| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 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.
● Title has passed and the product has been delivered.
● The price is fixed or determinable.
● Collection of the resulting receivable is reasonably assured. 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 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. In February 2016, the FASB issued ASU No. 2016-02 (“ASU
2016-02”), Leases (Topic 842) 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. Revenue from Contracts with Customers (Topic 606), 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 In January 2017, the FASB issued ASU No. 2017-01 (“ASU 2017-01”),
Business Combinations (Topic 805): Clarifying the Definition of a Business |
