NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2017
1.
BASIS OF PRESENTATION
Interim
financial data
The
accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete
consolidated financial statements and should be read in conjunction with Rubicon Technology, Inc.’s (the “Company”)
annual report filed on Form 10-K, for the fiscal year ended December 31, 2016. In the opinion of management, all adjustments
(consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentation of the results
of operations have been included. Consolidated operating results for the three and nine months periods ended September 30,
2017 are not necessarily indicative of results that may be expected for the year ending December 31, 2017.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of consolidation
The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Rubicon Technology Worldwide
LLC, Rubicon Sapphire Technology (Malaysia) SDN BHD, and Rubicon Technology Hong Kong Limited. All intercompany transactions and
balances have been eliminated in consolidation.
Foreign
currency translation and transactions
Rubicon
Technology Worldwide LLC and Rubicon Technology Hong Kong Limited’s 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 period. The Company records these gains and losses in other income (expense).
Foreign
currency transaction gains and losses are generated from the effects of exchange rate changes on transactions denominated in a
currency other than the functional currency of the Company, which is the U.S. dollar. Gains and losses on foreign currency transactions
are generally required to be recognized in the determination of net income (loss) for the period. The Company records these gains
and losses in other income (expense).
Going
Concern
The
Company evaluates whether it is probable that known conditions or events, considered in the aggregate, would raise substantial
doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements
are issued. If such conditions or events are identified, the Company prepares mitigation plans to alleviate the doubt or a statement
of the substantial doubt about the Company’s ability to continue as a going concern. The Company’s negative financial
trends of recurring operating losses and negative cash flow from operating activities are considered conditions or events that
raise substantial doubt about the Company’s ability to continue as a going concern. The Company has plans in place that
are considered as probable to effectively mitigate the adverse conditions. Activities around the Company’s restructuring
and mitigation plans are more fully disclosed below under assets held for sale and long-lived assets.
Investments
When
the Company invests available cash, it primarily invests it in investment grade commercial paper, corporate notes, FDIC
guaranteed certificates of deposit, common stock and government securities. Investments classified as available-for-sale
securities are carried at fair market value with unrealized gains and losses recorded in accumulated other comprehensive
loss. Investments in trading securities are reported at fair value, with both realized and unrealized gains and losses
recorded in other income (expense), in the Consolidated Statement of Operations. Investments in which the Company has the
ability and intent, if necessary, to liquidate in order to support its current operations, are classified as
short-term.
The
Company reviews its available-for-sale securities investments at the end of each quarter for other-than-temporary declines in
fair value based on the specific identification method. The Company considers various factors in determining whether an impairment
is other-than-temporary, including the severity and duration of the impairment, changes in underlying credit ratings, forecasted
recovery, its ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery
in market value and the probability that the scheduled cash payments will continue to be made. When the Company concludes that
an other-than-temporary impairment has resulted, the difference between the fair value and carrying value is written off and recorded
as a charge on the Consolidated Statement of Operations.
Accounts
receivable
The
majority of the Company’s accounts receivable is due from manufacturers serving the optical systems and specialty electronics
devices industries. Credit is extended based on an evaluation of the customer’s financial condition. Accounts receivable
are due based on contract terms and at stated amounts due from customers, net of an allowance for doubtful accounts.
Accounts
outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering
a number of factors, including the length of time 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 payments
subsequently received on such receivables are recorded as a reduction to bad debt expense. The following table shows the activity
of the allowance for doubtful accounts:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
31
|
|
|
$
|
389
|
|
Net allowance adjustments
|
|
|
(20
|
)
|
|
|
(235
|
)
|
Accounts charged off, less recoveries
|
|
|
(4
|
)
|
|
|
(123
|
)
|
Ending balance
|
|
$
|
7
|
|
|
$
|
31
|
|
Inventories
Inventories
are valued at the lower of cost or market. Raw materials cost is determined using the first-in, first-out method, and work-in-process
and finished goods costs are determined on a standard cost basis, which includes materials, labor and overhead. The Company reduces
the carrying value of its inventories for differences between the cost and the estimated net realizable value, taking into account
usage, expected demand, technological obsolescence and other information.
The
Company establishes inventory reserves when conditions exist that suggest inventory may be in excess of anticipated demand or
is obsolete based on customer specifications. The Company evaluates the ability to realize the value of its inventory based on
a combination of factors, including forecasted sales, estimated current and future market value and changes in customers’
product specifications. The Company’s method of estimating excess and obsolete inventory has remained consistent for all
periods presented.
At
times in 2016, the Company accepted sales orders for core and wafer products at prices lower than cost. Based on these sales prices,
the Company recorded for the nine months ended September 30, 2016, a lower of cost or market adjustment which reduced inventory
and increased cost of goods sold by $1.1 million. The Company did not record any additional lower of cost or market adjustments
for the three and nine months ended September 30, 2017.
The
Company evaluates the amount of raw material needed for future production based on expected crystal growth production needed to
meet anticipated sales. Based on this review, the Company determined at June 30, 2017 to lower its expected requirements for raw
material inventory supply from five to three years and that it had excess material needed for future production. For the six months
ended June 30, 2017, an excess and obsolete adjustment was recorded which reduced inventory and increased cost of goods sold by
$2.4 million. The Company did not record any additional excess and obsolete adjustments for the three months ended September 30,
2017.
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
476
|
|
|
$
|
3,112
|
|
Work-in-process
|
|
|
2,993
|
|
|
|
4,251
|
|
Finished goods
|
|
|
623
|
|
|
|
637
|
|
|
|
$
|
4,092
|
|
|
$
|
8,000
|
|
Property
and equipment
Property
and equipment consisted of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
(in thousands)
|
|
Machinery, equipment and tooling
|
|
$
|
6,352
|
|
|
$
|
17,769
|
|
Leasehold improvements
|
|
|
4,624
|
|
|
|
4,624
|
|
Furniture and fixtures
|
|
|
8
|
|
|
|
699
|
|
Information systems
|
|
|
841
|
|
|
|
991
|
|
Construction in progress
|
|
|
247
|
|
|
|
263
|
|
Total cost
|
|
|
12,072
|
|
|
|
24,346
|
|
Accumulated depreciation and amortization
|
|
|
(10,765
|
)
|
|
|
(17,236
|
)
|
Property and equipment, net
|
|
$
|
1,307
|
|
|
$
|
7,110
|
|
Assets
held for sale and long-lived assets
When
circumstances, such as adverse market conditions, indicate that the carrying value of a long-lived asset may be impaired, the
Company performs an analysis to review the recoverability of the asset’s carrying value. The Company makes estimates of
the undiscounted cash flows (excluding interest charges) from the expected future operations of the asset. These estimates consider
factors such as expected future operating income, operating trends and prospects, as well as the effects of demand, competition
and other factors. If the analysis indicates that the carrying value is not recoverable from future cash flows, an impairment
loss is recognized to the extent that the carrying value exceeds the estimated fair value. The estimated fair value of assets
is determined using appraisal techniques, which assume the highest and best use of the asset by market participants, considering
the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date. Any impairment
losses are recorded as operating expenses, which reduce net income.
In the third quarter of
2016, the Company announced its decision to limit its focus to the optical and industrial sapphire markets and to exit the LED
market. This resulted in the closing of the Company’s Malaysia facility. The Company evaluated its Malaysia asset portfolio
based on assuming an orderly liquidation plan. Based on this review, the Company recorded for the year ended December 31, 2016
an asset impairment charge on its Malaysia machinery, equipment and facilities. In the fourth quarter of 2016, the Company also
developed a plan to scale down the remaining operations and sell additional assets that would not be needed. In this regard, the
Company identified excess U.S. machinery, equipment and facilities. Based on these reviews, the Company recorded for the year ended
December 31, 2016 an asset impairment charge on its Malaysia and U.S. machinery, equipment and facilities of $26.6 million.
In the nine months ended
September 30, 2017, the Company held auctions and individual assets sales of certain equipment located in Batavia, Illinois, and
Malaysia, resulting in the sale of a portion of the excess U.S. and some of the Malaysia equipment classified as (a) assets held
for sale or (b) machinery and equipment which had a net book value of $3.1 million. Unsold equipment, including excess crystal
growth furnaces, was classified as current assets held for sale at September 30, 2017.
The
Company is seeking to sell a manufacturing and office facility in Batavia, Illinois, a parcel of land the Company owns in Batavia,
Illinois, and a facility in Penang, Malaysia. Although the Company cannot assure the timing of any sales, as it is the Company’s
intention to complete these sales within the next twelve-month period, these properties were classified as current assets held
for sale at September 30, 2017 and December 31, 2016.
At
September 30, 2017, the Company reviewed the current fair market value of its assets. With the scaling down of the Company’s
U.S. operations, the Company identified at September 30, 2017, additional assets that will not be needed. For the nine months
ended September 30, 2017, the Company reduced the net book value of certain machinery and equipment and recorded an asset impairment
charge of $675,000. The Company will continue to assess its long-lived assets and adjust the carrying amount of these assets to
reflect any changes in the asset usage, marketplace and other factors used in determining the current fair market value.
The
Company cannot guarantee that it will be able to successfully complete the sale of any assets.
The
table below summarizes the non-financial assets that were measured and recorded at fair value on a non-recurring basis as of September
30, 2017 and loss recorded during the nine months ended September 30, 2017 on those assets:
|
|
Carrying value at September 30,
2017
|
|
|
Quoted prices in active markets for identical assets
(Level 1)
|
|
|
Significant other observable inputs
(Level 2 )
|
|
|
Significant unobservable inputs
(Level 3 )
|
|
|
Loss for
nine months ended September 30,
2017
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets held and used
|
|
$
|
1,307
|
|
|
$
|
—
|
|
|
$
|
1,307
|
|
|
$
|
—
|
|
|
$
|
675
|
|
Long-lived assets held for sale
|
|
|
15,711
|
|
|
|
—
|
|
|
|
15,711
|
|
|
|
—
|
|
|
|
—
|
|
Total nonrecurring for value measurements
|
|
$
|
17,018
|
|
|
$
|
—
|
|
|
$
|
17,018
|
|
|
$
|
—
|
|
|
$
|
675
|
|
The
table below summarizes the non-financial assets that were measured and recorded at fair value on a non-recurring basis as of December
31, 2016 and loss recorded during the twelve months ended December 31, 2016 on those assets:
|
|
Carrying value at December 31,
2016
|
|
|
Quoted prices in active markets for identical assets
(Level 1)
|
|
|
Significant other observable inputs
(Level 2)
|
|
|
Significant unobservable inputs
(Level 3 )
|
|
|
Loss for twelve months
ended December 31,
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets held and used
|
|
$
|
7,110
|
|
|
$
|
—
|
|
|
$
|
7,110
|
|
|
$
|
—
|
|
|
$
|
12,264
|
|
Long-lived assets held for sale
|
|
|
14,761
|
|
|
|
—
|
|
|
|
14,761
|
|
|
|
—
|
|
|
|
14,290
|
|
Total nonrecurring for value measurements
|
|
$
|
21,871
|
|
|
$
|
—
|
|
|
$
|
21,871
|
|
|
$
|
—
|
|
|
$
|
26,554
|
|
Revenue
recognition
Revenue
recognized includes product sales and billings for costs and fees for government contracts.
Product
Sales
The
Company recognizes revenue from product sales when earned. Revenue is recognized when, and if, evidence of an arrangement is obtained
and the other criteria to support revenue recognition are met, including:
●
|
Persuasive
evidence of an arrangement exists.
The Company requires evidence of a purchase order
with the customer indicating the terms and specifications of the product to be delivered,
typically in the form of a signed quotation or purchase order from the customer.
|
●
|
Title
has passed and the product has been delivered.
Title passage and product delivery
generally occur when the product is delivered to a common carrier.
|
|
|
●
|
The
price is fixed or determinable.
All terms are fixed in the signed quotation or purchase
order received from the customer. Purchase orders do not contain rights of cancellation,
return, exchange or refund.
|
|
|
●
|
Collection
of the resulting receivable is reasonably assured.
The Company’s standard arrangement
with customers includes payment terms. Customers are subject to the credit review process
that evaluates each customer’s financial position and ability to pay. Collectability
is determined by considering the length of time the customer has been in business and
its history of collections. If it is determined that collection is not probable, no product
is shipped and no revenue is recognized unless payment is received in advance.
|
Government
Contracts
The
Company recognizes research and development revenue in the period during which the related costs are incurred over the contractually
defined period. In July 2012, the Company signed a contract with the Air Force Research Laboratory to produce large-area sapphire
windows on a cost plus fixed fee basis. The Company records research and development revenue on a gross basis as costs are incurred,
plus a portion of the fixed fee. For the three and nine months ended September 30, 2017, $273,000 and $301,000 of revenue
was recorded, respectively, and for the three and nine months ended September 30, 2016, $80,000 and $289,000 of revenue was
recorded, respectively. The total value of the contract is $4.7 million, of which $4.6 million has been recorded through September 30,
2017. For the year ended December 31, 2016, the Company recorded estimated costs expected to be incurred in excess of this contract
value of $217,000. No additional adjustments for the excess contract costs were recorded for the three and nine months ended September
30, 2017.
The
Company does not provide maintenance or other services and it does not have sales that involve multiple elements or deliverables.
Segment
information
The
Company evaluates operations as one reportable segment, as it only reports profit and loss information on an aggregate basis to
its chief operating decision maker.
Net
income per common share
Basic
net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding during
the period. Diluted net income per common share is computed by dividing net income 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 any outstanding
stock options and warrants based on the treasury stock method.
Diluted
net loss per share is the same as basic net loss per share for the three and nine months ended September 30, 2017 and 2016
because the effects of potentially dilutive securities are anti-dilutive.
As
of September 30, 2017 and 2016, diluted shares outstanding were the same as basic shares outstanding as the exercise price
of outstanding stock options exceeded the weighted-average trading share price.
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 earnings (loss) and other non-owner changes in equity that bypass the statement of operations and are reported
in a separate component of equity. For the nine months ended September 30, 2017 and for the twelve months ended December 31,
2016, other comprehensive loss includes the unrealized loss on investments and foreign currency translation adjustments.
The
following table summarizes the components of accumulated comprehensive loss:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
(in thousands)
|
|
Unrealized loss on investments
|
|
$
|
-
|
|
|
$
|
(12
|
)
|
Unrealized loss on currency translation
|
|
|
(10
|
)
|
|
|
(18
|
)
|
Ending balance
|
|
$
|
(10
|
)
|
|
$
|
(30
|
)
|
New
accounting pronouncements adopted
In
March 2016, the FASB issued ASU No. 2016-09 (“ASU 2016-09”),
Compensation—Stock Compensation
(
Topic
718): Improvements to Employee Share-Based Payment Accounting
which modifies several aspects of the accounting for share-based
payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification
on the statement of cash flows. The Company adopted ASU 2016-09 at January 1, 2017, and the impact of adopting ASU 2016-09 for
the nine months ended September 30, 2017 was that the Company was required to bring the deferred tax assets related to off balance
net operating losses onto the balance sheet. This increased the Company’s deferred tax assets by $10.3 million with a corresponding
entry to retained earnings. Since the Company continues to be in a full valuation allowance, there was an entry made to the valuation
allowance to offset the increase to the deferred tax assets with a corresponding entry to retained earnings.
Recent
accounting pronouncements
In
January 2016, the FASB issued ASU No. 2016-01 (“ASU 2016-01”),
Financial Instruments—Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
The standard requires equity investments
(except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be
measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit
price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of
financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement
for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required
to be disclosed for financial instruments measured at amortized cost. These changes become effective for fiscal years beginning
after December 15, 2017. The Company is evaluating the impact, if any, of adopting ASU 2016-01 on its financial statements.
In
February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”),
Leases (Topic 842)
which modifies the
lease recognition requirements and requires entities to recognize the assets and liabilities arising from leases on the balance
sheet. ASU 2016-02 requires entities to use a modified retrospective approach for leases that exist or are entered into after
the beginning of the earliest comparative period in the financial statements. ASU 2016-02 is effective for annual reporting periods
beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact, if any, of adopting
ASU 2016-02 on its financial statements.
In
April 2016, the FASB issued ASU No. 2016-10 (“ASU 2016-10”),
Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing.
This update clarifies how an entity identifies performance obligations
related to customer contracts as well as helps to improve the operability and understanding of the licensing implementation guidance.
The amendments in this update affect the guidance in ASU No. 2014-09, (“ASU 2014-09”),
Revenue from Contracts
with Customers (Topic 606),
which supersedes most of the current revenue recognition requirements. The underlying principle
is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity
expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions
to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration
of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies
are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and
uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the
interim and annual periods beginning on or after December 15, 2017 (early adoption is not permitted). The guidance permits
the use of either a retrospective or cumulative effect transition method. In May 2016, the FASB issued ASU No. 2016-12, (“ASU
2016-12”), Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This
update clarifies the objectives of collectability, sales and other taxes, noncash consideration, contract modifications at transition,
completed contracts at transition and technical correction. The amendments in this update affect the guidance in ASU 2014-09.
While the Company is currently assessing the impact of the new standards, the Company’s revenue is primarily generated from
the sale of finished products to customers. Sales predominantly contain a single delivery element and revenue is recognized at
a single point in time when ownership, risks, and rewards transfer. These are largely unaffected by the new standard. The Company
does not expect this new guidance to have a material impact on the amount of overall sales recognized; however, the timing of
sales on certain projects may be affected. The Company has not yet quantified this potential impact.
In
August 2016, the FASB issued ASU No. 2016-15 (“ASU 2016-15”),
Statement of Cash Flows (Topic230): Classification
of Certain Cash Receipts and Cash Payments
which adds or clarifies guidance on the classification of certain cash receipts
and payments in the statement of cash flows. The standard addresses eight specific cash flow issues with the objective of reducing
diversity in practice. ASU 2016-15 is effective for the interim and annual periods beginning after December 15, 2017 with
early adoption permitted. The Company is in the process of performing its initial assessment of the potential impact on its Consolidated
Financial Statements and has not decided on its adoption methodology. The Company is evaluating the impact, if any, of adopting
ASU 2016-15 on its financial statements.
In
January 2017, the FASB issued ASU No. 2017-01 (“ASU 2017-01”),
Business Combinations (Topic 805): Clarifying the
Definition of a Business
. This update clarifies the definition of a business with the objective of adding guidance to assist
entities with evaluating whether transactions should be accounted for as acquisitions (or disposal) of assets or businesses. The
update provides new guidance to determine when an integrated set of assets and activities (collectively referred to as a “set”)
is not a business. The guidance requires that when substantially all of the fair value of the gross assets acquired (or disposed
of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01
is effective for the interim and annual periods beginning after December 15, 2017 with early adoption permitted. The Company
is evaluating the impact, if any, of adopting ASU 2017-01 on its financial statements.
3.
SIGNIFICANT CUSTOMERS
For the three months ended
September 30, 2017, the Company had four customers individually that accounted for approximately 17%, 12%, 11% and 11% of
revenue. For the three months ended September 30, 2016, the Company had one customer individually that accounted for approximately
76% of revenue. For the nine months ended September 30, 2017, the Company had four customers individually that accounted for
approximately 17%, 13%, 11% and 10% of revenue. For the nine months ended September 30, 2016, the Company had two customers
individually that accounted for approximately 55% and 10% of revenue. No other customers individually accounted for more than 10%
of revenue for these reported periods in 2017 and 2016.
Customers
individually representing more than 10% of trade receivables accounted for approximately 64% and 75% of accounts receivable as
of September 30, 2017 and December 31, 2016, respectively. The Company grants credit to customers based on an evaluation
of their financial condition. Losses from credit sales are provided for in the financial statements.
4.
STOCKHOLDERS’ EQUITY
Common
Stock
On
April 19, 2017, the Company received a staff determination letter from the Listing Qualifications Department of NASDAQ informing
the Company that it has failed to regain compliance with the minimum bid price requirement set forth in Listing Rule 5550(a) (2),
and that the Company’s common stock would be delisted from the NASDAQ Capital Market at the opening of business on April
28, 2017 unless the Company timely requested an appeal of this determination. On April 26, 2017, the Company submitted an appeal
requesting a hearing before a NASDAQ listing qualifications panel. With completion of the reverse stock split (described below)
our shares began trading above the required $1.00 per share closing bid price. On May 19, 2017, the Company received notification
from NASDAQ that the bid price deficiency had been cured and the Company is considered in compliance with all applicable listing
standards.
At
the Company’s annual meeting of stockholders held on May 3, 2017, the Company’s stockholders approved, (i) an amendment
to the Company’s Eighth Amended and Restated Certificate of Incorporation (as amended, the “Certificate of Incorporation”)
to effect a reverse stock split of the Company’s common stock in a range of 1-for-10 to 1-for-20, such ratio to be determined
in the sole discretion of the Board; and (ii) an amendment to the Certificate of Incorporation to decrease the Company’s
authorized number of shares of common stock to three times the number of shares of the Company’s common stock outstanding
immediately following the reverse stock split, rounded up to the nearest 100,000 shares. On May 3, 2017, following the annual
meeting, the Board determined to effect the reverse stock split at a ratio of 1-for-10, and the Company filed with the Secretary
of State of the State of Delaware a Certificate of Amendment to (a) implement the reverse stock split and (b) to reduce the number
of authorized shares of common stock from 40,000,000 to 8,200,000, consequently reducing the number of total authorized shares
from 45,000,000 to 13,200,000. The amendment, reverse stock split and reduction in authorized shares were effective on May 5,
2017.
As
a result of the reverse stock split, every 10 shares of issued and outstanding common stock were automatically combined into one
issued and outstanding share of common stock. Following the amendment to the Certificate of Incorporation, the Company has a total
of 13,200,000 authorized shares, comprised of (i) 8,200,000 shares of common stock and (ii) 5,000,000 shares of preferred stock.
Stockholders
received cash in lieu of any fractional shares resulting from the reverse stock split in a proportionate amount equal to $0.78
per pre-split share based on the average closing price of the Common Stock for the 30 trading days immediately preceding the effective
date of the reverse stock split.
As
of September 30, 2017, the Company had reserved 159,102 shares of common stock for issuance upon the exercise of outstanding
common stock options and vesting of restricted stock units. Also 278,956 shares of the Company’s common stock were reserved
for future grants of stock options and restricted stock units (or other similar equity instruments) under the Rubicon Technology,
Inc. 2016 Stock Incentive Plan (the “2016 Plan”) as of September 30, 2017.
5.
STOCK INCENTIVE PLANS
In
August 2007, the Company adopted the Rubicon Technology Inc. 2007 Stock Incentive Plan, which was amended and restated effective
in March 2011 (the “2007 Plan”), and which allowed for the grant of incentive stock options, non-statutory stock options,
stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance awards and bonus shares.
The maximum number of shares that could be awarded under the 2007 Plan was 440,769 shares. Options granted under the 2007 Plan
entitle the holder to purchase shares of the Company’s common stock at the specified option exercise price, which could
not be less than the fair market value of the common stock on the grant date. On June 24, 2016, the plan terminated with
the adoption of the Rubicon Technology, Inc. 2016 Stock Incentive Plan, (the “2016 Plan”). Any existing awards under
the 2007 Plan remain outstanding in accordance with their current terms under the 2007 Plan.
In
June 2016, the Company’s stockholders approved adoption of the 2016 Plan effective as of March 17, 2016, which allows
for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, RSUs, performance
awards and bonus shares. The Compensation Committee of the Board administers the 2016 Plan. The committee determines the type
of award to be granted, the fair market value, the number of shares covered by the award, and the time when the award vests and
may be exercised.
Pursuant
to the 2016 Plan, 222,980 shares of the Company’s common stock plus any shares subject to outstanding awards under
the 2007 Plan that subsequently expire unexercised, are forfeited without the delivery of shares or are settled in cash, will
be available for issuance under the 2016 Plan. The 2016 Plan will automatically terminate on March 17, 2026, unless the Company
terminates it sooner.
The
Company uses the Black-Scholes option pricing model to value stock options issued. The Company uses a three-year historical stock
price average to determine its volatility assumptions. The assumed risk-free rates were based on U.S. Treasury rates in effect
at the time of grant with a term consistent with the expected option lives. The expected term is based upon the vesting term of
the Company’s options, a review of a peer group of companies, and expected exercise behavior. The forfeiture rate is based
on past history of forfeited options. The expense is allocated using the straight-line method. For the three and nine months ended
September 30, 2017, the Company recorded $20,000 and $258,000, respectively, of stock option compensation expense. For the
three and nine months ended September 30, 2016, the Company recorded $147,000 and $460,000, respectively, of stock option
compensation expense. As of September 30, 2017, the Company had $225,000 of total unrecognized compensation cost related
to non-vested stock option awards granted under the Company’s stock-based plans that it expects to recognize over a weighted-average
period of 1.40 years.
The
Company used a Monte Carlo simulation model valuation technique to determine the fair value of 59,098 RSUs granted in March 2017
to a key executive pursuant to an employment agreement because the awards vest based upon achievement of market price targets
of the Company’s common stock. The RSUs vest in the amounts set forth below on the first date the 15-trading day average
closing price of the Company’s common stock equals or exceeds the corresponding target price for the common stock before
March 15, 2021.
Number of restricted stock units
|
|
Target price
|
|
15,000
|
|
$
|
6.50
|
|
15,000
|
|
$
|
8.00
|
|
15,000
|
|
$
|
9.50
|
|
14,098
|
|
$
|
11.00
|
|
During
the nine months ended September 30, 2017, the first three tranches of the grant vested.
When the negotiation of
the terms of the employment agreement began, the closing price of the common stock was approximately $5.50 per share. On the date
of grant, the closing price of the Company’s common stock was $6.30 per share.
The
Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition
stipulated in the award and calculates the fair value of each RSU. The Company used the following assumptions in determining the
fair value of the RSUs:
Daily expected stock price volatility
|
|
|
4.4237
|
%
|
Daily expected mean return on equity
|
|
|
(0.2226
|
%)
|
Daily expected dividend yield
|
|
|
0.0
|
%
|
Average daily risk free interest rate
|
|
|
0.0063
|
%
|
The
daily expected stock price volatility is based on a four-year historical volatility of the Company’s common stock. The daily-expected
dividend yield is based on annual expected dividend payments. The average daily risk-free interest rate is based on the three-year
treasury yield as of the grant date. Each of the tranches is calculated to have its own fair value and requisite service period.
The fair value of each tranche is amortized over the requisite or derived service period, which is up to four years. These RSUs
had a grant date fair value of $322,623.
The
following table summarizes the activity of the stock incentive and equity plans as of September 30, 2017 and changes during
the nine months then ended:
|
|
Shares
available
for grant
|
|
|
Number of
options
outstanding
|
|
|
Weighted-
average option
exercise
price
|
|
|
Number of
restricted
stock and
board
shares
issued
|
|
|
Number of
restricted
stock units
outstanding
|
|
At January 1, 2017
|
|
|
243,218
|
|
|
|
253,541
|
|
|
$
|
37.30
|
|
|
|
76,483
|
|
|
|
12,584
|
|
Granted
|
|
|
(70,098
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
11,000
|
|
|
|
59,098
|
|
Exercised/issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(49,156
|
)
|
Cancelled/forfeited
|
|
|
105,836
|
|
|
|
(116,965
|
)
|
|
|
53.91
|
|
|
|
—
|
|
|
|
—
|
|
At September 30, 2017
|
|
|
278,956
|
|
|
|
136,576
|
|
|
$
|
19.23
|
|
|
|
87,483
|
|
|
|
22,526
|
|
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 market value of the common stock at September 30,
2017 and 2016, there was no intrinsic value for the options outstanding.
A
summary of the Company’s non-vested options during the nine months ended September 30, 2017 is presented below:
|
|
Options
|
|
|
Weighted-
average
exercise
price
|
|
Non-vested at January 1, 2017
|
|
|
148,983
|
|
|
$
|
10.20
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(42,757
|
)
|
|
|
12.79
|
|
Forfeited
|
|
|
(47,825
|
)
|
|
|
9.83
|
|
Non-vested at September 30, 2017
|
|
|
58,401
|
|
|
$
|
8.59
|
|
For
the three and nine months ended September 30, 2017, the Company recorded $94,000 and $418,000, respectively, of restricted
stock unit (“RSU”) expense. For the three and nine months ended September 30, 2016, the Company recorded $48,600
and $187,000, respectively, of restricted stock unit (“RSU”) expense. As of September 30, 2017, there was $61,000
of unrecognized compensation cost related to the non-vested RSUs. This cost is expected to be recognized over a weighted-average
period of 0.39 years.
A
summary of the Company’s restricted stock units is as follows:
|
|
RSUs
outstanding
|
|
|
Weighted average
price at
time of
grant
|
|
|
Aggregate intrinsic
value
|
|
Non-vested restricted stock units as of January 1, 2017
|
|
|
12,584
|
|
|
$
|
16.00
|
|
|
|
|
|
Granted
|
|
|
59,098
|
|
|
|
6.30
|
|
|
|
|
|
Vested
|
|
|
(49,156
|
)
|
|
|
8.49
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Non-vested at September 30, 2017
|
|
|
22,526
|
|
|
$
|
6.94
|
|
|
$
|
186,065
|
|
For
the three and nine months ended September 30, 2017, the Company recorded $49,000 and $110,000, respectively, of stock compensation
expense related to restricted stock. For the three and nine months ended September 30, 2016, the Company recorded $153,000
and $434,000, respectively, of stock compensation expense related to restricted stock.
An
analysis of restricted stock issued is as follows:
Non-vested restricted stock as of January 1, 2017
|
|
|
16,470
|
|
Granted
|
|
|
11,000
|
|
Vested
|
|
|
(22,566
|
)
|
Non-vested restricted stock as of September 30, 2017
|
|
|
4,904
|
|
6.
COMMITMENTS AND CONTINGENCIES
Litigation
From
time to time, the Company experiences routine litigation in the normal course of its business. The Company currently does not
have any material pending litigation.
7.
INCOME TAXES
The
Company is subject to income taxes in the U.S. and Malaysia. On a quarterly basis, the Company assesses the recoverability of
deferred tax assets and the need for a valuation allowance. Such evaluations involve the application of significant judgment and
multiple factors, both positive and negative, are considered. For the period ended September 30, 2017, a valuation allowance
has been included in the 2017 forecasted effective tax rate. The Company is in a cumulative loss position for the past three years,
which is considered significant negative evidence that is difficult to overcome on a “more likely than not” standard
through objectively verifiable data. Under the accounting standards objective verifiable evidence is given greater weight than
subjective evidence such as the Company’s projections for future growth. Based on an evaluation in accordance with the accounting
standards, a valuation allowance has been recorded against the net U.S. deferred tax assets in order to measure only the portion
of the deferred tax assets that are more likely than not to be realized based on the weight of all available evidence. At September 30,
2017, the Company continues to be in a three-year cumulative loss position, therefore, until an appropriate level of profitability
is attained, the Company expects to maintain a full valuation allowance on its U.S. and Malaysia net deferred tax assets. Any
U.S. and Malaysia tax benefits or tax expense recorded on the Company’s Consolidated Statement of Operations will be offset
with a corresponding valuation allowance until such time that the Company changes its determination related to the realization
of deferred tax assets. In the event that the Company changes its determination as to the amount of deferred tax assets that can
be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in
the period in which such determination is made.
The
tax provision for the three and nine months ended September 30, 2017 is based on an estimated combined statutory effective
tax rate. The Company recorded for the three and nine months ended September 30, 2017 a tax expense of $7,000 and $85,000
respectively for an effective tax rate of 0.6%.and 0.7%, respectively. For the three and nine months ended September 30,
2017, the difference between the Company’s effective tax rate and the U.S. federal 35% statutory rate and state 6.2% (net
of federal benefit) statutory rate was primarily related to U.S. and Malaysia valuation allowances, Malaysia foreign tax rate
differential, and Malaysia withholding taxes.
8.
CREDIT FACILITY
In
January 2013, the Company entered into a three-year term agreement with a bank to provide the Company with a senior secured credit
facility of up to $25.0 million. The agreement provided for the Company to borrow up to 80% of eligible accounts receivable and
up to 35% of domestically held raw material and finished goods inventory. Advances against inventory were limited to 40% of the
aggregate outstanding on the revolving line of credit and $10.0 million in aggregate. The Company had the option to borrow at
an interest rate of LIBOR plus 2.75% or the Wall Street Journal prime rate plus 0.50%. If the Company maintained liquidity of
$20.0 million or greater with the lending institution, then the borrowing interest rate options were LIBOR plus 2.25% or
the Wall Street Journal prime rate. There was an unused revolving line facility fee of 0.375% per annum. In August 2015,
the Company entered into an amended agreement with the bank to extend the senior secured facility through January 2018. Under
the amended agreement, advances against inventory were limited to the lesser of 45% of the aggregate outstanding principal on
the revolving line of credit and $10.0 million and the rate on facility fee on the unused portion of the revolving line was adjusted
to 0.50% per annum.
In
September 2016, the Company voluntarily terminated the loan agreement. Pursuant to the pay-off letter for termination of the loan
agreement, upon payment of the pay-off amount, all obligations under the loan agreement were paid and discharged in full, all
unfunded commitments by the bank to make credit extensions to the Company under the loan agreement were terminated, all security
interests granted to or held by the bank under the loan agreement were released, and all guaranties supporting the loan agreement
were released. The Company did not incur any early termination penalties in connection with the termination.
For
the three and nine months ended September 30, 2017, the Company incurred no interest expense. For the three and nine months ended
September 30, 2016, the Company recorded interest expense of $27,500 and $98,200, respectively, which includes $24,200 and
$87,000, respectively, of interest expense charged on the unused portion of the facility.