Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☒
As of June 30, 2017, there were 2,361,038
shares of common stock outstanding held by non-affiliates of the registrant, with an aggregate market value of the common stock
(based upon the closing price of these shares on the NASDAQ Capital Market) of approximately $21,863,210.
The number of shares of the registrant’s
common stock outstanding as of the close of business on March 5, 2018 was 2,737,813.
Portions
of the Registrant’s Proxy Statement for its 2018 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Annual Report on Form 10-K provided, that if such Proxy Statement is not filed with the Commission within 120 days
after the end of the fiscal year covered by this Form 10-K, an amendment to this Form 10-K shall be filed no later than the end
of such 120-day period.
PART I
All statements, other than statements of
historical facts, included in this Annual Report on Form 10-K including statements regarding our estimates, expectations, beliefs,
intentions, projections or strategies for the future, results of operations, financial position, net sales, projected costs, prospects
and plans and objectives of management for future operations may be “forward-looking statements” within the meaning
of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We have based these forward-looking
statements on our current expectations and projections about future events and financial trends that we believe may affect our
financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and
financial needs. These forward-looking statements can be identified by the use of terms and phrases such as “believe,”
“plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,”
“forecast,” “prospects,” “goals,” “potential,” “likely,” and the like,
and/or future-tense or conditional constructions such as “will,” “may,” “could,” “should,”
etc. (or the negative thereof). Items contemplating or making assumptions about actual or potential future sales, market size and
trends or operating results also constitute forward-looking statements.
Moreover, we operate in a very competitive
and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks,
nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking statements we may make. Before investing in our
common stock, investors should be aware that the occurrence of the risks, uncertainties and events described in the section entitled
“Risk Factors” and elsewhere in this Annual Report could have a material adverse effect on our business, results of
operations and financial condition. These risks and uncertainties include the adoption of sapphire as a material in new applications,
our successful development and the market’s acceptance of new products; our ability to sell certain assets, including those
in Malaysia and underutilized assets in the U.S., and the prices we receive therefor; our ability to make effective acquisitions
and successfully integrate newly acquired businesses into existing operations; our ability to effectively utilize net loss carryforwards;
dependence on key customers; our ability to secure new business and retain customers; changes in demand or the average selling
prices of sapphire products; the failure to achieve the margins we expect, whether due to our own operations or changes in the
market for our products; our ability to successfully qualify our products with customers and potential customers; potential disruptions
in our supply of electricity; changes in our product mix; the outcome of the testing of new products and processes or the testing
of our existing products for new applications; the failure of third parties performing services for us to do so successfully; our
ability to protect our intellectual property rights; the competitive environment; and the cost of compliance with environmental
standards. Although we believe that the expectations reflected in the forward-looking statements are reasonable, forward-looking
statements are inherently subject to known and unknown risks, including business, economic and other risks and uncertainties that
may cause actual results to be materially different from those discussed in these forward-looking statements. Readers are urged
not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We assume
no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date
of this Annual Report, other than as may be required by applicable law or regulation. If one or more of these risks or uncertainties
materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.
You should read this Annual Report and
the documents that we reference in this Annual Report and have filed with the Securities and Exchange Commission (the “SEC”)
as exhibits with the understanding that our actual future results, levels of activity, performance and events and circumstances
may be materially different from what we expect.
Unless otherwise indicated, the terms “Rubicon,”
the “Company,” “we,” “us,” and “our” refer to Rubicon Technology, Inc. and our
consolidated subsidiaries.
ITEM 1. BUSINESS OVERVIEW
We are a vertically integrated, advanced
materials provider specializing in monocrystalline sapphire for applications in optical and industrial systems. We design, assemble
and maintain our own proprietary crystal growth furnaces to grow high-purity, low-stress, ultra-low-defect-density sapphire crystals.
We apply our proprietary crystal growth technology to produce high-quality sapphire products to meet our customers exacting specifications.
Sapphire is a desirable material for high-performance applications due to its hardness and strength, transparency in the visible
and IR spectrum, thermal conductivity, thermal shock resistance, abrasion resistance, high melting point and chemical inertness.
As a result, it is ideally suited for extreme environments in a range of industries where material durability is just as important
as optical clarity.
Historically, we have also provided sapphire
products to the LED and mobile device markets, which are the largest markets for sapphire. However, given competitive pressures
in those markets, in September 2016 we announced our decision to limit our focus in the near-term on the optical and industrial
sapphire markets and exit the LED market. We believe that we continue to have a reputation as one of the highest quality sapphire
producers in the market. We provide optical and industrial sapphire products in various shapes and sizes, including round and rectangular
windows and blanks, domes, tubes and rods.
With the decision to exit the LED market,
in November 2016 we stopped our production activities located in Penang, Malaysia and subsequently closed this facility. Our wafer
patterning equipment located in Malaysia was sold in the fourth quarter of 2016 for $4.5 million. We held an auction in March 2017
in an effort to sell certain polishing and fabrication equipment with mixed results. Since the March 2017 auction, we have sold
some additional equipment and continue to seek buyers for the remaining unsold equipment. Additionally, we are seeking to sell
our Malaysia real estate. The timing of the sale of the remaining equipment and real estate located in Malaysia is difficult to
predict.
Following the decision in the fourth quarter
2016 to focus on smaller optical and industrial sapphire markets, we determined that we had more crystal growth and fabrication
capacity in the U.S. than we needed for our current business strategy. Consequently, we have consolidated operations into our leased
spaces in Bensenville, Illinois and Franklin Park, Illinois and vacated our owned facility in Batavia, Illinois. In March 2017,
we held an auction to sell excess equipment from our Batavia facility. Other than crystal growth furnaces, most of the equipment
was sold. The plant itself is a special purpose facility with extensive enhancements to power and water-cooling systems required
for crystal growth production.
We
are actively trying to sell or lease this property and our initial focus is to find a buyer that is interested in both the
building and its improved infrastructure. However, to date we have been unable to find a buyer that values such enhancements
and ultimately may be unable to sell this real estate for more than the value of a standard facility. In fact we may be
required by a buyer to pay for the removal of the enhancements. The timing on the sale or lease of this real estate and our
crystal growth furnaces is difficult to predict.
Historically,
we sold sapphire cores into the mobile device market and sapphire cores and wafers into the LED market. With the cessation of
our LED-related production activities at our Malaysia facility, our LED revenue ceased. Approximately 91% of our 2017 sales
came from optical and industrial sapphire components. The following table summarizes optical revenue for each of the last
three years:
Year ended December 31,
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Optical revenue
(in thousands)
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% of total
revenue
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2017
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$
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4,615
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91
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%
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2016
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$
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4,568
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23
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%
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2015
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$
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5,086
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21
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%
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We operate in a very competitive market.
Our ability to expand our optical and industrial business and the acceptance of new product offerings is difficult to predict.
In addition, our optical and industrial
sapphire business serves smaller markets than our historical undertakings, so we are actively evaluating the acquisition of profitable
companies outside of the sapphire market in order to utilize our substantial net tax loss carry-forwards
(“NOLs”).
We are a Delaware corporation incorporated
on February 7, 2001. Our common stock is listed on the NASDAQ Capital Market under the ticker symbol “RBCN.”
INDUSTRY OVERVIEW
Sapphire is utilized in optical and industrial
applications. It is used for windows and optics for aerospace, sensor, medical, semiconductor, instrumentation, electronics and
laser applications due to its wide-band transmission, superior strength, chemical and scratch resistance and high strength-to-weight
ratio. Sapphire’s physical and optical properties also make it very well suited for defense applications such as electro-optical
and sensor suite windows for military fighter jets, helicopters, unmanned air vehicles and ships, forward-looking infrared windows
for commercial and business aircrafts as well as missile domes, submarine windows and components and transparent armor for military
vehicles. We believe that these markets may be growing as new applications for sapphire emerge for larger size and higher quality
sapphire components and also due to the availability of more cost effective sapphire part production.
TECHNOLOGY
Our proprietary crystal growth technique,
which we refer to as ES2, produces high-quality sapphire crystals for use in our sapphire products. ES2 is derived from the standard
Kyropoulos method of crystal growth. We developed this technique with the goal of establishing greater control over the crystal
growth process while maintaining minimal temperature variations. Unlike other techniques, during the ES2 technique, the growing
sapphire crystal exists in an unconstrained, low stress environment inside a closed growth chamber. The closed system allows for
enhanced control of the melt, resulting in higher quality crystals. The temperature gradient between the melt and the crystal in
the ES2 technique is significantly lower than in other crystal growth techniques. These aspects of the ES2 technique enable us
to grow crystals that have a significantly lower dislocation density, higher crystal purity and greater uniformity than sapphire
crystals grown using other techniques. The ES2 technique provides an inherent annealing process once the crystal is fully grown.
This thermal annealing is an integral means of relieving stress in the crystal during the ES2 process. We have demonstrated the
ability to readily scale our ES2 technology in a production environment while maintaining high crystal quality even as crystal
boule size is increased.
Our furnace environments are controlled
by closed-loop control systems and the overall crystal growth process is run with minimal operator intervention. A single operator
can supervise the control of multiple ES2 furnaces simultaneously, which reduces costs.
We
have now completed crystal growth development for our Large Area Net Shaped Crystal Extraction (“LANCE”)
technology, which is a technology designed to produce very large, thick sapphire windows. This technology was developed with
government funding under a contract with the Air Force Research Laboratory. We have completed the growth of the window blank
deliverables on this project, including the largest size sapphire window in the world at 36 x 18 x 0.8 inch dimensions. The
project will not be fully completed until our subcontractors complete the polishing of the windows. We will continue to
refine the process to improve yield; however, our main focus now is the development of the market for these larger windows.
The product has been displayed at trade shows and has attracted interest both from military and industrial product
developers.
PRODUCTS
We believe the developing optical and
industrial markets require large diameter sapphire products, high quality sapphire and ultra-thin double side polished windows
and wafers which may be beyond the capability of many sapphire suppliers. In addition, military and defense applications often
require a U.S. based source for sapphire. We believe we continue to have a reputation for producing the highest quality optical-grade
sapphire. We also have the ability to maintain that crystal quality in very large sizes, to support a strong and developing U.S.
customer base, and to provide very high performance ultra-thin double side polished sapphire products, which we believe positions
us well in the optical, laser, and epitaxial growth markets.
We provide optical and industrial sapphire
products in various shapes and sizes, including round and rectangular windows and blanks, domes, tubes and rods. These optical
sapphire products are qualified and used in equipment for a wide variety of end markets and high performance applications including
defense and aerospace, specialty lighting, instrumentation, sensors and detectors, semiconductor process equipment, electronic
substrates, medical and laser applications.
We believe we offer the industry’s
largest sapphire windows and highest quality, ultra-thin, double side polished windows and substrates. Our product lines include
very thin, double-side polished windows as thin as 300 microns for 6” optical diameter substrates, and also very large-area
blanks and polished windows. We offer round C-plane sapphire windows up to 11” in diameter and A-plane windows up to 18”
in diameter with UV grade windows up to 13.5” in diameter. We also have produced sapphire window blanks at 36” x 18”
x 0.8” dimensions.
RESEARCH AND DEVELOPMENT
In 2017 and 2016, our R&D expenses
totaled $962,000 and $2.5 million, respectively. The scope of R&D projects has been reduced, and we expect R&D expenses
to be significantly lower in 2018. These expenses generally do not include costs incurred in connection with our R&D activities
under the LANCE government contract. However, in 2017 and 2016 we recorded estimated costs of $26,000 and $217,000 in excess of
the contract value at December 31, 2017 and 2016, respectively.
Production expenses associated with the
LANCE government agreement up to the contract value are accounted for as revenue and cost of goods sold. We record R&D revenue
associated with the LANCE government contract as costs are incurred plus a fixed fee. For each of the years ended December 31,
2017 and 2016 revenue from R&D accounted for less than 10% of our revenue. Since 2012, we have recorded $4.7 million in revenue
and the total value of the contract is $4.7 million. As LANCE is largely complete, we expect our R&D revenue to be less than
$100,000 in 2018.
MANUFACTURING
The process of growing the crystal begins
by heating the raw material, aluminum oxide, until it reaches an ideal temperature above its melting point. This ideal temperature
is essential for our process because it allows us to produce high-purity crystals with very low defect rates. Following the heating,
a seed rod is inserted in the melted material as the material is being cooled to crystallize into a boule. Following the growth
process, each boule is rigorously inspected by using polarized lighting and magnification to find imperfections, such as bubbles,
dislocations and granular deposits within the crystal.
We then drill the resulting boules into
cylindrical cores using our custom high-precision crystal orientation equipment and proprietary processes. For many of our parts,
the cores are then finished through an outsourcing model using trusted partners.
We are dedicated to quality assurance throughout
our entire operation. We employ detailed material traceability from raw material to finished product. Our quality system is certified
as ISO9001:2000.
All of our long-lived assets are located
in the U.S. and Malaysia. While there are long-lived assets in Malaysia, we are attempting to sell them, as that facility is shut-down
and is not an active part of our operations. For more information see Note 2 – Segment Information to our Consolidated Financial
Statements included in this Annual Report on Form 10-K.
SALES AND MARKETING
We market and sell our products through
our direct sales force to customers. Our direct sales force includes experienced and technically sophisticated sales professionals
and engineers who are knowledgeable in the development, manufacturing and use of sapphire windows and other optical materials.
Our sales staff works with customers during all stages of the manufacturing process, from developing the precise composition of
the parts through manufacturing and processing the parts to the customers’ specifications.
A key component of our marketing strategy
is developing and maintaining strong relationships with our customers. We achieve this by working closely with our customers to
optimize our products for their production processes. In addition, we are able to develop long-term relationships with key customers
by offering product specification assistance, providing direct access to enable them to evaluate and audit our operations, delivering
high-quality products and providing superior customer service. We believe that maintaining close relationships with our customers’
senior management and providing technical support improves customer satisfaction.
In order to increase brand recognition
of our products and our Company in general we publish technical articles, distribute promotional materials and participate in industry
trade shows and conferences.
CUSTOMERS
Our
principal customers have been defense sub-contractors, industrial manufacturers, fabricators and resellers. A
substantial portion of our sales have been to a small number of customers. In 2017 our top customers accounted for in the
aggregate approximately 31% of our revenue and in 2016, the top customer accounted for approximately 60% of our
revenue. Although we are attempting to diversify and expand our customer base, we expect our sales to continue to be
concentrated among a small number of customers. However, we also expect that our significant customers may change from time
to time. No other customer accounted for 10% or more of our revenues during 2017 or 2016.
INTELLECTUAL PROPERTY
Our
ability to protect our proprietary technologies and other confidential information is a key factor in our ability to compete
successfully. We rely primarily upon a combination of patent, trade secret laws and non-disclosure agreements with employees,
customers and potential customers to protect our intellectual property. We have six patents issued by the U.S. Patent and
Trademark office expiring between 2027 and 2030. In addition, we have an aggregate of seven pending patent applications with
the U.S. Patent and Trademark Office and with various other foreign countries. The patents and patent applications mostly
cover aspects of our core production, wafer grinding and lapping technologies. However, we believe that factors such as the
technological and innovative abilities of our personnel, the success of our ongoing product development efforts and our
efforts to maintain trade secret protection are more important than patents in maintaining our competitive position. We
pursue the registration of certain of our trademarks in the U.S. and currently have three registered trademarks.
COMPETITION
The markets for high-quality sapphire products
are very competitive and have been characterized by rapid technological change. The products we produce must meet certain demanding
requirements to succeed in the marketplace. Although we are a well-established sapphire producer, we face significant competition
from other established providers of similar products as well as from new and potential entrants into our markets.
We have several competitors that compete
directly with us. We believe that the key competitive factors in our markets are:
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consistently producing high-quality products in the desired size, orientation and finish;
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pricing;
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driving innovation through focused research and development efforts;
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producing large format high-quality crystal for certain applications;
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providing U.S.-based source of sapphire for military applications; and
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financial stability of the companies.
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We believe the developing optical and industrial markets require cost effective high quality sapphire, large diameter sapphire products and ultra-thin double side
polished windows and wafers, which we have the capabilities to provide while certain other sapphire producers may not. In addition,
defense applications often require a U.S. based source for sapphire. We believe we continue to have a reputation for producing
the highest quality sapphire in the market. We believe this positions us well with competitive advantages in the markets for optical
and industrial sapphire.
ENVIRONMENTAL REGULATION
In our manufacturing process, we use water,
oils, slurries, acids, adhesives and other industrial chemicals. We are subject to a variety of federal, state and local laws regulating
the discharge of these materials into the environment or otherwise relating to the protection of the environment. These include
statutory and regulatory provisions under which we are responsible for the management of hazardous materials we use and the disposition
of hazardous wastes resulting from our manufacturing processes. Failure to comply with such provisions, whether intentional or
inadvertent, could result in fines and other liabilities to the government or third parties, injunctions requiring us to suspend
or curtail operations or other remedies, which could have a material adverse effect on our business. The cost of complying with
environmental regulation is not material.
EMPLOYEES
As of December 31, 2017, we had 20
full-time employees and one full-time consultant of which 11 full time employees worked in technology and operations. None of our
employees are represented by a labor union. We consider our employee relations to be good.
OTHER INFORMATION
You may access, free of charge, our reports
filed with the SEC (for example, our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports
on Form 8-K and any amendments to those forms) over the Internet at the SEC’s website at http://www.sec.gov. You may also
read and copy any document we file at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available through
our Internet website (www.rubicontechnology.com). Reports filed with or furnished to the SEC will be available as soon as reasonably
practicable after they are filed with or furnished to the SEC. Alternatively, if you would like a paper copy of any such SEC report
(without exhibits) or document, write to Investor Relations, Rubicon Technology, Inc., 900 East Green Street, Bensenville, Illinois
60106, and a copy of such requested document will be provided to you, free of charge. The information found on our website is not
part of this or any other report filed with or furnished to the SEC.
You should carefully read the risk factors
set forth below, together with the financial statements, related notes and other information contained in this Annual Report on
Form 10-K. Our business is subject to a number of important risks and uncertainties, some of which are described below. The risks
described below, however, are not the only risks that we face. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial may also impair our business operations. Any of these risks may have a material adverse
effect on our business, financial condition, results of operations and cash flows. Please refer to the discussion of “forward-looking
statements” on page one of this Annual Report on Form 10-K in connection with your consideration of the risk factors and
other important factors that may affect future results described below.
We have incurred significant losses in prior periods and
may incur losses in the future.
We have incurred significant losses in
prior periods and may continue to incur significant losses for the foreseeable future. These losses may have an adverse effect
on our ability to attract new customers or retain existing customers. We have incurred net losses of $17.9 million, $62.9 million,
$77.8 million, $44.0 million, $30.4 million and $5.5 million in 2017, 2016, 2015, 2014, 2013 and 2012, respectively. There can
be no assurance that we will have sufficient revenue to achieve profitability in future periods.
We are exploring, evaluating and have begun implementing
alternatives with a goal of providing greater value to our stockholders. There can be no assurance that we will be successful in
identifying additional alternatives or implementing any alternative, or that any alternative will yield additional value for stockholders.
Our management and Board of Directors are
continuing to review alternatives with a goal of providing greater value to our stockholders. These alternatives could result in,
among other things, modifying or eliminating certain of our operations, selling material assets, seeking additional
financing, selling the business, effecting a merger, consolidation or other business combination, partnering or other collaboration
agreements, or potential acquisitions or recapitalizations, in one or more transactions. In connection with the Board of Directors’
continuing review of alternatives, on September 12, 2016, the Board of Directors determined to shut down production activities
and close our facility in Penang, Malaysia, and to sell our assets relating to the Malaysian operations. Production activities
at the Malaysia facility have ceased. Also on September 12, 2016, we announced the Board of Directors’ decision to limit
our focus on the optical and industrial sapphire markets and to exit the LED and mobile device markets. There is no assurance that
we will be able to successfully expand our optical and industrial sapphire business or that we will obtain market acceptance for
any new product offerings in these markets.
During 2017, we sold certain equipment located
in the United States and Malaysia and we are continuing our efforts to sell additional excess equipment. There is no assurance that we will
be able to sell any additional excess equipment at prices favorable to us, or at all. Our Batavia, Illinois
land and facility remains for sale or lease and our Malaysia land and facility remain for sale. There is no assurance that we will
be able to sell or lease any land or facilities at prices favorable to us. Additionally, there can be no assurance that our continued
exploration of alternatives will result in the identification of additional alternatives or that any transaction will be consummated.
The process of exploring alternatives may be costly and may be time consuming, distracting to management and disruptive to our
business operations. If we are unable to effectively manage the process, our business, financial condition and results of
operations could be adversely affected. We also cannot provide assurance that any potential transaction or other alternative identified,
evaluated and consummated, will provide greater value to our stockholders than that reflected in the current stock price. Any potential
transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market
conditions, industry trends and the availability of financing to us on reasonable terms.
We may acquire other businesses, products or technologies;
if we do, we may be unable to integrate them with our business effectively or at all, which may adversely affect our business,
financial condition and operating results.
If we find appropriate opportunities and
have adequate funding, we may acquire other businesses, product lines or technologies. However, if we acquire a business, product
line or technology, the process of integration may produce unforeseen operating difficulties and expenditures and may absorb significant
attention of our management that would otherwise be available for the ongoing development of our business. Further, the acquisition
of a business may result in the assumption of unknown liabilities or create risks with respect to our existing relationships with
suppliers and customers. If we make acquisitions, we may issue shares of stock that dilute other stockholders, expend cash, incur
debt, assume contingent liabilities or create additional expenses related to amortizing intangible assets, any of which may adversely
affect our business, financial condition or operating results.
If we are unable to raise additional capital when needed,
we may not be able to execute our business plan or the acquisition of other businesses.
We may require additional capital to fund
operations, capital expenditures and the introduction of new products or the acquisition of other businesses. We may finance future
cash needs through public or private equity offerings, debt financings, corporate collaborations or licensing arrangements. Additional
funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available,
we may be required to delay, reduce the scope of or eliminate one or more of our acquisition opportunities. To the extent that
we raise additional funds by issuing equity securities, our stockholders may experience dilution, and debt financing, if available,
may involve restrictive covenants. To the extent that we raise additional funds through corporate collaborations or licensing arrangements,
it may be necessary to relinquish some rights to our technologies or our new products or grant licenses on terms that may not be
favorable to us. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not
have an immediate need for additional capital at that time. Introducing newly developed products to the market often requires investment
before revenue is generated from those products. We currently have no commitments or arrangements for any additional financing
to fund our product research and development programs. However, we may need to raise substantial additional capital in the future
to complete the development and commercialization of our new products or to acquire new businesses or technology.
We believe our existing cash, cash equivalents
and short-term investments and interest thereon, will be sufficient to fund our projected operating requirements for at least the
next twelve months. However, if our success in generating sufficient operating cash flow or our use of cash in the next twelve
months were to significantly adversely change, we may not have enough funds available to continue operating at our current level
in future periods. A limitation of funds available may raise concerns about our ability to continue to operate. Such concerns may
limit our ability to obtain financing and some customers may not be willing to do business with us.
Our future funding requirements, both near
and long-term, will depend on many factors, including, but not limited to:
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the amount of our revenues and ability to be operationally cash flow positive;
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the extent to which we acquire or invest in businesses, products or technologies;
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the level of capital expenditures required to maintain or expand our operations;
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the initiation, progress, timing, costs and results of studies and trials required for our new products;
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the terms and timing of any future collaboration, licensing or other arrangements that we may establish;
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the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
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the effect of competing technological and market developments; and
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the cost of establishing sales, marketing and distribution capabilities for any new products.
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We rely on third parties for certain finishing steps for
our products, including the slicing and polishing of our sapphire crystal.
In order to reduce product costs and improve
cash flow, we use third parties for certain finishing functions for our products, including the slicing and polishing of our sapphire
crystal inventory. These types of services are only available from a limited number of third parties. Our ability to
successfully outsource these finishing functions will substantially depend on our ability to develop, maintain and expand our strategic
relationship with these third parties. Any impairment in our relationships with the third parties performing these functions, in
the absence of a timely and satisfactory alternative arrangement, could have a material adverse effect on our business, results
of operations, cash flow and financial condition. In addition, we do not control any of these third parties or the operation
of their facilities, and we may not be able to adequately manage and oversee the third parties performing our finishing functions. Accordingly,
any difficulties encountered by these third parties that result in product defects, delays or defaults on their contractual commitments
to us could adversely affect our business, financial condition and results of operations. In addition, their facilities may
be vulnerable to damage or interruption from natural disasters, inclement weather conditions, power loss, acts of terrorism and
similar events. A decision to close a facility without adequate notice as a result of these or other unanticipated problems
at the facility could result in lengthy interruptions in their services to us; and any loss or interruption of these services could
significantly increase our expenses, cause us to default on our obligations to our customers and/or otherwise adversely affect
our business. Furthermore, the outsourcing of our finishing steps, such as slicing and polishing of wafers, may not continue to
be available at reasonable prices or on commercially reasonable terms, or at all.
Our gross margins could fluctuate as a result of changes
in our product mix and other factors, which may adversely impact our operating results.
We anticipate that our gross margins will
fluctuate from period to period as a result of the mix of products that we sell in any given period. We are working to increase
sales of higher margin products, introduce new differentiated products and lower our costs. There can be no assurance that we will
be successful in improving our gross margin mix. If we are not successful, our overall gross margin levels and operating results
in future periods would continue to be adversely impacted. Increased competition and the adoption of alternatives to our products,
more complex engineering requirements, lower demand and other factors may lead to a further downward shift in our product margins,
leading to price erosion and lower revenues for us in the future.
The markets in which we operate are very competitive, and
many of our competitors and potential competitors are larger, more established and better capitalized than we are.
The markets for selling high-quality sapphire
products are very competitive and have been characterized by rapid technological change. This competition could result in increased
pricing pressure, reduced profit margins, increased sales and marketing expenses, and failure to increase, or the loss of, market
share or expected market share, any of which would likely seriously harm our business, operating results and financial condition.
Some of our competitors and potential competitors
are substantially larger and have greater financial, technical, marketing and other resources than we do. Given their capital resources,
the large companies with which we compete, or may compete in the future, are in a better position to substantially increase their
manufacturing capacity and research and development efforts or to withstand any significant reduction in orders by customers in
our markets. Such larger companies typically have broader product lines and market focus and thus are not as susceptible to downturns
in a particular market. Some of our competitors also receive government subsidies, which could create a competitive advantage.
We would be at a competitive disadvantage if our competitors bring their products to market earlier, if their products are more
technologically capable than ours, or if any of our competitors’ products or technologies becomes preferred in the industry.
Moreover, we cannot assure you that existing or potential customers will not develop their own products, or acquire companies with
products that are competitive with our products. Any of these competitive threats could have a material adverse effect on our business,
operating results or financial condition.
The average selling prices of sapphire products have historically
been volatile and in recent years sapphire product prices have been increasingly depressed.
Historically, our industry has experienced
volatility in product demand and pricing. However, in the last three years, the sales prices for our sapphire products have trended
downward due to an over-supply of products in the market. In some countries, government programs support sapphire producers who
would otherwise be unprofitable; in such circumstances, sapphire may be sold at prices below cost for an extended period of time,
depressing market prices, to the detriment of our gross margins. This has had a significant adverse impact on our profitability
and our results of operations. Moreover, changes in average selling prices of our products as a result of competitive pricing pressures
increased sales discounts and new product introductions by our competitors could have a significant impact on our profitability.
Although we attempt to optimize our product mix, introduce new products, reduce manufacturing costs and pass along certain increases
in costs to our customers in order to lessen the effect of decreases in selling prices, we may not be able to successfully do so
in a timely manner or at all, and our results of operations and business may be harmed.
Our future operating results may fluctuate significantly,
which makes our future results difficult to predict and could cause our operating results for particular periods to fall below
expectations.
Our revenues and operating results have
fluctuated in the past and are likely to fluctuate in the future. These fluctuations are due to a number of factors, many of which
are beyond our control. In connection with the Board of Directors’ continuing review of alternatives with a goal of providing
greater value to our stockholders, on September 12, 2016, we announced the Board’s decision to limit our business focus
to the optical and industrial sapphire markets and to exit the LED and mobile device markets. The optical and industrial sapphire
markets are smaller markets than our historical undertakings and there is no assurance that we will be able to successfully expand
our optical and industrial sapphire business, or that such shift in focus will ultimately improve our profitability or operating
results.
Some of the factors that will affect operating
results include, among others:
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our ability to attract new customers;
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gain or loss of significant customers;
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timing and size of orders from and shipments to customers;
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volatility of sapphire product prices;
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our ability to develop, introduce and market new products and technologies on a timely basis;
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our ability to meet customer specifications for products;
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our ability to retain key relationships with suppliers and contractor third parties, including for the slicing and polishing
functions for our sapphire crystal;
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performance of suppliers, contractors and other third parties on whom we depend;
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our ability to reduce costs commensurate to our scaled down operations;
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competitive market conditions, including pricing actions by our competitors and our customers’ competitors;
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additions or departures of key personnel;
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interruption of operations at our manufacturing facilities or the facilities of our suppliers; and
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natural disasters, such as floods, hurricanes and earthquakes, as well as interruptions in power supply resulting from such
events or due to other causes.
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The
foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our quarterly
or annual operating results. Likewise, if we acquire any new business, whether or not in the sapphire market, the operating results
of that business will be subject to the same risks as are listed above. If our revenues or operating results fall below the expectations
of investors or any securities analysts that may publish research on our Company, the price of our common stock would likely decline.
We depend on a few customers for a major portion of our sales
and our results of operations would be adversely impacted if they reduce their order volumes.
Historically,
we have earned, and believe that in the future we will continue to earn, a substantial portion of our revenue from a
small number of customers. In 2017 our top two customers accounted for in the aggregate approximately 31% of our revenue and
in 2016 our top customer accounted for approximately 60% of our revenue. If we were to lose one of our major customers or
have a major customer significantly reduce its volume of business with us, our revenues and profitability would be materially
reduced unless we are able to replace such demand with other orders promptly. We expect to continue to be dependent on our
major customers, the number and identity of which may change from period to period.
We generally sell our products on the basis
of purchase orders. Thus, most of our customers could cease purchasing our products with little or no notice and without penalties.
In addition, delays in product orders could cause our quarterly revenue to vary significantly. A number of factors could cause
our customers to cancel or defer orders, including interruptions to their operations due to a downturn in their industries, natural
disasters, delays in manufacturing their own product offerings into which our products are incorporated, securing other sources
for the products that we manufacture or developing such products internally.
Our products must meet exacting specifications and undetected
defects may cause customers to return or stop buying our products.
Our customers establish demanding specifications
for quality, performance and reliability that our products must meet. While we inspect our products before shipment, they still
may contain undetected defects. If defects occur in our products, we could experience lost revenue, increased costs, delays in,
or cancellations or rescheduling of orders or shipments, product returns or discounts, or damage to our reputation, any of which
would harm our operating results and our business.
If the market acceptance of newly developed products does
not meet our expectations or our efforts to enhance existing products are not successful, our future operating results may be harmed.
The development of new products may require
substantial investment in development efforts. If our newly developed products do not achieve market acceptance, we may be unable
to generate anticipated revenue and our operating results could be harmed.
Our continuing efforts to enhance our current
products and to develop new products involve several risks, including:
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our ability to anticipate and respond in a timely manner to changes in customer requirements;
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the significant research and development investment that we may be required to make before market acceptance of a particular
new or enhanced product;
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the possibility that the industry may not accept our new or enhanced products after we have invested a significant amount of
resources in development; and
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competition from new technologies, processes and products introduced by our current and/or future competitors.
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If we are unable to attract or retain qualified personnel,
our business and product development efforts could be harmed.
Our success depends on our continued ability
to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, manufacturing, administrative and
sales and marketing personnel. Competition for these individuals is intense, and we may not be able to successfully recruit, assimilate
or retain sufficiently qualified personnel. In particular, we may encounter difficulties in recruiting and retaining a sufficient
number of qualified technical personnel. The inability to attract and retain necessary technical, managerial, manufacturing, administrative
and sales and marketing personnel could harm our ability to obtain new customers and develop new products and could adversely affect
our business and operating results. In addition, the loss of the services, or distraction, of our senior management for any reason
could adversely affect our business, operating results and financial condition.
We are dependent on the continued services and performances
of certain senior management employees such as sales management and the head of operations.
Our future success is dependent on the continued
services and continuing contributions of our senior management who must work together effectively in order to design and produce
our products, expand our business, increase our revenue and improve our operating results. The loss of services of our senior management
for any reason could adversely affect our business, operating results and financial condition.
We are subject to risks from international sales that may
harm our operating results.
In 2017 and 2016, revenue from international
sales for our optical and industrial markets products was approximately 37% and 35%, respectively, of our total optical and industrial
markets revenue. We expect that revenue from international sales will continue to be a portion of our total revenue for the foreseeable
future. Our international sales are subject to a variety of additional risks, including risks arising from:
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sales variability as a result of transacting our foreign sales in U.S. dollars as prices for our products become less competitive
in countries with currencies that are low or are declining in value against the U.S. dollar and more competitive in countries with
currencies that are high or increasing in value against the U.S. dollar;
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trading restrictions, tariffs, trade barriers and taxes;
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differing intellectual property laws;
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economic and political risks, wars, acts of terrorism, political unrest, pandemics, boycotts, curtailments of trade and other
business restrictions;
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the difficulty of enforcing contracts and collecting receivables through some foreign legal systems;
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unexpected changes in regulatory requirements and other governmental approvals, permits and licenses; and
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periodic foreign economic downturns.
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Our future success will depend on our ability
to anticipate and effectively manage these and other risks associated with our international sales. Our failure to manage any of
these risks could harm our operating results.
Our gross margins and profitability may be adversely affected
by energy costs.
Most of our power consumption takes place
in our crystal growth facility in the U.S. Electricity prices could increase due to overall changes to the price of energy due
to conditions in the Middle East, natural gas shortages in the U.S. and other economic conditions and uncertainties regarding the
outcome and implications of such events. Once our current purchase agreements expire, if electricity prices increase significantly,
we may not be able to pass these price increases through to our customers on a timely basis, if at all, which could adversely affect
our gross margins and results of operations.
The protection of our intellectual property rights and the
defense of claims of infringement against us by third parties may subject us to costly litigation.
Other companies might allege that we are
infringing certain of their patents or other rights. If we are unable to resolve these matters satisfactorily, or to obtain licenses
on acceptable terms, we may face litigation. Any litigation to enforce patents issued to us, to protect trade secrets or know-how
possessed by us or to defend us or indemnify others against claimed infringement of the rights of others could have a material
adverse effect on our financial condition and operating results. Regardless of the validity or successful outcome of any such intellectual
property claims, we may need to expend significant time and expense to protect our intellectual property rights or to defend against
claims of infringement by third parties, which could have a material adverse effect on us. If we lose any such litigation where
we are alleged to infringe the rights of others, we may be required to:
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pay substantial damages;
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seek licenses from others; or
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change, or stop manufacturing or selling, some or all of our products.
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Any of these outcomes could have an adverse
effect on our business, results of operations or financial condition.
We are subject to numerous environmental laws and regulations,
which could expose us to environmental liabilities, increase our manufacturing and related compliance costs or otherwise adversely
affect our business and operating results.
In our manufacturing process, we use water,
oils, slurries, acids, adhesives and other industrial chemicals. We are subject to a variety of foreign, federal, state and local
laws and regulations governing the protection of the environment. These environmental laws and regulations include those relating
to the use, storage, handling, discharge, emission, disposal and reporting of toxic, volatile or otherwise hazardous materials
used in our manufacturing processes. These materials may have been or could be released into the environment at properties currently
or previously operated by us, at other locations during the transport of the materials, or at properties to which we send substances
for treatment or disposal. If we were to violate or become liable under environmental laws and regulations or become non-compliant
with permits required at some of our facilities, we could be held financially responsible and incur substantial costs, including
investigation and cleanup costs, fines and civil or criminal sanctions, third-party property damages or personal injury claims.
In addition, new laws and regulations or stricter enforcement of existing laws and regulations could give rise to additional compliance
costs and liabilities.
Our operations are concentrated in two facilities, and the
unavailability of one or both of these facilities could harm our business.
Our manufacturing, research and development,
sales and marketing, and administrative activities are concentrated in two facilities in the Chicago metropolitan area. Should
a casualty, natural disaster, inclement weather, an act of terrorism, an outbreak of disease, power loss, an act of terrorism or
similar event affect the Chicago area, our operations could be significantly impacted. We may not be able to replicate the manufacturing
capacity and other operations of our Chicago facilities or such replication could take significant time and resources to accomplish.
The disruption from such an event could adversely affect or interrupt entirely our ability to conduct our business.
Our U.S. net operating loss carryforwards may expire or could
be substantially limited if we experience an ownership change as defined in the Internal Revenue Code (“IRC”) or if
changes are made to the IRC.
We
have significant U.S. net operating loss carryforwards (the “Tax Attributes”). Under federal tax laws, we can carry
forward and use our Tax Attributes to reduce our future U.S. taxable income and tax liabilities until such Tax Attributes expire
in accordance with the Internal Revenue Code of 1986, as amended (the “IRC”). Our NOLs and carry-forwards provide
a benefit to us, if fully utilized, of significant future tax savings. However, our ability to use these tax benefits in future
years will depend upon the amount of our federal and state taxable income. If we do not have sufficient federal and state income
in future years to use the benefits before they expire, we will permanently lose the benefit of the NOLs. Our ability to use the
tax benefits associated with our NOLs is dependent upon our generation of future taxable profits and our ability to successfully
identify and acquire suitable acquisition or investment candidates.
Additionally, Section 382 and Section 383 of the IRC provide an annual limitation on our
ability to utilize our Tax Attributes, as well as certain built-in-losses, against future U.S. taxable income in the event of
a change in ownership, as defined under the IRC. While we have implemented a stockholder’s right plan to protect the
net operating loss carryforwards, there is no assurance that we will not experience a change in ownership in the future as a
result of changes in our stock ownership, and any such subsequent changes in ownership for purposes of the IRC could further
limit our ability to use our Tax Attributes.
Under the recently enacted Tax Cut and Jobs Act, U.S. NOLs generated on or after January 1, 2018
could be limited to 80 percent of taxable income. If other changes were made to the IRC, they could impact our ability
to utilize our net operating losses. Accordingly, any such occurrences could adversely affect our financial condition,
operating results and cash flows.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
The trading price of our common stock
has been and will likely continue to be volatile due to various factors, some of which are beyond our control, and each of which
could adversely affect our stockholders’ value.
Factors related to our Company and our
business, as well as broad market and industry factors, may adversely affect the market price of our common stock, regardless of
our actual operating performance. Such factors that could cause fluctuations in our stock price include, among other things:
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changes in market valuations of other companies in our industry;
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changes in financial guidance or estimates by us, by investors or by any financial analysts who might cover our stock or our
industry;
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our ability to meet the performance expectations of financial analysts or investors;
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our ability to develop and market new and enhanced products on a timely basis;
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announcements by us or our competitors of significant products, contracts, acquisitions or strategic partnerships;
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general market and economic conditions; and
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the size of the public float of our stock.
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Our certificate of incorporation, bylaws and Delaware law
may discourage takeovers and business combinations that our stockholders might consider in their best interests.
A number of provisions in our certificate
of incorporation and bylaws, as well as anti-takeover provisions of Delaware law, may have the effect of delaying, deterring, preventing
or rendering more difficult a change in control of Rubicon that our stockholders might consider in their best interests. These
provisions include:
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a classified Board of Directors;
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a
tax benefits preservation plan designed to preserve our ability to utilize our net operating
losses as a result of certain stock ownership changes, which may have the effect of discouraging
transactions involving an actual or potential change in our ownership;
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granting to the Board of Directors sole power to set the number of directors and to fill any vacancy on the Board of Directors,
whether such vacancy occurs as a result of an increase in the number of directors or otherwise;
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limitations on the ability of stockholders to remove directors;
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the ability of our Board of Directors to designate and issue one or more series of preferred stock without stockholder approval,
the terms of which may be determined at the sole discretion of the Board of Directors;
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prohibition on stockholders from calling special meetings of stockholders;
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prohibition on stockholders from acting by written consent; and
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establishment of advance notice requirements for stockholder proposals and nominations for election to the Board of Directors
at stockholder meetings.
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These provisions may prevent our stockholders
from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context.
Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of
our common stock if they are viewed as discouraging takeover attempts in the future.
The foregoing provisions of our certificate
of incorporation and bylaws may also make it difficult for stockholders to replace or remove our management. These provisions may
facilitate management entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not
be in the best interests of our stockholders.
We are subject to litigation risks, including securities
class action litigation, which may be costly to defend.
All industries, including ours, are subject
to legal claims, including securities litigation. When the market price of a stock declines significantly, due to factors such
as trends in the stock market in general, broad market and industry fluctuations or operating performance, holders of that stock
have sometimes instituted securities class action litigation against the company that issued the stock. This sort of litigation
can be particularly costly and may divert the attention of our management and our resources in general. We have been subject to
securities class action litigation in the past, as disclosed in our previous filings with the SEC. Due to the inherent uncertainty
of the litigation process, the resolution of any particular legal claim or proceeding (including by settlement) could have a material
effect on our business, financial condition, results of operations or cash flows. Further, uncertainties resulting from the initiation
and continuation of securities or other litigation could harm our ability to obtain credit and financing for our operations and
to compete in the marketplace.
Our Board of Directors does not intend to declare or pay
any dividends to our stockholders in the foreseeable future.
The declaration, payment and amount of
any future dividends will be made at the discretion of our Board of Directors and will depend upon, among other things, the results
of our operations, cash flows and financial condition, operating and capital requirements, and other factors the Board of Directors
considers relevant. There is no plan to pay dividends in the foreseeable future, and if dividends are paid, there can be no assurance
with respect to the amount of any such dividend.
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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Disclosure under this item is not required,
as the registrant is a smaller reporting company.
Our
executive, research and development and manufacturing functions are located on properties that we lease or own. We lease properties
in Franklin Park, Illinois and Bensenville, Illinois. These facilities total approximately 62,000 square feet in two buildings,
which includes 30,000 square feet in our Bensenville, Illinois facility and 32,000 square feet in our Franklin Park, Illinois
facility. The Franklin Park, Illinois facility is primarily used for manufacturing. The Bensenville, Illinois facility houses
crystal growth, research and development and our corporate executive offices. The leases for the Franklin Park, Illinois and Bensenville,
Illinois facilities terminate in July 2018 and June 2019, respectively.
Future minimum payments under these leases, in the aggregate
are as follows:
Year ending December 31,
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Lease Payments (in
thousands)
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2018
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|
$
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468
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2019
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|
145
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|
In
addition, we own a 134,400 square foot facility in Batavia, Illinois previously used for crystal growth, manufacturing, research
and development and office space. We also own a parcel of extra land in Batavia, Illinois which was acquired in 2012 for future
expansion. In addition, we own a 65,000 square foot facility in Penang, Malaysia previously used for manufacturing operations.
All of the real property we own are currently available for sale or lease and are actively being marketed.
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ITEM 3.
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LEGAL PROCEEDINGS
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From time to time, we, our subsidiaries
and/or our directors and officers may be named in claims arising in the ordinary course of business. Management believes that there
are no pending legal proceedings involving us or any of our subsidiaries that will, individually or in the aggregate, have a material
adverse effect on our consolidated results of operations or financial condition.
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ITEM 4.
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MINE SAFETY DISCLOSURES
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Not applicable.
The accompanying notes are an integral part
of these consolidated statements.
The accompanying notes are an integral part
of these consolidated statements.
The accompanying notes are an integral
part of these consolidated statements.
The accompanying notes are an integral part
of these consolidated statements.
The accompanying notes are an integral part
of these consolidated statements.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
Rubicon Technology, Inc., a Delaware corporation
(the “Company”), is a vertically integrated, advanced materials provider specializing in monocrystalline sapphire for
applications in optical and industrial systems. The Company sells its products on a global basis to customers in Asia, Australia,
North America and Europe. The Company maintains its operating facilities in the Chicago metropolitan area.
Principles of consolidation
The Consolidated Financial Statements include
the accounts of the Company and its wholly owned subsidiaries, Rubicon Technology Worldwide LLC, Rubicon Sapphire Technology (Malaysia)
SDN BHD, and Rubicon Technology Hong Kong Limited. All intercompany transactions and balances have been eliminated in consolidation.
A summary of the Company’s significant
accounting policies applied in the preparation of the accompanying Consolidated Financial Statements follows.
Cash and cash equivalents
The Company considers all unrestricted
highly liquid investments immediately available to be cash equivalents. Cash equivalents primarily consist of time deposits with
banks, unsettled trades and brokerage money market accounts.
Restricted cash
A summary of the Company’s restricted
cash at December 31, 2017 and 2016 is as follows:
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As of December 31,
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|
2017
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|
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2016
|
|
|
|
(in thousands)
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|
Certificates of deposit
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|
$
|
5
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$
|
5
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|
Flexible spending funds
|
|
|
3
|
|
|
|
2
|
|
Fixed deposit pledge
|
|
|
173
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
181
|
|
|
$
|
163
|
|
Foreign currency translation and transactions
Rubicon Technology Worldwide LLC and Rubicon
Technology Hong Kong Limited assets and liabilities are translated into U.S. dollars at exchange rates existing at the respective
balance sheet dates and capital accounts at historical exchange rates. The results of operations are translated into U.S. dollars
at the average exchange rates during the respective period. Translation adjustments resulting from fluctuations in exchange rates
for Rubicon Technology Worldwide LLC and Rubicon Technology Hong Kong Limited are recorded as a separate component of accumulated
other comprehensive income (loss) within stockholders’ equity.
The Company has determined that the functional
currency of Rubicon Sapphire Technology (Malaysia) SDN BHD is the U.S. dollar. Rubicon Sapphire Technology (Malaysia) SDN BHD’s
assets and liabilities are translated into U.S. dollars using the remeasurement method. Non-monetary assets are translated at historical
exchange rates and monetary assets are translated at exchange rates existing at the respective balance sheet dates. Translation
adjustments for Rubicon Sapphire Technology (Malaysia) SDN BHD are included in determining net income (loss) for the period. The
results of operations are translated into U.S. dollars at the average exchange rates during the respective period. The Company
records these gains and losses in other income (expense).
Rubicon Technology, Inc.
Notes
to Consolidated Financial Statements—(Continued)
Foreign currency transaction gains and
losses are generated from the effects of exchange rate changes on transactions denominated in a currency other than the functional
currency of the Company, which is the U.S. dollar. Gains and losses on foreign currency transactions are generally required to
be recognized in the determination of net income (loss) for the period. The Company records these gains and losses in other income
(expense).
Investments
When the Company invests available cash,
it primarily invests it in investment grade commercial paper, corporate notes, FDIC guaranteed certificates of deposit, common
stock and government securities. Investments classified as available-for-sale securities are carried at fair market value with
unrealized gains and losses recorded in accumulated other comprehensive income (loss). Investments in trading securities are reported
at fair value, with both realized and unrealized gains and losses recorded in other income (expense), in the consolidated statements
of operations. Investments in which the Company has the ability and intent, if necessary, to liquidate are classified as short-term.
The Company reviews its available-for-sale
securities investments at the end of each quarter for other-than-temporary declines in fair value based on the specific identification
method. The Company considers various factors in determining whether an impairment is other-than-temporary, including the severity
and duration of the impairment, changes in underlying credit ratings, forecasted recovery, its ability and intent to hold the investment
for a period of time sufficient to allow for any anticipated recovery in market value and the probability that the scheduled cash
payments will continue to be made. When the Company concludes that an other-than-temporary impairment has resulted, the difference
between the fair value and carrying value is written off and recorded as a charge on the consolidated statements of operations.
As of December 31, 2017 and 2016, no impairment was recorded.
Treasury stock
The Company records treasury stock purchases
under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock.
Accounts receivable
The majority of the Company’s accounts
receivable is due from defense sub-contractors, 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.
Accounts outstanding longer than the contractual
payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length
of time a 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.
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
The following table shows the activity
of the allowance for doubtful accounts:
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|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
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(in thousands)
|
|
Beginning balance
|
|
$
|
31
|
|
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$
|
389
|
|
Charges to costs and expenses
|
|
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(20
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)
|
|
|
(235
|
)
|
Accounts write offs, less recoveries
|
|
|
(4
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)
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|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
7
|
|
|
$
|
31
|
|
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 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. For the years ended December
31, 2017 and 2016, the Company determined it had excess or obsolete inventory and recorded an adjustment which reduced inventory
and increased costs of goods sold by $1.4 million and $130,000, respectively. The Company’s method of estimating excess and
obsolete inventory has remained consistent for all periods presented.
At times in 2017 and 2016, the Company
has accepted sales orders for core and wafer products at prices lower than cost. Based on these sales prices, the Company recorded
for the years ended December 31 2017 and 2016, a lower of cost or market adjustment which reduced inventory and increased
cost of goods sold by $97,000 and $1.1 million, respectively.
Low prices and a worldwide over supply
of material has significantly limited the sales of the Company’s two-inch diameter core. Therefore, two-inch diameter core
is considered to be in excess. Since it can be recycled and used as raw material to grow new crystals, two-inch diameter core material
has been written down to raw material value and for the years ended December 31, 2017 and 2016 an excess and obsolete adjustment
was recorded which reduced inventory and increased cost of goods sold by $310,000 and $2.3 million, respectively.
With the decision to exit the LED market,
the discontinuation of polished and patterned wafer production will result in a significant decrease in crystal growth production
and thus impact the amount of raw material needed for future production. Accordingly, raw material in excess of the amount needed
for future production has been written down and for the year ended December 31, 2016, an excess and obsolete adjustment was recorded
which reduced inventory and increased cost of goods sold by $4.0 million. The Company evaluates the amount of raw material needed
for future production based on expected crystal growth production needed to meet anticipated sales. Based on this review, the Company
determined to lower its expected requirements for raw material inventory supply from five to three years and that it had excess
material needed for future production. For the year ended December 31, 2017, an excess and obsolete adjustment for raw material
was recorded which reduced inventory and increased cost of goods sold by $2.4 million.
In addition, for the year ended December
31, 2017, the Company determined it had excess inventory of lower quality sapphire crystals and recorded an adjustment which reduced
inventory and increased cost of goods sold by $451,000.
For
the years ended December 31, 2017 and 2016, amounts charged to cost of goods sold for all inventory write downs were $4.7 million
and $7.5 million, respectively.
Inventories are composed of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
476
|
|
|
$
|
3,112
|
|
Work-in-process
|
|
|
2,334
|
|
|
|
4,251
|
|
Finished goods
|
|
|
220
|
|
|
|
637
|
|
|
|
$
|
3,030
|
|
|
$
|
8,000
|
|
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
Other inventory supplies
The Company’s other inventory supplies
include stock of consumable and spare parts used in the manufacturing process. With the decision to focus on optical and industrial
products, the Company determined it had consumable parts stock that was obsolete and recorded for the years ended December 31,
2017 and 2016 a consumable stock write-down of $256,000 and $3.2 million, respectively.
Property and equipment
Property and equipment consisted of the
following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Machinery, equipment and tooling
|
|
$
|
6,105
|
|
|
$
|
17,769
|
|
Leasehold improvements
|
|
|
4,624
|
|
|
|
4,624
|
|
Information systems
|
|
|
819
|
|
|
|
991
|
|
Furniture and fixtures
|
|
|
8
|
|
|
|
699
|
|
Construction in progress
|
|
|
—
|
|
|
|
263
|
|
Total cost
|
|
|
11,556
|
|
|
|
24,346
|
|
Accumulated depreciation and amortization
|
|
|
(10,741
|
)
|
|
|
(17,236
|
)
|
Property and equipment, net
|
|
$
|
815
|
|
|
$
|
7,110
|
|
Property and equipment are carried at cost
and depreciated over their estimated useful lives using the straight-line method. The cost of maintenance and repairs is charged
to expense as incurred. Significant renewals and improvements are capitalized. Depreciation and amortization expense associated
with property and equipment was $1.2 million and $6.1 million for the years ended December 31, 2017 and 2016, respectively.
Construction in progress includes costs
associated with the construction of furnaces and deposits made on equipment purchases.
The estimated useful lives are as follows:
Asset description
|
|
Life
|
Buildings
|
|
39 years
|
Machinery, equipment and tooling
|
|
3-10 years
|
Leasehold improvements
|
|
Lesser of life of lease or economic life
|
Furniture and fixtures
|
|
7 years
|
Information systems
|
|
3 years
|
Other assets
The Company’s other assets include
overhaul costs that are accounted for using the deferral method. These overhaul costs are recorded at cost on the balance sheet
as other assets and are amortized over terms in accordance with their respectful useful lives.
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
Warranty cost
The Company’s sales terms include
a warranty that its products will meet certain specifications. The Company records a current liability for the expected cost of
warranty-related claims at the time of sale. The warranty reserve is included in accrued and other current liabilities on the Consolidated
Balance Sheets.
The following table presents changes in
the Company’s product warranty liability:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Balance, beginning of period
|
|
$
|
27
|
|
|
$
|
73
|
|
Charged to cost of sales
|
|
|
20
|
|
|
|
(1
|
)
|
Actual product warranty expenditures
|
|
|
(32
|
)
|
|
|
(45
|
)
|
Balance, end of period
|
|
$
|
15
|
|
|
$
|
27
|
|
Fair value of financial instruments
The Company’s financial instruments
consist primarily of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable. The carrying
values of these assets and liabilities approximate their fair values due to the short-term nature of these instruments at December 31,
2017 and 2016.
Concentration of credit risks and other risks and uncertainties
Financial instruments that could potentially
subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, short term
investments and accounts receivable. At December 31, 2017 and 2016, the Company had $1.2 million and $681,000, respectively,
on deposit at foreign financial institutions. At December 31, 2017 and 2016, the Company had $6.8 million and $6.4 million,
respectively, on deposit at financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation and
other foreign governmental insurance agencies. The Company performs a periodic evaluation of these institutions for relative credit
standing. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant
risk of loss on these balances.
The Company uses third parties for certain
finishing functions for its products, including the slicing and polishing of its sapphire crystal inventory. These types of
services are only available from a limited number of third parties. The Company’s ability to successfully outsource
these finishing functions will substantially depend on its ability to develop, maintain and expand its strategic relationship with
these third parties. As a result, the Company may be unable to meet the demand for its products, which could have a material adverse
impact on the Company.
Concentration of credit risk related to
revenue and accounts receivable is discussed in Note 4.
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
Revenue recognition
Revenues recognized include product sales
and billings for costs and fees for government contracts.
Product Sales
The Company recognizes revenue from product
sales when earned. Revenue is recognized when, and if, evidence of an arrangement is obtained and the other criteria to support
revenue recognition are met, including:
|
●
|
Persuasive evidence of an arrangement exists
. The Company requires evidence of a purchase order with the customer
specifying the terms and specifications of the product to be delivered, typically in the form of a signed quotation or purchase
order from the customer;
|
|
●
|
Title has passed and the product has been delivered.
Title passage and product delivery generally occur when the
product is delivered to a common carrier or per terms of a consignment agreement;
|
|
●
|
The price is fixed or determinable
. All terms are fixed in the signed quotation or purchase order received from
the customer. The purchase orders do not contain rights of cancellation, return, exchange or refund; and
|
|
●
|
Collection of the resulting receivable is reasonably assured.
The Company’s standard arrangement with customers
includes payment terms. Customers are subject to a credit review process that evaluates each customer’s financial position
and its ability to pay. Collectability is determined by considering the length of time the customer has been in business and history
of collections. If it is determined that collection is not probable, no product is shipped and no revenue is recognized unless
cash is received in advance.
|
Government Contracts
The Company recognizes research and development
revenue in the period during which the related costs are incurred over the contractually defined period. In July 2012, the Company
signed a contract with the Air Force Research Laboratory (the LANCE government contract) to produce large-area sapphire windows
on a cost plus fixed fee basis. The Company records revenue on a gross basis as costs are incurred plus a portion of the fixed
fee. For the years ended December 31, 2017 and 2016, $394,000 and $289,000, respectively, of revenue was recorded. At December
31, 2017 and 2016, the estimated costs to complete the contract were in excess of the contract value. For the years ended December
31, 2017 and 2016, the Company accrued $26,000 and $217,000, respectively for the estimated costs of completion. To date, the Company
has recorded $4.7 million in revenue and the total value of the contract is $4.7 million.
The Company does not provide maintenance
or other services and it does not have sales that involve multiple elements or deliverables.
Shipping and handling costs
The Company records costs incurred in connection
with shipping and handling of products as cost of goods sold. Amounts billed to customers in connection with these costs are included
in revenue and are not material for any of the periods presented in the accompanying financial statements.
Sales tax
The Company collects and remits sales taxes
on products sold to customers and reports such amounts under the net method in its Consolidated Statements of Operations and records
a liability until remitted to the respective tax authority.
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
Stock-based compensation
The Company requires all share-based payments
to employees, including grants of employee stock options to be measured at fair value and expensed in the Consolidated Statements
of Operations over the service period (generally the vesting period) of the grant. Expense is recognized in the Consolidated Statements
of Operations for these share-based payments.
Research and development
Research and development costs are expensed
as incurred. Research and development expense was $962,000 and $2.5 million for the years ended December 31, 2017 and 2016,
respectively.
Accounting for uncertainty in income taxes
The Company recognizes the tax benefit
from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions
are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. The Company
recognizes interest and/or penalties related to income tax matters in income tax expense. There were no interest or penalties related
to income taxes that have been accrued or recognized as of and for the years ended December 31, 2017 and 2016.
The Company is subject to taxation in the
U.S. and in a state jurisdiction. The Company is exempt from Malaysian income tax for a five-year period beginning in 2009 with
a five-year renewal. As of December 31, 2016, the Company requested the Malaysian government to modify the tax holiday to allow
it to extend through 2016 even though the Company did not meet the original requirements. Due to the uncertainty of the modification
being granted, at December 31, 2016 the Company recorded a current income tax provision for Malaysia income taxes with the expectation
that the holiday will not be granted. During 2017, the Company was granted approval for extension of the holiday and the provision
was reversed. Due to the existence of net operating loss carryforwards, tax years ended December 31, 2001 through 2006, 2008,
2009 and 2011 through 2016 are open to examination by tax authorities for Federal purposes. Due to net operating loss carryforwards
at the State level, tax years ended 2004 through 2006 and 2008 through 2016 are open to examination by state tax authorities. Tax
years 2013 through 2016 are open to examination by tax authorities in Malaysia.
Income taxes
Deferred tax assets and liabilities are
provided for temporary differences between financial reporting and income tax bases of assets and liabilities, and are measured
using the enacted tax rates and laws expected to be in effect when the differences will reverse. Deferred income taxes also arise
from the future benefits of net operating loss carryforwards. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. Full valuation allowances on net deferred tax assets are maintained until an
appropriate level of profitability that generates taxable income is deemed sustainable or until a tax strategy is developed that
would enable the Company to conclude that it is more likely than not that a portion of the deferred tax assets will be realizable.
Based on an evaluation in accordance with the accounting standards, as of December 31, 2017 and 2016, a valuation allowance
has been recorded against the net U.S. and Malaysia deferred tax assets in order to measure only the portion of the deferred tax
assets that are more likely than not to be realized based on the weight of all the available evidence.
Use of estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
Other comprehensive loss
Comprehensive loss is defined as the change
in equity of a business enterprise from transactions and other events from non-owner sources. Comprehensive loss includes net loss
and other non-owner changes in equity that bypass the statement of operations and are reported in a separate component of equity.
A summary of the components of comprehensive loss for the years ended December 31, 2017 and 2016 follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Unrealized loss on investments, net of tax
|
|
$
|
(2
|
)
|
|
$
|
(12
|
)
|
Unrealized loss on currency translation
|
|
|
(1
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(3
|
)
|
|
$
|
(30
|
)
|
Net loss per common share
Basic net loss per share is computed by
dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share
is computed by dividing net loss by the weighted average number of diluted common shares outstanding during the period. Diluted
shares outstanding are calculated by adding to the weighted shares outstanding any common stock equivalents, outstanding stock
options and warrants based on the treasury stock method.
Diluted net loss per common share is the
same as basic net loss per common share for the years ended December 31, 2017 and 2016 because the effects of potentially
dilutive securities are anti-dilutive.
New accounting pronouncements adopted
In March 2016, the FASB issued ASU No. 2016-09
(“ASU 2016-09”),
Compensation—Stock Compensation
(
Topic 718): Improvements to Employee Share-Based
Payment Accounting
which modifies several aspects of the accounting for share-based payment transactions, including income
tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The Company adopted ASU 2016-09 at January 1, 2017, and the impact of adopting ASU 2016-09 for the twelve months ended December
31, 2017 was that the Company was required to bring the deferred tax assets related to off balance net operating losses onto the
balance sheet. This increased the Company’s deferred tax assets by $10.3 million with a corresponding entry to retained earnings.
Since the Company continues to be in a full valuation allowance, there was an entry made to the valuation allowance to offset the
increase to the deferred tax assets with a corresponding entry to retained earnings.
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 annual reporting periods beginning after December 15, 2018. Early adoption
is permitted. The Company is evaluating the impact, if any, of adopting ASU 2016-02 on its financial statements.
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
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 (early adoption is not permitted). The guidance permits the use of either a retrospective or cumulative
effect transition method. In May 2016, the FASB issued ASU No. 2016-12, (“ASU 2016-12”), Revenue from Contracts
with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This update clarifies the objectives of collectability,
sales and other taxes, noncash consideration, contract modifications at transition, completed contracts at transition and technical
correction. The amendments in this update affect the guidance in ASU 2014-09. 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 will adopt 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 will 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 (Topic230): Classification of Certain Cash Receipts and Cash Payments
which adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The
standard addresses eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective
for the interim and annual periods beginning after December 15, 2017 with early adoption permitted. The Company does not anticipate
that the adoption of ASU 2016-15 will 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 (Topic230): 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
does not anticipate that the adoption of ASU 2016-18 will have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No.
2017-01 (“ASU 2017-01”),
Business Combinations (Topic 805): Clarifying the Definition of a Business
. This update
clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions
should be accounted for as acquisitions (or disposal) of assets or businesses. The update provides new guidance to determine when
an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The guidance requires
that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable
asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 is effective for the interim and annual
periods beginning after December 15, 2017 with early adoption permitted. The Company does not anticipate that the adoption
of ASU 2017-01 will have a material impact on its consolidated financial statements.
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
2. SEGMENT INFORMATION
The Company has determined that it operates
in only one segment as it only reports profit and loss information on an aggregate basis to its chief operating decision maker.
Revenue is attributed by geographic region
based on ship-to location of the Company’s customers. The following table summarizes revenue by geographic region:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
3,158
|
|
|
$
|
3,364
|
|
Canada
|
|
|
899
|
|
|
|
876
|
|
Israel
|
|
|
715
|
|
|
|
398
|
|
Turkey
|
|
|
154
|
|
|
|
47
|
|
Germany
|
|
|
33
|
|
|
|
8,945
|
|
Malaysia
|
|
|
—
|
|
|
|
2,880
|
|
Korea
|
|
|
—
|
|
|
|
1,486
|
|
Taiwan
|
|
|
14
|
|
|
|
847
|
|
Australia
|
|
|
—
|
|
|
|
509
|
|
China
|
|
|
6
|
|
|
|
222
|
|
Other
|
|
|
65
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
5,044
|
|
|
$
|
19,630
|
|
The following table summarizes sales by
product type:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
Optical
|
|
$
|
4,615
|
|
|
$
|
4,568
|
|
Wafer
|
|
|
9
|
|
|
|
13,121
|
|
Core
|
|
|
26
|
|
|
|
1,652
|
|
Research & development
|
|
|
394
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
5,044
|
|
|
$
|
19,630
|
|
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
The following table summarizes assets by
geographic region:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
United States
|
|
$
|
30,037
|
|
|
$
|
47,171
|
|
Malaysia
|
|
|
5,007
|
|
|
|
5,811
|
|
Other
|
|
|
4
|
|
|
|
31
|
|
Total assets
|
|
$
|
35,048
|
|
|
$
|
53,013
|
|
3. INVESTMENTS
When the Company invests available cash,
it primarily invests it in investment grade commercial paper, corporate notes, FDIC guaranteed certificates of deposit, common
stock and government securities. 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 gains and 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
|
|
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
The Company did not have any short-term
investments as of December 31, 2016.
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 high-quality, investment grade commercial paper, FDIC guaranteed certificates of deposits, corporate notes
and government securities. The Company values these securities based on pricing from pricing vendors, who may use quoted prices
in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly
or indirectly (Level 2 inputs) in determining fair value. The valuation techniques used to measure the fair value of the 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 December 31, 2017:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
4,575
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,575
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sales securities—current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
—
|
|
|
|
4,993
|
|
|
|
—
|
|
|
|
4,993
|
|
Corporate notes/bonds
|
|
|
—
|
|
|
|
1,458
|
|
|
|
—
|
|
|
|
1,458
|
|
Total
|
|
$
|
4,575
|
|
|
$
|
6,451
|
|
|
$
|
—
|
|
|
$
|
11,026
|
|
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
The following table summarizes the Company’s
financial assets measured at fair value on a recurring basis as of December 31, 2016:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
10,949
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,949
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sales securities—current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FDIC guaranteed certificates of deposit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Corporate notes/bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
10,949
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,949
|
|
There are no terms or conditions restricting
the Company from redeeming any of its investments.
In addition to the debt securities noted
above, the Company had approximately $6.9 million and $6.7 million of time deposits included in cash and cash equivalents as of
December 31, 2017 and 2016, respectively.
4. SIGNIFICANT CUSTOMERS
For the year ended December 31, 2017,
the Company had two customers that accounted for approximately 18% and 13% of its revenue. For the year ended December 31,
2016, the Company had one customer that accounted for approximately 60% of its revenue.
Customers individually representing more
than 10% of trade receivables accounted for approximately 69% and 75% of accounts receivable as of December 31, 2017 and 2016,
respectively. The Company grants credit to customers based on an evaluation of their financial condition. Losses from credit sales
are provided for in the financial statements.
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
5. LONG-LIVED ASSET IMPAIRMENT CHARGES
When circumstances, such as adverse market
conditions, indicate that the carrying value of a long-lived asset may be impaired, the Company performs an analysis to review
the recoverability of the 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 September 2016, as the Company believed
the prospects of becoming profitable in the LED substrate market to be unlikely for the foreseeable future, the Company announced
its decision to limit its focus to the optical and industrial sapphire markets and to exit the LED market. This resulted in closing
of the Malaysia facility. In the fourth quarter of 2016, the Company developed a plan to scale down the remaining operations and
sell additional assets that would not be needed for the Company’s business plan. In this regard, the Company identified
excess U.S. machinery, equipment and facilities. The Company engaged an independent valuation company to assist in the determination
of the fair value of assets to provide an updated valuation of the U.S. and Malaysia machinery and equipment. The Company evaluated
its U.S. asset portfolio for the assets continuing to be used in operations using a cost and market approach to determine the
current fair value. The Company evaluated its Malaysia asset portfolio and excess U.S. assets based on assuming an orderly liquidation
plan which considers economic obsolescence and sales of comparable equipment, as it is the Company’s intention to sell these
assets. Based on this review, the Company recorded for the year ended December 31, 2016 an asset impairment charge on U.S. and
Malaysia machinery and equipment of $12.3 million.
At September 30, 2017, the Company
reviewed the current fair value of its assets. With the scaling down of the Company’s U.S. operations, the Company identified
at September 30, 2017, additional assets that will not be needed. The Company reduced the net book value of certain machinery and
equipment and recorded an asset impairment charge of $675,000. At December 31, 2017, the Company reviewed the current fair
value of the U.S. and Malaysia machinery and equipment. An impairment charge of $354,000 was recorded on lower expected sales prices
for assets held for sale and identification of additional assets that will not be needed to support current operations.
The Company is actively pursuing the sale
or lease of a 134,400 square foot manufacturing and office facility in Batavia, Illinois, a parcel of extra land the Company
owns in Batavia, Illinois, and a 65,000 square foot facility in Penang, Malaysia. Since the expected sale price is below the book
value of these properties, for the year ended December 31, 2016, an impairment charge of $14.3 million was recorded. For the
year ended December 31, 2017, the expected sale price for the Batavia, Illinois facility and parcel of extra land was further
reduced resulting in recording an additional impairment charge of $4.0 million.
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 cannot guarantee that it will
be able to successfully complete the sale or lease of any assets.
Rubicon Technology, Inc.
Notes
to Consolidated Financial Statements—(Continued)
The table below summarizes the non-financial
assets that were measured and recorded at fair value on a non-recurring basis as of December 31, 2017 and loss recorded during
the twelve months ended December 31, 2017 on those assets:
|
|
Carrying value at December 31, 2017
|
|
|
Quoted prices in active markets for identical assets (Level 1)
|
|
|
Significant other observable inputs
(Level 2 )
|
|
|
Significant unobservable inputs (Level 3 )
|
|
|
Loss for twelve months ended December 31, 2017
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets held and used
|
|
$
|
815
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
815
|
|
|
$
|
1,028
|
|
Long-lived assets held for sale
|
|
|
11,202
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,202
|
|
|
|
4,023
|
|
Total nonrecurring for value measurements
|
|
$
|
12,017
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,017
|
|
|
$
|
5,051
|
|
At December 31, 2017 long-lived assets have
been reclassified from Level 2 assets to Level 3 assets as the determination of fair value for the year ended December 31, 2017
included inputs that are not readily observable or easily corroborated by observable market data.
The table below summarizes the non-financial
assets that were measured and recorded at fair value on a non-recurring basis as of December 31, 2016 and loss recorded during
the twelve months ended December 31, 2016 on those assets:
|
|
Carrying value at December 31, 2016
|
|
|
Quoted prices in active markets for identical assets (Level 1)
|
|
|
Significant other observable inputs
(Level 2 )
|
|
|
Significant unobservable inputs (Level 3 )
|
|
|
Loss for twelve months ended December 31, 2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long lived assets held and used
|
|
$
|
7,110
|
|
|
$
|
—
|
|
|
$
|
7,110
|
|
|
$
|
—
|
|
|
$
|
12,264
|
|
Long lived assets held for sale
|
|
|
14,761
|
|
|
|
—
|
|
|
|
14,761
|
|
|
|
—
|
|
|
|
14,290
|
|
Total nonrecurring for value measurements
|
|
$
|
21,871
|
|
|
$
|
—
|
|
|
$
|
21,871
|
|
|
$
|
—
|
|
|
$
|
26,554
|
|
Rubicon Technology, Inc.
Notes
to Consolidated Financial Statements—(Continued)
6. STOCKHOLDERS’ EQUITY
Common stock
On
April 19, 2017, the Company received a staff determination letter from the Listing Qualifications Department of NASDAQ informing
the Company that it has failed to regain compliance with the minimum bid price requirement set forth in Listing Rule 5550(a) (2),
and that the Company’s common stock would be delisted from the NASDAQ Capital Market at the opening of business on April
28, 2017 unless the Company timely requested an appeal of this determination. On April 26, 2017, the Company submitted an appeal
requesting a hearing before a NASDAQ listing qualifications panel. With completion of the reverse stock split (described below)
the Company’s shares began trading above the required $1.00 per share closing bid price. On May 19, 2017, the Company received
notification from NASDAQ that the bid price deficiency had been cured and the Company is considered in compliance with all applicable
listing standards.
At the Company’s annual meeting of
stockholders held on May 3, 2017, the Company’s stockholders approved, (i) an amendment to the Company’s Eighth Amended
and Restated Certificate of Incorporation (as amended, the “Certificate of Incorporation”) to effect a reverse stock
split of the Company’s common stock in a range of 1-for-10 to 1-for-20, such ratio to be determined in the sole discretion
of the Board; and (ii) an amendment to the Certificate of Incorporation to decrease the Company’s authorized number of shares
of common stock to three times the number of shares of the Company’s common stock outstanding immediately following the reverse
stock split, rounded up to the nearest 100,000 shares. On May 3, 2017, following the annual meeting, the Board determined to effect
the reverse stock split at a ratio of 1-for-10, and the Company filed with the Secretary of State of the State of Delaware a Certificate
of Amendment to (a) implement the reverse stock split and (b) to reduce the number of authorized shares of common stock from 40,000,000
to 8,200,000, consequently reducing the number of total authorized shares from 45,000,000 to 13,200,000. The amendment, reverse
stock split and reduction in authorized shares were effective on May 5, 2017.
As a result of the reverse stock split,
every 10 shares of issued and outstanding common stock were automatically combined into one issued and outstanding share of common
stock. Following the amendment to the Certificate of Incorporation, the Company has a total of 13,200,000 authorized shares, comprised
of (i) 8,200,000 shares of common stock and (ii) 5,000,000 shares of preferred stock.
Stockholders
received cash in lieu of any fractional shares resulting from the reverse stock split in a proportionate amount equal to $0.78
per pre-split share based on the average closing price of the Common Stock for the 30 trading days immediately preceding the effective
date of the reverse stock split.
The Company’s consolidated financial
statements, related notes and other financial data contained in this report have been adjusted to give the retroactive effect to
the decreased authorization and reverse stock split for all periods presented.
Common shares reserved
As of December 31, 2017, the Company
had reserved 147,948 shares of common stock for issuance upon the exercise of outstanding common stock options and vesting of restricted
stock units. Also 274,494 shares of the Company’s common stock were reserved for future grants of stock options and restricted
stock units (or other similar equity instruments) under the Rubicon Technology, Inc. 2016 Stock Incentive Plan (the “2016
Plan”) as of December 31, 2017.
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
7. 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, restricted stock units (“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 market value of
the common stock on the grant date. On June 24, 2016, the plan terminated with the adoption of the Rubicon Technology, Inc.
2016 Stock Incentive Plan, (the “2016 Plan”). Any existing awards under the 2007 Plan remain outstanding in accordance
with their current terms under the 2007 Plan.
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 market value,
the number of shares covered by the award, and the time when the award vests and may be exercised.
Pursuant to the 2016 Plan, 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 following table summarizes the activity
of the stock incentive and equity plans:
|
|
Shares
available
for grant
|
|
|
Number of
options
outstanding
|
|
|
Weighted-
average
option
exercise price
|
|
|
Number of
restricted
stock shares
issued
|
|
|
Number of
restricted
stock units
outstanding
|
|
Outstanding at January 1, 2016
|
|
|
73,227
|
|
|
|
285,157
|
|
|
$
|
70.67
|
|
|
|
20,146
|
|
|
|
45,402
|
|
Authorized
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(153,769
|
)
|
|
|
94,362
|
|
|
|
6.34
|
|
|
|
59,407
|
|
|
|
—
|
|
Exercised/issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13,368
|
)
|
Canceled/forfeited
|
|
|
133,760
|
|
|
|
(125,978
|
)
|
|
|
89.63
|
|
|
|
(3,070
|
)
|
|
|
(19,450
|
)
|
Outstanding at December 31, 2016
|
|
|
243,218
|
|
|
|
253,541
|
|
|
|
37.31
|
|
|
|
76,483
|
|
|
|
12,584
|
|
Granted
|
|
|
(85,071
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
21,209
|
|
|
|
63,862
|
|
Exercised/issued
|
|
|
—
|
|
|
|
(938
|
)
|
|
|
6.10
|
|
|
|
—
|
|
|
|
(53,625
|
)
|
Canceled/forfeited
|
|
|
116,347
|
|
|
|
(127,039
|
)
|
|
|
51.85
|
|
|
|
—
|
|
|
|
(437
|
)
|
Outstanding at December 31, 2017
|
|
|
274,494
|
|
|
|
125,564
|
|
|
$
|
19.53
|
|
|
|
97,692
|
|
|
|
22,384
|
|
The following table sets forth option grants
made during 2016 with intrinsic value calculated based on grant date fair value. No options were granted during 2017.
Date of grant
|
|
Number of
options
granted
|
|
|
Exercise
price
|
|
|
Intrinsic
value
per share
|
|
January – April 2016
|
|
|
5,112
|
|
|
|
$7.30 - $11.40
|
|
|
|
—
|
|
September 2016
|
|
|
89,250
|
|
|
$
|
6.10
|
|
|
|
—
|
|
There is no intrinsic value because the
exercise price per share of each option was equal to the fair value of the common stock on the date of grant.
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
At December 31, 2017, the exercise
prices of outstanding options were as follows:
Exercise price
|
|
Number of
options
outstanding
|
|
|
Average
remaining
contractual life
(years)
|
|
|
Number of
options
exercisable
|
|
$6.10 - $13.50
|
|
|
97,594
|
|
|
|
7.44
|
|
|
|
51,860
|
|
$40.10 - $52.00
|
|
|
23,197
|
|
|
|
1.70
|
|
|
|
22,089
|
|
$77.50 - $121.10
|
|
|
2,012
|
|
|
|
3.28
|
|
|
|
2,012
|
|
$194.90 - $326.70
|
|
|
2,761
|
|
|
|
1.79
|
|
|
|
2,761
|
|
|
|
|
125,564
|
|
|
|
4.31
|
|
|
|
78,722
|
|
The weighted average grant date fair value
of the options that became vested in the years ended 2017 and 2016 was $614,000 and $928,000, respectively.
The following table summarizes the activity
of non-vested options:
|
|
Non-vested
options
|
|
|
Weighted-
average option
exercise
price
|
|
Non-vested at January 1, 2016
|
|
|
125,196
|
|
|
$
|
22.32
|
|
Granted
|
|
|
94,362
|
|
|
|
6.34
|
|
Vested
|
|
|
(33,011
|
)
|
|
|
28.10
|
|
Cancelled
|
|
|
(37,564
|
)
|
|
|
25.10
|
|
Non-vested at December 31, 2016
|
|
|
148,983
|
|
|
|
10.20
|
|
Vested
|
|
|
(47,618
|
)
|
|
|
12.89
|
|
Cancelled
|
|
|
(54,523
|
)
|
|
|
9.50
|
|
Non-vested at December 31, 2017
|
|
|
46,842
|
|
|
$
|
8.26
|
|
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 December 31, 2017 and 2016, there was no aggregate intrinsic
value for options outstanding and exercisable.
For the year ended December 31, 2016,
the Company used historical stock prices as the basis for its volatility assumptions. The assumed risk-free rates were based on
U.S. Treasury rates in effect at the time of grant with a term consistent with the expected option lives. The expected term for
the year ended December 31, 2016 is based upon the Company’s median average life of its options. The forfeiture rate
is based on past history of forfeited options. The expense is being allocated using the straight-line method. For the years ended
December 31, 2017 and 2016, the Company recorded $277,000 and $527,000, respectively, of stock option compensation expense.
As of December 31, 2017, the Company has $177,000 of total unrecognized compensation cost related to non-vested options granted
under the Company’s stock-based plans that it expects to recognize over a weighted-average period of 1.92 years.
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
For the year ended December 31, 2016,
the assumptions used for the estimated fair value at the date of option grant using the Black-Scholes option-pricing model were
as follows:
|
|
2016
|
|
Weighted average fair value per option
|
|
$
|
6.34
|
|
Expected term
|
|
|
5.1 years
|
|
Risk free interest rate
|
|
|
1.24% -1.73%
|
|
Volatility
|
|
|
65
|
%
|
Dividend yield
|
|
|
None
|
|
Forfeiture rate
|
|
|
23.1
|
%
|
The Company used a Monte Carlo simulation
model valuation technique to determine the fair value of 59,098 RSUs granted in March 2017 to a key executive pursuant to an employment
agreement because the awards vest based upon achievement of market price targets of the Company’s common stock. 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 March 15, 2021.
Number of restricted stock units
|
|
Target price
|
|
15,000
|
|
$
|
6.50
|
|
15,000
|
|
$
|
8.00
|
|
15,000
|
|
$
|
9.50
|
|
14,098
|
|
$
|
11.00
|
|
During the twelve months ended December
31, 2017, the first three tranches of the grant vested.
When the negotiation of the terms of the
employment agreement began, the closing price of the common stock was approximately $5.50 per share. On the date of grant, the
closing price of the Company’s common stock was $6.30 per share.
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:
Daily expected stock price volatility
|
|
|
4.4237
|
%
|
Daily expected mean return on equity
|
|
|
(0.2226
|
%)
|
Daily expected dividend yield
|
|
|
0.0
|
%
|
Average daily risk free interest rate
|
|
|
0.0063
|
%
|
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
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. These RSUs had a grant date fair
value of $322,623.
A summary of the Company’s RSUs is
as follows:
|
|
RSUs
outstanding
|
|
|
Weighted average
price at
time of grant
|
|
|
Aggregate intrinsic
value
|
|
Non-vested restricted stock units as of January 1, 2016
|
|
|
45,402
|
|
|
$
|
19.18
|
|
|
|
|
|
Vested
|
|
|
(13,368
|
)
|
|
|
16.01
|
|
|
|
|
|
Cancelled
|
|
|
(19,450
|
)
|
|
|
23.45
|
|
|
|
|
|
Non-vested restricted stock units as of December 31, 2016
|
|
|
12,584
|
|
|
|
16.00
|
|
|
|
|
|
Granted
|
|
|
63,862
|
|
|
|
6.46
|
|
|
|
|
|
Vested
|
|
|
(53,625
|
)
|
|
|
9.41
|
|
|
|
|
|
Cancelled
|
|
|
(437
|
)
|
|
|
11.30
|
|
|
|
|
|
Non-vested at December 31, 2017
|
|
|
22,384
|
|
|
$
|
4.65
|
|
|
$
|
178,553
|
|
The fair value of each RSU is the market
price on the date of grant and is being recorded as compensation expense ratably over the vesting terms. For the years ended December 31,
2017 and 2016, the Company recorded $460,000 and $262,000 of RSU expense, respectively. The RSUs are forfeited by a participant
upon termination for any reason and there is no proportionate or partial vesting in the periods between the vesting dates. As of
December 31, 2017, there was $71,000 of unrecognized compensation cost related to the non-vested restricted stock units. This
cost is expected to be recognized over a weighted-average period of 0.41 years.
An analysis of restricted stock issued
is as follows:
Non-vested restricted stock as of January 1, 2016
|
|
|
1,520
|
|
Granted
|
|
|
59,407
|
|
Vested
|
|
|
(41,387
|
)
|
Cancelled/forfeited
|
|
|
(3,070
|
)
|
|
|
|
|
|
Non-vested restricted stock as of December 31, 2016
|
|
|
16,470
|
|
Granted
|
|
|
21,209
|
|
Vested
|
|
|
(32,775
|
)
|
|
|
|
|
|
Non-vested restricted stock as of December 31, 2017
|
|
|
4,904
|
|
For
the years ended December 31, 2017 and 2016, the Company recorded $160,000 and $559,000, respectively, of stock compensation
expense related to restricted stock.
Rubicon Technology, Inc.
Notes
to Consolidated Financial Statements—(Continued)
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. As a result, the provision for income taxes and effective tax rate in 2017 included a non-cash charge
of $28.0 million due primarily to the remeasurement of deferred tax assets and liabilities expected to apply when the temporary
differences are realized/settled at a rate of 21% versus 35%. As the Company is in a full valuation allowance position, an equal
benefit adjustment was recorded. Also, the Company estimated a deemed inclusion in the amount of $3.9 million related to the transition
tax on untaxed earnings overseas which was applied against the 2017 net operating loss. Estimates will true up within the measurement
period with the completion of filing of the federal and state tax returns.
Components of income before income taxes
and the income tax provision are as follows:
(Loss) before income taxes
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
U.S.
|
|
$
|
(17,104
|
)
|
|
$
|
(50,689
|
)
|
Foreign
|
|
|
(659
|
)
|
|
|
(12,413
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(17,763
|
)
|
|
$
|
(63,102
|
)
|
Income taxes
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
88
|
|
|
|
331
|
|
Total current income tax expense
|
|
|
88
|
|
|
|
331
|
|
Deferred
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
(554
|
)
|
Total deferred income tax expense (benefit)
|
|
|
—
|
|
|
|
(554
|
)
|
Total income tax expense (benefit)
|
|
$
|
88
|
|
|
$
|
(223
|
)
|
The reconciliation of income tax computed
at the federal statutory rate to income before taxes is as follows:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
U.S. Federal statutory rate
|
|
|
(33.6
|
)%
|
|
|
(34.0
|
)%
|
State taxes net of federal benefit
|
|
|
(4.9
|
)
|
|
|
(4.1
|
)
|
Impact of new federal tax rate
|
|
|
157.8
|
|
|
|
—
|
|
Foreign rate differential and transactional tax
|
|
|
0.3
|
|
|
|
1.8
|
|
Impact of foreign tax holiday
|
|
|
—
|
|
|
|
(0.9
|
)
|
Valuation allowance
|
|
|
(118.4
|
)
|
|
|
36.6
|
|
Other
|
|
|
(0.7
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
%
|
|
|
(0.4
|
)%
|
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
Deferred
income taxes reflect the net tax effects of the temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s net deferred income
taxes are as follows at December 31:
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2
|
|
|
$
|
12
|
|
Inventory reserves
|
|
|
3,672
|
|
|
|
3,855
|
|
Accrued liabilities
|
|
|
4
|
|
|
|
11
|
|
Warrant interest expense
|
|
|
196
|
|
|
|
269
|
|
Stock compensation expense
|
|
|
2,022
|
|
|
|
2,774
|
|
State net operating loss—net of tax
|
|
|
15,954
|
|
|
|
9,189
|
|
Net operating loss carryforward
|
|
|
37,856
|
|
|
|
50,284
|
|
Tax credits
|
|
|
999
|
|
|
|
825
|
|
Depreciation
|
|
|
5,117
|
|
|
|
4,995
|
|
Valuation allowance
|
|
|
(65,817
|
)
|
|
|
(72,199
|
)
|
Total deferred tax assets
|
|
|
5
|
|
|
|
15
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(5
|
)
|
|
|
(15
|
)
|
Net deferred tax liability
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company adopted the guidance in ASU
No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
, which requires that all deferred
tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent in the balance sheet. As a
result, each jurisdiction has one net noncurrent deferred tax asset or liability. The new guidance does not change the existing
requirement that only permits offsetting within a jurisdiction. Companies are still prohibited from offsetting deferred tax liabilities
from one jurisdiction against deferred tax assets of another jurisdiction. The change in accounting principle did not have an impact
on the Company’s results of operations, cash flows or stockholders’ equity.
In March 2016, the FASB issued ASU No. 2016-09
(“ASU 2016-09”),
Compensation—Stock Compensation
(
Topic 718): Improvements to Employee Share-Based
Payment Accounting
which modifies several aspects of the accounting for share-based payment transactions, including income
tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The Company adopted ASU 2016-09 at January 1, 2017, and the impact of adopting ASU 2016-09 for the twelve months ended December
31, 2017 was that the Company was required to bring the deferred tax assets related to off balance net operating losses onto the
balance sheet. This increased the Company’s deferred tax assets by $10.3 million with a corresponding entry to retained earnings.
Since the Company continues to be in a full valuation allowance, there was an entry made to the valuation allowance to offset the
increase to the deferred tax assets with a corresponding entry to retained earnings.
In accordance with ASC740 “Accounting
for Income Taxes” (“ASC740”), the Company evaluates its deferred income tax assets quarterly to determine if
valuation allowances are required or should be adjusted. ASC740 requires that companies assess whether valuation allowances should
be established against their deferred tax assets based on consideration of all available evidence, both positive and negative,
using a “more likely than not” standard. The Company is in a cumulative loss position for the past three years which
is considered significant negative evidence that is difficult to overcome on a “more likely than not” standard through
objectively verifiable data. Based on an evaluation in accordance with the accounting standards, as of December 31, 2017 and
2016, a valuation allowance of $65.8 million and $72.2 million, respectively has been recorded against the net U.S. and Malaysia
deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized
based on the weight of all the available evidence. Until an appropriate level of profitability is attained, the Company expects
to maintain a full valuation allowance on its U.S. and Malaysia net deferred tax assets. Any U.S. or Malaysia tax benefits or tax
expense recorded on the 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.
Rubicon Technology, Inc.
Notes
to Consolidated Financial Statements—(Continued)
At December 31, 2017, the Company
had separate Federal and Illinois net operating loss carryforwards (“NOL”) of $177.9 million and $212.0 million, respectively,
which begin to expire in 2021 and 2019, respectively. With the adoption of ASU 2016-09 in 2017, the Company recorded a deferred
tax asset related to $26.4 million of unrecorded federal and state NOL’s attributable to stock option exercises. The impact
of bringing these NOL’s onto the balance sheet was fully offset by the valuation allowance. The Company has also recorded
an uncertain tax position of $2.6 million that further reduces the net operating loss deferred tax assets reported in the financial
statements. In addition, at December 31, 2017, the Company had Federal and Illinois research and development credits and Illinois
investment tax credits of $805,000, $66,000 and $95,000, respectively which begin to expire in 2018. Tax credits are accounted
for using the flow through method and therefore are taken in the year earned.
The Company completed an analysis of the
utilization of net operating losses subject to limits based upon certain ownership changes as of December 31, 2017. The results
of this analysis indicated no ownership change limiting the utilization of net operating losses and tax credits.
The Company prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken,
in a tax return. At December 31, 2017 and 2016, the Company had unrecognized tax benefits taken or expected to be taken in
a tax return that have been recorded on the Company’s financial statements of $1.1 million that are related to tax positions
taken in 2012. It is not reasonably possible that the amount will change in the next twelve months.
A reconciliation of the beginning and ending
balance of the unrecognized tax benefit follows (in thousands):
Balance at December 31, 2016
|
|
$
|
1,141
|
|
Decrease related to prior year positions
|
|
|
—
|
|
Tax position related to current year
|
|
|
—
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
$
|
1,141
|
|
There were no interest or penalties related
to income taxes that have been accrued or recognized as of and for the years ended December 31, 2017 and 2016.
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
The Company files income tax returns in
the United States federal jurisdiction and in a state jurisdiction. During 2009, the Company began foreign operations in Malaysia
and is subject to local income taxes in that jurisdiction. The Company is exempt from Malaysian income tax for a five-year period
beginning in 2009 with a five year renewal. As the Company believes the prospects of becoming profitable in the LED substrate market
to be unlikely for the foreseeable future, the Company ceased production activities in the Rubicon Sapphire Technology (Malaysia)
SDN BHD (“Rubicon Malaysia”) facility effective November 30, 2016. The Company requested the Malaysian government to
modify the tax holiday to allow it to extend through 2016 even though the Company did not meet the original requirements. Due to
the uncertainty of the modification being granted, at December 31, 2016 the Company recorded a current income tax provision of
$42,000 of Malaysia income tax with the expectation that the holiday will not be granted. During 2017, the Company was granted
approval for extension of the holiday and the $42,000 was reversed. The Company’s Malaysia tax returns for the periods ended
December 31, 2010 through 2012 have been audited by the Malaysia Inland Revenue Board with no changes made to the taxable
income for those years. All other tax years in Malaysia are open to examination by tax authorities.
The Company’s federal tax returns
for the periods ended December 31, 2010, 2008 and 2007 have been audited by the Internal Revenue Service (IRS) with no changes
made to the Company’s taxable losses for those years. The Company’s state tax returns for the periods ended December 31,
2009 through 2012 have been audited by the Illinois Department of Revenue with no changes made to the Company’s taxable losses
for those years. Due to the existence of net operating loss carryforwards, tax years ended December 31, 2001 through 2006,
2008, 2009 and 2011 through 2016 are open to examination by tax authorities for Federal purposes. Due to net operating loss carryforwards
at the State level, tax years ended 2004 through 2006 and 2008 through 2016 are open to examination by state tax authorities.
Due to the closing
of the Rubicon Malaysia operations, the Company no longer considers the undistributed earnings of Rubicon Malaysia to be indefinitely
reinvested. Upon liquidation of Rubicon Malaysia, it is anticipated any cash left after the liquidation will be brought back to
the U.S. via a payment of principal towards the intercompany loan. A
withholding tax will be payable
to the Malaysian government on the interest portion of the loan. At December 31, 2017 and 2016, the Company accrued the withholding
tax on the interest balance of the loan in the amount of $129,000 and $274,000, respectively, which represents the incremental
tax.
9. CREDIT FACILITY
On January 2, 2013, the Company entered
into a three-year term agreement with a bank to provide the Company with a senior secured credit facility of up to $25.0 million.
The agreement provided for the Company to borrow up to 80% of eligible accounts receivable and up to 35% of domestically held raw
material and finished goods inventory. Advances against inventory were limited to 40% of the aggregate outstanding on the revolving
line of credit and $10.0 million in aggregate. The Company had the option to borrow at an interest rate of LIBOR plus 2.75% or
the Wall Street Journal prime rate plus 0.50%. If the Company maintained liquidity of $20.0 million or greater with the lending
institution, then the borrowing interest rate options were LIBOR plus 2.25% or the Wall Street Journal prime rate. There was an
unused revolving line facility fee of 0.375% per annum. The facility was secured by a first priority interest in substantially
all of the Company’s personal property, excluding intellectual property. The Company was required to maintain an adjusted
quick ratio of 1.40 to 1.00, maintain operating and other deposit accounts with the bank or bank’s affiliates of 25% of the
Company’s total worldwide cash, securities and investments, and the Company could pay dividends or repurchase capital stock
only with the bank’s consent during the three-year term. In August 2015, the Company entered into an amended agreement with
the bank to extend the senior secured facility through January 2, 2018. Under the amended agreement, advances against inventory
were limited to the lesser of 45% of the aggregate outstanding principal on the revolving line of credit and $10.0 million and
the rate on the facility fee on the unused portion of the revolving line was adjusted to 0.50% per annum. All other terms
and conditions remained the same. The agreement contained a subjective acceleration clause and required the Company to maintain
a lockbox. As a result, the Company classified the debt as a current liability on its balance sheet.
On September 9, 2016, the Company voluntarily
terminated the loan agreement. Pursuant to the pay-off letter for termination of the loan agreement, upon payment of the pay-off
amount, all obligations under the loan agreement were paid and discharged in full, all unfunded commitments by the bank to make
credit extensions to the Company under the loan agreement were terminated, all security interests granted to or held by the bank
under the loan agreement were released, and all guaranties supporting the loan agreement were released. The Company did not incur
any early termination penalties in connection with the termination.
For the year ended December 31, 2016,
the Company recorded interest expense of $99,000 related to the credit facility which includes $92,000 of interest expense charged
on the unused portion of the facility.
Rubicon Technology, Inc.
Notes to Consolidated Financial Statements—(Continued)
10. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases buildings used for manufacturing
and offices. The leases provide for payment of the Company’s proportionate share of operating expenses and real estate taxes.
Net rent expense under operating leases
in 2017 and 2016 amounted to $592,500 and $589,900, respectively.
Future minimum payments under all leases
are as follows:
Year ending December 31,
|
|
Operating
leases
(in thousands)
|
|
2018
|
|
$
|
468
|
|
2019
|
|
|
145
|
|
Balance at December 31, 2017
|
|
$
|
613
|
|
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.
11. BENEFIT PLAN
The Company sponsors a 401(k) savings plan
(the “Plan”). Employees are eligible to participate in the Plan upon reaching 18 years of age. Employees make contributions
to the Plan through payroll deferrals and employer matching contributions are discretionary. There were no employer matching contributions
for the years ended December 31, 2017 and 2016.
F-34