PART
I
All
statements, other than statements of historical facts, included in this Annual Report on Form 10-K including statements regarding
our estimates, expectations, beliefs, intentions, projections or strategies for the future, results of operations, financial position,
net sales, projected costs, prospects and plans and objectives of management for future operations may be “forward-looking
statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.
We have based these forward-looking statements on our current expectations and projections about future events and financial trends
that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business
operations and objectives and financial needs. These forward-looking statements can be identified by the use of terms and phrases
such as “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,”
“expect,” “forecast,” “prospects,” “goals,” “potential,” “likely,”
and the like, and/or future-tense or conditional constructions such as “will,” “may,” “could,”
“should,” etc. (or the negative thereof). Items contemplating or making assumptions about actual or potential future
sales, market size and trends or operating results also constitute forward-looking statements.
Moreover,
we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for
our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor,
or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements
we may make. Before investing in our common stock, investors should be aware that the occurrence of the risks, uncertainties and
events described in the section entitled “Risk Factors” and elsewhere in this Annual Report could have a material
adverse effect on our business, results of operations and financial condition. These risks and uncertainties include the adoption
of sapphire as a material in new applications, our successful development and the market’s acceptance of new products; our
ability to sell certain assets, including those in Malaysia and underutilized assets in the U.S., and the prices we receive therefor;
our ability to make effective acquisitions and successfully integrate newly acquired businesses into existing operations; our
ability to effectively utilize net operating loss carryforwards; dependence on key customers; our ability to secure new business
and retain customers; changes in demand or the average selling prices of sapphire products; the failure to achieve the margins
we expect, whether due to our own operations or changes in the market for our products; our ability to successfully qualify our
products with customers and potential customers; potential disruptions in our supply of electricity; changes in our product mix;
the outcome of the testing of new products and processes or the testing of our existing products for new applications; the failure
of third parties performing services for us to do so successfully; our ability to protect our intellectual property rights; the
competitive environment; and the cost of compliance with environmental standards. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, forward-looking statements are inherently subject to known and unknown risks,
including business, economic and other risks and uncertainties that may cause actual results to be materially different from those
discussed in these forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements,
which speak only as of the date of this Annual Report. We assume no obligation to update any forward-looking statements in order
to reflect any event or circumstance that may arise after the date of this Annual Report, other than as may be required by applicable
law or regulation. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect,
our actual results may vary materially from those expected or projected.
You
should read this Annual Report and the documents that we reference in this Annual Report and have filed with the Securities and
Exchange Commission (the “SEC”) as exhibits with the understanding that our actual future results, levels of activity,
performance and events and circumstances may be materially different from what we expect.
Unless
otherwise indicated, the terms “Rubicon,” the “Company,” “we,” “us,” and “our”
refer to Rubicon Technology, Inc. and our consolidated subsidiaries.
ITEM 1.
BUSINESS OVERVIEW
Rubicon
is a vertically integrated, advanced materials provider specializing in monocrystalline sapphire for applications in optical and
industrial systems. We design, assemble and maintain our own proprietary crystal growth furnaces to grow high-purity, low-stress,
ultra-low-defect-density sapphire crystals. We use our proprietary crystal growth technology to produce high-quality sapphire
products to meet our customers’ exacting specifications. Sapphire is a desirable material for high-performance applications
due to its hardness and strength, transparency in the visible and infrared spectrum, thermal conductivity, thermal shock resistance,
abrasion resistance, high melting point and chemical inertness. As a result, it is ideally suited for extreme environments in
a range of industries where material durability is just as important as optical clarity. 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 a variety of shapes and sizes, including round and rectangular windows, blanks, domes, tubes and rods.
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 focus on the optical
and industrial sapphire markets and exit the LED market. Following this decision, we closed our Malaysia facility and scaled down
and consolidated our remaining operations in the U.S. In the succeeding years we have completed individual sales and held auctions
for assets located in Malaysia and at each of our U.S. properties, resulting in the sale of certain of our excess equipment and
consumable assets. In September 2018, we completed the sale of our manufacturing and office facility located in Batavia, Illinois
and in December 2019 we entered into a purchase and sale agreement to sell our manufacturing facility located in Malaysia. We
are continuing to pursue the sale of our vacant parcels of land in Batavia, Illinois and in Penang, Malaysia. The timing on the
sale or lease of this real estate is difficult to predict. See Subsequent Events.
We
manage direct sales, grow and fabricate sapphire parts and ship from our Bensenville, Illinois facility. Previously, we leased
this property, and it served as the headquarters of our operations and one of our growth facilities. In the third quarter of 2018,
we vacated our leased Franklin Park, Illinois, facility due to the expiration of our lease. In September 2018, we completed the
purchase of our Bensenville property and consolidated all of our operations related to sapphire into this facility.
Our
sapphire business operates in a very competitive market. Our ability to expand our optical and industrial business and the acceptance
of new product offerings are difficult to predict. Our total sales backlog was approximately $1,625,000 and $859,000 as of December
31, 2019 and 2018, respectively.
In May 2019, the Company
established Rubicon DTP LLC (“Direct Dose”) and acquired certain assets, hired employees and sublet a facility from
a pharmacy that was in the process of liquidation. Direct Dose was launched as a start-up pharmacy primarily to deliver medications
and vitamins to patients being discharged from skilled nursing facilities. The Direct Dose revenue and expenses are currently not
material to the consolidated financial information of the Company and therefore are neither independently disclosed nor discussed
herein in much detail.
In
addition, since our optical and industrial sapphire business serves smaller markets than our historical undertakings, we are actively
evaluating the acquisition of profitable companies outside of the sapphire market in order to utilize our substantial net operating
loss (“NOL”) tax carryforwards.
Rubicon
Technology, Inc. is a Delaware corporation and was incorporated on February 7, 2001. Our common stock is listed on the
NASDAQ Capital Market under the ticker symbol “RBCN.”
Sapphire
INDUSTRY OVERVIEW
Sapphire
is utilized in optical and industrial applications. It is used for windows and optics for aerospace, sensor, medical, semiconductor,
instrumentation, electronics and laser applications due to its wide-band transmission, superior strength, chemical and scratch
resistance and high strength-to-weight ratio. Sapphire’s physical and optical properties also make it very well suited for
defense applications such as electro-optical and sensor suite windows for military fighter jets, helicopters, unmanned air vehicles
and ships, forward-looking infrared windows for commercial and business aircrafts, as well as missile domes, submarine windows
and components and transparent armor for military vehicles. We believe that these markets may be growing as new applications for
sapphire emerge for larger size and higher quality sapphire components.
TECHNOLOGY
Our
proprietary crystal growth technique, which we refer to as ES2, produces high-quality sapphire crystals for use in our sapphire
products. ES2 is derived from the standard Kyropoulos method of crystal growth. We developed this technique with the goal of establishing
greater control over the crystal growth process while maintaining minimal temperature variations. Unlike other techniques, during
the ES2 technique, the growing sapphire crystal exists in an unconstrained, low-stress environment inside a closed growth chamber.
The closed system allows for enhanced control of the melt, resulting in a higher quality of crystals. The temperature gradient
between the melt and the crystal in the ES2 technique is significantly lower than in other crystal growth techniques. We believe
that these aspects of the ES2 technique enable us to grow crystals that have a significantly lower dislocation density, higher
crystal purity and greater uniformity than sapphire crystals grown using other techniques. The ES2 technique provides an inherent
annealing process once the crystal is fully grown. This thermal annealing is an integral means of relieving stress in the crystal
during the ES2 process. We have demonstrated the ability to readily scale our ES2 technology in a production environment while
maintaining high crystal quality even as crystal boule size is increased.
Our
furnace environments are controlled by closed-loop control systems and the overall crystal growth process is run with minimal
operator intervention. A single operator can supervise the control of multiple ES2 furnaces simultaneously, which reduces costs.
We
have now completed crystal growth development for our Large Area Net-Shaped Crystal Extraction (“LANCE”) technology,
which is a technology designed to produce very large, thick sapphire windows. This technology was developed with government funding
under a contract with the Air Force Research Laboratory. We have completed the growth of the window blank deliverables on this
project, including the largest size sapphire window in the world at 36 x 18 x 0.8 inch dimensions. The project was completed in
2018. We will continue to refine the process to improve yield; however, our main focus now is the development of the market for
these larger windows. The product has been displayed at trade shows and has attracted interest both from military and industrial
product developers. In addition, we are exploring other potential strategies to maximize the value of the LANCE technology.
PRODUCTS
We
believe the developing optical and industrial markets require large-diameter sapphire products, high-quality sapphire and ultra-thin
double-side polished windows and wafers which may be beyond the capability of many sapphire suppliers. In addition, military and
defense applications often require a U.S.-based source for their parts. We believe we continue to have a reputation for producing
the highest quality optical-grade sapphire. We also have the ability to maintain the same high quality in crystals of very large
sizes, to support a strong and developing U.S. customer base, and to provide very high performance ultra-thin double-side polished
sapphire products, which we believe positions us well in the optical, laser, and epitaxial growth markets.
We
provide optical and industrial sapphire products in various shapes and sizes, including round and rectangular windows and blanks,
domes, tubes and rods. These optical sapphire products are qualified and used in equipment for a wide variety of end markets and
high performance applications, including defense and aerospace, specialty lighting, instrumentation, sensors and detectors, semiconductor
process equipment, electronic substrates, medical and laser applications.
We
believe we offer the industry’s largest sapphire windows and highest quality, ultra-thin, double-side polished windows and
substrates. Our product lines include very thin, double-side polished windows as thin as 300 microns for 6” optical diameter
substrates, and also very large-area blanks and polished windows. We offer round C-plane sapphire windows up to 11” in diameter
and A-plane windows up to 18” in diameter with UV grade windows up to 13.5” in diameter. We also have produced sapphire
window blanks at 36” x 18” x 0.8” dimensions.
RESEARCH
AND DEVELOPMENT
In
2019, Rubicon did not incur any research and development (“R&D”) expenses and it currently does not have any plans
for expenditures in 2020 related to R&D. In 2018, the Company had approximately $122,000 in R&D expenses.
MANUFACTURING
The
process of growing crystal begins by heating the raw material, aluminum oxide, until it reaches an ideal temperature above its
melting point. This ideal temperature is essential for our process because it allows us to produce high-purity crystals with very
low defect rates. Following the heating, a seed rod is inserted in the melted material as the material is being cooled to crystallize
into a boule. Following the growth process, each boule is rigorously inspected by using polarized lighting and magnification to
find imperfections, such as bubbles, dislocations and granular deposits within the crystal. We then drill the resulting boules
into cylindrical cores using our custom high-precision crystal orientation equipment and proprietary processes. For some of our
parts, the cores are then finished through an outsourcing model using trusted partners.
We
are dedicated to quality assurance throughout our entire operation. We employ detailed material traceability from raw material
to finished product. Our quality system is certified as ISO9001:2000.
All
of our long-lived assets are located in the United States and Malaysia. The Company currently owns vacant land and a factory in
Malaysia and has entered into an agreement to sell the factory and is in ongoing discussions to sell the land. None of its Malaysian
assets are an active part of our operations.
SALES
AND MARKETING
We
market and sell our products through our direct sales force to customers. Our direct sales force includes experienced and technically
sophisticated sales professionals and engineers who are knowledgeable in the development, manufacturing and use of sapphire windows
and other optical materials. Our sales staff works with customers during all stages of the manufacturing process, from developing
the precise composition of the parts through manufacturing and processing the parts to the customers’ specifications.
A
key component of our marketing strategy is developing and maintaining strong relationships with our customers. We achieve this
by working closely with our customers to optimize our products for their production processes. In addition, we are able to develop
long-term relationships with key customers by offering product specification assistance, providing direct access to enable them
to evaluate and audit our operations, delivering high-quality products and providing superior customer service. We believe that
maintaining close relationships with our customers’ senior management and providing technical support improves customer
satisfaction.
In
order to increase brand recognition of our products and our Company in general, we publish technical articles, distribute promotional
materials and participate in industry trade shows and conferences.
CUSTOMERS
Our
principal customers have been defense subcontractors, industrial manufacturers, fabricators and resellers. A substantial
portion of our sales have been to a small number of customers. In 2019, our top three customers (each greater than 10% of our
revenues) accounted for, in the aggregate, approximately 58% of our revenue and in 2018, the top three customers accounted
for approximately 44% of our revenue. Although we are attempting to diversify and expand our customer base, we expect our
sales to continue to be concentrated among a small number of customers. However, we also expect that our significant
customers may change from time to time. No other customer accounted for 10% or more of our revenues during 2019 or
2018.
INTELLECTUAL
PROPERTY
We
rely primarily upon a combination of know-how, patents, trade secret laws and non-disclosure agreements with employees, customers
and potential customers to protect our intellectual property. However, we believe that factors such as the technological and innovative
abilities of our personnel, the success of our ongoing product development efforts and our efforts to maintain trade secret protection
are more important than patents in maintaining our competitive position.
COMPETITION
The
markets for high-quality sapphire products are very competitive and have been characterized by rapid technological change. The
products we produce must meet certain demanding requirements to succeed in the marketplace. Although we are a well-established
sapphire producer, we face significant competition from other established providers of similar products as well as from new and
potential entrants into our markets.
We
have several competitors that compete directly with us. We believe that the key competitive factors in our markets are:
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consistently
producing high-quality products in the desired size, orientation and finish;
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pricing;
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producing
large-format high-quality crystal for certain applications;
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providing
an United States based source of sapphire for military applications; and
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the
financial stability of a company.
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We
believe the developing optical and industrial markets require cost effective high-quality sapphire, large-diameter sapphire products
and ultra-thin double-side polished windows and wafers, which we have the capabilities to provide while certain other sapphire
producers may not. In addition, defense applications often require a U.S.-based source for sapphire. We believe we continue to
have a reputation for producing the highest quality sapphire in the market. We believe this positions us well with competitive
advantages in the markets for optical and industrial sapphire.
ENVIRONMENTAL
REGULATION
In
our manufacturing process, we use water, oils, slurries, acids, adhesives and other industrial chemicals. We are subject to a
variety of federal, state and local laws regulating the discharge of these materials into the environment or otherwise relating
to the protection of the environment. These include statutory and regulatory provisions under which we are responsible for the
management of hazardous materials we use and the disposition of hazardous wastes resulting from our manufacturing processes. Failure
to comply with such provisions, whether intentional or inadvertent, could result in fines and other liabilities to the government
or third parties, injunctions requiring us to suspend or curtail operations or other remedies, which could have a material adverse
effect on our business. The cost of complying with environmental regulation is not material.
EMPLOYEES
As
of December 31, 2019, we had 22 full-time employees. None of our employees are represented by a labor union. We consider
our employee relations to be good.
OTHER
INFORMATION
You
may access, free of charge, our reports filed with the SEC (for example, our Annual Reports on Form 10-K, our Quarterly Reports
on Form 10-Q and our Current Reports on Form 8-K and any amendments to those forms) over the Internet at the SEC’s website
at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room at 100 F Street,
N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our
SEC filings are also available through our Internet website (www.rubicontechnology.com). Reports filed with or furnished to the
SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC. Alternatively, if you
would like a paper copy of any such SEC report (without exhibits) or document, write to Investor Relations, Rubicon Technology,
Inc., 900 East Green Street, Bensenville, Illinois 60106, and a copy of such requested document will be provided to you, free
of charge. The information found on our website is not part of this or any other report filed with or furnished to the SEC.
You
should carefully read the risk factors set forth below, together with the financial statements, related notes and other information
contained in this Annual Report on Form 10-K. Our business is subject to a number of important risks and uncertainties, some of
which are described below. The risks described below, however, are not the only risks that we face. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial may also impair our business operations. Any of these risks
may have a material adverse effect on our business, financial condition, results of operations and cash flows. Please refer to
the discussion of “forward-looking statements” on page one of this Annual Report on Form 10-K in connection with your
consideration of the risk factors and other important factors that may affect future results described below.
We
have incurred significant losses in prior periods and may incur losses in the future.
We
have incurred significant losses in prior periods and may incur significant losses in the future. These losses may have an adverse
effect on our ability to attract new customers or retain existing customers. We have incurred net losses of $1.1 million, $17.8
million, $62.9 million and $77.8 million in 2019, 2017, 2016 and 2015, respectively. Although we recorded net income of $963,000
in 2018, there can be no assurance that we will achieve profitability in future periods.
We
are exploring, evaluating and have begun implementing certain strategic alternatives with a goal of providing greater value to
our stockholders. There can be no assurance that we will be successful in identifying additional strategic alternatives or implementing
any strategic alternative, or that any strategic alternative will yield additional value for stockholders.
Our
management and Board of Directors are continuing to review strategic alternatives with a goal of providing greater value to our
stockholders. These alternatives could result in, among other things, modifying or eliminating certain of our operations, selling
material assets, seeking additional financing, selling the business, making investments, effecting a merger, consolidation or
other business combination, partnering or other collaboration agreements, or potential acquisitions or recapitalizations, in one
or more transactions. In connection with the Board of Directors’ continuing review of alternatives, in 2016, the Board
of Directors determined to exit the LED and mobile device markets, scale down and consolidate remaining operations in the U.S.
and limit our focus on the optical and industrial sapphire markets. There is no assurance that we will be able to successfully
expand our optical and industrial sapphire business or that we will obtain market acceptance for any new product offerings in
these markets.
There
can be no assurance that our continued exploration of strategic alternatives will result in the identification of additional alternatives
or that any transaction will be consummated. The process of exploring strategic alternatives may be costly and may be time consuming,
distracting to management and disruptive to our business operations. If we are unable to effectively manage the process,
our business, financial condition and results of operations could be adversely affected. We also cannot provide assurance that
any potential transaction, investment or other alternative identified, evaluated and consummated, will provide greater value to
our stockholders than that reflected in the current stock price. Any potential transaction or investment would be dependent upon
a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends and the
availability of financing to us on reasonable terms.
We
may acquire other businesses, products or technologies; if we do, we may be unable to integrate them with our business effectively
or at all, which may adversely affect our business, financial condition and operating results.
If
we find appropriate opportunities and have adequate funding, we may acquire other businesses, product lines or technologies. However,
if we acquire a business, product line or technology, the process of integration may produce unforeseen operating difficulties
and expenditures and may absorb significant attention of our management that would otherwise be available for the ongoing development
of our business. Further, the acquisition of a business may result in the assumption of unknown liabilities or create risks with
respect to our existing relationships with suppliers and customers. If we make acquisitions, we may issue shares of stock that
dilute other stockholders, expend cash, incur debt, assume contingent liabilities or create additional expenses related to amortizing
intangible assets, any of which may adversely affect our business, financial condition or operating results.
If
we are unable to raise additional capital when needed, we may not be able to execute our business plan or the acquisition of other
businesses.
We
may require additional capital to fund operations, capital expenditures and the introduction of new products or the acquisition
of other businesses. We may finance future cash needs through public or private equity offerings, debt financings, corporate collaborations
or licensing arrangements. Additional funds may not be available when we need them on terms that are acceptable to us, or at all.
If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our acquisition
opportunities. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience dilution,
and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through corporate
collaborations or licensing arrangements, it may be necessary to relinquish some rights to our technologies or our new products,
or grant licenses on terms that may not be favorable to us. We may seek to access the public or private capital markets whenever
conditions are favorable, even if we do not have an immediate need for additional capital at that time. Introducing newly developed
products to the market often requires investment before revenue is generated from those products. We currently have no commitments
or arrangements for any additional financing to fund our product research and development programs. However, we may need to raise
substantial additional capital in the future to complete the development and commercialization of our new products or to acquire
new businesses or technology.
We
believe our existing cash, cash equivalents and short-term investments and interest thereon, will be sufficient to fund our projected
operating requirements for at least the next twelve months. However, if our success in generating sufficient operating cash flow
or our use of cash in the next twelve months were to significantly adversely change, we may not have enough funds available to
continue operating at our current level in future periods. A limitation of funds available may raise concerns about our ability
to continue to operate. Such concerns may limit our ability to obtain financing and some customers may not be willing to do business
with us.
Our
future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:
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the
amount of our revenues and ability to be operationally cash flow positive;
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the
extent to which we acquire or invest in businesses, products or technologies;
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the
level of capital expenditures required to maintain or expand our operations;
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the
initiation, progress, timing, costs and results of studies and trials required for our new products;
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the
terms and timing of any future collaboration, licensing or other arrangements that we may establish;
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the
cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
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the
effect of competing technological and market developments; and
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the
cost of establishing sales, marketing and distribution capabilities for any new products.
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We
rely on third parties for certain finishing steps for our products, including the slicing and polishing of our sapphire crystal.
In
order to reduce product costs and improve cash flow, we use third parties for certain finishing functions for our products, including
the slicing and polishing of our sapphire crystal inventory. These types of services are only available from a limited number
of third parties. Our ability to successfully outsource these finishing functions will substantially depend on our ability
to develop, maintain and expand our strategic relationship with these third parties. Any impairment in our relationships with
the third parties performing these functions, in the absence of a timely and satisfactory alternative arrangement, could have
a material adverse effect on our business, results of operations, cash flow and financial condition. In addition, we do not
control any of these third parties or the operation of their facilities, and we may not be able to adequately manage and oversee
the third parties performing our finishing functions. Accordingly, any difficulties encountered by these third parties that
result in product defects, delays or defaults on their contractual commitments to us could adversely affect our business, financial
condition and results of operations. In addition, their facilities may be vulnerable to damage or interruption from natural
disasters, inclement weather conditions, power loss, acts of terrorism and similar events. A decision to close a facility
without adequate notice as a result of these or other unanticipated problems at the facility could result in lengthy interruptions
in their services to us; and any loss or interruption of these services could significantly increase our expenses, cause us to
default on our obligations to our customers and/or otherwise adversely affect our business. Furthermore, the outsourcing of our
finishing steps, such as slicing and polishing of wafers, may not continue to be available at reasonable prices or on commercially
reasonable terms, or at all.
Our
gross margins could fluctuate as a result of changes in our product mix and other factors, which may adversely impact our operating
results.
We
anticipate that our gross margins will fluctuate from period to period as a result of the mix of products that we sell in any
given period. We are working to increase sales of higher margin products, introduce new differentiated products and lower our
costs. There can be no assurance that we will be successful in improving our gross margin mix. If we are not successful, our overall
gross margin levels and operating results in future periods would continue to be adversely impacted. Increased competition and
the adoption of alternatives to our products, more complex engineering requirements, lower demand and other factors may lead to
a further downward shift in our product margins, leading to price erosion and lower revenues for us in the future.
The
markets in which we operate are very competitive, and many of our competitors and potential competitors are larger, more established
and better capitalized than we are.
The
markets for selling high-quality sapphire products are very competitive and have been characterized by rapid technological change.
This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses, and
failure to increase, or the loss of, market share or expected market share, any of which would likely seriously harm our business,
operating results and financial condition.
Some
of our competitors and potential competitors are substantially larger and have greater financial, technical, marketing and other
resources than we do. Given their capital resources, the large companies with which we compete, or may compete in the future,
are in a better position to substantially increase their manufacturing capacity and research and development efforts or to withstand
any significant reduction in orders by customers in our markets. Such larger companies typically have broader product lines and
market focus and thus are not as susceptible to downturns in a particular market. Some of our competitors also receive government
subsidies, which could create a competitive advantage. We would be at a competitive disadvantage if our competitors bring their
products to market earlier, if their products are more technologically capable than ours, or if any of our competitors’
products or technologies becomes preferred in the industry. Moreover, we cannot assure you that existing or potential customers
will not develop their own products, or acquire companies with products that are competitive with our products. Any of these competitive
threats could have a material adverse effect on our business, operating results or financial condition.
The
average selling prices of sapphire products have historically been volatile and in recent years sapphire product prices have been
increasingly depressed.
Historically,
our industry has experienced volatility in product demand and pricing. However, in the last five years, the sales prices for our
sapphire products have trended downward due to an over-supply of products in the market. In some countries, government programs
support sapphire producers who would otherwise be unprofitable; in such circumstances, sapphire may be sold at prices below cost
for an extended period of time, depressing market prices, to the detriment of our gross margins. This has had a significant adverse
impact on our profitability and our results of operations. Moreover, changes in average selling prices of our products as a result
of competitive pricing pressures increased sales discounts and new product introductions by our competitors could have a significant
impact on our profitability. Although we attempt to optimize our product mix, introduce new products, reduce manufacturing costs
and pass along certain increases in costs to our customers in order to lessen the effect of decreases in selling prices, we may
not be able to successfully do so in a timely manner or at all, and our results of operations and business may be harmed.
Our
future operating results may fluctuate significantly, which makes our future results difficult to predict and could cause our
operating results for particular periods to fall below expectations.
Our
revenues and operating results have fluctuated in the past and are likely to fluctuate in the future. These fluctuations are due
to a number of factors, many of which are beyond our control. In connection with the Board of Directors’ continuing review
of alternatives with a goal of providing greater value to our stockholders, on September 12, 2016, we announced the Board’s
decision to limit our business focus to the optical and industrial sapphire markets and to exit the LED and mobile device markets. The
optical and industrial sapphire markets are smaller markets than our historical undertakings and there is no assurance that we
will be able to successfully expand our optical and industrial sapphire business, or that such shift in focus will ultimately
improve our profitability or operating results.
Some
of the factors that will affect operating results include, among others:
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our
ability to attract new customers;
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gain
or loss of significant customers;
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timing
and size of orders from and shipments to customers;
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volatility
of sapphire product prices;
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our
ability to meet customer specifications for products;
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our
ability to retain key relationships with suppliers and contractor third parties, including for the slicing and polishing functions
for our sapphire crystal;
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●
|
performance
of suppliers, contractors and other third parties on whom we depend;
|
|
●
|
our
ability to reduce costs commensurate to our scaled down operations;
|
|
●
|
competitive
market conditions, including pricing actions by our competitors and our customers’ competitors;
|
|
●
|
additions
or departures of key personnel;
|
|
●
|
interruption
of operations at our manufacturing facilities or the facilities of our suppliers; and
|
The
foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our quarterly
or annual operating results. Likewise, if we acquire any new business, whether or not in the sapphire market, the operating results
of that business will be subject to the same risks as are listed above. If our revenues or operating results fall below the expectations
of investors or any securities analysts that may publish research on our Company, the price of our common stock would likely decline.
We
depend on a few customers for a major portion of our sales and our results of operations would be adversely impacted if they reduce
their order volumes.
Historically,
we have earned, and believe that in the future we will continue to earn, a substantial portion of our revenue from a small number
of customers. In 2019 our top three customers accounted for, in the aggregate, approximately 58% of our revenue and in 2018 our
top three customers accounted for approximately 44% of our revenue. If we were to lose one of our major customers or have a major
customer significantly reduce its volume of business with us, our revenues and profitability would be materially reduced unless
we are able to replace such demand with other orders promptly. We expect to continue to be dependent on our major customers, the
number and identity of which may change from period to period.
We
generally sell our products on the basis of purchase orders. Thus, most of our customers could cease purchasing our products with
little or no notice and without penalties. In addition, delays in product orders could cause our quarterly revenue to vary significantly.
A number of factors could cause our customers to cancel or defer orders, including interruptions to their operations due to a
downturn in their industries, natural disasters, delays in manufacturing their own product offerings into which our products are
incorporated, securing other sources for the products that we manufacture or developing such products internally.
Our
products must meet exacting specifications and undetected defects may cause customers to return or stop buying our products.
Our
customers establish demanding specifications for quality, performance and reliability that our products must meet. While we inspect
our products before shipment, they still may contain undetected defects. If defects occur in our products, we could experience
lost revenue, increased costs, delays in, or cancellations or rescheduling of orders or shipments, product returns or discounts,
or damage to our reputation, any of which would harm our operating results and our business.
If
the market acceptance of newly developed products does not meet our expectations or our efforts to enhance existing products are
not successful, our future operating results may be harmed.
The
development of new products may require substantial investment in development efforts. If our newly developed products do not
achieve market acceptance, we may be unable to generate anticipated revenue and our operating results could be harmed.
Our
continuing efforts to enhance our current products and to develop new products involve several risks, including:
|
●
|
our
ability to anticipate and respond in a timely manner to changes in customer requirements;
|
|
●
|
the
significant research and development investment that may be required to make before market acceptance of a particular new
or enhanced product;
|
|
●
|
the
possibility that the industry may not accept new or enhanced products after we have invested a significant amount of resources
in development; and
|
|
●
|
competition
from new technologies, processes and products introduced by our current and/or future competitors.
|
If
we are unable to attract or retain qualified personnel, our business and product development efforts could be harmed.
Our
success depends on our continued ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial,
manufacturing, administrative and sales and marketing personnel. Competition for these individuals is intense, and we may not
be able to successfully recruit, assimilate or retain sufficiently qualified personnel. In particular, we may encounter difficulties
in recruiting and retaining a sufficient number of qualified technical personnel. The inability to attract and retain necessary
technical, managerial, manufacturing, administrative and sales and marketing personnel could harm our ability to obtain new customers
and develop new products and could adversely affect our business and operating results. In addition, the loss of the services,
or distraction, of our senior management for any reason could adversely affect our business, operating results and financial condition.
We
are dependent on the continued services and performances of certain senior management employees such as sales management and the
head of operations.
Our
future success is dependent on the continued services and contributions of our senior management who must work together effectively
in order to design and produce our products, expand our business, increase our revenue and improve our operating results. The
loss of services of our senior management for any reason could adversely affect our business, operating results and financial
condition.
We
are subject to risks from international sales that may harm our operating results.
In
2019 and 2018, revenue from sales outside of North America for our optical and industrial markets products was approximately 6%
and 13%, respectively, of our total optical and industrial markets revenue. We expect that revenue from international sales will
continue to be a portion of our total revenue for the foreseeable future. Our international sales are subject to a variety of
additional risks, including risks arising from:
|
●
|
sales
variability as a result of transacting our foreign sales in U.S. dollars as prices for our products become less competitive
in countries with currencies that are low or are declining in value against the U.S. dollar and more competitive in countries
with currencies that are high or increasing in value against the U.S. dollar;
|
|
●
|
trading
restrictions, tariffs, trade barriers and taxes;
|
|
●
|
economic
and political risks, wars, acts of terrorism, political unrest, pandemics, boycotts, curtailments of trade and other business
restrictions;
|
|
●
|
the
difficulty of enforcing contracts and collecting receivables through some foreign legal systems;
|
|
●
|
unexpected
changes in regulatory requirements and other governmental approvals, permits and licenses; and
|
|
●
|
periodic
foreign economic downturns.
|
Our
future success will depend on our ability to anticipate and effectively manage these and other risks associated with our international
sales. Our failure to manage any of these risks could harm our business, operating results and financial condition.
Our
gross margins and profitability may be adversely affected by energy costs.
Most
of our power consumption takes place in our manufacturing facility in the United States. Electricity prices could increase due
to overall changes to the price of energy due to conditions in the Middle East, natural gas shortages in the U.S. and other economic
conditions and uncertainties regarding the outcome and implications of such events. Once our current purchase agreements expire,
if electricity prices increase significantly, we may not be able to pass these price increases through to our customers on a timely
basis, if at all, which could adversely affect our gross margins and results of operations.
The
protection of our intellectual property rights and the defense of claims of infringement against us by third parties may subject
us to costly litigation.
Other
companies might allege that we are infringing certain of their patents or other rights. If we are unable to resolve these matters
satisfactorily, or to obtain licenses on acceptable terms, we may face litigation. Any litigation to enforce patents issued to
us, to protect trade secrets or know-how possessed by us or to defend us or indemnify others against claimed infringement of the
rights of others could have a material adverse effect on our financial condition and operating results. Regardless of the validity
or successful outcome of any such intellectual property claims, we may need to expend significant time and expense to protect
our intellectual property rights or to defend against claims of infringement by third parties, which could have a material adverse
effect on us. If we lose any such litigation where we are alleged to infringe the rights of others, we may be required to:
|
●
|
pay
substantial damages;
|
|
●
|
seek
licenses from others; or
|
|
●
|
change,
or stop manufacturing or selling, some or all of our products.
|
Any
of these outcomes could have an adverse effect on our business, results of operations or financial condition.
We
are subject to numerous environmental laws and regulations, which could expose us to environmental liabilities, increase our manufacturing
and related compliance costs or otherwise adversely affect our business and operating results.
In
our manufacturing process, we use water, oils, slurries, acids, adhesives and other industrial chemicals. We are subject to a
variety of foreign, federal, state and local laws and regulations governing the protection of the environment. These environmental
laws and regulations include those relating to the use, storage, handling, discharge, emission, disposal and reporting of toxic,
volatile or otherwise hazardous materials used in our manufacturing processes. These materials may have been or could be released
into the environment at properties currently or previously operated by us, at other locations during the transport of the materials,
or at properties to which we send substances for treatment or disposal. If we were to violate or become liable under environmental
laws and regulations or become non-compliant with permits required at some of our facilities, we could be held financially responsible
and incur substantial costs, including investigation and cleanup costs, fines and civil or criminal sanctions, third-party property
damages or personal injury claims. In addition, new laws and regulations or stricter enforcement of existing laws and regulations
could give rise to additional compliance costs and liabilities.
Our
operations are concentrated in one facility, and the unavailability of this facility could harm our business.
Our
manufacturing, research and development, sales and marketing, and administrative activities are concentrated in one facility located
in Bensenville, Illinois. Going forward, this will be our sole operating facility. Should a casualty, natural disaster, inclement
weather, an outbreak of disease, power loss, an act of terrorism or similar event affect the Chicagoland area, our operations
could be significantly impacted. We may not be able to replicate the manufacturing capacity and other operations of our Bensenville
facility or such replication could take significant time and resources to accomplish. The disruption from such an event could
adversely affect or interrupt entirely our ability to conduct our business.
We
are dependent on information technology, and disruptions, failures or security breaches of our information technology infrastructure
could have a material adverse effect on our operations. In addition, increased information technology security threats and
more sophisticated computer crime pose a risk to our systems, networks, products and services.
We
rely on information technology networks and systems, including the Internet and cloud services, many of which are managed by third
parties, to securely process, transmit and store electronic information of financial, marketing, legal and regulatory nature to
manage our business processes and activities. Although we have implemented enhanced controls around our information technology
systems, these systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading
or replacing software, databases, power outages, hardware failures, telecommunication failures, user errors, natural disasters,
terrorist attacks or other catastrophic events. If any of our significant information technology systems suffer severe damage,
disruption or shutdown, and our disaster recovery and business continuity plans do not effectively resolve the issues in a timely
manner, our product sales, financial condition and results of operations may be materially and adversely affected, and we could
experience delays in reporting our financial results, or our operations may be disrupted, exposing us to performance failures
with customers. In addition, cybersecurity threats, such as computer viruses, attacks by computer hackers or other cybersecurity
threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data.
There can be no assurance that our security controls and safeguard measures taken to improve our cybersecurity protection will
be sufficient to mitigate all potential risks to our systems, networks and data. Potential consequences of a cybersecurity attack
include disruption to systems, corruption of data, unauthorized release of confidential or otherwise protected information, reputational
damage, and litigation with third parties. The amount of insurance coverage we maintain may be inadequate to cover claims or liabilities
related to a cybersecurity attack.
Our
U.S. NOL carryforwards may expire or could be substantially limited if we experience an ownership change as defined in the Internal
Revenue Code (“IRC”) or if changes are made to the IRC.
We
have significant U.S. NOL carryforwards. Under federal tax laws, we can carry forward and use our NOLs to reduce our future U.S.
taxable income and tax liabilities until such NOL carryforwards expire in accordance with the IRC of 1986, as amended. Our NOL
carryforwards provide a benefit to us, if fully utilized, of significant future tax savings. However, our ability to use these
tax benefits in future years will depend upon the amount of our federal and state taxable income. If we do not have sufficient
federal and state income in future years to use the benefits before they expire, we will permanently lose the benefit of the NOL
carryforwards. Our ability to use the tax benefits associated with our NOL carryforwards is dependent upon our generation of future
taxable profits and our ability to successfully identify and consummate suitable acquisitions or investment opportunities.
Additionally,
Section 382 and Section 383 of the IRC provide an annual limitation on our ability to utilize our NOL carryforwards,
as well as certain built-in losses, against the future U.S. taxable income in the event of a change in ownership, as defined under
the IRC. While we have implemented a stockholder’s right plan to protect our NOL carryforwards, there is no assurance that
we will not experience a change in ownership in the future as a result of changes in our stock ownership, and any such subsequent
changes in ownership for purposes of the IRC could further limit our ability to use our NOL carryforwards.
Under
the recently enacted Tax Cut and Jobs Act, U.S. NOLs generated on or after January 1, 2018, could be limited to 80% of taxable
income. If other changes were made to the IRC, they could impact our ability to utilize our NOLs. Accordingly, any such occurrences
could adversely affect our financial condition, operating results and cash flows.
RISKS
RELATED TO OWNERSHIP OF OUR COMMON STOCK
The
trading price of our common stock has been and will likely continue to be volatile due to various factors, some of which are beyond
our control, and each of which could adversely affect our stockholders’ value.
Factors
related to our Company and our business, as well as broad market and industry factors, may adversely affect the market price of
our common stock, regardless of our actual operating performance. Such factors that could cause fluctuations in our stock price
include, among other things:
|
●
|
changes
in market valuations of other companies in our industry;
|
|
●
|
changes
in financial guidance or estimates by us, by investors or by any financial analysts who might cover our stock or our industry;
|
|
●
|
our
ability to meet the performance expectations of financial analysts or investors;
|
|
●
|
our
ability to develop and market new and enhanced products on a timely basis;
|
|
●
|
announcements
by us or our competitors of significant products, contracts, acquisitions or strategic partnerships;
|
|
●
|
general
market and economic conditions; and
|
|
●
|
the
size of the public float of our stock.
|
Our
certificate of incorporation, bylaws and Delaware law may discourage takeovers and business combinations that our stockholders
might consider in their best interests.
A
number of provisions in our certificate of incorporation and bylaws, as well as anti-takeover provisions of Delaware law, may
have the effect of delaying, deterring, preventing or rendering more difficult a change in control of Rubicon that our stockholders
might consider in their best interests. These provisions include:
|
●
|
a
classified Board of Directors;
|
|
●
|
a
tax benefits preservation plan designed to preserve our ability to utilize our net operating
losses as a result of certain stock ownership changes, which may have the effect of discouraging
transactions involving an actual or potential change in our ownership;
|
|
●
|
granting
to the Board of Directors sole power to set the number of directors and to fill any vacancy
on the Board of Directors, whether such vacancy occurs as a result of an increase in
the number of directors or otherwise;
|
|
●
|
limitations
on the ability of stockholders to remove directors;
|
|
●
|
the
ability of our Board of Directors to designate and issue one or more series of preferred
stock without stockholder approval, the terms of which may be determined at the sole
discretion of the Board of Directors;
|
|
●
|
prohibition
on stockholders from calling special meetings of stockholders;
|
|
●
|
prohibition
on stockholders from acting by written consent; and
|
|
●
|
establishment
of advance notice requirements for stockholder proposals and nominations for election
to the Board of Directors at stockholder meetings.
|
These
provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered
by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely
affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.
The
foregoing provisions of our certificate of incorporation and bylaws may also make it difficult for stockholders to replace or
remove our management. These provisions may facilitate management entrenchment that may delay, deter, render more difficult or
prevent a change in our control, which may not be in the best interests of our stockholders.
We
are subject to litigation risks, including securities class action litigation, which may be costly to defend.
All
industries, including ours, are subject to legal claims, including securities litigation. When the market price of a stock declines
significantly, due to factors such as trends in the stock market in general, broad market and industry fluctuations or operating
performance, holders of that stock have sometimes instituted securities class action litigation against the company that issued
the stock. This sort of litigation can be particularly costly and may divert the attention of our management and our resources
in general. We have been subject to securities class action litigation in the past, as disclosed in our previous filings with
the SEC. Due to the inherent uncertainty of the litigation process, the resolution of any particular legal claim or proceeding
(including by settlement) could have a material effect on our business, financial condition, results of operations or cash flows.
Further, uncertainties resulting from the initiation and continuation of securities or other litigation could harm our ability
to obtain credit and financing for our operations and to compete in the marketplace.
Our
Board of Directors does not intend to declare or pay any dividends to our stockholders in the foreseeable future.
The
declaration, payment and amount of any future dividends will be made at the discretion of our Board of Directors and will depend
upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements,
and other factors the Board of Directors considers relevant. There is no plan to pay dividends in the foreseeable future, and
if dividends are paid, there can be no assurance with respect to the amount of any such dividend.
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
Disclosure
under this item is not required, as the registrant is a smaller reporting company.
Our
executive, growth and manufacturing functions are located in our Bensenville, Illinois, 30,000 square-foot facility that we purchased
in September 2018. Previously, we leased this property, and it served as the headquarters of our operations and one of our growth
facilities. In the third quarter of 2018, we vacated our leased Franklin Park, Illinois, facility due to the expiration of our
lease. In September 2018, we completed the purchase of our Bensenville property and consolidated all of our operations into
this facility.
We
own a parcel of land in Batavia, Illinois, which was acquired in 2012 for future expansion. We also own vacant land and a 65,000
square-foot facility in Penang, Malaysia. The Company entered into an agreement for the sale of its Malaysian facility in December
2019. The remaining parcels of land located in Penang, Malaysia, and Batavia, Illinois are currently available for sale or lease and
being marketed.
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
From
time to time, we, our subsidiaries and/or our directors and officers may be named in claims arising in the ordinary course of
business. Management believes that there are no pending legal proceedings involving us or any of our subsidiaries that will, individually
or in the aggregate, have a material adverse effect on our consolidated results of operations or financial condition.
In
October 2018, we received a summons from Bartmann, Perales & Dolter, LLC, the former lessor of the Franklin Park, Illinois,
property we leased previously, alleging that we owe $175,000 in overdue rent payments, property taxes and restoration costs. We
intend to vigorously defend against these allegations and have asserted a counterclaim pursuant to the terms of the lease agreement
for reimbursement of costs and expenses to maintain the condition and repair of said property.
No
other outstanding actions exist as of December 31, 2019 or through the date of this filing.
|
ITEM 4.
|
MINE
SAFETY DISCLOSURES
|
Not
applicable.
Notes
to Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of business
Rubicon
Technology, Inc., a Delaware corporation (the “Company”), is a vertically integrated, advanced materials provider
specializing in monocrystalline sapphire for applications in optical and industrial systems. The Company sells its products on
a global basis to customers in North America, Europe and Asia. The Company maintains its operating facility in the Chicago metropolitan
area.
Principles
of consolidation
The
Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries, Rubicon Technology Worldwide
LLC, Rubicon DTP LLC, Rubicon Technology BP LLC, Rubicon Sapphire Technology (Malaysia) SDN BHD and Rubicon Technology Hong Kong
Limited. All intercompany transactions and balances have been eliminated in consolidation.
A
summary of the Company’s significant accounting policies applied in the preparation of the accompanying Consolidated Financial
Statements follows.
Cash
and cash equivalents
The
Company considers all unrestricted highly liquid investments immediately available to be cash equivalents. Cash equivalents primarily
consist of time deposits with banks, unsettled trades and brokerage money market accounts.
Restricted
cash
A
summary of the Company’s restricted cash at December 31, 2019 and 2018, is as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(in thousands)
|
|
Fixed deposits
|
|
|
171
|
|
|
|
169
|
|
|
|
$
|
171
|
|
|
$
|
169
|
|
Foreign
currency translation and transactions
Rubicon
Technology Worldwide LLC, and Rubicon Technology Hong Kong Limited assets and liabilities are translated into U.S. dollars at
exchange rates existing at the respective balance sheet dates and capital accounts at historical exchange rates. The results of
operations are translated into U.S. dollars at the average exchange rates during the respective period. Translation adjustments
resulting from fluctuations in exchange rates for Rubicon Technology Worldwide LLC and Rubicon Technology Hong Kong Limited are
recorded as a separate component of accumulated other comprehensive income (loss) within stockholders’ equity.
The
Company has determined that the functional currency of Rubicon Sapphire Technology (Malaysia) SDN BHD is the U.S. dollar. Rubicon
Sapphire Technology (Malaysia) SDN BHD’s assets and liabilities are translated into U.S. dollars using the remeasurement
method. Non-monetary assets are translated at historical exchange rates and monetary assets are translated at exchange rates existing
at the respective balance sheet dates. Translation adjustments for Rubicon Sapphire Technology (Malaysia) SDN BHD are included
in determining net income (loss) for the period. The results of operations are translated into U.S. dollars at the average exchange
rates during the respective period. The Company records these gains and losses in other income.
Foreign
currency transaction gains and losses are generated from the effects of exchange rate changes on transactions denominated in a
currency other than the functional currency of the Company, which is the U.S. dollar. Gains and losses on foreign currency transactions
are generally required to be recognized in the determination of net income (loss) for the period. The Company records these gains
and losses in other income.
Investments
We
invest our available cash primarily in U.S. Treasury securities, investment grade commercial paper, FDIC guaranteed
certificates of deposit, common 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 equity securities are reported at fair value, with both realized and unrealized
gains and losses recorded in other income, 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. As of December 31, 2019 and 2018, no impairment was recorded.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
The
Company records treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury
stock. In November 2018, the Company’s Board of Directors authorized a program to repurchase up to $3 million of the Company’s
common stock. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under
the program, shares may be repurchased in privately negotiated and/or open market transactions. The timing, price and volume of
repurchases will be based upon market conditions, relevant securities laws and other factors. The stock repurchase plan expires
on November 19, 2021, and may be terminated at any time.
Share
repurchase activity during the year ended December 31, 2019, was as follows:
Periods
|
|
Total
number of
shares
purchased
|
|
|
Average
price
paid per
share
|
|
|
Total
number of
shares
purchased
as part of
publicly
announced
program
|
|
|
Approximate
dollar value
of shares
that may yet
be purchased
under the program
(in thousands)
|
|
January 1, 2019, to December 31, 2019
|
|
|
67,141
|
|
|
$
|
7.97
|
|
|
|
67,141
|
|
|
|
2,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
67,141
|
|
|
|
|
|
|
|
|
|
|
$
|
2,399
|
|
Accounts
receivable
The
majority of the Company’s accounts receivable are 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 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:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
7
|
|
|
$
|
7
|
|
Charges to costs and expenses
|
|
|
33
|
|
|
|
—
|
|
Account write-offs, less recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
40
|
|
|
$
|
7
|
|
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 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
relevant 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. The Company recorded for the years ended December 31,
2019 and 2018, a lower of cost or net realizable value adjustment which reduced inventory and increased cost of goods sold by
$35,000 and $6,000, respectively.
In
2018 and 2019, the Company used some of its previously written down two-inch diameter core material in production of optical and
industrial sapphire wafers and did not record any additional adjustments for the years ended December 31, 2018 and December
31, 2019.
The
Company evaluates the amount of raw material needed for future production based on expected crystal growth production needed to
meet anticipated sales. The Company did not record any write-downs of its raw materials inventory for the years ended December
31, 2018 and December 31, 2019.
Inventories
are composed of the following:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
468
|
|
|
$
|
468
|
|
Work-in-process
|
|
|
901
|
|
|
|
1,322
|
|
Finished goods
|
|
|
809
|
|
|
|
340
|
|
|
|
$
|
2,178
|
|
|
$
|
2,130
|
|
In the year ended December 31, 2019, the Company made the determination
that raw material inventories were such that the likelihood of significant usage within the current year was doubtful and reclassified
such raw material inventories as non-current in the reported financial statements.
Other
inventory supplies
The
Company’s other inventory supplies include stock of consumable assets and spare parts used in the manufacturing process.
For
the year ended December 31, 2018, the Company recorded a write-down of certain of its obsolete consumable assets in the amount
of $63,000. No additional write-downs were recorded in the year ended December 31, 2019.
Assets held for sale
An asset is considered
to be held for sale when all of the following criteria are met: (i) management commits to a plan to sell the asset; (ii) it
is unlikely that the disposal plan will be significantly modified or discontinued; (iii) the asset is available for immediate
sale in its present condition; (iv) actions required to complete the sale of the asset have been initiated; (v) sale
of the asset is probable and the completed sale is expected to occur within one year; and (vi) the asset is actively being
marketed for sale at a price that is reasonable given its current market value.
A long-lived asset
classified as held for sale is measured at the lower of its carrying amount or fair value less cost to sell. If the long-lived
asset is newly acquired, the carrying amount of the long-lived asset is established based on its fair value less cost to sell at
the acquisition date. A long-lived asset is not depreciated or amortized while it is classified as held for sale.
Property
and equipment
Property
and equipment consisted of the following:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Machinery, equipment and tooling
|
|
$
|
3,341
|
|
|
$
|
3,293
|
|
Buildings
|
|
|
1,711
|
|
|
|
1,686
|
|
Information systems
|
|
|
835
|
|
|
|
819
|
|
Land and land improvements
|
|
|
594
|
|
|
|
594
|
|
Furniture and fixtures
|
|
|
8
|
|
|
|
8
|
|
Total cost
|
|
|
6,489
|
|
|
|
6,400
|
|
Accumulated depreciation and amortization
|
|
|
(3,842
|
)
|
|
|
(3,672
|
)
|
Property and equipment, net
|
|
$
|
2,647
|
|
|
$
|
2,728
|
|
Property
and equipment are carried at cost and depreciated over their estimated useful lives using the straight-line method. The cost of
maintenance and repairs is charged to expense as incurred. Significant renewals and improvements are capitalized. Depreciation
expense associated with property and equipment was $169,000 and $355,000 for the years ended December 31, 2019 and 2018,
respectively.
The
estimated useful lives are as follows:
Asset
description
|
|
Life
|
Buildings
|
|
39 years
|
Machinery,
equipment and tooling
|
|
3-10 years
|
Furniture
and fixtures
|
|
7
years
|
Information
systems
|
|
3
years
|
Warranty
cost
The
Company’s sales terms include a warranty that its products will meet certain specifications. The Company records a current
liability for the expected cost of warranty-related claims at the time of sale. The warranty reserve is included in accrued and
other current liabilities on the Consolidated Balance Sheets.
The
following table presents changes in the Company’s product warranty liability:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in
thousands)
|
|
Balance,
beginning of period
|
|
$
|
8
|
|
|
$
|
15
|
|
Charged
to cost of sales
|
|
|
31
|
|
|
|
23
|
|
Actual
product warranty expenditures
|
|
|
(35
|
)
|
|
|
(30
|
)
|
Balance,
end of period
|
|
$
|
4
|
|
|
$
|
8
|
|
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 $4,000 and $8,000 for the years ended December 31, 2019 and 2018, respectively.
Fair
value of financial instruments
The
Company’s financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable,
and accounts payable. The carrying values of these assets and liabilities approximate their fair values due to the short-term
nature of these instruments at December 31, 2019 and 2018.
Concentration
of credit risks and other risks and uncertainties
Financial
instruments that could potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents,
restricted cash, short-term investments and accounts receivable. At December 31, 2019 and 2018, the Company had $1.6 million
on deposit at foreign financial institutions. For the year ended December 31, 2019, the Company had $5.7 million on deposit
at financial institutions in excess of amounts insured by the FDIC and other foreign governmental insurance agencies. This compares
to a $6.8 million as of December 31, 2018. The Company performs a periodic evaluation of these institutions for relative credit
standing. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant
risk of loss on these balances.
The
Company uses third parties for certain finishing functions for its products, including the slicing and polishing of its sapphire
crystal inventory. These types of services are only available from a limited number of third parties. The Company’s
ability to successfully outsource these finishing functions will substantially depend on its ability to develop, maintain and
expand its strategic relationship with these third parties. As a result, the Company may be unable to meet the demand for its
products, which could have a material adverse impact on the Company.
Concentration
of credit risk related to revenue and accounts receivable is discussed in Note 4.
Revenue
recognition
Revenues
recognized include product sales and billings for costs and fees for government contracts.
Product
Sales
The
Company recognizes revenue in accordance with ASC Topic 606, Revenue From Contracts with Customers (“Topic 606”)
which was adopted on January 1, 2018. The Company recognizes revenue when performance obligations under a purchase order or signed
quotation are satisfied. The Company’s business practice commits the Company to manufacture and deliver product upon acceptance
of a customer’s purchase order or signed quotation (“agreement”). The agreement with the customer includes specifications
of the product to be delivered, price, expected ship date and payment terms. The Company’s agreements generally do not contain
variable, financing, rights of return or non-cash components. There are no up-front costs to develop the production process. The
performance obligation is satisfied at the point in time (single performance obligation) when the product is manufactured to the
customer’s specification, as performance does not create an asset with an alternative use to the Company. Accordingly, the
Company recognizes revenue when the product is shipped, and control of the product, title and risk of loss have been transferred
to the customer. The Company grants credit terms considering normal collection risk. If there is doubt about collection, full
prepayment for the order is required. Any payments received prior to shipment are recorded as deferred revenue and included in
Advance Payments in the Consolidated Balance Sheets.
Government
Contracts
The
Company recognizes R&D revenue in the period during which the related costs are incurred over the contractually defined period.
In July 2012, the Company signed a contract with the Air Force Research Laboratory (the LANCE government contract) to produce
large-area sapphire windows on a cost plus fixed fee basis for a total contract amount of $4.7 million. 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 year ended December 31, 2018, $56,000 of
revenue was recorded. The performance obligations under this contract were completed in the year ended December 31, 2018 and as
such, no R&D revenue for this contract was recognized in the year ended December 31, 2019.
Shipping
and handling costs
The
Company records costs incurred in connection with shipping and handling of products as cost of goods sold. Amounts billed to customers
in connection with these costs are included in revenue and are not material for any of the periods presented in the accompanying
financial statements.
Sales
tax
The
Company collects and remits sales taxes on products sold to customers and reports such amounts under the net method in its Consolidated
Statements of Operations and records a liability until remitted to the respective tax authority.
Stock-based
compensation
The
Company requires all share-based payments to employees, including grants of employee stock options, to be measured at fair value
and expensed in the Consolidated Statements of Operations over the service period (generally the vesting period) of the grant.
Expense is recognized in the Consolidated Statements of Operations for these share-based payments. The Company uses Black Scholes
option pricing model in order to determine the fair value of stock option grants.
Research
and development
R&D
costs are expensed as incurred. There was no R&D expense recognized during the year ended December 31, 2019. R&D expense
was $122,000 for the year ended December 31, 2018.
Accounting
for uncertainty in income taxes
The
Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood
of being realized upon settlement. The Company recognizes interest and/or penalties related to income tax matters in income tax
expense. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the years
ended December 31, 2019 and 2018.
The
Company is subject to taxation in the U.S., Malaysia and in a U.S. state jurisdiction. Due to the existence of NOL carryforwards,
tax years ended December 31, 2001 through 2006, 2008, 2009 and 2012 through 2018 are open to examination by tax authorities
for Federal purposes. Due to NOL carryforwards at the State level, tax years ended 2008, 2009 and 2012 through 2018 are open to
examination by state tax authorities. Tax years 2013 through 2018 are open to examination by the Malaysia Inland Revenue Board.
Income
taxes
Deferred
tax assets and liabilities are provided for temporary differences between financial reporting and income tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws expected to be in effect when the differences will reverse.
Deferred income taxes also arise from the future benefits of NOL carryforwards. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized. Full valuation allowances on net deferred tax assets are
maintained until an appropriate level of profitability that generates taxable income is deemed sustainable or until a tax strategy
is developed that would enable the Company to conclude that it is more likely than not that a portion of the deferred tax assets
will be realizable. Based on an evaluation in accordance with the accounting standards, as of December 31, 2019 and 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.
Use
of estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Other
comprehensive loss
Comprehensive
loss is defined as the change in equity of a business enterprise from transactions and other events from non-owner sources. Comprehensive
loss includes net loss and other non-owner changes in equity that bypass the statement of operations and are reported in a separate
component of equity.
Net
income (loss) per common share
Basic
net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding
during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted-average
number of diluted common shares outstanding during the period. Diluted shares outstanding are calculated by adding to the weighted-average
shares (a) any outstanding stock options based on the treasury stock method and (b) restricted stock units (“RSU”).
Diluted
net income per share was the same as basic net income per share for the year ended December 31, 2019, because the effects
of potentially dilutive securities did not have a material impact on the calculation of diluted net income per share. The Company
had outstanding options exercisable into 19,500 shares of the Company’s common stock that would have had an anti-dilutive
effect at December 31, 2019.
Diluted
net loss per common share was the same as basic net loss per common share for the year ended December 31, 2018, because the
effects of potentially dilutive securities were anti-dilutive.
New
accounting pronouncements adopted
In
November 2016, the FASB issued ASU No. 2016-18 (“ASU 2016-18”), Statement of Cash Flows (Topic 230): 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. As of December 31, 2019, cash and cash equivalents of $8,709,000 and restricted cash of $171,000 on the
consolidated balance sheet are presented on the consolidated statement of cash flows as $8,880,000 as the end-of-year balance
of cash, cash equivalents and restricted cash. As of December 31, 2018, cash and cash equivalents of $11,241,000 and restricted
cash of $169,000 on the consolidated balance sheet are presented on the consolidated statement of cash flows as $11,410,000 as
the end-of-year balance of cash, cash equivalents and restricted cash.
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 for the periods longer than twelve months
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 adopted
ASU 2016-02 in the first quarter of the fiscal year ending December 31, 2019. The adoption of ASU 2016-02 did not have a material
impact on the Company’s consolidated financial statements, as the Company does not have any material lease agreements.
In
June 2018, the FASB issued ASU No. 2018-07 (“ASU 2018-07”), Compensation - Stock Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting. These amendments expand the scope of Topic 718, Compensation – Stock Compensation,
which currently only includes share-based payments to employees, to include share-based payments issued to non-employees for goods
or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned.
ASU 2018-07 supersedes Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. The guidance is effective for public
companies for the interim and annual periods beginning after December 15, 2018. Early adoption is permitted, but no earlier than
a company’s adoption date of Topic 606, Revenue from Contracts with Customers. At this time, the Company does not recognize
the existence of any non-employee relationships involving share-based payments. The adoption of ASU 2018-07 effective January
1, 2019, did not have any material impact on the consolidated financial statements, as the Company has not entered into any material
transactions involving share-based payments with non-employees.
In
August 2018, the FASB issued ASU No. 2018-13 (“ASU 2018-13”), Fair Value Measurement (Topic 820): Disclosure Framework—Changes
to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 revises the disclosure requirements for fair value measurements
by removing, modifying or adding certain disclosures. This standard is effective for fiscal years beginning after December 15,
2019. Early adoption is permitted. The Company is currently in the process of evaluating the effects of this pronouncement on
its financial statements.
The Company has evaluated
other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant
impact the Company’s consolidated financial statements and related disclosures.
2.
SEGMENT INFORMATION
The Company has determined that it operates in two segments,
the sapphire and pharmacy business.
Revenue
is attributed by geographic region based on ship-to location of the Company’s customers. The following table summarizes
revenue by geographic region:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
3,324
|
|
|
$
|
3,389
|
|
Asia
|
|
|
185
|
|
|
|
478
|
|
Other
|
|
|
17
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
3,526
|
|
|
$
|
3,878
|
|
The
following table summarizes sales by product type:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
|
|
|
|
Optical
|
|
$
|
3,338
|
|
|
$
|
3,781
|
|
Core
|
|
|
9
|
|
|
|
41
|
|
Research & development
|
|
|
—
|
|
|
|
56
|
|
Rubicon DTP
|
|
|
179
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
3,526
|
|
|
$
|
3,878
|
|
The
following table summarizes assets by geographic region:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
|
|
|
|
United States
|
|
$
|
29,703
|
|
|
$
|
30,680
|
|
Malaysia
|
|
|
5,094
|
|
|
|
5,110
|
|
Other
|
|
|
4
|
|
|
|
4
|
|
Total assets
|
|
$
|
34,801
|
|
|
$
|
35,794
|
|
Rubicon DTP accounted for approximately $447,000 of the Company’s
loss for the year ended December 31, 2019.
3.
INVESTMENTS
The Company invests
available cash primarily in U.S. Treasury securities, investment grade commercial paper, FDIC guaranteed certificates of deposit,
common 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 equity
securities are reported at fair value, with both realized and unrealized gains and losses recorded as unrealized gain/(loss) on
investments and realized gain on investments, in other income/(expense), in the consolidated statements of operations. Investments
in which the Company has the ability and intent, if necessary, to liquidate are classified as short-term.
The
following table presents the amortized cost, and gross unrealized gains and losses on all securities at December 31, 2019:
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
(in thousands)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
14,668
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,668
|
|
Marketable securities
|
|
|
961
|
|
|
|
—
|
|
|
|
(171
|
)
|
|
|
790
|
|
Total short-term investments
|
|
$
|
15,629
|
|
|
$
|
—
|
|
|
$
|
(171
|
)
|
|
$
|
15,458
|
|
The
following table presents the amortized cost, and gross unrealized gains and losses on all securities at December 31, 2018:
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
(in thousands)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
14,357
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
14,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
14,357
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
14,356
|
|
The
Company values its investments at fair value, defined as the price that would be received to sell an asset or paid to transfer
a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of
observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels
of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value
which are the following:
|
●
|
Level
1—Quoted prices in active markets for identical assets or liabilities.
|
|
●
|
Level
2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities.
|
|
●
|
Level
3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities.
|
The
Company’s fixed income available-for-sale securities consist of U.S. Treasury securities, high-quality investment grade
commercial paper, FDIC guaranteed certificates of deposit, common stock, 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 December 31,
2019:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
3,759
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,759
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sales securities—current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
—
|
|
|
|
14,668
|
|
|
|
—
|
|
|
|
14,668
|
|
Marketable securities
|
|
|
790
|
|
|
|
|
|
|
|
—
|
|
|
|
790
|
|
Total
|
|
$
|
4,549
|
|
|
$
|
14,668
|
|
|
$
|
—
|
|
|
$
|
19,217
|
|
The
following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of December 31,
2018:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
2,821
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,821
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sales securities—current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
—
|
|
|
|
14,356
|
|
|
|
—
|
|
|
|
14,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,821
|
|
|
$
|
14,356
|
|
|
$
|
—
|
|
|
$
|
17,177
|
|
There
are no terms or conditions restricting the Company from redeeming any of its investments.
In
addition to the debt securities noted above, the Company had approximately $4.9 million and $8.4 million of time deposits included
in cash and cash equivalents as of December 31, 2019 and 2018, respectively.
4.
SIGNIFICANT CUSTOMERS
For
the year ended December 31, 2019, the Company had three customers that accounted for approximately 31%, 15% and 12% of its
revenue. For the year ended December 31, 2018, the Company had three customers that accounted for approximately 18%, 16%
and 10% of its revenue.
Customers
individually representing more than 10% of trade receivables accounted for approximately 74% and 79% of accounts receivable as
of December 31, 2019 and 2018, respectively.
5.
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 using 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 in 2016 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.
In
September 2018, the Company completed the sale of its 134,400 square-foot manufacturing and office facility located in Batavia,
Illinois, with the net book value of $5.9 million. The sale price for the property was $6.7 million, the Company realized net
proceeds of approximately $6.4 million after the payment of real estate taxes, brokerage and legal fees, transfer taxes and other
expenses, and recorded a gain on sale of this asset of $504,000.
In
the year ended December 31, 2018, the Company completed individual sales and held auctions for equipment and consumable assets
located at each of its U.S. properties, resulting in the sale of certain of its excess U.S. equipment and excess consumable assets,
which had a total net book value of $1.6 million. In the beginning of 2018, the Company intended to sell a certain number of its
crystal growth furnaces. Due to the changed needs and business plan, the Company reduced the number of furnaces it wanted to sell.
The difference in the number of furnaces the Company originally intended to sell and the number it actually disposed of, had a
net book value of $236,000. The additional furnaces that the Company decided to retain were reclassified from current assets
held for sale to fixed assets held and used at December 31, 2018. Additionally, in the year ended December 31, 2018, the Company
completed sales of Malaysia equipment with a total net book value of $131,000. Based on these sales, a gain on disposal of equipment
and consumable assets of $2.9 million was recorded for the year ended December 31, 2018. Unsold excess Malaysia equipment continued
to be classified as current assets held for sale at December 31, 2018.
In
the year ended December 31, 2019, we completed the sale of the remaining excess equipment located in Malaysia for total consideration
of $490,000. Such equipment had a total net book value of $188,000, thereby resulting in a gain on disposal of $302,000.
The
Company is pursuing the sale of its parcel of land in Batavia, Illinois and in Penang, Malaysia. We have entered into an agreement
to sell our manufacturing facility located in Penang, Malaysia. Although the Company cannot assure the timing of these sales,
these properties were classified as current assets held for sale at December 31, 2019 and 2018, as it is the Company’s intention
to complete these sales within the next twelve-month period.
In
September 2018, the Company completed the purchase of a property located in Bensenville, Illinois. The purchase price for the
property was approximately $2.3 million. Previously, the Company leased the Bensenville property and it was the headquarters of
its operations and one of its growth facilities. The Company used its cash on hand to purchase the property.
6.
STOCKHOLDERS’ EQUITY
Common
stock
At
the Company’s annual meeting of stockholders held on May 3, 2017, the Company’s stockholders approved amendments to
the Company’s Eighth Amended and Restated Certificate of Incorporation (as amended, the “Certificate of Incorporation”)
to (i) effect a reverse stock split of the Company’s common stock; and (ii) decrease the Company’s authorized number
of shares of common stock to three times the number of shares of the Company’s common stock outstanding immediately following
the reverse stock split. On May 3, 2017, following the annual meeting, the Company filed with the Secretary of State of the State
of Delaware a Certificate of Amendment to (a) implement the reverse stock split at a ratio of 1-for-10; and (b) to reduce the
number of authorized shares of common stock from 40,000,000 to 8,200,000, consequently reducing the number of total authorized
shares from 45,000,000 to 13,200,000. With the completion of the reverse stock split, the Company’s shares began trading
above the required $1.00 per share closing bid price, as required by the Listing Qualifications Department of NASDAQ. The share
information has been retroactively reflected for the effects of this reverse stock split for all periods presented.
Preferred
stock
At
the Company’s annual meeting of stockholders held on May 10, 2018, the Company’s stockholders approved an amendment
to 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.
Common
shares reserved
As
of December 31, 2019, the Company had reserved 76,842 shares of common stock for issuance upon the exercise of outstanding
common stock options and vesting of RSUs. Also 281,386 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 December 31, 2019.
7.
STOCKHOLDER RIGHTS AGREEMENT
On
December 18, 2017, the Company entered into a Section 382 Rights Agreement with American Stock Transfer & Trust Company, LLC,
as Rights Agent (the “Rights Agreement”) in an effort to protect stockholder value by attempting to diminish the risk
that the Company’s ability to use its net NOLs to reduce potential future federal income tax obligations may become substantially
limited. The Company’s ability to utilize its NOLs may be substantially limited if the Company experiences an “ownership
change” within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “IRC”). The Rights
Agreement is intended to act as a deterrent to any person acquiring beneficial ownership of 4.9% or more of the Company’s
outstanding common stock without the approval of the Company’s Board of Directors (the “Board”).
The
Board authorized the issuance of one Right for each outstanding share of common stock, par value $0.001 per share, of the Company,
payable to stockholders of record date of the close of business on January 2, 2018. One Right will also be issued together with
each share of the Company’s common stock issued after January 2, 2018 but before the Distribution Date (as defined below)
and, in certain circumstances, after the Distribution Date. Subject to the terms, provisions and conditions of the Rights Agreement,
if the Rights become exercisable, each Right would initially represent the right to purchase from the Company one one-thousandth
of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share, of the Company (the “Series A Preferred
Stock”) for a purchase price of $40.00. If issued, each one-thousandth of a share of Series A Preferred Stock would give
the stockholder approximately the same dividend, voting and liquidation rights as does one share of common stock. However, prior
to exercise, a Right does not give its holder any rights as a stockholder of the Company, including, without limitation, any dividend,
voting or liquidation rights.
The
Rights will not be exercisable until the earlier of (i) ten business days after a public announcement that a person has become
an “Acquiring Person” by acquiring beneficial ownership of 4.9% or more of outstanding common stock (or, in the case
of a person that had beneficial ownership of 4.9% or more of the outstanding common stock as of the close of business on December
18, 2017, by obtaining beneficial ownership of any additional shares of common stock representing 0.5% or more of the shares of
common stock then outstanding (other than pursuant to a dividend or distribution paid or made by the Company on the outstanding
shares of the common stock or pursuant to a split or subdivision of the outstanding shares of common stock) at a time such person
still beneficially owns 4.9% or more of the outstanding common stock), and (ii) ten business days (or such later date as may be
specified by the Board prior to such time as any person becomes an Acquiring Person) after the commencement of a tender or exchange
offer by or on behalf of a person that, if completed, would result in such person becoming an Acquiring Person (the “Distribution
Date”).
Until
the Distribution Date, common stock certificates or the ownership statements issued with respect to uncertificated shares of common
stock will evidence the Rights. Any transfer of shares of common stock prior to the Distribution Date will also constitute a transfer
of the associated Rights. After the Distribution Date, separate rights certificates will be issued and the Rights may be transferred
other than in connection with the transfer of the underlying shares of common stock unless and until the Board has determined
to effect an exchange pursuant to the Rights Agreement (as described below).
In
the event that a person becomes an Acquiring Person, each holder of a Right, other than Rights that are or, under certain circumstances,
were beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter have the right to receive
upon exercise of a Right and payment of the purchase price, a number of shares of the Company’s common stock (or, in certain
circumstances, cash, property or other securities of the Company) having a market value equal to two times the purchase price.
However, Rights are subject to redemption and exchange at the option of the Company.
In
the event that, at any time following a person becoming an Acquiring Person, (i) the Company engages in a merger or other business
combination transaction in which the Company is not the surviving corporation; (ii) the Company engages in a merger or other business
combination transaction in which the Company is the surviving corporation and the common stock is changed or exchanged; or (iii)
50% or more of the Company’s assets, cash flow or earning power is sold or transferred, each holder of a Right (except Rights
which have previously been voided) shall thereafter have the right to receive, upon exercise of the Right, common stock of the
acquiring company having a value equal to two times the purchase price.
At
any time until the earlier of December 18, 2020, and ten calendar days following the first date of public announcement that a
person has become an Acquiring Person or that discloses information which reveals the existence of an Acquiring Person or such
earlier date as a majority of the Board becomes aware of the existence of an Acquiring Person, the Board may redeem the Rights
in whole, but not in part, at a price of $0.001 per Right (the “Redemption Price”). The redemption of the Rights may
be made effective at such time, on such basis and with such conditions as the Board in its sole discretion may establish. Immediately
upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights
will be to receive the Redemption Price.
At
any time after a person becomes an Acquiring Person, the Board may, at its option, exchange the Rights (other than Rights that
have become void), in whole or in part, at an exchange ratio of one share of common stock, or a fractional share of Series A Preferred
Stock (or of a share of a similar class or series of the Company’s preferred stock having similar rights, preferences and
privileges) of equivalent value, per Right (subject to adjustment). Immediately upon an exchange of any Rights, the right to exercise
such Rights will terminate and the only right of the holders of Rights will be to receive the number of shares of common stock
(or fractional share of Series A Preferred Stock or of a share of a similar class or series of the Company’s preferred stock
having similar rights, preferences and privileges) equal to the number of such Rights held by such holder multiplied by the exchange
ratio.
Each
one one-thousandth of a share of Series A Preferred Stock, if issued: (i) will be nonredeemable and junior to any other series
of preferred stock the Company may issue (unless otherwise provided in the terms of such other series), (ii) will entitle holders
to preferential cumulative quarterly dividends in an amount per share of Series A Preferred Stock equal to the greater of (a)
$1 or (b) 1,000 times the aggregate the dividends, if any, declared on one share of the Company’s common stock, (iii) will
entitle holders upon liquidation (voluntary or otherwise) to receive $1,000 per share of Series A Preferred Stock plus an amount
equal to accrued and unpaid dividends and distributions thereon, whether or not declared, (iv) will have the same voting power
as one share of common stock, and (v) will entitle holders to a per share payment equal to the payment made on one share of the
Company’s common stock, if shares of the common stock are exchanged via merger, consolidation, or a similar transaction.
Because of the nature of the Series A Preferred Stock’s dividend, liquidation and voting rights, the value of a Unit of
Series A Preferred Stock purchasable upon exercise of each Right should approximate the value of one share of common stock.
The
Rights and the Rights Agreement will expire on the earliest of (i) December 18, 2020, (ii) the time at which the Rights are redeemed
pursuant to the Rights Agreement, (iii) the time at which the Rights are exchanged in full pursuant to the Rights Agreement, (iv)
the date that the Board determines that the Rights Agreement is no longer necessary for the preservation of material valuable
Tax Benefits, (v) the beginning of a taxable year of the Company to which the Board determines that no NOL tax benefits may be
carried forward, and (vi) a determination by the Board, prior to the time any Person becomes an Acquiring Person, that the Rights
Agreement and the Rights are no longer in the best interests of the Company and its stockholders.
The
Board may adjust the purchase price, the number of shares of Series A Preferred Stock or other securities or assets issuable and
the number of outstanding Rights to prevent dilution that may occur as a result of certain events, including among others, a stock
dividend, a stock split or a reclassification of the Series A Preferred Stock or common stock. With certain exceptions, no adjustments
to the purchase price will be required until cumulative adjustments amount to at least 1% of the purchase price.
For
so long as the Rights are redeemable, the Board may supplement or amend any provision of the Rights Agreement in any respect without
the approval of the holders of the Rights. From and after the time the Rights are no longer redeemable, the Board may supplement
or amend the Rights Agreement only to cure an ambiguity, to alter time period provisions, to correct inconsistent provisions,
or to make any additional changes to the Rights Agreement which the Company may deem necessary or desirable, but only to the extent
that those changes do not impair or adversely affect any Rights holder (other than an Acquiring Person or any Affiliate or Associate
of an Acquiring Person or certain of their transferees) and do not result in the Rights again becoming redeemable or the Rights
Agreement again becoming amendable other than in accordance with this sentence.
In
connection with the adoption of the Rights Agreement and authorization and declaration of the dividend of the Rights, on December
18, 2017, the Company filed the Certificate of Designation with the Secretary of State of the State of Delaware. The Certificate
of Designation became effective on December 18, 2017.
8.
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 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 2007 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, 222,980 shares of the Company’s common stock plus any shares subject to outstanding awards under
the 2007 Plan that subsequently expire unexercised, are forfeited without the delivery of shares or are settled in cash, will
be available for issuance under the 2016 Plan. The 2016 Plan will automatically terminate on March 17, 2026, unless the Company
terminates it sooner.
The
following table summarizes the activity of the stock incentive and equity plans:
|
|
Shares
available
for grant
|
|
|
Number of
options
outstanding
|
|
|
Weighted-
average
option
exercise price
|
|
|
Number of
restricted
stock shares
issued
|
|
|
Number of
RSUs
outstanding
|
|
Outstanding at January 1, 2018
|
|
|
274,494
|
|
|
|
125,564
|
|
|
|
19.53
|
|
|
|
97,692
|
|
|
|
22,384
|
|
Granted
|
|
|
(47,953
|
)
|
|
|
10,000
|
|
|
|
—
|
|
|
|
1,878
|
|
|
|
36,075
|
|
Exercised/issued
|
|
|
—
|
|
|
|
(938
|
)
|
|
|
6.10
|
|
|
|
—
|
|
|
|
(5,300
|
)
|
Canceled/forfeited
|
|
|
68,526
|
|
|
|
(65,543
|
)
|
|
|
31.66
|
|
|
|
—
|
|
|
|
(2,983
|
)
|
Outstanding at December 31, 2018
|
|
|
295,067
|
|
|
|
69,083
|
|
|
|
12.10
|
|
|
|
99,570
|
|
|
|
50,176
|
|
Granted
|
|
|
(60,925
|
)
|
|
|
1,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
925
|
|
Exercised/issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,098
|
)
|
Canceled/forfeited
|
|
|
47,244
|
|
|
|
(47,244
|
)
|
|
|
11.35
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2019
|
|
|
281,386
|
|
|
|
22,839
|
|
|
$
|
13.48
|
|
|
|
99,570
|
|
|
|
45,003
|
|
The
following table sets forth option grants made during 2019. 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.
Date
of grant
|
|
Number of
options
granted
|
|
|
Exercise
price
|
|
|
Intrinsic
value
per share
|
|
May
2019
|
|
|
1,000
|
|
|
$
|
8.34
|
|
|
|
—
|
|
At
December 31, 2019, the exercise prices of outstanding options were as follows:
Exercise price
|
|
Number of
options
outstanding
|
|
|
Average
remaining
contractual life
(years)
|
|
|
Number of
options
exercisable
|
|
$6.10 - $13.50
|
|
|
20,500
|
|
|
|
6.75
|
|
|
|
14,634
|
|
$40.10 - $44.10
|
|
|
1,850
|
|
|
|
4.94
|
|
|
|
1,850
|
|
$77.50 - $121.10
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
$194.90 - $226.90
|
|
|
489
|
|
|
|
0.44
|
|
|
|
489
|
|
|
|
|
22,839
|
|
|
|
4.86
|
|
|
|
17,973
|
|
The
weighted average grant date fair value of the options that became vested in the years ended 2019 and 2018 was $77,000 and $76,000,
respectively.
The
following table summarizes the activity of non-vested options:
|
|
Non-vested
options
|
|
|
Weighted-
average option
exercise
price
|
|
Non-vested at January 1, 2018
|
|
|
46,842
|
|
|
$
|
8.26
|
|
Granted
|
|
|
10,000
|
|
|
|
7.77
|
|
Vested
|
|
|
(8,413
|
)
|
|
|
9.04
|
|
Cancelled
|
|
|
(26,437
|
)
|
|
|
8.99
|
|
Non-vested at December 31, 2018
|
|
|
21,992
|
|
|
|
6.86
|
|
Granted
|
|
|
1,000
|
|
|
|
8.34
|
|
Vested
|
|
|
(10,878
|
)
|
|
|
7.07
|
|
Cancelled
|
|
|
(7,248
|
)
|
|
|
7.25
|
|
Non-vested at December 31, 2019
|
|
|
4,866
|
|
|
$
|
5.79
|
|
The
Company’s aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options
and the fair value of the Company’s common stock. Based on the fair value of the common stock at December 31, 2019
there was $43,000 of intrinsic value arising from 19,500 stock options exercisable or outstanding.
The
Company used historical stock prices as the basis for its volatility assumptions. The assumed risk-free rates were based on U.S.
Treasury rates in effect at the time of grant with a term consistent with the expected option lives. The expected term for the
year ended December 31, 2019, is based upon the Company’s median average life of its options. The forfeiture rate is
based on the past history of forfeited options. The expense is being allocated using the straight-line method. For the years ended
December 31, 2019 and 2018, the Company recorded $24,000 and $47,000, respectively, of stock option compensation expense.
As of December 31, 2019, the Company has $12,000 of total unrecognized compensation cost related to non-vested options granted
under the Company’s stock-based plans that it expects to recognize over a weighted-average period of 0.75 years.
For
the year ended December 31, 2019, the assumptions used for the estimated fair value at the date of option grant using the
Black-Scholes option-pricing model were as follows:
|
|
2019
|
|
Weighted-average fair value per option
|
|
$
|
6.09
|
|
Expected
term
|
|
|
5.1 years
|
|
Risk-free
interest rate
|
|
|
2.95%
|
|
Volatility
|
|
|
47%
|
|
Dividend
yield
|
|
|
None
|
|
Forfeiture
rate
|
|
|
24.43
|
%
|
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 years ended December 31, 2018 and 2017, respectively.
The
following table summarizes the award vesting terms for the RSUs granted in 2019:
Number
of RSUs
|
|
Target
price
|
|
925
|
|
$
|
7.95
|
|
The
following table summarizes the award vesting terms for the RSUs granted in 2018:
Number
of restricted stock units
|
|
Target price
|
|
902
|
|
$
|
11.00
|
|
15,000
|
|
$
|
12.50
|
|
15,000
|
|
$
|
14.00
|
|
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. 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. During the twelve months ended December 31, 2017, the first three tranches of the grant vested. No additional
tranches vested during the years ended December 31, 2019 and 2018.
The
Company used Monte Carlo simulation model valuation technique to determine the fair value of RSUs granted because the awards vest
based upon achievement of market price targets. The Monte Carlo simulation model utilizes multiple input variables that determine
the probability of satisfying the market condition stipulated in the award and calculates the fair value of each RSU. The 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. There were no grants with market price targets issued
in the year ended December 31, 2019.
A
summary of the Company’s RSUs is as follows:
|
|
RSUs
outstanding
|
|
|
Weighted-average
price at
time of grant
|
|
|
Aggregate intrinsic
value
|
|
Non-vested RSUs as of January 1, 2018
|
|
|
22,384
|
|
|
$
|
4.65
|
|
|
|
|
|
Granted
|
|
|
36,075
|
|
|
|
7.88
|
|
|
|
|
|
Vested
|
|
|
(5,300
|
)
|
|
|
8.51
|
|
|
|
|
|
Cancelled
|
|
|
(2,983
|
)
|
|
|
8.88
|
|
|
|
|
|
Non-vested RSUs as of December 31, 2018
|
|
|
50,176
|
|
|
|
6.31
|
|
|
|
|
|
Granted
|
|
|
9,925
|
|
|
|
8.32
|
|
|
|
|
|
Vested
|
|
|
(6,098
|
)
|
|
|
7.40
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Non-vested RSUs at December 31, 2019
|
|
|
54,003
|
|
|
$
|
6.56
|
|
|
$
|
354,250
|
|
The fair value of
each RSU is the market price on the date of grant and is being recorded as compensation expense ratably over the vesting terms
or the expected achievement of market price targets based on the Monte Carlo simulation model. For the years ended December 31,
2019 and 2018, the Company recorded $7,000 and $265,000 of RSU expense, respectively. The RSUs are forfeited by a participant upon
termination for any reason, and there is no proportionate or partial vesting in the periods between the vesting dates. As of December 31,
2019, there was no unrecognized compensation cost related to the non-vested RSUs.
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 December 31, 2018
|
|
|
2,454
|
|
Granted
|
|
|
—
|
|
Vested
|
|
|
(2,454
|
)
|
|
|
|
|
|
Non-vested restricted stock as of December 31, 2019
|
|
|
—
|
|
For
the year ended December 31, 2019 the Company recorded $14,000 related to restricted stock compared to $69,000 in the prior
year.
9.
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 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 allowed the Company to record provisional amounts for those impacts, with
the requirement that the accounting be completed in a period not to exceed one year from the date of enactment. The Company has
completed its accounting for the tax effects of enactment of the Act. The deemed inclusion from the repatriation tax increased
from $3.9 million at the time of provision to $5.0 million at the time the calculation was finalized for the tax return. The increase
of the inclusion related primarily to the refinement of Malaysia earnings and profits. As the Company is in a full valuation allowance
position, an equal benefit adjustment was recorded for the impact of the increase of the deemed repatriation tax.
Components
of income before income taxes and the income tax provision are as follows:
Income
(loss) before income taxes
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
|
|
|
|
U.S.
|
|
$
|
(1,142
|
)
|
|
$
|
1,017
|
|
Foreign
|
|
|
17
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,125
|
)
|
|
$
|
987
|
|
Income
taxes
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
22
|
|
|
|
24
|
|
Total current income tax expense
|
|
|
22
|
|
|
|
24
|
|
Deferred
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
Total deferred income tax expense (benefit)
|
|
|
—
|
|
|
|
—
|
|
Total income tax expense (benefit)
|
|
$
|
22
|
|
|
$
|
24
|
|
The
reconciliation of income tax computed at the federal statutory rate to income before taxes is as follows:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
U.S. federal statutory rate
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
State taxes net of federal benefit
|
|
|
(7.6
|
)
|
|
|
(7.7
|
)
|
Foreign rate differential and transactional tax
|
|
|
0.1
|
|
|
|
0.1
|
|
Tax credits
|
|
|
—
|
|
|
|
(14.0
|
)
|
Valuation allowance
|
|
|
28.5
|
|
|
|
42.7
|
|
Other
|
|
|
2.0
|
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
%
|
|
|
(2.4
|
)%
|
Deferred
income taxes reflect the net tax effects of the temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant
components of the Company’s net deferred income taxes are as follows at December 31:
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
11
|
|
|
$
|
2
|
|
Inventory reserves
|
|
|
3,185
|
|
|
|
3,323
|
|
Consumables excess reserve
|
|
|
169
|
|
|
|
170
|
|
Accrued liabilities
|
|
|
52
|
|
|
|
55
|
|
Warrant interest expense
|
|
|
196
|
|
|
|
196
|
|
Stock compensation expense
|
|
|
789
|
|
|
|
881
|
|
State net operating loss
|
|
|
15,010
|
|
|
|
14,633
|
|
Net operating loss carryforward
|
|
|
40,437
|
|
|
|
38,525
|
|
Tax credits
|
|
|
740
|
|
|
|
740
|
|
Depreciation
|
|
|
1,329
|
|
|
|
2,993
|
|
Valuation allowance
|
|
|
(61,869
|
)
|
|
|
(61,512
|
)
|
Total deferred tax assets
|
|
|
49
|
|
|
|
6
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(49
|
)
|
|
|
(6
|
)
|
Net deferred tax liability
|
|
$
|
—
|
|
|
$
|
—
|
|
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.
The
Company adopted the guidance in ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,
which requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent
in the balance sheet. As a result, each jurisdiction has one net noncurrent deferred tax asset or liability. The new guidance
does not change the existing requirement that only permits offsetting within a jurisdiction. Companies are still prohibited from
offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The change in accounting
principle did not have an impact on the Company’s results of operations, cash flows or stockholders’ equity.
At
December 31, 2019, the Company had separate Federal and Illinois NOL carryforwards of $188.1 million and $200.0 million,
respectively, which begin to expire in 2021 and 2020, respectively. In addition, at December 31, 2019, the Company had Federal
and Illinois research and development credits and Illinois investment tax credits of $662,000, $66,000 and $23,000, respectively,
which began to expire in 2019. Tax credits are accounted for using the flow-through method and therefore are taken in the year
earned.
The
Company completed an analysis of the utilization of NOLs subject to limits based upon certain ownership changes as of December
31, 2019. The results of this analysis indicated no ownership change limiting the utilization of net operating losses and tax
credits.
The
Company prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken, or expected to be taken, in a tax return. At December 31, 2019 and 2018, the Company had $1.1 million
of unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded on the Company’s financial
statements as an offset to the valuation allowance related to tax positions taken in 2012. It is not reasonably possible that
the amount will change in the next twelve months. There were no material changes to prior year or current year positions taken
during the year ended December 31, 2019.
There
were no interest or penalties related to income taxes that have been accrued or recognized as of and for the years ended December 31,
2019 and 2018.
The
Company files income tax returns in the United States federal jurisdiction and in a state jurisdiction. During 2009, the Company
began foreign operations in Malaysia and is subject to local income taxes in that jurisdiction. The Company’s Malaysia tax
returns for the periods ended December 31, 2010 through 2012 have been audited by the Malaysia Inland Revenue Board with
no changes made to the taxable income for those years. All other tax years in Malaysia are open to examination by tax authorities.
The
Company’s federal tax returns for the periods ended December 31, 2010, 2008 and 2007 have been audited by the Internal
Revenue Service (IRS) with no changes made to the Company’s taxable losses for those years. The Company’s state tax
returns for the periods ended December 31, 2009 through 2012 have been audited by the Illinois Department of Revenue with
no changes made to the Company’s taxable losses for those years. Due to the existence of NOL carryforwards, tax years ended
December 31, 2001 through 2006, 2008, 2009 and 2011 through 2018 are open to examination by tax authorities for Federal purposes.
Due to NOL carryforwards at the State level, tax years ended 2008, 2009 and 2012 through 2018 are open to examination by state tax authorities.
Due
to the closing of the Rubicon Malaysia operations, the Company no longer considers the undistributed earnings of Rubicon Malaysia
to be indefinitely reinvested. Upon liquidation of Rubicon Malaysia, it is anticipated any cash left after the liquidation will
be brought back to the U.S. via a payment of principal towards the intercompany loan. A withholding tax will be payable to the
Malaysian government on the interest portion of the loan. At December 31, 2019 and 2018, the Company accrued the withholding tax
on the interest balance of the loan in the amount of $22,000 and $24,000, respectively, which represents the incremental tax.
10.
COMMITMENTS AND CONTINGENCIES
Operating
Leases
The Company adopted
ASU 2016-02 in the first quarter of the fiscal year ending December 31, 2019. The adoption of ASU 2016-02 did not have a material
impact on the Company’s consolidated financial statements, as the Company does not have any material lease agreements Rubicon
DTP leases a building for its manufacturing and offices, however such lease was not considered material to the Company’s
financial statements.
Net
rent expense under operating leases in 2019 and 2018 amounted to $35,000 and $418,000, respectively.
Litigation
From
time to time, the Company experiences routine litigation in the ordinary course of business. On October 31, 2018, the Company
received a summons from Bartmann, Perales & Dolter, LLC, the former lessor of the Franklin Park, Illinois, property the Company
leased previously, alleging that the Company owes $175,000 in overdue rent payments, property taxes and restoration costs. The
Company intends to vigorously defend against these allegations and has asserted a counterclaim pursuant to the terms of the lease
agreement for reimbursement of costs and expenses to maintain the condition and repair for said property. The management of the
Company does not believe any pending litigation will have a material adverse effect on the financial condition or results of operations
or cash flows of the Company.
11.
BENEFIT PLAN
The
Company sponsors a 401(k) savings plan (the “Plan”). Employees are eligible to participate in the Plan upon reaching
18 years of age. Employees make contributions to the Plan through payroll deferrals. Employer matching contributions are discretionary.
There were no employer matching contributions for the years ended December 31, 2019 and 2018.
12.
SUBSEQUENT EVENTS
None.
F-31