The accompanying notes are an integral part of
these condensed consolidated financial statements.
The accompanying notes are an integral part of
these condensed consolidated financial statements.
The accompanying notes are an integral part of
these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part of
these condensed consolidated financial statements.
The accompanying notes are an integral part of
these condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
For the Three and Nine Months Ended September
30, 2021 and 2020
1. BASIS OF PRESENTATION
Interim financial data
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)
for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by GAAP for complete consolidated financial statements and should be read in conjunction with
Rubicon Technology, Inc.’s (the “Company”) annual report filed on Form 10-K for the fiscal year ended December 31,
2020. In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary
for a fair presentation of the results of operations have been included. Consolidated operating results for the three and nine-month periods
ended September 30, 2021, are not necessarily indicative of results that may be expected for the year ending December 31, 2021.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries, Rubicon Technology Worldwide LLC, Rubicon DTP LLC, Rubicon Technology BP
LLC and Rubicon Sapphire Technology (Malaysia) SDN BHD. All intercompany transactions and balances have been eliminated in consolidation.
Investments
The Company invests available cash primarily in
U.S. Treasury securities, investment grade commercial paper, FDIC guaranteed certificates of deposit, common stock, preferred stock, equity-related
securities and corporate notes. Investments classified as available-for-sale debt securities are carried at fair value with unrealized
gains and losses recorded in accumulated other comprehensive income (loss). Investments in common stock, preferred stock and equity-related
securities are reported at fair value, with both realized and unrealized gains and losses recorded in other income (expense), in the consolidated
statements of operations. Investments in which the Company has the ability and intent, if necessary, to liquidate are classified as short-term.
The Company reviews its available-for-sale debt
securities investments at the end of each quarter for other-than-temporary declines in fair value based on the specific identification
method. The Company considers various factors in determining whether an impairment is other-than-temporary, including the severity and
duration of the impairment, changes in underlying credit ratings, forecasted recovery, its ability and intent to hold the investment for
a period of time sufficient to allow for any anticipated recovery in market value and the probability that the scheduled cash payments
will continue to be made. When the Company concludes that an other-than-temporary impairment has resulted, the difference between the
fair value and carrying value is written off and recorded as a charge on the consolidated statements of operations.
Accounts receivable
The majority of the Company’s accounts receivable
is due from defense subcontractors, industrial manufacturers, fabricators, and resellers. Credit is extended based on an evaluation of
the customer’s financial condition. Accounts receivable are due based on contract terms and at stated amounts due from customers,
net of an allowance for doubtful accounts. Losses from credit sales are provided for in the financial statements.
Accounts outstanding longer than the contractual
payment terms are considered past due. The Company determines its allowance by considering a number of factors, including length of time
customer’s account is past due, customer’s current ability to pay and the condition of the general economy and industry as
a whole. The Company writes off accounts receivable when they are deemed uncollectible and such write-offs, net of payments received,
are recorded as a reduction to the allowance.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In November 2018, the Company’s Board of
Directors authorized a program to repurchase up to $3,000,000 of its common stock. In July 2020, the Company used all of the original
authorized $3,000,000.
On December 14, 2020, Rubicon’s Board of
Directors authorized an additional $3,000,000 for the repurchase of the Company’s common stock. The Company’s share repurchase
program does not obligate it to acquire any specific number of shares. The timing, price and volume of repurchases will be based on market
conditions, relevant securities laws and other factors. The stock repurchases may be made from time to time, through solicited or unsolicited
transactions in the open market, in privately negotiated transactions or pursuant to a Rule 10b5-1 plan. The program may be terminated,
suspended or modified at any time. There can be no assurance as to the number of shares of common stock repurchased. The Company records
treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock.
No shares of the Company’s common stock
were repurchased during the nine months ended September 30, 2021. The dollar value of shares that may yet to be purchased under the program
is $3,000,000.
Inventories
Inventories are valued at the lower of cost or
net realizable value. Net realizable value is determined based on an estimated selling price in the ordinary course of business less reasonably
predictable costs of completion and disposal. Raw materials cost is determined using the first-in, first-out method, and work-in-process
and finished goods costs are determined on a standard cost basis, which includes materials, labor and manufacturing overhead. The Company
reduces the carrying value of its inventories for differences between the cost and the estimated net realizable value, taking into account
usage, expected demand, technological obsolescence and other information.
The Company establishes inventory reserves when
conditions exist that suggest inventory may be in excess of anticipated demand or is obsolete based on customer specifications. The Company
evaluates the ability to realize the value of its inventory based on a combination of factors, including forecasted sales, estimated current
and future market value and changes in customers’ product specifications. The Company’s method of estimating excess and obsolete
inventory has remained consistent for all periods presented.
Inventories of continuing operations consisted of the following:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
468
|
|
|
$
|
468
|
|
Work-in-process
|
|
|
300
|
|
|
|
614
|
|
Finished goods
|
|
|
403
|
|
|
|
400
|
|
|
|
$
|
1,171
|
|
|
$
|
1,482
|
|
Inventories of discontinued operations was approximately
$0 and $59,000, as of September 30, 2021 and December 31, 2020, respectively.
As of September 30, 2021 and December 31, 2020,
the Company made the determination that raw material inventories were such that the likelihood of significant usage within the current
year was doubtful and classified such raw material inventories as non-current in the reported financial statements.
Property and equipment
Property and equipment consisted of the following:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
(in thousands)
|
|
Machinery, equipment and tooling
|
|
$
|
3,296
|
|
|
$
|
3,296
|
|
Buildings
|
|
|
1,711
|
|
|
|
1,711
|
|
Information systems
|
|
|
818
|
|
|
|
818
|
|
Land and land improvements
|
|
|
594
|
|
|
|
594
|
|
Furniture and fixtures
|
|
|
8
|
|
|
|
8
|
|
Total cost
|
|
|
6,427
|
|
|
|
6,427
|
|
Accumulated depreciation and amortization
|
|
|
(4,094
|
)
|
|
|
(3,945
|
)
|
Property and equipment, net
|
|
$
|
2,333
|
|
|
$
|
2,482
|
|
As of September 30, 2021 and December 31, 2020,
the property and equipment of the discontinued operations was $0 and less than $41,000, respectively.
Assets held for sale and long-lived assets
When circumstances, such as adverse market conditions,
indicate that the carrying value of a long-lived asset may be impaired, the Company performs an analysis to review the recoverability
of the asset’s carrying value. The Company makes estimates of the undiscounted cash flows (excluding interest charges) from the
expected future operations of the asset. These estimates consider factors such as expected future operating income, operating trends and
prospects, as well as the effects of demand, competition and other factors. If the analysis indicates that the carrying value is not recoverable
from future cash flows, an impairment loss is recognized to the extent that the carrying value exceeds the estimated fair value. The estimated
fair value of assets is determined using appraisal techniques, which assume the highest and best use of the asset by market participants,
considering the use of the asset that is physically possible, legally permissible and financially feasible at the measurement date. Any
impairment losses are recorded as operating expenses which reduce net income.
For the year ended December 31, 2020, the Company
reviewed the current fair value of its assets and concluded no adjustments were needed. Additionally, no adjustments were recorded for
the three and nine months ended September 30, 2021. 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.
During the nine months ended September 30, 2020,
the Company completed the sale of its Malaysian facility for a sale price of Ringgit Malaysia 20,750,000. The Company realized net proceeds
of approximately Ringgit Malaysia 20,364,000 (approximately $4,800,000 based on the exchange rate on September 30, 2020 of $1=MYR4.27)
after the payment of consent fees, real estate taxes, brokerage and legal fees, transfer and other expenses. The Company recorded a gain
on the disposal of the Malaysian facility of approximately $1,800,000.
The Company completed a sale of excess consumable
assets in the amount of approximately $243,000 and $613,000 during the three months and nine months ended September 30, 2021.
The Company is pursuing the sale of its remaining
parcels of land in Batavia, Illinois. Although the Company cannot assure the timing of this sale, this property was classified as current
assets held for sale at September 30, 2021 and December 31, 2020, as it is the Company’s intention to complete this sale within
the next twelve-month period. The Company cannot guarantee that it will be able to successfully complete the sale or lease of any assets.
Revenue recognition
The Company recognizes revenue in accordance with
ASC Topic 606, Revenue From Contracts with Customers (“Topic 606”), when performance obligations under a purchase order
or signed quotation are satisfied. The Company’s business practice commits the Company to manufacture and deliver product upon acceptance
of a customer’s purchase order or signed quotation (“agreement”). The agreement with the customer includes specifications
of the product to be delivered, price, expected ship date and payment terms. The Company’s agreements generally do not contain variable,
financing, rights of return or non-cash components. There are no up-front costs to develop the production process. The performance obligation
is satisfied at the point in time (single performance obligation) when the product is manufactured to the customer’s specification,
as performance does not create an asset with an alternative use to the Company. Accordingly, the Company recognizes revenue when the product
is shipped, and control of the product, title and risk of loss have been transferred to the customer. The Company grants credit terms
considering normal collection risk. If there is doubt about collection, full prepayment for the order is required. Any payments received
prior to shipment are recorded as deferred revenue and included in Advance Payments in the Consolidated Balance Sheets.
The Company does not provide maintenance or other
services and it does not have sales that involve bill & hold arrangements, multiple elements or deliverables. However, the Company
does provide product warranty for up to 90 days, for which the Company has accrued a warranty reserve of $1,000 and $2,000 at September
30, 2021 and December 31, 2020, respectively.
Net income (loss) per common share
Basic net income (loss) per common share is computed
by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss)
per common share is computed by dividing net income (loss) by the weighted-average number of diluted common shares outstanding during
the period. Diluted shares outstanding are calculated by adding to the weighted-average shares (a) any outstanding stock options based
on the treasury stock method and (b) restricted stock units (“RSU”).
Basic net income (loss) per common share for the
three months ended September 30, 2021 and 2020, were $.08 and $(.04) respectively. Basic net income (loss) per common share for the nine
months ended September 30, 2021 and 2020, were $(.22) and $(.16) respectively. Diluted net income (loss) per common share for the three
months ended September 30, 2021 and 2020, were $.08 and $(.04) respectively. Diluted net income (loss) per common share for the nine months
ended September 30, 2021 and 2020, were $(.22) and $(.16) respectively. The Company had outstanding options exercisable into 7,000 and
19,500 shares of the Company’s common stock that would have had an anti-dilutive or immaterial effect at September 30, 2021 and
2020, respectively.
3. INVESTMENTS
The Company invests its available cash primarily
in U.S. Treasury securities, investment grade commercial paper, FDIC guaranteed certificates of deposit, equity-related securities and
corporate notes. Investments classified as available-for-sale debt securities are carried at fair value with unrealized gains and losses
recorded in accumulated other comprehensive income/(loss). Investments in equity securities are reported at fair value, with both realized
and unrealized gains and losses recorded in other income (expense), in the consolidated statements of operations.
The following table presents the amortized cost
and gross unrealized losses on all securities at September 30, 2021:
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
(in thousands)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
14,749
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,749
|
|
The following table presents the amortized cost and gross unrealized
losses on all securities at December 31, 2020:
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
(in thousands)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
14,749
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
14,748
|
|
The Company values its investments at fair value,
defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation
techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard
describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable,
that may be used to measure fair value, which are the following:
|
●
|
Level 1—Quoted prices in active markets for identical assets or liabilities.
|
|
●
|
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
●
|
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The Company’s fixed-income available-for-sale
debt securities consist of U.S. Treasury securities, high-quality investment grade commercial paper, FDIC guaranteed certificates of deposit,
equity-related securities and corporate notes. The Company values these securities based on pricing from pricing vendors, who may use
quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly
or indirectly (Level 2 inputs) in determining fair value. The valuation techniques used to measure the fair value of the Company’s
financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable
market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques.
The following table summarizes the Company’s
financial assets measured at fair value on a recurring basis as of September 30, 2021:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
3,137
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,137
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities — current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
—
|
|
|
|
14,749
|
|
|
|
—
|
|
|
|
14,749
|
|
Total
|
|
$
|
3,137
|
|
|
$
|
14,749
|
|
|
$
|
—
|
|
|
$
|
17,886
|
|
The following table summarizes the Company’s
financial assets measured at fair value on a recurring basis as of December 31, 2020:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
3,136
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,136
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities — current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
—
|
|
|
|
14,748
|
|
|
|
—
|
|
|
|
14,748
|
|
Total
|
|
$
|
3,136
|
|
|
$
|
14,748
|
|
|
$
|
—
|
|
|
$
|
17,884
|
|
There are no terms or conditions restricting the
Company from redeeming any of its investments.
In addition to the debt securities noted above,
the Company had approximately $7,740,000 and $7,994,000 of time deposits included in cash and cash equivalents as of September 30, 2021
and December 31, 2020, respectively.
4. DISCONTINUED OPERATIONS: Closure of Direct Dose Rx
On June 24, 2021, the Company’s Board
of Directors decided effective immediately, to close its pharmacy operations dba Direct Dose Rx. Immediately thereafter, Direct Dose Rx
began transitioning its customers to other providers and began the process of closing its operations. Direct Dose was launched as a start-up
pharmacy primarily to deliver medications and vitamins to patients being discharged from skilled nursing facilities. The Company does
not believe that the costs associated with such closure will be material. Based on the Company’s review and analysis of ASC 205-20
Presentation of Discontinued Operations it concluded to present the discontinued operations separately.
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (discontinued operations)
|
|
$
|
—
|
|
|
$
|
226
|
|
|
$
|
370
|
|
|
$
|
559
|
|
Operating Expense (discontinued operations)
|
|
$
|
55
|
|
|
$
|
151
|
|
|
$
|
295
|
|
|
$
|
438
|
|
Loss from operations of discontinued operations, net of taxes
|
|
$
|
(61
|
)
|
|
$
|
(92
|
)
|
|
$
|
(271
|
)
|
|
$
|
(287
|
)
|
5. SIGNIFICANT CUSTOMERS
For the three months ended September 30, 2021, the
Company had four customers individually that accounted for approximately 21%, 14%, 10%and 10% of revenue. For the three months ended September
30, 2020, the Company had three customers individually that accounted for approximately 33%, 17% and 10% of revenue. For the nine months
ended September 30, 2021, the Company had three customers that accounted for approximately 24%, 18%and 12% of revenue. For the nine months
ended September 30, 2020, the Company had four customers that accounted for approximately 22%, 15%, 12% and 10% of revenue. Our principal
customers have been defense subcontractors, industrial manufacturers, fabricators, resellers and pharmacy benefit managers. No other customer
accounted for 10% or more of the Company’s revenues during the three and nine months ended September 30, 2021 and 2020. 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.
Customers
individually representing more than 10% of trade receivables accounted for approximately 85% and 44% of accounts receivable as of September
30, 2021 and December 31, 2020, respectively.
6. STOCKHOLDERS’ EQUITY
Common shares reserved
As of September 30, 2021, the Company had reserved
8,800 and 3,030 shares of common stock for issuance upon the exercise of outstanding common stock options and vesting of RSUs, respectively.
Also, 319,635 shares of the Company’s common stock were reserved for future grants of stock options and RSUs (or other similar equity
instruments) under the Rubicon Technology, Inc. 2016 Stock Incentive Plan (the “2016 Plan”) as of September 30, 2021.
7. STOCK INCENTIVE PLANS
In August 2007, the Company adopted the Rubicon
Technology Inc. 2007 Stock Incentive Plan, which was amended and restated effective in March 2011 (the “2007 Plan”), and which
allowed for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, RSUs, performance
awards and bonus shares. The maximum number of shares that could be awarded under the 2007 Plan was 440,769 shares. Options granted under
the 2007 Plan entitled the holder to purchase shares of the Company’s common stock at the specified option exercise price, which
could not be less than the fair value of the common stock on the grant date. On June 24, 2016, the plan terminated with the adoption
of the Rubicon Technology, Inc. 2016 Stock Incentive Plan, (the “2016 Plan”). Any existing awards under the 2007 Plan remain
outstanding in accordance with their current terms under the 2007 Plan.
In June 2016, the Company’s stockholders
approved adoption of the 2016 Plan effective as of March 17, 2016, which allows for the grant of incentive stock options, non-statutory
stock options, stock appreciation rights, restricted stock, RSUs, performance awards and bonus shares. The Compensation Committee of the
Board administers the 2016 Plan. The committee determines the type of award to be granted, the fair value, the number of shares covered
by the award, and the time when the award vests and may be exercised.
Pursuant to the 2016 Plan, 319,635 shares of the
Company’s common stock plus any shares subject to outstanding awards under the 2007 Plan that subsequently expire unexercised,
are forfeited without the delivery of shares or are settled in cash, will be available for issuance under the 2016 Plan. The 2016 Plan
will automatically terminate on March 17, 2026, unless the Company terminates it sooner.
The following table summarizes the activity of
the stock incentive and equity plans as of September 30, 2021, and changes during the nine months then ended:
|
|
Shares
available
for grant
|
|
|
Number of
options
outstanding
|
|
|
Weighted-
average
option
exercise price
|
|
|
Number of
restricted
stock and
board
shares issued
|
|
|
Number of
RSUs
outstanding
|
|
At January 1, 2021
|
|
|
296,105
|
|
|
|
20,100
|
|
|
$
|
9.71
|
|
|
|
99,570
|
|
|
|
48,753
|
|
Granted
|
|
|
(38,330
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,030
|
|
Exercised/issued
|
|
|
—
|
|
|
|
(11,250
|
)
|
|
|
6.10
|
|
|
|
—
|
|
|
|
(3,750
|
)
|
Cancelled/forfeited
|
|
|
61,860
|
|
|
|
(50
|
)
|
|
|
44.10
|
|
|
|
—
|
|
|
|
(45,003
|
)
|
At September 30, 2021
|
|
|
319,635
|
|
|
|
8,800
|
|
|
$
|
14.13
|
|
|
|
99,570
|
|
|
|
3,030
|
|
The Company’s aggregate intrinsic value
is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common
stock. Based on the fair value of the common stock at September 30, 2021, there was $26,110 of intrinsic value arising from 7,000 in the
money stock options exercisable and outstanding.
The Company uses the Black-Scholes option pricing
model to value stock options. The Company uses historical stock price average to determine its volatility assumptions. The assumed risk-free
rates were based on U.S. Treasury rates in effect at the time of grant with a term consistent with the expected option lives. The expected
term is based upon the vesting term of the Company’s options. The forfeiture rate of 36.13% is based on the history of forfeited
options. The expense is allocated using the straight-line method. For the three and nine months ended September 30, 2021, the Company
did not record any stock option compensation expense. For the three and nine months ended September 30, 2020, the Company recorded $2,000
and $8,000, respectively, of stock option compensation expense. As of September 30, 2021, the Company had $0 of total unrecognized compensation
cost related to non-vested stock option awards granted under the Company’s stock-based plans
As of December 31, 2020 and September 30, 2021,
the Company did not have any non-vested options.
A summary of the Company’s RSUs for the nine month period ended
September 30, 2021 is presented below:
|
|
RSUs
outstanding
|
|
|
Weighted average
price at
time of grant
|
|
|
Aggregate intrinsic
value
|
|
Non-vested RSUs as of January 1, 2021
|
|
|
48,753
|
|
|
$
|
6.31
|
|
|
|
|
|
Granted
|
|
|
3,030
|
|
|
|
9.90
|
|
|
|
|
|
Vested
|
|
|
(3,750
|
)
|
|
|
—
|
|
|
|
|
|
Cancelled
|
|
|
(45,003
|
)
|
|
|
6.20
|
|
|
|
|
|
Non-vested RSUs at September 30, 2021
|
|
|
3,030
|
|
|
$
|
9.90
|
|
|
$
|
30,000
|
|
The Company’s board of directors are compensated
partially in cash and partially in restricted stock units. For the three and nine months ended September 30, 2021 and 2020, the Company
recorded $7,500 and $22,500, respectively, of stock compensation expense related to restricted stock units.
As of September 30, 2021 and December 31, 2020,
the Company did not recognize any expense for the granting of shares to employees of the Company as a bonus.
8. 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, results of operations or cash flows of the Company.
COVID-19 Pandemic
In March 2020, the World Health Organization declared
the outbreak of a novel coronavirus (COVID-19) as a pandemic. The full impact of the COVID-19 outbreak is unknown and cannot be reasonably
estimated. The magnitude and duration of the COVID-19 outbreak, as well as other factors, could result in a material impact to the Company’s
financial statements in future reporting periods.
9. INCOME TAXES
In 2017, the U.S. enacted the Tax Cuts and Jobs
Act (the “Act”) which, among other provisions, reduced the U.S. corporate tax rate from 35% to 21% effective January 1, 2018.
The SEC issued guidance, Staff Accounting Bulletin 118, on accounting for the tax effects of the Act. The guidance allows the Company
to record provisional amounts for those impacts, with the requirement that the accounting be completed in a period not to exceed one year
from the date of enactment. The Company has completed its accounting for the tax effects of enactment of the Act. The deemed inclusion
from the repatriation tax increased from $3,900,000 at the time of provision to $5,000,000 at the time the calculation was finalized for
the tax return. The increase of the inclusion related primarily to the refinement of Malaysia earnings and profits. As the Company is
in a full valuation allowance position, an equal benefit adjustment was recorded for the impact of the increase of the deemed repatriation
tax.
The Company is subject to taxation in the U.S.
and in U.S. state jurisdictions. On a quarterly basis, the Company assesses the recoverability of deferred tax assets and the need for
a valuation allowance. Such evaluations involve the application of significant judgment, and multiple factors, both positive and negative,
are considered. For the period ended September 30, 2021, a valuation allowance has been included in the 2021 forecasted effective tax
rate. The Company is in a cumulative loss position for the past three years, which is considered significant negative evidence that is
difficult to overcome on a “more likely than not” standard through objectively verifiable data. Under the accounting standards,
objective verifiable evidence is given greater weight than subjective evidence such as the Company’s projections for future growth.
Based on an evaluation in accordance with the accounting standards, as of December 31, 2015, a valuation allowance has been recorded against
the net U.S. deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized
based on the weight of all available evidence. At September 30, 2021, 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. net deferred tax assets. Any U.S. tax benefits or tax expense recorded on the Company’s consolidated statements of operations
will be offset with a corresponding adjustment from the use of the net operating loss (“NOL”) carry-forward asset which currently
has a full valuation allowance. In the event that the Company changes its determination as to the amount of deferred tax assets that can
be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period
in which such determination is made.
10. SEGMENT INFORMATION
The Company has determined that it operates in
two segments, the sapphire and pharmacy (until June 2021) businesses.
Revenue is attributed by geographic region based on
ship-to location of the Company’s customers. The following table summarizes revenue by geographic region:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,247
|
|
|
$
|
788
|
|
|
$
|
2,356
|
|
|
$
|
2,628
|
|
Asia
|
|
|
49
|
|
|
|
91
|
|
|
|
258
|
|
|
|
359
|
|
Other
|
|
|
6
|
|
|
|
13
|
|
|
|
32
|
|
|
|
21
|
|
Total revenue
|
|
$
|
1,302
|
|
|
$
|
892
|
|
|
$
|
2,646
|
|
|
$
|
3,008
|
|
The following table summarizes sales by product type:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Optical
|
|
$
|
1,302
|
|
|
$
|
892
|
|
|
$
|
2,646
|
|
|
$
|
3,008
|
|
Substantially all of the Company’s assets are located in the
United States.