Unsold excess Malaysia
equipment continued to be classified as current assets held for sale at June 30, 2019 and December 31, 2018.
The
Company is pursuing the sale of its parcel of land 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, these properties were classified as
current assets held for sale at June 30, 2019 and December 31, 2018, as it is the Company’s intention to complete these
sales within the next twelve-month period. The Company cannot guarantee that it will be able to successfully complete the sale
or lease of any assets.
Revenue
recognition
The
Company recognizes revenue in accordance with ASC Topic 606,
Revenue From Contracts with Customers
(“Topic 606”),
when performance obligations under a purchase order or signed quotation are satisfied. 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 the product is shipped, and
control of the product, title and risk of loss have been transferred to the customer. 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
In
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 this 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 recorded research and development revenue related to this contract on a gross basis over the contractually defined
period of time as the obligations were completed, using the input method of measuring progress, which recognizes revenue as resources
are consumed, labor hours expended and costs are incurred, plus a portion of the fixed fee. For the three and six months ended
June 30, 2018, the same amount of revenue of $56,000 was recorded, as no revenue was recorded for the three months ended
March 31, 2018. As the Company has completed this contract in 2018, all revenues corresponding to the total value of the contract
of $4.7 million have been recognized as of December 31, 2018. Therefore no additional research and development revenue was recorded
for the three and six months ended June 30, 2019. At June 30, 2019, the estimated costs to complete the contract were in excess
of the contract value. In reviewing its current estimates, the Company expects its remaining payments to be less than $200,000,
which has previously been accrued.
The
Company does not provide maintenance or other services and it does not have sales that involve bill & hold arrangements, multiple
elements or deliverables. However, the Company does provide product warranty for up to 90 days, for which the Company has accrued
a warranty reserve of $3,000 and $8,000 at June 30, 2019 and December 31, 2018, respectively.
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 common share was the same as basic net income (loss) per common share for the three and six months ended
June 30, 2019 and 2018, 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 32,126 and 27,000 shares of the Company’s
common stock that would have had an anti-dilutive effect at June 30, 2019 and 2018, respectively.
New
accounting pronouncements adopted
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’s adoption of ASU 2016-02
did not have a material impact on its consolidated financial statements, as the Company does not have any material lease arrangements.
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.
In
June 2018, the FASB issued ASU No. 2018-07 (“ASU 2018-07”),
Compensation - Stock Compensation (Topic 718): Improvements
to Non-Employee 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; therefore, the
Company’s adoption of ASU 2018-07 did not have a material impact on the Company’s financial statements.
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. Investments classified as available-for-sale debt securities are carried at fair
value with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Investments in equity securities
are reported at fair value, with both realized and unrealized gains and losses recorded as unrealized gain (loss) on investments
and realized gain on investments, in other income (expense), in the consolidated statements of operations.
The
following table presents the amortized cost and gross unrealized losses on all securities at June 30, 2019:
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
(in
thousands)
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$
|
14,522
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
14,524
|
|
Common
stock
|
|
|
1,059
|
|
|
|
29
|
|
|
|
(134
|
)
|
|
$
|
954
|
|
Total
short-term investments
|
|
$
|
15,581
|
|
|
$
|
31
|
|
|
$
|
(134
|
)
|
|
$
|
15,478
|
|
The
following table presents the amortized cost and gross unrealized losses on all securities at December 31, 2018:
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
(in thousands)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
14,357
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
14,356
|
|
Total short-term investments
|
|
$
|
14,357
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
14,356
|
|
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 debt securities consist of U.S. Treasury securities, high-quality investment grade
commercial paper, FDIC guaranteed certificates of deposit and corporate notes. Investments in equity securities consist of common
stock. 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 June 30,
2019:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
3,873
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,873
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities — current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
—
|
|
|
|
14,524
|
|
|
|
—
|
|
|
|
14,524
|
|
Common stock
|
|
|
954
|
|
|
|
—
|
|
|
|
—
|
|
|
|
954
|
|
Total
|
|
$
|
4,827
|
|
|
$
|
14,524
|
|
|
$
|
—
|
|
|
$
|
19,351
|
|
The
following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of December 31,
2018:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
2,821
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,821
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities — current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
—
|
|
|
|
14,356
|
|
|
|
—
|
|
|
|
14,356
|
|
Total
|
|
$
|
2,821
|
|
|
$
|
14,356
|
|
|
$
|
—
|
|
|
$
|
17,177
|
|
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 $5.7 million and $8.4 million of time deposits included
in cash and cash equivalents as of June 30, 2019 and December 31, 2018, respectively.
4.
SIGNIFICANT CUSTOMERS
For
the three months ended June 30, 2019, the Company had three customers individually that accounted for approximately 19%,
17% and 12%, of revenue. For the three months ended June 30, 2018, the Company had three customers individually that accounted
for approximately 21%, 15% and 13% of revenue. For the six months ended June 30, 2019, the Company had three customers that
accounted for approximately 20%, 18% and 15% of revenue. For the six months ended June 30, 2018, the Company had three customers
that accounted for approximately 15%, 15% and 10% of revenue. No other customer accounted for 10% or more of the Company’s
revenues during the three and six months ended June 30, 2019 and 2018.
Customers
individually representing more than 10% of trade receivables accounted for approximately 69% and 79% of accounts receivable as
of June 30, 2019 and December 31, 2018, respectively.
5.
STOCKHOLDERS’ EQUITY
Common
shares reserved
As
of June 30, 2019, the Company had reserved 80,030 shares of common stock for issuance upon the exercise of outstanding common
stock options and vesting of RSUs. Also, 328,660 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 June 30, 2019.
On
May 30, 2019, the Company’s Compensation Committee determined that the Chief Executive Officer satisfied the criteria to
earn his 2018 objective based bonus and therefore is entitled to be granted 49,000 shares (“Bonus Shares”) of the
Company’s Common Stock. The Bonus Shares have not been issued as of this date and are likely to be issued in the third quarter
of 2019. The Company recognized an expense of $414,000 during the three months ended June 30, 2019 for the granting of the Bonus
Shares. The share information set forth in this Report on Form 10-Q does not include the Bonus Shares.
Preferred
stock
At
the Company’s 2018 annual meeting (“2018 Annual Meeting”) of stockholders, an amendment to the Company’s
Eighth Amended and Restated Certificate of Incorporation (as amended, the “Certificate of Incorporation”) was approved
to decrease the Company’s authorized number of shares of preferred stock from 5,000,000 shares to 1,000,000 shares. Subsequent
to receiving stockholder approval at the 2018 Annual Meeting, 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 June 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 entitled 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, 328,660 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
following table summarizes the activity of the stock incentive and equity plans as of June 30, 2019, and changes during the
six months then ended:
|
|
Shares
available
for grant
|
|
|
Number of
options
outstanding
|
|
|
Weighted-
average option
exercise price
|
|
|
Number of
restricted
stock
shares
issued
|
|
|
Number of
RSUs
outstanding
|
|
At January 1, 2019
|
|
|
295,067
|
|
|
|
69,083
|
|
|
$
|
12.10
|
|
|
|
99,570
|
|
|
|
50,176
|
|
Granted
|
|
|
(925
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
925
|
|
Exercised/issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,636
|
)
|
Cancelled/forfeited
|
|
|
34,518
|
|
|
|
(34,518
|
)
|
|
|
12.58
|
|
|
|
—
|
|
|
|
—
|
|
At June 30, 2019
|
|
|
328,660
|
|
|
|
34,565
|
|
|
$
|
11.62
|
|
|
|
99,570
|
|
|
|
45,465
|
|
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 June 30, 2019, there
was $53,977 of intrinsic value arising from 32,126 stock options exercisable and outstanding.
The
Company uses the Black-Scholes option pricing model to value stock options. The Company uses 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. The forfeiture rate of 28.99% is based on the history of forfeited options. The expense is allocated using the straight-line
method. For the three and six months ended June 30, 2019, the Company recorded $6,000 and $13,000, respectively, of stock
option compensation expense. For the three and six months ended June 30, 2018, the Company recorded $13,000 and $30,000,
respectively, of stock option compensation expense. As of June 30, 2019, the Company had $53,000 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 1.25 years.
A
summary of the Company’s non-vested options during the six months ended June 30, 2019, is presented below:
|
|
Options
|
|
|
Weighted-
average
exercise
price
|
|
Non-vested options at January 1, 2019
|
|
|
21,992
|
|
|
$
|
6.86
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
Canceled/forfeited
|
|
|
(1,874
|
)
|
|
|
6.10
|
|
Non-vested options at June 30, 2019
|
|
|
20,118
|
|
|
$
|
6.93
|
|
Pursuant
to an employment agreement, the Company granted 30,902 and 59,098 RSUs to a key executive in 2018 and 2017, respectively.
The
following table summarizes the award vesting terms for the remaining unvested RSUs under this grant:
Number of RSUs
|
|
Target price
|
|
15,000
|
|
$
|
11.00
|
|
15,000
|
|
$
|
12.50
|
|
15,000
|
|
$
|
14.00
|
|
The
RSUs vest in the amounts set forth above 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
daily expected stock price volatility is based on a three-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.
For
the three and six months ended June 30, 2019, the Company recorded $7,000 and $7,000, respectively, of RSU expense. For the three
months and six months ended June 30, 2018, the Company recorded $115,000 and $206,000, respectively, of RSU expense. As of
June 30, 2019, there was no compensation cost related to the non-vested RSUs remaining.
A
summary of the Company’s RSUs for the six month period ended June 30, 2019, is presented below:
|
|
RSUs
outstanding
|
|
|
Weighted average
price at
time of grant
|
|
|
Aggregate intrinsic
value
|
|
Non-vested RSUs as of January 1, 2019
|
|
|
50,176
|
|
|
$
|
6.31
|
|
|
|
|
|
Granted
|
|
|
925
|
|
|
|
7.95
|
|
|
|
|
|
Vested
|
|
|
(5,636
|
)
|
|
|
7.36
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Non-vested RSUs at June 30, 2019
|
|
|
45,465
|
|
|
$
|
6.22
|
|
|
$
|
282,684
|
|
For
the three and six months ended June 30, 2019, the Company recorded $3,000 and $7,000, respectively, of stock compensation
expense related to restricted stock. For the three and six months ended June 30, 2018, the Company recorded $4,000 and
$61,000, respectively, of stock compensation expense related to restricted stock.
In
2018, all non-employee directors received an annual fee of $20,000 cash, payable quarterly. From January 1, 2018, to the 2018
Annual Meeting of Stockholders, the directors in the aggregate earned $15,000 in stock, which was equal to 1,878 shares of restricted
common stock. Thereafter, at every Annual Meeting, beginning in 2018, non-employee directors receive $10,000 in RSUs which vest
on the day immediately preceding the next following Annual Meeting of Stockholders.
For
the three months ended June 30, 2019, $30,000 in RSUs were issued to our directors. For the three months ended June 30, 2018,
6,592 shares of restricted stock were issued to our directors. As of June 30, 2019 and December 31, 2018, outstanding non-vested
restricted stock shares were 0 and 2,454 respectively.
For
the six months ended June 30, 2018, 1,878 shares of restricted common stock were issued to outside directors.
An
analysis of restricted stock outstanding is as follows:
Non-vested restricted stock as of January 1, 2019
|
|
|
2,454
|
|
Granted
|
|
|
—
|
|
Vested
|
|
|
(2,454
|
)
|
Non-vested restricted stock as of June 30, 2019
|
|
|
—
|
|
The Company recognized an expense of $414,000 during the three
months ended June 30, 2019 for the granting of the Bonus Shares. The share information set forth in this Report on Form 10-Q does
not include the Bonus Shares.
7.
COMMITMENTS AND CONTINGENCIES
Litigation
From
time to time, the Company experiences routine litigation in the normal course of its business.
In
the third quarter of 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 has asserted 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.
The management of the Company does not believe this pending litigation will have a material adverse effect on the financial condition
or results of operations or cash flows of the Company.
Contingent Payments Related to Direct
Dose
In May 2019, the Company formed Rubicon
DTP LLC (“Rubicon DTP”) in order to launch a Direct to Patient (DTP) pharmacy solution under the brand names - Direct
Dose Rx and Rubicon Rx. On May 17, 2019, the Company acquired certain equipment and other assets from an Indiana based pharmacy
operation (“Seller”), including its licenses to operate in 11 states. Direct Dose Rx is focused on the delivery of
prescription medication, over-the-counter drugs and vitamins (“Meds”) to skilled nursing facilities and hospitals for
patients that are being discharged. Rubicon Rx will deliver Meds to patients at their homes. The Company has concluded that as
of June 30, 2019 this transaction was not material to its financial statements.
The Company has a contingent liability
to Seller in the amount of $500,000 in the event that, for the time period between May 17, 2019 and December 31, 2019, Rubicon
DTP’s revenue is equal to or greater than $4,185,000.
The Company has an additional contingent
liability to Seller in the amount of $500,000 in the event that, for the time period between January 1, 2020 and December 31, 2020,
Rubicon DTP’s revenue is equal to or greater than $7,500,000.
The Company has an additional contingent
liability to Seller if Rubicon DTP is sold for greater than $12 million on or before May 17, 2022, in an amount equal to one of
the following: (a) if the aggregate consideration paid for Rubicon DTP is greater than $12 million, but equal to or less than $30
million, then $1.5 million; (b) if the aggregate consideration paid for Rubicon DTP is greater than $30 million, but equal to or
less than $60 million, then $2.0 million; (c) if the aggregate consideration paid for Rubicon DTP is greater than $60 million,
but less than $100 million, then $3.0 million; or (d) if the total consideration paid for Rubicon DTP is greater than or equal
to $100 million, then $4.5 million.
Although it is possible that the Company
meets one or more of the various targets and is required to make some or all of the above described payments, the Company believes
the likelihood is remote.
8.
INCOME TAXES
In
2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”) which, among other provisions, reduced the U.S. corporate
tax rate from 35% to 21% effective January 1, 2018. The SEC issued guidance, Staff Accounting Bulletin 118, 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 completed its
accounting for the tax effects of enactment of the Act. The deemed inclusion from the repatriation tax increased from $3.9 million
at the time of provision to $5.0 million at the time the calculation was finalized for the 2018 tax return. The increase of the
inclusion related primarily to the refinement of Malaysia earnings and profits. As the Company is in a full valuation allowance
position, an equal benefit adjustment was recorded for the impact of the increase of the deemed repatriation tax.
The
Company is subject to taxation in the U.S., Malaysia and in a U.S. state jurisdiction. 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 June 30, 2019,
a valuation allowance has been included in the 2019 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 June 30, 2019, 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 statements of operations will be offset with a corresponding adjustment from the use of the net operating
loss (“NOL”) carryforward asset which currently has a full valuation allowance. 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 six months ended
June 30, 2019, is based on an estimated combined statutory effective tax rate. The Company recorded for the three and six months
ended June 30, 2019, a tax expense of $6,000 and $10,000, respectively, for an effective tax rate of 0.74% and 1.29%, respectively.
For the three and six months ended June 30, 2019 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 the change in the Company’s
U.S. and Malaysia valuation allowances, U.S. research and development credit, Malaysia foreign tax rate differential and Malaysia
withholding taxes on intercompany loan interest.