The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2020
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, 2019. 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-month period ended March 31, 2020, are not necessarily indicative of results that may be expected for
the year ending December 31, 2020.
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 DTP 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, equity related securities 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 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 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 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 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. 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.
Share repurchase activity during the three months ended March 31,
2020, 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)
|
|
January 1, 2020 to January 31, 2020
|
|
|
33,664
|
|
|
$
|
8.30
|
|
|
|
33,664
|
|
|
$
|
2,119
|
|
February 1, 2020 to February 29, 2020
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
2,119
|
|
March 1, 2020 to March 31, 2020
|
|
|
113,010
|
|
|
|
8.19
|
|
|
|
113,010
|
|
|
|
1,194
|
|
Total
|
|
|
146,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
468
|
|
|
$
|
468
|
|
Work-in-process
|
|
|
816
|
|
|
|
901
|
|
Finished goods
|
|
|
578
|
|
|
|
809
|
|
|
|
$
|
1,862
|
|
|
$
|
2,178
|
|
In the year ended December 31, 2019, the Company made the determination
that raw material inventories were such that the likelihood of significant usage within the current year was doubtful and reclassified
such raw material inventories as non-current in the reported financial statements.
Property and equipment
Property and equipment consisted of the following:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
(in thousands)
|
|
Machinery, equipment and tooling
|
|
$
|
3,341
|
|
|
$
|
3,341
|
|
Buildings
|
|
|
1,711
|
|
|
|
1,711
|
|
Information systems
|
|
|
835
|
|
|
|
835
|
|
Land and land improvements
|
|
|
594
|
|
|
|
594
|
|
Furniture and fixtures
|
|
|
8
|
|
|
|
8
|
|
Total cost
|
|
|
6,489
|
|
|
|
6,489
|
|
Accumulated depreciation and amortization
|
|
|
(3,884
|
)
|
|
|
(3,842
|
)
|
Property and equipment, net
|
|
$
|
2,605
|
|
|
$
|
2,647
|
|
Assets 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, 2019, the Company reviewed
the current fair value of its assets and concluded no adjustments were needed. Additionally, no adjustments were recorded for
the three months ended March 31, 2020. 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.
The Company did not record any sales of its equipment or consumable
assets for the three months ended March 31, 2020.
The Company is pursuing the sale of its parcels of land in
Batavia, Illinois and Penang, Malaysia, as well as the sale or lease of its 65,000 square-foot facility located in Penang, Malaysia.
We have entered into an agreement for the sale of our manufacturing facility located in Penang, Malaysia and the transaction has
been stalled due to certain actions taken by the Malaysian government in response to the COVID-19 pandemic. Although the Company
cannot assure the timing of these sales, these properties were classified as current assets held for sale at March 31, 2020 and
December 31, 2019, 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.
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 $500 and $3,000 at March
31, 2020 and December 31, 2019, 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 per common share was the same as basic net
income per common share for the three months ended March 31, 2020 and 2019, because the effects of potentially dilutive securities
did not have a material impact on the calculation of diluted net income per share. The Company had outstanding options exercisable
into 19,500 and 34,000 shares of the Company’s common stock that would have had an anti-dilutive effect at March 31,
2020 and 2019, respectively.
3. INVESTMENTS
The Company invests its available cash primarily in U.S. Treasury
securities, investment grade commercial paper, FDIC guaranteed certificates of deposit, equity-related securities 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 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 March 31, 2020:
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
(in thousands)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
9,934
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
9,945
|
|
Marketable securities
|
|
|
276
|
|
|
|
—
|
|
|
|
(156
|
)
|
|
$
|
120
|
|
Total short-term investments
|
|
$
|
10,210
|
|
|
$
|
11
|
|
|
$
|
(156
|
)
|
|
$
|
10,065
|
|
The following table presents the amortized cost and gross unrealized
losses on all securities at December 31, 2019:
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
(in thousands)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
14,668
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,668
|
|
Marketable securities
|
|
|
961
|
|
|
|
—
|
|
|
|
(171
|
)
|
|
|
790
|
|
Total short-term investments
|
|
$
|
15,629
|
|
|
$
|
—
|
|
|
$
|
(171
|
)
|
|
$
|
15,458
|
|
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,
equity related securities 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 March 31, 2020:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
8,094
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,094
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities — current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
—
|
|
|
|
9,945
|
|
|
|
—
|
|
|
|
9,945
|
|
Marketable securities
|
|
|
120
|
|
|
|
—
|
|
|
|
—
|
|
|
|
120
|
|
Total
|
|
$
|
8,214
|
|
|
$
|
9,945
|
|
|
$
|
—
|
|
|
$
|
18,159
|
|
The following table summarizes the Company’s financial
assets measured at fair value on a recurring basis as of December 31, 2019:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
3,759
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,759
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities — current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
—
|
|
|
|
14,668
|
|
|
|
—
|
|
|
|
14,668
|
|
Marketable securities
|
|
|
790
|
|
|
|
—
|
|
|
|
—
|
|
|
|
790
|
|
Total
|
|
$
|
4,549
|
|
|
$
|
14,668
|
|
|
$
|
—
|
|
|
$
|
19,217
|
|
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 $3.2 million and $6.4 million of time deposits included in cash and cash equivalents as of March 31, 2020 and
December 31, 2019, respectively.
4. SIGNIFICANT CUSTOMERS
For the three months ended March 31, 2020, the Company
had four customers individually that accounted for approximately 18%, 18%, 16% and 13% of revenue. For the three months ended
March 31, 2019, the Company had three customers individually that accounted for approximately 21%, 20% and 18% of revenue.
No other customer accounted for 10% or more of the Company’s revenues during the three months ended March 31, 2020 and 2019.
Customers individually representing more than 10% of trade
receivables accounted for approximately 70% and 74% of accounts receivable as of March 31, 2020 and December 31, 2019, respectively.
5. STOCKHOLDERS’ EQUITY
Common shares reserved
As of March 31, 2020, the Company had reserved 76,530
shares of common stock for issuance upon the exercise of outstanding common stock options and vesting of RSUs. Also, 281,698 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 March 31, 2019.
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 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, 281,698 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 March 31, 2020, and changes during the three 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, 2020
|
|
|
281,386
|
|
|
|
22,839
|
|
|
$
|
13.48
|
|
|
|
99,570
|
|
|
|
54,003
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised/issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled/forfeited
|
|
|
312
|
|
|
|
(312
|
)
|
|
|
194.90
|
|
|
|
—
|
|
|
|
—
|
|
At March 31, 2020
|
|
|
281,698
|
|
|
|
22,527
|
|
|
$
|
10.97
|
|
|
|
99,570
|
|
|
|
54,003
|
|
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 March 31, 2020, there was $31,590 of intrinsic value arising from 19,500
stock options exercisable or 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 months ended March 31, 2020 and 2019,
the Company recorded $3,000 and $7,000, respectively, of stock option compensation expense. As of March 31, 2020, the Company had
$8,000 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 0.5 years.
A summary of the Company’s non-vested options during
the three months ended March 31, 2020, is presented below:
|
|
Options
|
|
|
Weighted-
average
exercise
price
|
|
Non-vested options at January 1, 2020
|
|
|
4,866
|
|
|
$
|
5.79
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
Canceled/forfeited
|
|
|
—
|
|
|
|
—
|
|
Non-vested options at March 31, 2020
|
|
|
4,866
|
|
|
$
|
5.79
|
|
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.
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.
The Company did not record any RSU expense for the three months
ended March 31, 2020. For the three months ended March 31, 2019, the Company recorded $8,000 in RSU expense.
A summary of the Company’s RSUs during the three months
ended March 31, 2020, is presented below:
|
|
RSUs
outstanding
|
|
|
Weighted
average
price at
time
of grant
|
|
|
Aggregate
intrinsic
value
|
|
Non-vested RSUs as of January 1, 2020
|
|
|
54,003
|
|
|
$
|
6.56
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Non-vested RSUs at March 31, 2020
|
|
|
54,003
|
|
|
$
|
6.56
|
|
|
$
|
354,250
|
|
For the three months ended March 31, 2020 and 2019, the
Company recorded $8,000 and $4,000, 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. For the three months ended March 31, 2020 and 2019, no restricted stock shares were
issued to our directors. As of March 31, 2020 and December 31, 2019, there were no outstanding non-vested restricted stock 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.
See Note 10 to the Condensed Financial Statements for a discussion
of the settlement of the litigation.
COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak
of a novel coronavirus (COVID-19) as a pandemic. The full impact of the COVID-19 outbreak is unknown and cannot be reasonably estimated.
The magnitude and duration of the COVID-19 outbreak, as well as other factors, could result in a material impact to the Company’s
financial statements in future reporting periods.
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 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 March 31, 2020, a valuation allowance has been included in the 2020 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 March 31, 2020,
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 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 three months ended March 31, 2020,
is based on an estimated combined statutory effective tax rate. The Company recorded for the three months ended March 31,
2020, a tax expense of $4,210, for an effective tax rate of (0. 2)%. For the three months ended March 31, 2020, 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.
9. SEGMENT INFORMATION
The Company has determined
that it operates in two segments, the sapphire and pharmacy business.
Revenue is attributed
by geographic region based on ship-to location of the Company’s customers. The following table summarizes revenue by geographic
region:
|
|
Three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,040
|
|
|
$
|
862
|
|
Asia
|
|
|
113
|
|
|
|
48
|
|
Other
|
|
|
7
|
|
|
|
10
|
|
Total revenue
|
|
$
|
1,160
|
|
|
$
|
920
|
|
The following table summarizes sales by product
type:
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
|
|
|
|
Optical
|
|
$
|
1,027
|
|
|
$
|
910
|
|
Core
|
|
|
—
|
|
|
|
10
|
|
Rubicon DTP
|
|
|
133
|
|
|
|
—
|
|
Total revenue
|
|
$
|
1,160
|
|
|
$
|
920
|
|
The following table summarizes assets by geographic
region:
|
|
As of March 31,
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
|
|
|
|
United States
|
|
$
|
26,105
|
|
|
$
|
29,703
|
|
Malaysia
|
|
|
4,992
|
|
|
|
5,094
|
|
Other
|
|
|
4
|
|
|
|
4
|
|
Total assets
|
|
$
|
31,101
|
|
|
$
|
34,801
|
|
Rubicon DTP accounted for approximately $119,000
of the Company’s loss for the three months ended March 31, 2020. The Company established Rubicon DTP in May 2019.
10. SUBSEQUENT EVENTS
On May 6, 2020, the Company entered into
a Settlement Agreement and Mutual General Release with its former landlord (the “Landlord”) at its Franklin Park facility,
Bartmanns, Perales & Dolter, relating to a dispute regarding Rubicon’s restoration obligations, back rent and taxes owed.
The settlement amount was $115,000, which consisted of a payment by Rubicon to the Landlord of $91,500 and the forfeiture of a
security deposit in the amount of $23,500. The Company had previously recorded liabilities for approximately $119,000 related to
this litigation and therefore this settlement will have no material impact on our financial statements.