ITEM
1.
|
Consolidated
Financial Statements
|
Rubicon
Technology, Inc.
Consolidated
balance sheets
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(in thousands, other than
share data)
|
|
Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,023
|
|
|
$
|
11,544
|
|
Restricted cash
|
|
|
179
|
|
|
|
181
|
|
Short-term investments
|
|
|
13,489
|
|
|
|
6,451
|
|
Accounts receivable, net
|
|
|
507
|
|
|
|
718
|
|
Inventories
|
|
|
2,788
|
|
|
|
3,030
|
|
Other inventory supplies
|
|
|
206
|
|
|
|
837
|
|
Prepaid expenses and other current assets
|
|
|
830
|
|
|
|
270
|
|
Assets held for sale
|
|
|
10,382
|
|
|
|
11,202
|
|
Total current assets
|
|
|
34,404
|
|
|
|
34,233
|
|
Property and equipment, net
|
|
|
412
|
|
|
|
815
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
34,816
|
|
|
$
|
35,048
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
169
|
|
|
$
|
582
|
|
Accrued payroll
|
|
|
35
|
|
|
|
101
|
|
Accrued and other current liabilities
|
|
|
420
|
|
|
|
430
|
|
Corporate income and franchise taxes
|
|
|
273
|
|
|
|
294
|
|
Accrued real estate taxes
|
|
|
149
|
|
|
|
249
|
|
Advance payments
|
|
|
34
|
|
|
|
59
|
|
Total current liabilities
|
|
|
1,080
|
|
|
|
1,715
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value, 1,000,000 undesignated shares authorized, no shares issued or outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock, $.001 par value, 8,200,000 shares authorized; 2,918,393 and 2,910,334 shares issued; 2,740,909 and 2,732,850 shares outstanding
|
|
|
29
|
|
|
|
29
|
|
Additional paid-in capital
|
|
|
375,903
|
|
|
|
375,611
|
|
Treasury stock, at cost, 177,484 shares
|
|
|
(12,148
|
)
|
|
|
(12,148
|
)
|
Accumulated other comprehensive loss
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Accumulated deficit
|
|
|
(330,046
|
)
|
|
|
(330,156
|
)
|
Total stockholders’ equity
|
|
|
33,736
|
|
|
|
33,333
|
|
Total liabilities and stockholders’ equity
|
|
$
|
34,816
|
|
|
$
|
35,048
|
|
The
accompanying notes are an integral part of these consolidated statements.
Rubicon
Technology, Inc.
Consolidated
statements of operations
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, other than share data)
|
|
Revenue
|
|
$
|
801
|
|
|
$
|
1,053
|
|
|
$
|
1,840
|
|
|
$
|
2,322
|
|
Cost of goods sold
|
|
|
921
|
|
|
|
3,889
|
|
|
|
1,853
|
|
|
|
6,739
|
|
Gross loss
|
|
|
(120
|
)
|
|
|
(2,836
|
)
|
|
|
(13
|
)
|
|
|
(4,417
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
692
|
|
|
|
1,299
|
|
|
|
1,314
|
|
|
|
3,110
|
|
Sales and marketing
|
|
|
106
|
|
|
|
194
|
|
|
|
225
|
|
|
|
438
|
|
Research and development
|
|
|
42
|
|
|
|
195
|
|
|
|
75
|
|
|
|
836
|
|
(Gain) loss on disposal of assets
|
|
|
(1,052
|
)
|
|
|
432
|
|
|
|
(1,614
|
)
|
|
|
1,181
|
|
Asset impairment charge
|
|
|
—
|
|
|
|
675
|
|
|
|
—
|
|
|
|
675
|
|
Income (loss) from operations
|
|
|
92
|
|
|
|
(5,631
|
)
|
|
|
(13
|
)
|
|
|
(10,657
|
)
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
80
|
|
|
|
28
|
|
|
|
138
|
|
|
|
34
|
|
Realized gain (loss) on foreign currency translation
|
|
|
(16
|
)
|
|
|
13
|
|
|
|
(2
|
)
|
|
|
19
|
|
Total other income
|
|
|
64
|
|
|
|
41
|
|
|
|
136
|
|
|
|
53
|
|
Income (loss) before income taxes
|
|
|
156
|
|
|
|
(5,590
|
)
|
|
|
123
|
|
|
|
(10,604
|
)
|
Income tax expense
|
|
|
(6
|
)
|
|
|
(17
|
)
|
|
|
(13
|
)
|
|
|
(78
|
)
|
Net income (loss)
|
|
$
|
150
|
|
|
$
|
(5,607
|
)
|
|
$
|
110
|
|
|
$
|
(10,682
|
)
|
Net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
$
|
(2.16
|
)
|
|
$
|
0.04
|
|
|
$
|
(4.04
|
)
|
Diluted
|
|
$
|
0.05
|
|
|
$
|
(2.16
|
)
|
|
$
|
0.04
|
|
|
$
|
(4.04
|
)
|
Weighted average common shares outstanding used in computing net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,733,202
|
|
|
|
2,608,814
|
|
|
|
2,732,285
|
|
|
|
2,641,144
|
|
Diluted
|
|
|
2,739,198
|
|
|
|
2,608,814
|
|
|
|
2,735,283
|
|
|
|
2,641,144
|
|
The
accompanying notes are an integral part of these consolidated statements.
Rubicon
Technology, Inc.
Consolidated
statements of comprehensive income (loss)
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Net income (loss)
|
|
$
|
150
|
|
|
$
|
(5,607
|
)
|
|
$
|
110
|
|
|
$
|
(10,682
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments, net of tax
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
12
|
|
Unrealized gain (loss) on currency translation
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
8
|
|
Other comprehensive income (loss)
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
20
|
|
Comprehensive income (loss)
|
|
$
|
151
|
|
|
$
|
(5,609
|
)
|
|
$
|
111
|
|
|
$
|
(10,662
|
)
|
The
accompanying notes are an integral part of these consolidated statements.
Rubicon
Technology, Inc.
Consolidated
statements of cash flows
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
(in thousands)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
110
|
|
|
$
|
(10,682
|
)
|
Adjustments to reconcile net income (loss) to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
206
|
|
|
|
868
|
|
Net (gain) loss on disposal of assets
|
|
|
(1,614
|
)
|
|
|
1,181
|
|
Asset impairment charge
|
|
|
—
|
|
|
|
675
|
|
Stock-based compensation
|
|
|
297
|
|
|
|
623
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
211
|
|
|
|
2,004
|
|
Inventories
|
|
|
242
|
|
|
|
3,286
|
|
Other inventory supplies
|
|
|
72
|
|
|
|
256
|
|
Prepaid expenses and other assets
|
|
|
(560
|
)
|
|
|
692
|
|
Accounts payable
|
|
|
(413
|
)
|
|
|
(437
|
)
|
Accrued payroll
|
|
|
(66
|
)
|
|
|
109
|
|
Corporate income and franchise taxes
|
|
|
(21
|
)
|
|
|
(101
|
)
|
Accrued real estate taxes
|
|
|
(100
|
)
|
|
|
28
|
|
Advanced payments
|
|
|
(24
|
)
|
|
|
(12
|
)
|
Accrued and other current liabilities
|
|
|
(15
|
)
|
|
|
(75
|
)
|
Net cash used in operating activities
|
|
|
(1,675
|
)
|
|
|
(1,585
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Proceeds from disposal of assets
|
|
|
3,195
|
|
|
|
1,849
|
|
Purchases of investments
|
|
|
(7,139
|
)
|
|
|
(9
|
)
|
Proceeds from sale of investments
|
|
|
102
|
|
|
|
21
|
|
Net cash (used in) provided by investing activities
|
|
|
(3,842
|
)
|
|
|
1,861
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Taxes paid related to net share settlement of equity awards
|
|
|
(5
|
)
|
|
|
(173
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(5
|
)
|
|
|
(173
|
)
|
|
|
|
|
|
|
|
|
|
Net effect of currency translation
|
|
|
(1
|
)
|
|
|
4
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(5,523
|
)
|
|
|
107
|
|
Cash and cash equivalents, beginning of period
|
|
|
11,725
|
|
|
|
17,835
|
|
Cash and cash equivalents, end of period
|
|
$
|
6,202
|
|
|
$
|
17,942
|
|
The
accompanying notes are an integral part of these consolidated statements.
Rubicon
Technology, Inc.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2018
1.
BASIS OF PRESENTATION
Interim
financial data
The
accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete
consolidated financial statements and should be read in conjunction with Rubicon Technology, Inc.’s (the “Company”)
annual report filed on Form 10-K for the fiscal year ended December 31, 2017. In the opinion of management, all adjustments
(consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentation of the results
of operations have been included. Consolidated operating results for the three and six-month periods ended June 30, 2018
are not necessarily indicative of results that may be expected for the year ending December 31, 2018.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of consolidation
The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Rubicon Technology Worldwide
LLC, Rubicon Sapphire Technology (Malaysia) SDN BHD and Rubicon Technology Hong Kong Limited. All intercompany transactions and
balances have been eliminated in consolidation.
Investments
The
Company invests available cash primarily in 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 Statement of Operations. Investments in which the Company has the ability and intent, if necessary, to liquidate
are classified as short-term.
The
Company reviews its available-for-sale securities investments at the end of each quarter for other-than-temporary declines in
fair value based on the specific identification method. The Company considers various factors in determining whether an impairment
is other-than-temporary, including the severity and duration of the impairment, changes in underlying credit ratings, forecasted
recovery, its ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery
in market value and the probability that the scheduled cash payments will continue to be made. When the Company concludes that
an other-than-temporary impairment has resulted, the difference between the fair value and carrying value is written off and recorded
as a charge on the consolidated statement of operations.
Accounts
receivable
The
majority of the Company’s accounts receivable is due from defense 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. Losses from credit
sales are provided for in the financial statements.
Accounts
outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering
a number of factors, including 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. The following
table shows the activity of the allowance for doubtful accounts:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
7
|
|
|
$
|
31
|
|
Charges to costs and expenses
|
|
|
(2
|
)
|
|
|
(20
|
)
|
Accounts charged off, less recoveries
|
|
|
—
|
|
|
|
(4
|
)
|
Ending balance
|
|
$
|
5
|
|
|
$
|
7
|
|
Inventories
Inventories
are valued at the lower of cost or net realizable value. Raw materials cost is determined using the first-in, first-out method,
and work-in-process and finished goods costs are determined on a standard cost basis, which includes materials, labor and manufacturing
overhead. The Company reduces the carrying value of its inventories for differences between the cost and the estimated net realizable
value, taking into account usage, expected demand, technological obsolescence and other information.
The
Company establishes inventory reserves when conditions exist that suggest inventory may be in excess of anticipated demand or
is obsolete based on customer specifications. The Company evaluates the ability to realize the value of its inventory based on
a combination of factors, including forecasted sales, estimated current and future market value and changes in customers’
product specifications. The Company’s method of estimating excess and obsolete inventory has remained consistent for all
periods presented.
Inventories
consisted of the following:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(in
thousands)
|
|
Raw
materials
|
|
$
|
476
|
|
|
$
|
476
|
|
Work-in-process
|
|
|
2,109
|
|
|
|
2,334
|
|
Finished
goods
|
|
|
203
|
|
|
|
220
|
|
|
|
$
|
2,788
|
|
|
$
|
3,030
|
|
Property
and equipment
Property
and equipment consisted of the following:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(in thousands)
|
|
Machinery, equipment and tooling
|
|
$
|
5,435
|
|
|
$
|
6,105
|
|
Leasehold improvements
|
|
|
4,624
|
|
|
|
4,624
|
|
Information systems
|
|
|
819
|
|
|
|
819
|
|
Furniture and fixtures
|
|
|
8
|
|
|
|
8
|
|
Total cost
|
|
|
10,886
|
|
|
|
11,556
|
|
Accumulated depreciation and amortization
|
|
|
(10,474
|
)
|
|
|
(10,741
|
)
|
Property and equipment, net
|
|
$
|
412
|
|
|
$
|
815
|
|
A
ssets
held for sale and long-lived assets
When
circumstances, such as adverse market conditions, indicate that the carrying value of a long-lived asset may be impaired, the
Company performs an analysis to review the recoverability of the asset’s carrying value. The Company makes estimates of
the undiscounted cash flows (excluding interest charges) from the expected future operations of the asset. These estimates consider
factors such as expected future operating income, operating trends and prospects, as well as the effects of demand, competition
and other factors. If the analysis indicates that the carrying value is not recoverable from future cash flows, an impairment
loss is recognized to the extent that the carrying value exceeds the estimated fair value. The estimated fair value of assets
is determined using appraisal techniques, which assume the highest and best use of the asset by market participants, considering
the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date. Any impairment
losses are recorded as operating expenses, which reduce net income.
In
connection with the Company’s decision to limit its focus to the optical and industrial sapphire markets and exit the LED
market, the Company developed a plan to close its Malaysia facility, scale down and consolidate remaining operations in the U.S.
and sell additional assets that would not be needed. The Company evaluated its U.S. and Malaysia asset portfolios to identify
assets needed for its current business strategy and excess assets that were no longer needed. The Company determined it had excess
machinery, equipment and facilities. Excess U.S. and Malaysia assets were evaluated based on assuming an orderly liquidation plan,
which considers economic obsolescence and sales of comparable equipment, as it is the Company’s intention to sell these
assets. Additionally, the Company evaluated its U.S. assets continuing to be used in operations using a cost and market approach
to determine the current fair value.
As
a result, for the year ended December 31, 2017, the Company recorded an impairment charge of $1.0 million on lower than expected
sales prices for certain machinery and equipment held for sale, and identification of assets that will not be needed to support
the Company’s current operations. Additionally, for the year ended December 31, 2017, the Company recorded an impairment
charge of $4.0 million on its U.S. and Malaysia land and building assets on lower than expected sale price. At June 30, 2018,
the Company reviewed the current fair value of its assets and concluded no adjustments were needed. The Company will continue
to assess its long-lived assets to ensure the carrying amount of these assets is still appropriate given any changes in the asset
usage, marketplace and other factors used in determining the current fair value.
In
the six months ended June 30, 2018, the Company completed individual sales and held auctions for assets located at each of its
U.S. properties, resulting in the sale of a portion of its excess U.S. equipment and consumables, which had a total net book value
of $1.5 million. Additionally, in the six months ended June 30, 2018, the Company completed sales of Malaysia equipment with a
total net book value of $131,000. Unsold excess equipment continued to be classified as current assets held for sale at June 30,
2018. Based on these sales, a gain on disposal of assets of $1.6 million was recorded for the six months ended June 30, 2018.
The
Company is actively pursuing the sale or lease of its 134,400 square-foot manufacturing and office facility located in Batavia,
Illinois, a parcel of extra land the Company owns in Batavia, Illinois, and a 65,000 square-foot facility located in Penang, Malaysia.
Although the Company cannot assure the timing of these sales, as it is the Company’s intention to complete these sales within
the next twelve-month period, hence, these properties were classified as current assets held for sale at June 30, 2018 and December
31, 2017.
The
Company cannot guarantee that it will be able to successfully complete the sale or lease of any assets.
Revenue
recognition
The
Company recognizes revenue in accordance with ASC Topic 606,
Revenue From Contracts with Customers
(“Topic 606”)
which was adopted on January 1, 2018 using the full retrospective transition method. Adoption of Topic 606 had no impact on periods
reported. Under Topic 606, the Company recognizes revenue when performance obligations under a purchase order or signed quotation
are satisfied. Revenue is recognized when products are shipped and title and risk of loss transfer to a customer. The Company’s
business practice commits the Company to manufacture and deliver product upon acceptance of a customer’s purchase order
or signed quotation (“agreement”). The agreement with the customer includes specifications of the product to be delivered,
price, expected ship date and payment terms. The Company’s agreements generally do not contain variable, financing, rights
of return or non-cash components. There are no up-front costs to develop the production process. The performance obligation is
satisfied at the point in time (single performance obligation) when the product is manufactured to the customer’s specification,
as performance does not create an asset with an alternate use to the Company. Accordingly, the Company recognizes revenue when
title and risk of loss have been transferred to the customer, generally at the time of shipment of product. The Company grants
credit terms considering normal collection risk. If there is doubt about collection, full prepayment for the order is required.
Any payments received prior to shipment are recorded as deferred revenue and included in Advance Payments in the Consolidated
Balance Sheets.
Government
Contracts
The
Company recognizes research and development revenue in the period during which the related costs are incurred over the contractually
defined period. In July 2012, the Company signed a contract with the Air Force Research Laboratory to produce large-area sapphire
windows on a cost plus fixed fee basis. The deliverables under the contract included development of machinery and technology to
be able to produce large area sapphire windows, prove the concept of growing large windows with that equipment and delivery of
large-area sapphire windows. The Company records research and development revenue on a gross basis as costs are incurred, plus
a portion of the fixed fee over a period of time as the obligations (machinery, proof of concept and finished windows) are completed
following the input method of measuring progress which recognizes revenue as resources are consumed, labor hours expended and
costs are incurred. For the three and six months ended June 30, 2018, the same amount of revenue of $56,000 was recorded,
as no revenue was recorded for the three months ended March 31, 2018. For the three and six months ended June 30, 2017, $3,000
and $29,000 of revenue was recorded, respectively. To date, the Company has recorded $4.7 million in revenue and the total value
of the contract is $4.7 million. At December 31, 2017, the estimated costs to complete the contract were in excess of the contract
value. For the year ended December 31, 2017, the Company recorded estimated costs expected to be incurred in excess of this contract
value of $243,000. No additional adjustments for the excess contract costs were recorded for the three and six months ended June
30, 2018.
The
Company does not provide maintenance or other services and it does not have sales that involve multiple elements or deliverables.
Net
income (loss) per common share
Basic
net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding
during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted-average
number of diluted common shares outstanding during the period. Diluted shares outstanding are calculated by adding to the weighted-average
shares (a) any outstanding stock options based on the treasury stock method and (b) restricted stock units (“RSU”).
Diluted
net income (loss) per share is the same as basic net income (loss) per share for the three and six months ended June 30,
2018 and 2017 because the effects of potentially dilutive securities do not have a material impact on the calculation of diluted
net income (loss) per share.
New
accounting pronouncements adopted
In
January 2016, the FASB issued ASU No. 2016-01 (“ASU 2016-01”),
Financial Instruments – Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. Further clarifications were made in February
2018 with the issuance of ASU No. 2018-03 (“ASU 2018-03”). The amended guidance requires certain equity investments
that are not consolidated and not accounted for under the equity method to be measured at fair value with changes recognized in
net income rather than as a component of accumulated other comprehensive income (loss). It further states that an entity may choose
to measure equity investments that do not have readily determinable fair values using a quantitative approach, or measurement
alternative, which is equal to its cost minus impairment, if any, plus or minus changes resulting from observable price changes
in orderly transactions for the identical or a similar investment of the same issuer. The adoption of ASU 2016-01 and ASU 2018-03
did not have a material impact on the Company’s financial statements.
In
April 2016, the FASB issued ASU No. 2016-10 (“ASU 2016-10”),
Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing.
This update clarifies how an entity identifies performance obligations
related to customer contracts as well as helps to improve the operability and understanding of the licensing implementation guidance.
The amendments in this update affect the guidance in ASU No. 2014-09, (“ASU 2014-09”),
Revenue from Contracts
with Customers (Topic 606),
which supersedes most of the current revenue recognition requirements. The underlying principle
is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity
expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions
to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration
of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies
are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and
uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the
interim and annual periods beginning on or after December 15, 2017. The guidance permits the use of either a retrospective
or cumulative effect transition method. In May 2016, the FASB issued ASU No. 2016-12, (“ASU 2016-12”), Revenue
from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This update clarifies the
objectives of collectability, sales and other taxes, noncash consideration, contract modifications at transition, completed contracts
at transition and technical correction. The amendments in this update affect the guidance in ASU 2014-09. In September 2017, the
FASB issued additional amendments providing clarification and implementation guidance. The Company’s revenue is primarily
generated from the sale of finished products to customers. Sales predominantly contain a single delivery element and revenue is
recognized at a single point in time when ownership, risks and rewards transfer. These are largely unaffected by the new standard
as they closely align with the new standards principles relating to the measurement of revenue and timing of recognition. The
Company adopted Topic 606 effective January 1, 2018 using the full retrospective transition method. As the underlying principles
of the new standard, relating to the measurement of revenue and the timing of recognition, are closely aligned with the Company’s
current business model and practices, the adoption of ASU 2014-09 did not have a material impact on the consolidated financial
statements.
In
August 2016, the FASB issued ASU No. 2016-15 (“ASU 2016-15”),
Statement of Cash Flows (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’s adoption of ASU 2016-15 did not have a material impact on its consolidated financial
statements.
In
November 2016, the FASB issued ASU No. 2016-18 (“ASU 2016-18”),
Statement of Cash Flows (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’s adoption of ASU 2016-18 did not have a material impact on its consolidated
financial statements.
Recent
accounting pronouncements
In
February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”),
Leases (Topic 842)
which modifies the
lease recognition requirements and requires entities to recognize the assets and liabilities arising from leases on the balance
sheet. ASU 2016-02 requires entities to use a modified retrospective approach for leases that exist or are entered into after
the beginning of the earliest comparative period in the financial statements. ASU 2016-02 is effective for annual reporting periods
beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact, if any, of adopting
ASU 2016-02 on its financial statements.
In
February 2018, the FASB issued ASU No. 2018-02 (“ASU 2018-02),
Income Statement-Reporting Comprehensive Income (Topic
220): Reclassification of Certain Tax Effects from Accumulated Comprehensive Income
. The new guidance allows companies to
reclassify stranded tax effects resulting from the Tax Act, from accumulated other comprehensive income to retained earnings.
The guidance also requires certain new disclosures regardless of the election. Early adoption is permitted. The Company’s
adoption of ASU 2018-02 did not have a material impact on its consolidated financial statements.
In
March 2018, the FASB issued ASU No. 2018-05 (“ASU 2018-05),
Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant
to SEC Staff Accounting Bulletin No. 118
. This standard amends ASC 740,
Income Taxes
, to provide guidance on accounting
for tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) pursuant to Staff Accounting Bulletin No. 118, which
allows companies to complete the accounting under ASC 740 within one-year measurement period from the Tax Act enactment date.
This standard is effective upon issuance. The Company has decided to follow the guidance provided by ASU 2018-05 and will leave
the one-year measurement period open to evaluate the impact of the Tax Act.
3.
INVESTMENTS
The
Company invests its available cash primarily 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 June 30, 2018:
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
(in thousands)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
1,499
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,499
|
|
Commercial paper
|
|
|
11,730
|
|
|
$
|
—
|
|
|
|
(1
|
)
|
|
$
|
11,729
|
|
Corporate notes / bonds
|
|
|
261
|
|
|
|
—
|
|
|
|
—
|
|
|
|
261
|
|
Total short-term investments
|
|
$
|
13,490
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
13,489
|
|
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
|
|
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 June 30,
2018:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
3,514
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,514
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sales securities — current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
—
|
|
|
|
1,499
|
|
|
|
—
|
|
|
|
1,499
|
|
Commercial paper
|
|
|
—
|
|
|
|
11,729
|
|
|
|
—
|
|
|
|
11,729
|
|
Corporate notes / bonds
|
|
|
—
|
|
|
|
261
|
|
|
|
—
|
|
|
|
261
|
|
Total
|
|
$
|
3,514
|
|
|
$
|
13,489
|
|
|
$
|
—
|
|
|
$
|
17,003
|
|
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
|
|
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 $2.5 million and $6.9 million of time deposits included
in cash and cash equivalents as of June 30, 2018 and December 31, 2017, respectively.
4.
SIGNIFICANT CUSTOMERS
For
the three months ended June 30, 2018, the Company had three customers individually that accounted for approximately 21%,
15% and 13% of revenue. For the three months ended June 30, 2017, the Company had three customers individually that accounted
for approximately 17%, 12% and 10% of revenue. For the six months ended June 30, 2018, the Company had three customers that
accounted for approximately 15%, 15% and 10% of revenue. For the six months ended June 30, 2017, the Company had four customers
that accounted for approximately 17%, 13%, 11% and 11% of revenue. No other customer accounted for 10% or more of the Company’s
revenues during the three and six months ended June 30, 2018 and 2017.
Customers
individually representing more than 10% of trade receivables accounted for approximately 60% and 69% of accounts receivable as
of June 30, 2018 and December 31, 2017, respectively.
5.
STOCKHOLDERS’ EQUITY
Common
shares reserved
As
of June 30, 2018, the Company had reserved 130,489 shares of common stock for issuance upon the exercise of outstanding common
stock options and vesting of restricted stock units. Also, 286,597 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 June 30, 2018.
Preferred
stock
At
the Company’s annual meeting of stockholders held on May 10, 2018, the Company’s stockholders approved an amendment
to the Company’s Ninth Amended and Restated Certificate of Incorporation (as amended, the “Certificate of Incorporation”)
to decrease the Company’s authorized number of shares of preferred stock from 5,000,000 shares to 1,000,000 shares. The
Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to decrease the authorized number
of preferred shares, consequently reducing the number of total authorized shares from 13,200,000 to 9,200,000.
6.
STOCK INCENTIVE PLANS
In
August 2007, the Company adopted the Rubicon Technology Inc. 2007 Stock Incentive Plan, which was amended and restated effective
in March 2011 (the “2007 Plan”), and which allowed for the grant of incentive stock options, non-statutory stock options,
stock appreciation rights, restricted stock, 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
Company uses the Black-Scholes option pricing model to value stock options. The Company uses a three-year historical stock price
average to determine its volatility assumptions. The assumed risk-free rates were based on U.S. Treasury rates in effect at the
time of grant with a term consistent with the expected option lives. The expected term is based upon the vesting term of the Company’s
options, a review of a peer group of companies, and expected exercise behavior. The forfeiture rate of 24.43% is based on the
history of forfeited options. The expense is allocated using the straight-line method. For the three and six months ended June 30,
2018, the Company recorded $13,000 and $30,000, respectively, of stock option compensation expense. For the three and six months
ended June 30, 2017, the Company recorded $40,000 and $238,000, respectively, of stock option compensation expense. As of
June 30, 2018, the Company had $66,000 of total unrecognized compensation cost related to non-vested stock option awards
granted under the Company’s stock-based plans that it expects to recognize over a weighted-average period of 1.42 years.
Pursuant
to an employment agreement in March 2017, which was subsequently amended on May 12, 2017, the Company granted 30,902 and 59,098
RSUs to a key executive in the six months ended June 30, 2018 and 2017, respectively.
The
Company used a Monte Carlo simulation model valuation technique to determine the fair value of RSUs granted because the awards
vest based upon achievement of market price targets. The RSUs vest in the amounts set forth below on the first date the 15-trading
day average closing price of the Company’s common stock equals or exceeds the corresponding target price for the common
stock before May 12, 2021.
The
following table summarizes the award vesting terms for the RSUs granted on January 1, 2018:
Number of RSUs
|
|
Target
price
|
|
902
|
|
$
|
11.00
|
|
15,000
|
|
$
|
12.50
|
|
15,000
|
|
$
|
14.00
|
|
The
following table summarizes the award vesting terms for the RSUs granted on March 17, 2017:
Number of RSUs
|
|
Target
price
|
|
15,000
|
|
$
|
6.50
|
|
15,000
|
|
$
|
8.00
|
|
15,000
|
|
$
|
9.50
|
|
14,098
|
|
$
|
11.00
|
|
At
the time the negotiation of the terms of the employment agreement began, the closing price of the common stock was $5.50. On the
date of grant, the closing price of the common stock was $6.30.
The
Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition
stipulated in the award and calculates the fair value of each RSU. The Company used the following assumptions in determining the
fair value of the RSUs:
|
|
Granted
|
|
|
|
January
2018
|
|
|
March
2017
|
|
Daily expected stock price volatility
|
|
|
4.2806
|
%
|
|
|
4.4237
|
%
|
Daily expected mean return on equity
|
|
|
(0.2575
|
%)
|
|
|
(0.2226
|
%)
|
Daily expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Average daily risk-free interest rate
|
|
|
0.0078
|
%
|
|
|
0.0063
|
%
|
The
daily expected stock price volatility is based on a four-year historical volatility of the Company’s common stock. The daily
expected dividend yield is based on annual expected dividend payments. The average daily risk-free interest rate is based on the
three-year treasury yield as of the grant date. Each of the tranches is calculated to have its own fair value and requisite service
period. The fair value of each tranche is amortized over the requisite or derived service period which is up to four years. The
RSUs granted in January 2018 and March 2017 had a grant date fair value of $209,000 and $323,000, respectively.
The
following table summarizes the activity of the stock incentive and equity plans as of June 30, 2018 and changes during the
six months then ended:
|
|
Shares
available
for grant
|
|
|
Number of
options
outstanding
|
|
|
Weighted-
average option
exercise price
|
|
|
Number of
restricted
stock and
board
shares
issued
|
|
|
Number of
restricted
stock units
outstanding
|
|
At January 1, 2018
|
|
|
274,494
|
|
|
|
125,564
|
|
|
$
|
19.53
|
|
|
|
97,692
|
|
|
|
22,384
|
|
Granted
|
|
|
(36,953
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1,878
|
|
|
|
35,075
|
|
Exercised/issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,477
|
)
|
Cancelled/forfeited
|
|
|
49,056
|
|
|
|
(46,073
|
)
|
|
|
23.94
|
|
|
|
—
|
|
|
|
(2,983
|
)
|
At June 30, 2018
|
|
|
286,597
|
|
|
|
79,491
|
|
|
$
|
21.84
|
|
|
|
99,570
|
|
|
|
50,999
|
|
The
Company’s aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options
and the fair value of the Company’s common stock. Based on the fair value of the common stock at June 30, 2018 and
2017, there was no intrinsic value for options outstanding.
A
summary of the Company’s non-vested options during the six months ended June 30, 2018 is presented below:
|
|
Options
|
|
|
Weighted-
average
exercise
price
|
|
Non-vested at January 1, 2018
|
|
|
46,842
|
|
|
$
|
8.26
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(250
|
)
|
|
|
11.40
|
|
Forfeited
|
|
|
(23,813
|
)
|
|
|
9.07
|
|
Non-vested at June 30, 2018
|
|
|
22,779
|
|
|
$
|
7.38
|
|
For
the three and six months ended June 30, 2018, the Company recorded $115,000 and $206,000, respectively, of RSU expense. For
the three and six months ended June 30, 2017, the Company recorded $188,000 and $324,000, respectively, of RSU expense. As
of June 30, 2018, there was $52,000 of unrecognized compensation cost related to the non-vested RSUs. This cost is expected
to be recognized over a weighted-average period of 0.24 years.
A
summary of the Company’s restricted stock units is as follows:
|
|
RSUs
outstanding
|
|
|
Weighted
average
price
at
time of grant
|
|
|
Aggregate
intrinsic
value
|
|
Non-vested restricted stock units as of January 1, 2018
|
|
|
22,384
|
|
|
$
|
4.65
|
|
|
|
|
|
Granted
|
|
|
35,075
|
|
|
|
7.89
|
|
|
|
|
|
Vested
|
|
|
(3,477
|
)
|
|
|
7.05
|
|
|
|
|
|
Cancelled
|
|
|
(2,983
|
)
|
|
|
8.88
|
|
|
|
|
|
Non-vested at June 30, 2018
|
|
|
50,999
|
|
|
$
|
6.46
|
|
|
$
|
329,614
|
|
For
the three and six months ended June 30, 2018, the Company recorded $4,000 and $61,000, respectively, of stock compensation
expense related to restricted stock. For the three and six months ended June 30, 2017, the Company recorded $57,000
and $61,000, respectively, of stock compensation expense related to restricted stock.
The
Company’s board of directors are compensated partially in cash and partially in restricted stock. As such, for the six months
ended June 30, 2018, 1,878 shares of restricted common stock were issued to outside directors.
An
analysis of restricted stock issued is as follows:
Non-vested restricted stock as of January 1, 2018
|
|
|
4,904
|
|
Granted
|
|
|
1,878
|
|
Vested
|
|
|
(4,328
|
)
|
Non-vested restricted stock as of June 30, 2018
|
|
|
2,454
|
|
7.
COMMITMENTS AND CONTINGENCIES
Litigation
From
time to time, the Company experiences routine litigation in the normal course of its business. The management of the Company does
not believe any pending litigation, will have a material adverse effect on the financial condition or results of operations of
the Company.
8.
INCOME TAXES
On
December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”) which, among other provisions, reduced the
U.S. corporate tax rate form 35% to 21% effective January 1, 2018. The SEC issued guidance on accounting for the tax effects of
the Act. The guidance allows the Company to record provisional amounts for those impacts, with the requirement that the accounting
be completed in a period not to exceed one year from the date of enactment. The Company has not completed its accounting for the
tax effects of enactment of the Act; however, the Company has made reasonable estimates of the effects on its existing deferred
tax balances and the transition tax or deemed repatriation tax. Estimates will true up within the measurement period with the
completion of filing of the federal and state tax returns.
The
Company is subject to income taxes in the U.S. and Malaysia. On a quarterly basis, the Company assesses the recoverability of
deferred tax assets and the need for a valuation allowance. Such evaluations involve the application of significant judgment,
and multiple factors, both positive and negative, are considered. For the period ended June 30, 2018, a valuation allowance
has been included in the 2018 forecasted effective tax rate. The Company is in a cumulative loss position for the past three years,
which is considered significant negative evidence that is difficult to overcome on a “more likely than not” standard
through objectively verifiable data. Under the accounting standards, objective verifiable evidence is given greater weight than
subjective evidence such as the Company’s projections for future growth. Based on an evaluation in accordance with the accounting
standards, as of December 31, 2015, a valuation allowance has been recorded against the net U.S. deferred tax assets in order
to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all
available evidence. At June 30, 2018, the Company continues to be in a three-year cumulative loss position, therefore, until
an appropriate level of profitability is attained, the Company expects to maintain a full valuation allowance on its U.S. and
Malaysia net deferred tax assets. Any U.S. and Malaysia tax benefits or tax expense recorded on the Company’s Consolidated
Statement of Operations will be offset with a corresponding valuation allowance until such time that the Company changes its determination
related to the realization of deferred tax assets. In the event that the Company changes its determination as to the amount of
deferred tax assets that can be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision
for income taxes in the period in which such determination is made.
The
tax provision for the six months ended June 30, 2018 is based on an estimated combined statutory effective tax rate. The Company
recorded for the three and six months ended June 30, 2018 a tax expense of $6,000 and $13,000, respectively, for an effective
tax rate of 3.8% and 10.2%, respectively. For the three and six months ended June 30, 2018, the difference between the Company’s
effective tax rate and the U.S. federal 21% statutory rate and state 6.2% (net of federal benefit) statutory rate was primarily
related to U.S. and Malaysia valuation allowances, Malaysia foreign tax rate differential, and Malaysia withholding taxes on intercompany
loan interest.
ITEM 2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Forward
Looking Statements
All
statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q, 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” in our Annual Report on Form 10-K, for the year ended December 31,
2017 and elsewhere in this Quarterly Report could have a material adverse effect on our business, results of operations and financial
condition.
Although
we believe that the expectations reflected in the forward-looking statements are reasonable, forward-looking statements are inherently
subject to known and unknown 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 Quarterly 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 Quarterly 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 Quarterly Report, the documents that we reference in this Quarterly Report and have filed with the SEC as exhibits,
and our Annual Report on Form 10-K for the year ended December 31, 2017, 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.
OVERVIEW
We
are a vertically integrated, advanced materials provider specializing in monocrystalline sapphire for applications in optical
and industrial systems. We use our proprietary crystal growth technology to produce high-quality sapphire products to meet our
customers exacting specifications. 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 the fourth quarter of 2016
we announced our decision to limit our focus in the near-term to 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.
Following
the decision in the fourth quarter of 2016 to limit our focus to the optical and industrial sapphire markets and exit the LED
market, we developed a plan to close our Malaysia facility, scale down and consolidate remaining operations in the U.S. and sell
additional assets that would not be needed for our current business strategy. We evaluated our U.S. and Malaysia asset portfolios
and determined we had excess machinery, equipment and facilities assets.
In
March 2017, we held auctions at our U.S. and Malaysia properties in an effort to sell excess machinery equipment with mixed results.
Since the March 2017 auction, we have sold some additional U.S. and Malaysia equipment, and continue to seek buyers for our remaining
unsold U.S. and Malaysia equipment. In May 2018, we held auctions for assets located at each of our U.S. properties, resulting
in the sale of a portion of the excess U.S. equipment.
We
are actively pursuing the sale or lease of the Batavia, Illinois, manufacturing and office facility. We are also actively trying
to sell a parcel of extra land in Batavia and a manufacturing facility in Penang, Malaysia. The timing on the sale or lease of
this real estate is difficult to predict.
We
operate in a very competitive market. Our ability to expand our optical and industrial business and acceptance of new product
offerings is difficult to predict.
In
addition, our current optical and industrial sapphire business serves smaller markets than our historical undertakings, therefore,
we are actively evaluating the acquisition of profitable companies outside of the sapphire market to utilize our substantial net
operating loss carry-forwards.
Historically,
a significant portion of our revenue has been derived from sales to relatively few customers. For the three months ended June 30,
2018, we had three customers individually that accounted for approximately 21%, 15% and 13% of revenue. For the three months ended
June 30, 2017, we had three customers individually that accounted for approximately 17%, 12% and 10% of revenue. For the
six months ended June 30, 2018, we had three customers that accounted for approximately 15%, 15% and 10% of revenue and for
the six months ended June 30, 2017, we had four customers that accounted for approximately 17%, 13%, 11% and 11% of revenue.
Our principal customers have been defense subcontractors, industrial manufacturers, fabricators and resellers. No other customer
accounted for 10% or more of our revenues during the three and six months ended June 30, 2018 and 2017. 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.
We
recognize revenue based upon the shipping terms with our customers, and from our government contract as costs and fees are incurred.
Delays in product orders or changes to the timing of shipments could cause our quarterly revenue to vary significantly. We sell
our products on a global basis, and historically derived a significant portion of our revenue from customers outside of the U.S.,
with the majority of our sales to the European and Asian markets. Following the decision to limit our focus to the optical and
industrial sapphire markets, a major source of our revenue is derived from the North American market. All of our revenue and corresponding
accounts receivable are denominated in U.S. dollars.
We
manage direct sales from our Bensenville, Illinois offices. Substantially all of our revenue is generated by our direct sales
force and we expect this to continue in the future.
We
manufacture and ship our products from our facilities in the Chicago metropolitan area. We have an aggregate of approximately
196,400 square feet of manufacturing and office space in Batavia, Franklin Park and Bensenville, Illinois, and a 65,000 square-foot
facility in Penang, Malaysia. However, we are no longer operating out of our Batavia facility of 134,400 square feet. Additionally,
it is likely that, as of the third quarter of 2018, we will vacate the Franklin Park facility due to expiration of our lease agreement,
and will consolidate our operations into our Bensenville facility. The Malaysia and Batavia facilities are currently held for
sale. Additional land in Batavia is also held for sale.
Our
cost of goods sold consists primarily of manufacturing materials, labor, manufacturing-related overhead, such as utilities, depreciation
and rent, provisions for excess and obsolete inventory reserves, idle plant charges, outsourcing costs, freight and warranties.
We purchase materials and supplies to support current and future demand for our products. We are subject to variations in the
cost of consumables from period to period because we do not have long-term fixed-price agreements with our suppliers. We currently
outsource some of our production processes and needs.
Our
operating expenses are comprised of sales and marketing, research and development (“R&D”), and general and administrative
(“G&A”) expenses. G&A expenses consist primarily of compensation and associated costs for finance, human resources,
information technology and administrative activities, including charges for accounting, legal, insurance and stock-based compensation.
The majority of our stock-based compensation relates to administrative personnel and is accounted for as a G&A expense.
Other
income (expense) consists of interest income and realized gains and losses on investments and currency translation.
We
account for income taxes under the asset and liability method, whereby the expected future tax consequences of temporary differences
between the book value and the tax basis of assets and liabilities are recognized as deferred tax assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected to be recognized. Our analysis of ownership changes
that limit the utilization of our net operating loss (“NOL”) carryforwards as of December 31, 2017, shows no
impact on such utilization. In order to protect our NOL carryforwards, in December 2017, we implemented a stockholders’
rights plan. We are in a cumulative loss position for the past three years. Based on an evaluation in accordance with the accounting
standards, 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.
Until an appropriate level of profitability is attained, we expect to maintain a full valuation allowance on our U.S. and Malaysia
net deferred tax assets.
We
continue to review a variety of alternatives with a goal of providing greater value to our stockholders. These alternatives could
result in, among other things, further modifying or eliminating certain of our operations, selling material assets, seeking additional
financing, a sale of the business, a merger, consolidation or other business combination, partnering or other collaboration agreements,
potential acquisitions or recapitalizations, or we may continue to operate with our current business plan and strategy. We cannot
provide assurance that this process will result in the consummation of any transaction, or that the consummation of any transaction
will provide greater value to our stockholders.
RESULTS
OF CONSOLIDATED OPERATIONS THREE MONTHS ENDED JUNE 30, 2018 AND 2017
The
following table sets forth our consolidated statements of operations for the periods indicated:
|
|
Three months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Revenue
|
|
$
|
0.8
|
|
|
$
|
1.1
|
|
Cost of goods sold
|
|
|
0.9
|
|
|
|
3.9
|
|
Gross loss
|
|
|
(0.1
|
)
|
|
|
(2.8
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
0.7
|
|
|
|
1.3
|
|
Sales and marketing
|
|
|
0.1
|
|
|
|
0.2
|
|
Research and development
|
|
|
0.1
|
|
|
|
0.2
|
|
(Gain) loss on disposal of assets
|
|
|
(1.1
|
)
|
|
|
0.4
|
|
Asset impairment charge
|
|
|
—
|
|
|
|
0.7
|
|
Total operating (income) expenses
|
|
|
(0.2
|
)
|
|
|
2.8
|
|
Income (loss) from operations
|
|
|
0.1
|
|
|
|
(5.6
|
)
|
Other income
|
|
|
0.1
|
|
|
|
—
|
|
Income (loss) before income taxes
|
|
|
0.2
|
|
|
|
(5.6
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
Net income (loss)
|
|
$
|
0.2
|
|
|
$
|
(5.6
|
)
|
The
following table sets forth our consolidated statements of operations as a percentage of revenue for the periods indicated:
|
|
Three months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(percentage of total)
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of goods sold
|
|
|
113
|
|
|
|
369
|
|
Gross loss
|
|
|
(13
|
)
|
|
|
(269
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
87
|
|
|
|
123
|
|
Sales and marketing
|
|
|
13
|
|
|
|
19
|
|
Research and development
|
|
|
13
|
|
|
|
19
|
|
(Gain) loss on disposal of assets
|
|
|
(139
|
)
|
|
|
41
|
|
Asset impairment charge
|
|
|
—
|
|
|
|
64
|
|
Total operating (income) expenses
|
|
|
(26
|
)
|
|
|
266
|
|
Income (loss) from operations
|
|
|
13
|
|
|
|
(535
|
)
|
Other income
|
|
|
13
|
|
|
|
4
|
|
Income (loss) before income taxes
|
|
|
26
|
|
|
|
(531
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
Net income (loss)
|
|
|
26
|
%
|
|
|
(531
|
)%
|
Revenue.
Revenue was $801,000 and $1.1 million for the three months ended June 30, 2018 and 2017, respectively, a decrease of
$252,000. Due to fluctuations in demand and timing of orders, revenue from optical and industrial sapphire business decreased
by $305,000. This was partially offset by the increase in the revenue from our government contract of $53,000.
We operate in an
extremely volatile market, so the amount of price or volume change and acceptance of new product offerings are difficult to predict.
Gross loss.
Gross loss was $120,000 and $2.8 million for
the three months ended June 30, 2018 and 2017, respectively, a decrease in gross loss of $2.7 million. This decrease in gross
loss was primarily related to the cost of excess raw material write-down of $2.4 million during the three months ended June 30,
2017. An additional decrease in gross loss was attributable to an increase in pricing and a decrease in production costs of $356,000
due to improved production efficiency. This was partially offset by $130,000 of estimated expenses for the restoration of our leased
facilities that we may incur in order to comply with the terms of their respective leases.
General
and administrative expenses
. General and administrative expenses were $692,000 and $1.3 million for the three months ended
June 30, 2018 and 2017, respectively, a decrease of $607,000. The decrease was partially attributable to a reduction in the
employee compensation costs of $127,000 on lower headcount. We also recorded lower legal and shareholder relations expenses of
$127,000 for the three months ended June 30, 2018. The decrease was related to the SEC compliance counsel cost incurred in the
three months ended June 30, 2017. In addition, we experienced a decrease in the administrative office maintenance and connectivity
costs of $140,000 on renegotiated contracts, a decrease in the board of directors’ compensation costs of $75,000, a decrease
of $68,000 in franchise tax, a decrease in insurance costs of $42,000 on renegotiated contracts and a decrease in audit and tax
consulting expense of $28,000 due to appointment of a new audit firm.
Sales
and marketing expenses.
Sales and marketing expenses were $106,000 and $194,000 for the three months ended June 30, 2018
and 2017, respectively, a decrease of $88,000. The decrease in sales and marketing expenses was attributable to a decrease in
employee compensation costs of $105,000 on a lower headcount. This was partially offset by an increase of $17,000 related to the
costs of marketing exhibitions and customer development incurred during the three months ended June 30, 2018.
Research
and development expenses.
Research and development expenses were $42,000 and $195,000 for the three months ended June 30,
2018 and 2017, respectively, a decrease of $153,000. This is attributable primarily to a decrease in employee compensation costs
of $146,000 on a lower headcount. Additionally, we experienced a decrease in project expenses and equipment costs of $7,000.
(Gain)
loss on disposal of assets.
Following the decision to limit our focus to the smaller optical and industrial sapphire markets,
we held multiple auctions and completed individual sales of the excess equipment and consumable parts located in the U.S. and
Malaysia. As a result of these sales, for the three months ended June 30, 2018, we recorded gain on disposal of assets of $1.1
million, of which $996,000 was attributable to the sale of fully depreciated and previously written down equipment, and $56,000
was attributable to the sale of previously written down consumable parts, small tools and equipment. For the three months ended
June 30, 2017, we recorded a loss on disposal of assets of $432,000, which was primarily attributable to the loss on sale of machinery
and equipment.
Asset
impairment charge.
With the scaling down of our U.S. operations, for the three months ended June 30, 2017, we reduced the
net book value of certain machinery and equipment and recorded an asset impairment charge of $675,000. We did not record any additional
asset impairment expenses for the three months ended June 30, 2018.
Other
income.
Other income was $64,000 and $41,000 for the three months ended June 30, 2018 and, 2017, respectively, an increase
of $23,000. The increase in other income was primarily due to an increase in the interest income of $52,000 on short-term investment
securities. This was partially offset by an increase in the realized loss on foreign currency translation of $29,000.
Income
tax (benefit) expense.
In accordance with ASC740 “Accounting for Income Taxes” (“ASC740”), we evaluate
our deferred income tax assets quarterly to determine if valuation allowances are required or should be adjusted. At June 30,
2018, we continue to be in a three-year cumulative loss position, therefore, until an appropriate level of profitability is attained,
we expect to maintain a valuation allowance on net deferred tax assets related to future U.S. and Malaysia tax benefits and will
no longer accrue tax benefits or tax expense on our Consolidated Statement of Operations. The tax provision for the three months
ended June 30, 2018 is based on an estimated combined statutory effective tax rate. For the three months ended June 30,
2018, the difference between the Company’s effective tax rate of 3.8% and the U.S. federal 21% statutory rate and state
6.2% (net of federal benefit) statutory rate was primarily related to U.S. and Malaysia valuation allowances, Malaysia foreign
tax rate differential and Malaysia withholding taxes on intercompany loan interest.
RESULTS
OF CONSOLIDATED OPERATIONS SIX MONTHS ENDED JUNE 30, 2018 AND 2017
The
following table sets forth our consolidated statements of operations for the periods indicated:
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Revenue
|
|
$
|
1.8
|
|
|
$
|
2.3
|
|
Cost of goods sold
|
|
|
1.8
|
|
|
|
6.7
|
|
Gross loss
|
|
|
—
|
|
|
|
(4.4
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1.3
|
|
|
|
3.1
|
|
Sales and marketing
|
|
|
0.2
|
|
|
|
0.5
|
|
Research and development
|
|
|
0.1
|
|
|
|
0.8
|
|
(Gain) loss on disposal of assets
|
|
|
(1.6
|
)
|
|
|
1.2
|
|
Asset impairment charge
|
|
|
—
|
|
|
|
0.7
|
|
Total operating expenses
|
|
|
—
|
|
|
|
6.3
|
|
Loss from operations
|
|
|
—
|
|
|
|
(10.7
|
)
|
Other income
|
|
|
0.1
|
|
|
|
0.1
|
|
Income (loss) before income taxes
|
|
|
0.1
|
|
|
|
(10.6
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
(0.1
|
)
|
Net income (loss)
|
|
$
|
0.1
|
|
|
$
|
(10.7
|
)
|
The
following table sets forth our consolidated statements of operations as a percentage of revenue for the periods indicated:
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(percentage of total)
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of goods sold
|
|
|
100
|
|
|
|
290
|
|
Gross profit (loss)
|
|
|
—
|
|
|
|
(190
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
72
|
|
|
|
134
|
|
Sales and marketing
|
|
|
11
|
|
|
|
19
|
|
Research and development
|
|
|
6
|
|
|
|
36
|
|
(Gain) loss on disposal of assets
|
|
|
(89
|
)
|
|
|
51
|
|
Asset impairment charge
|
|
|
—
|
|
|
|
29
|
|
Total operating expenses
|
|
|
—
|
|
|
|
269
|
|
Loss from operations
|
|
|
—
|
|
|
|
(459
|
)
|
Other income
|
|
|
6
|
|
|
|
2
|
|
Income (loss) before income taxes
|
|
|
6
|
|
|
|
(457
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
(3
|
)
|
Net income (loss)
|
|
|
6
|
%
|
|
|
(460
|
)%
|
Revenue.
Revenue was $1.8 million and $2.3 million for the six months ended June 30, 2018 and 2017, respectively, a decrease of
$482,000. Due to fluctuations in demand and timing of orders, revenue from optical and industrial sapphire business decreased
by $509,000. This was partially offset by the increase in the revenue from our government contract of $27,000.
We
operate in an extremely volatile market, so the amount of price or volume change and acceptance of new product offerings are difficult
to predict.
Gross loss.
Gross loss was $13,000 and $4.4 million for the
six months ended June 30, 2018 and 2017, respectively, a decrease in gross loss of $4.4 million. This decrease in gross loss
was primarily related to the cost of excess raw material write-down of $2.4 million and costs of restructuring our operations of
$250,000 recorded during the six months ended June 30, 2017. An additional decrease in gross loss was attributable to an increase
in pricing and a decrease in production costs of $1.8 million due to improved production efficiency. This was partially offset
by $130,000 of estimated expenses for the restoration of our leased facilities that we may incur in order to comply with the terms
of their respective leases.
General
and administrative expenses
. General and administrative expenses were $1.3 million and $3.1 million for the six months ended
June 30, 2018 and 2017, respectively, a decrease of $1.8 million. The decrease was partially attributable to a reduction
in the employee compensation costs of $660,000 on lower headcount, of which $458,000 of the decrease was related to the employee
severance compensation cost recorded for the six months ended June 30, 2017. We also recorded lower legal and shareholders meeting
expenses of $475,000 for the six months ended June 30, 2018. The decrease was related to the SEC compliance counsel cost incurred
in the six months ended June 30, 2017. In addition, we experienced a decrease in the administrative office maintenance and
connectivity costs of $287,000 on renegotiated contracts, a decrease in the board of directors’ compensation costs of $150,000,
a decrease of $122,000 in franchise tax and a decrease in insurance costs of $92,000 on renegotiated contracts.
Sales
and marketing expenses.
Sales and marketing expenses were $225,000 and $438,000 for the six months ended June 30, 2018
and 2017, respectively, a decrease of $213,000. The decrease in sales and marketing expenses was attributable to a decrease in
employee compensation costs of $195,000 on a lower headcount, a decrease in marketing services and other costs related to sales
and marketing of $18,000.
Research
and development expenses.
Research and development expenses were $75,000 and $836,000 for the six months ended June 30,
2018 and 2017, respectively, a decrease of $761,000. This is attributable primarily to a decrease in employee compensation costs
of $696,000 on a lower headcount, of which $160,000 was related to the employee severance compensation cost recorded for the six
months ended June 30, 2017. Additionally, we experienced a decrease in project expenses and equipment costs of $65,000.
(Gain)
loss on disposal of assets.
Following the decision to limit our focus to the smaller optical and industrial sapphire markets,
we have held multiple auctions and completed individual sales of the excess equipment and consumable parts located in the U.S.
and Malaysia. As a result of these sales, for the six months ended June 30, 2018, we recorded gain on disposal of assets of $1.6
million, of which $1.2 million was attributable to the sale of fully depreciated and previously written down equipment, and $400,000
was attributable to the sale of previously written down consumable parts, small tools and equipment. For the six months ended
June 30, 2017, we recorded loss on disposal of assets of $1.2 million, which was primarily attributable to the loss on sale of
machinery and equipment.
Asset
impairment charge.
With the scaling down of our U.S. operations, for the six months ended June 30, 2017, we reduced the net
book value of certain machinery and equipment and recorded an asset impairment charge of $675,000. We did not record any additional
asset impairment expenses for the six months ended June 30, 2018.
Other
income.
Other income was $136,000 and $53,000 for the six months ended June 30, 2018 and, 2017, respectively, an increase
of $83,000. The increase in other income was primarily due to an increase in the interest income of $104,000 on short-term investment
securities. This was partially offset by an increase in the realized loss on foreign currency translation of $21,000.
Income
tax benefit (expense).
In accordance with ASC740 “Accounting for Income Taxes” (“ASC740”), we evaluate
our deferred income tax assets quarterly to determine if valuation allowances are required or should be adjusted. At June 30,
2018, we continue to be in a three-year cumulative loss position, therefore, until an appropriate level of profitability is attained,
we expect to maintain a valuation allowance on net deferred tax assets related to future U.S. and Malaysia tax benefits and will
no longer accrue tax benefits or tax expense on our Consolidated Statement of Operations. The tax provision for the six months
ended June 30, 2018 is based on an estimated combined statutory effective tax rate. For the six months ended June 30,
2018, the difference between the Company’s effective tax rate of 10.2% and the U.S. federal 21% statutory rate and state
6.2% (net of federal benefit) statutory rate was primarily related to U.S. and Malaysia valuation allowances, Malaysia foreign
tax rate differential and Malaysia withholding taxes on intercompany loan interest.
LIQUIDITY
AND CAPITAL RESOURCES
We
have historically funded our operations using a combination of issuances of common stock and cash generated from our operations.
In addition to this, recently, we have used the funds obtained through selling our excess equipment to fund our operations.
As
of June 30, 2018, we had cash and short-term investments totaling $19.5 million, including cash of $2.5 million held in deposits
at major banks, $3.5 million invested in money market funds and $13.5 million of short-term investments in commercial paper and
corporate notes and bonds.
Cash
flows from operating activities
The
following table represents the major components of our cash flows from operating activities for the six months ended June 30,
2018 and 2017:
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Net income (loss)
|
|
$
|
0.1
|
|
|
$
|
(10.7
|
)
|
Non-cash items:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
0.2
|
|
|
|
0.9
|
|
Net (gain) loss on disposal of assets
|
|
|
(1.6
|
)
|
|
|
1.2
|
|
Asset impairment charge
|
|
|
—
|
|
|
|
0.7
|
|
Stock-based compensation
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
Total non-cash items:
|
|
|
(1.1
|
)
|
|
|
3.4
|
|
Working capital:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
0.2
|
|
|
|
2.0
|
|
Inventories
|
|
|
0.3
|
|
|
|
3.3
|
|
Prepaid expenses and other assets
|
|
|
(0.5
|
)
|
|
|
0.9
|
|
Accounts payable
|
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
Other accruals
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
Total working capital items:
|
|
|
(0.7
|
)
|
|
|
5.7
|
|
Net cash used in operating activities
|
|
$
|
(1.7
|
)
|
|
$
|
(1.6
|
)
|
Cash
used in operating activities was $1.7 million for the six months ended June 30, 2018. During such period, we generated a net income
of $110,000, including non-cash items of ($1.1) million, and a decrease in cash from net working capital of $675,000. The net
working capital cash decrease was primarily driven by an increase in prepaid expenses and other assets of $560,000 due to collections
on sales of assets completed after the end of the period. Additionally, we experienced a decrease in accounts payable of $413,000
and a decrease in other accruals of $227,000 on decreased spending. This was partially offset by a decrease of $314,000 in raw
materials, work-in-process and consumable parts inventories used in operations, and a decrease in accounts receivable of $211,000
on lower sales volume.
Cash
used in operating activities was $1.6 million for the six months ended June 30, 2017. During such period, we generated a
net loss of $10.7 million, non-cash expenses of $3.4 million, and an increase in cash from net working capital of $5.7 million.
The net working capital decrease was driven by a decrease in inventory of $3.3 million primarily related to a write-downs of excess
raw material inventories of $2.4 million, a decrease in accounts receivable of $2.0 million on decreased revenue and collection
of a LED customer account, and a decrease in prepaid and other assets of $948,000 on amounts collected on asset sales and a deposit
refund. This decrease was partially offset by a decrease in accounts payable and other accruals of $505,000 on timing of payments.
Cash
flows from investing activities
The
following table represents the major components of our cash flows from investing activities for the six months ended June 30,
2018 and 2017:
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Purchases of investments
|
|
$
|
(7.1
|
)
|
|
$
|
—
|
|
Proceeds from disposal of assets
|
|
|
3.2
|
|
|
|
1.8
|
|
Proceeds from sales of investments
|
|
|
0.1
|
|
|
|
0.1
|
|
Net cash (used in) provided by investing activities
|
|
$
|
(3.8
|
)
|
|
$
|
1.9
|
|
Net
cash used in investing activities was $3.8 million for the six months ended June 30, 2018, primarily due to the purchases
of investments in commercial paper, corporate notes and bonds and U.S. Treasury securities of $7.1 million. This was partially
offset by the proceeds from sales of equipment and other assets of $3.2 million, as the result of the auctions we held and completion
of individual sales at our U.S. and Malaysia locations. Additionally, this was offset by the proceeds from sales of investments
of $102,000.
Net
cash provided by investing activities was $1.9 million for the six months ended June 30, 2017, primarily due to sales of
equipment and other assets at our Penang, Malaysia, and Batavia, IL, locations, as the result of our decision to close the Malaysia
facility and consolidate our operations in the U.S.
We
anticipate our capital expenditures will be kept to a minimum.
Cash
flows from financing activities
Net
cash used in financing activities was $5,000 and $173,000 for the six months ended June 30, 2018 and 2017, respectively.
This was primarily from cash used for taxes on net share settlement of equity awards.
Future
liquidity requirements
We
believe that our existing cash, cash equivalents, anticipated cash flows from operating activities and proceeds from sales or
lease of fixed assets will be sufficient to meet our anticipated cash needs for at least the next twelve months. However, if our
ability to generate 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. Our cash needs include
cash required to fund our operations. If the assumptions underlying our business plan regarding future revenues and expenses change,
or if unexpected opportunities or needs arise, we may seek to raise additional cash by selling equity or convertible debt securities.
If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders
could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of
existing stockholders.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
We
consider to be critical those accounting policies that require our most subjective or complex judgments, which often result from
a need to make estimates about the effect of matters that are inherently uncertain, and that are among the most important of our
accounting policies in the portrayal of our financial condition and results of operations. We believe the following to be our
critical accounting policies, including the more significant estimates and assumptions used in preparation of our financial statements.
Revenue
recognition
We
recognize revenue in accordance with ASC Topic 606,
Revenue From Contracts with Customers
(“Topic 606”) which
was adopted on January 1, 2018 using the full retrospective transition method. Adoption of Topic 606 had no impact on periods
reported. Under Topic 606, we recognize revenue when performance obligations under a purchase order or signed quotation are satisfied.
Revenue is recognized when products are shipped and title and risk of loss transfer to a customer. Our business practice commits
us to manufacture and deliver product upon acceptance of a customer’s purchase order or signed quotation (“agreement”).
The agreement with the customer includes specifications of the product to be delivered, price, expected ship date and payment
terms. Our agreements generally do not contain variable, financing, rights of return or non-cash components. There are no up-front
costs to develop the production process. The performance obligation is satisfied at the point in time (single performance obligation)
when the product is manufactured to the customer’s specification as performance does not create an asset with an alternate
use to us. Accordingly, we recognize revenue when title and risk of loss have been transferred to the customer, generally at the
time of shipment of product. We grant credit terms considering normal collection risk. If there is doubt about collection, full
prepayment for the order is required. Any payments received prior to shipment are recorded as deferred revenue and included in
Advance Payments in the Consolidated Balance Sheets.
Government
Contracts
We
recognize research and development revenue in the period during which the related costs are incurred over the contractually defined
period. In July 2012, we signed a contract with the Air Force Research Laboratory to produce large-area sapphire windows on a
cost plus fixed fee basis. The deliverables under the contract included development of machinery and technology to be able to
produce large area sapphire windows, prove the concept of growing large windows with that equipment and delivery of large-area
sapphire windows. We record research and development revenue on a gross basis as costs are incurred, plus a portion of the fixed
fee over a period of time as the obligations (machinery, proof of concept and finished windows) are completed following the input
method of measuring progress which recognizes revenue as resources are consumed, labor hours expended and costs are incurred.
For the six months ended June 30, 2018 and 2017, $56,000 and $29,000 of revenue was recognized, respectively. To date, we
have recorded $4.7 million in revenue and the total value of the contract is $4.7 million. At December 31, 2017, the estimated
costs to complete the contract were in excess of the contract value. For the year ended December 31, 2017, we recorded estimated
costs expected to be incurred in excess of this contract value of $243,000. No additional adjustments for the excess contract
costs were recorded for the six months ended June 30, 2018.
We
do not provide maintenance or other services and we do not have sales that involve multiple elements or deliverables.
Assets
held for sale and long-lived assets
When
circumstances, such as adverse market conditions, indicate that the carrying value of a long-lived asset may be impaired, we perform
an analysis to review the recoverability of the asset’s carrying value. We make 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 reduces net income.
In
connection with the decision to limit our focus to the optical and industrial sapphire markets and exit the LED market, we developed
a plan to close our Malaysia facility, scale down and consolidate remaining operations in the U.S. and sell additional assets
that would not be needed. We evaluated our U.S. and Malaysia asset portfolios to identify assets needed for our current business
strategy and excess assets that were no longer needed. We determined we had excess machinery, equipment and facilities. Excess
U.S. and Malaysia assets were evaluated based on assuming an orderly liquidation plan, which considers economic obsolescence and
sales of comparable equipment, as it is our intention to sell these assets. Additionally, we evaluated our U.S. assets continuing
to be used in operations using a cost and market approach to determine the current fair value.
As
a result, for the year ended December 31, 2017, we recorded an impairment charge of $1.0 million on lower than expected sales
prices for certain machinery and equipment held for sale, and identification of assets that will not be needed to support our
current operations. Additionally, for the year ended December 31, 2017, we recorded an impairment charge of $4.0 million on our
U.S. and Malaysia land and building assets on lower than expected sale price. At June 30, 2018, we reviewed the current fair
value of our assets and concluded no adjustments were needed. We will continue to assess our long-lived assets to ensure the carrying
amount of these assets is still appropriate given any changes in the asset usage, marketplace and other factors used in determining
the current fair value.
In
the six months ended June 30, 2018, we completed individual sales and held auctions for assets located at each of our U.S. properties,
resulting in the sale of a portion of our excess U.S. equipment and excess consumables, which had a total net book value of $1.5
million. Additionally, in the six months ended June 30, 2018, we completed sales of Malaysia equipment with a total net book value
of $131,000. Unsold excess equipment continued to be classified as current assets held for sale at June 30, 2018. Based on these
sales, a gain on disposal of assets of $1.6 million was recorded for the six months ended June 30, 2018.
We
are actively pursuing the sale or lease of a 134,400 square-foot manufacturing and office facility located in Batavia, Illinois,
a parcel of extra land in Batavia and a 65,000 square-foot manufacturing facility in Penang, Malaysia. Although we cannot assure
the timing of these sales, as it is our intention to complete these sales within the next twelve-month period, these properties
were classified as current assets held for sale at June 30, 2018 and December 31, 2017.
Inventory
valuation
We
value our inventory at the lower of cost or net realizable value. Net realizable value is determined based on an estimated selling
price in the ordinary course of business less reasonably predictable costs of completion and disposal. Raw materials cost is determined
using the first-in, first-out method, and work-in-process and finished goods costs are determined on a standard cost basis which
includes materials, labor and manufacturing overhead. We establish inventory reserves when conditions exist that suggest inventory
may be in excess of anticipated demand or is obsolete based on customer required specifications. We evaluate the ability to realize
the value of our inventory based on a combination of factors, including forecasted sales, estimated current and future market
value and changes in customers’ product specifications.
Our
method of estimating excess and obsolete inventory has remained consistent for all periods presented. However, if our recognition
of excess or obsolete inventory is, or if our estimates of our inventory’s potential utility become, less favorable than
currently expected, additional inventory reserves may be required.
We
determine our normal operating capacity and record as an expense costs attributable to lower utilization of equipment and staff.
For the three and six months ended June 30, 2018, we determined that we were not operating at capacity and recorded costs
associated with lower utilization of equipment and staff of $207,000 and $445,000, respectively. For the three and six months
ended June 30, 2017, costs associated with lower utilization of equipment and staff were $595,000 and $1.7 million, respectively.
It is likely we will incur additional adjustments for lower utilization of our equipment and staff in 2018.
Investments
We
invest our available cash primarily in investment grade commercial paper, FDIC guaranteed certificates of deposit, corporate notes,
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 we have the ability and intent, if necessary, to liquidate are classified as short-term.
We
review our 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. We consider 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, our 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 we conclude that an other-than-temporary impairment
has resulted, the difference between the fair value and carrying value is written off and recorded as a charge on the Consolidated
Statement of Operations. As of June 30, 2018 and 2017, no impairment was recorded.
Stock-based
compensation
We
grant stock-based compensation in the form of stock options, restricted stock units (“RSUs”) and restricted stock.
We expense stock-based compensation based upon the fair value on the date of grant. We use the Black-Scholes option pricing model
to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of
grant using an option-pricing model will be affected by assumptions regarding a number of complex and subjective variables. These
variables include our expected stock volatility over the term of the awards, actual and projected employee stock option exercise
behaviors, risk-free interest rates, forfeitures and expected dividends.
The
expected term represents the weighted-average period that our stock options are expected to be outstanding and is based upon five
years of historical data. We estimate the volatility of our common stock based on a five-year historical stock price. We base
the risk-free interest rate that we use in the option pricing model on U.S. Treasury zero-coupon issues with remaining terms similar
to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and, therefore,
use an expected dividend yield of zero in the option pricing model. We are required to estimate forfeitures at the time of grant
and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The current forfeiture rate
of 24.43% was based on our past history of forfeitures.
Pursuant
to an employment agreement in March 2017, which was subsequently amended on May 12, 2017, we granted 30,902 and 59,098 RSUs to
a key executive in the six months ended June 30, 2018 and 2017, respectively.
We
used a Monte Carlo simulation model valuation technique to determine the fair value of RSUs granted because the awards vest based
upon achievement of market price targets. The RSUs vest in the amounts set forth below on the first date the 15-trading day average
closing price of our common stock equals or exceeds the corresponding target price for the common stock before May 12, 2021.
The
following table summarizes the award vesting terms for the RSUs granted on January 1, 2018:
Number of RSUs
|
|
Target
price
|
|
902
|
|
$
|
11.00
|
|
15,000
|
|
$
|
12.50
|
|
15,000
|
|
$
|
14.00
|
|
The
following table summarizes the award vesting terms for the RSUs granted on March 17, 2017:
Number of RSUs
|
|
Target
price
|
|
15,000
|
|
$
|
6.50
|
|
15,000
|
|
$
|
8.00
|
|
15,000
|
|
$
|
9.50
|
|
14,098
|
|
$
|
11.00
|
|
At
the time the negotiation of the terms of the employment agreement began, the closing price of our common stock was $5.50. On the
date of grant, the closing price of the common stock was $6.30.
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. We used the following assumptions in determining the fair value
of the RSUs:
|
|
Granted
|
|
|
|
January
2018
|
|
|
March
2017
|
|
Daily expected stock price volatility
|
|
|
4.2806
|
%
|
|
|
4.4237
|
%
|
Daily expected mean return on equity
|
|
|
(0.2575
|
%)
|
|
|
(0.2226
|
%)
|
Daily expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Average daily risk free interest rate
|
|
|
0.0078
|
%
|
|
|
0.0063
|
%
|
The
daily expected stock price volatility is based on a four-year historical volatility of our common stock. The daily expected dividend
yield is based on annual expected dividend payments. The average daily risk-free interest rate is based on the three-year treasury
yield as of the grant date. Each of the tranches is calculated to have its own fair value and requisite service period. The fair
value of each tranche is amortized over the requisite or derived service period which is up to four years. The RSUs granted in
January 2018 and March 2017 had a grant date fair value of $209,000 and $323,000, respectively.
We
allocate stock based compensation costs using a straight-line method, which amortizes the fair value of each award on a straight-line
basis over the service period. Based on the variables affecting the valuation of our common stock and the method used for allocating
compensation costs, we recognized $297,000 in stock compensation expense during the six months ended June 30, 2018.
All
option grants are granted at an exercise price per share equal to the closing market price of our common stock on the day before
the date of grant. Therefore, 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.
Based
on the fair value of the common stock at June 30, 2018, there is no aggregate intrinsic value of all stock options exercisable
or outstanding.
Income
tax valuation allowance
In
accordance with ASC 740 “Accounting for Income Taxes” (“ASC 740”), we evaluate our deferred income tax
assets quarterly to determine if valuation allowances are required or should be adjusted. Evaluating the need for and amount of
a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all positive and negative
evidence available to determine whether all or some portion of the deferred tax assets will not be realized. A valuation allowance
must be established for deferred tax assets when it is more likely than not (a probability level of more than 50%) that they will
not be realized. In general, “realization” refers to the incremental benefit achieved through the reduction in future
taxes payable or an increase in future taxes refundable from the deferred tax assets, assuming that the underlying deductible
differences and carryforwards are the last items to enter into the determination of future taxable income. In determining our
valuation allowance, we consider the source of taxable income including taxable income in prior carryback years, future reversals
of existing temporary differences, the required use of tax planning strategies, and future taxable income exclusive of reversing
temporary differences and carryforwards. We are in a cumulative loss position for the past three years, which is considered significant
negative evidence by the accounting standards that is difficult to overcome on a “more likely than not” standard through
objectively verifiable data. The accounting standards attribute greater weight to objective verifiable evidence than to subjective
positive evidence, such as our projections for future growth. Based on an evaluation in accordance with the accounting standards,
as of June 30, 2018, 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. Any U.S. and Malaysia tax benefits or tax expense recorded on the Consolidated Statement of Operations
will be offset with a corresponding valuation allowance until such time that we change our determination related to the realization
of deferred tax assets. In the event that we change our determination as to the amount of deferred tax assets that can be realized,
we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such
determination is made.
RECENT
ACCOUNTING PRONOUNCEMENTS
See
Note 2 to the Consolidated Financial Statements for a discussion of new accounting standards.
OFF-BALANCE
SHEET ARRANGEMENTS
We
do not have any off-balance sheet arrangements.