| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 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 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, 2018 and 2017, is as follows:
As of December 31,
2018 2017
(in thousands)
Certificates of deposit $ — $ 5
Flexible spending funds — 3
Fixed deposit pledge 169 173
$ 169 $ 181 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 (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). Investments
We
invest our available cash primarily in U.S. Treasury securities, investment grade commercial paper, FDIC guaranteed certificates
of deposit, common stock and corporate notes. Investments classified as available-for-sale debt securities are carried at fair
value with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Investments in equity securities
are reported at fair value, with both realized and unrealized gains and losses recorded in other income (expense), in the consolidated
statements of operations. 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, 2018 and 2017, 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, 2018, was as follows:
Periods Total Average Total Approximate dollar value
of
shares that
may yet be
purchased under
the program (in
thousands)
December 1, 2018, to December 31,
2018 8,457 $ 7.69 8,457 2,935
Total 8,457 $ 2,935 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,
2018 2017
(in thousands)
Beginning balance $ 7 $ 31
Charges to costs and expenses — (20 )
Account write-offs, less recoveries — (4 )
Ending balance $ 7 $ 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. For the years ended December
31, 2018 and 2017, the Company determined it had excess or obsolete inventory and recorded an adjustment which reduced inventory
and increased costs of goods sold by $284,000 and $1.4 million, respectively. The Company’s method of estimating excess
and obsolete inventory has remained consistent for all periods presented. Based on these sales prices, the Company recorded for
the years ended December 31, 2018 and 2017, a lower of cost or net realizable value adjustment which reduced inventory and
increased cost of goods sold by $6,000 and $97,000, respectively. In
2017, due to low prices and a worldwide over supply of material, the Company’s two-inch diameter core material was considered
to be in excess and had been written down to raw material value. An excess and obsolete adjustment was recorded which reduced
the value of two-inch diameter core inventory and increased cost of goods sold by $310,000 for the year ended December 31, 2017.
In 2018, the Company used some of its two-inch diameter core material in production of optical and industrial sapphire wafers
and did not record any additional adjustments for the year ended December 31, 2018. The
Company evaluates the amount of raw material needed for future production based on expected crystal growth production needed to
meet anticipated sales. With the decision to exit the LED market in the fourth quarter of 2016, the Company evaluated its future
production needs and determined it had excess raw materials inventory. Accordingly, raw materials inventory in excess of the amount
needed for future production has been written down and for the year ended December 31, 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
write-downs of its raw materials inventory for the year ended December 31, 2018. In
addition, for the year ended December 31, 2017, the Company determined it had excess inventory of lower quality sapphire crystals
and recorded an adjustment which reduced inventory and increased cost of goods sold by $451,000. The Company did not record any
adjustments for the year ended December 31, 2018, as it sold some of its lower-quality crystals at a price exceeding the book
value of these crystals. For
the years ended December 31, 2018 and 2017, amounts charged to cost of goods sold for all inventory write-downs were $290,000
and $4.7 million, respectively. Inventories
are composed of the following:
As of December 31,
2018 2017
(in thousands)
Raw materials $ 468 $ 476
Work-in-process 1,322 2,334
Finished goods 340 220
$ 2,130 $ 3,030 Other
inventory supplies The
Company’s other inventory supplies include stock of consumable assets and spare parts used in the manufacturing process.
With the decision to focus on optical and industrial products, the Company determined it had consumable assets that were obsolete
and recorded for the year ended December 31, 2017, a consumable asset write-down of $256,000. For
the year ended December 31, 2018, the Company recorded additional write-down of the obsolete consumable assets of $63,000. Property
and equipment Property
and equipment consisted of the following:
As of December 31,
2018 2017
(in thousands)
Machinery, equipment and tooling $ 3,293 $ 6,105
Buildings 1,686 —
Information systems 819 819
Land and land improvements 594 —
Furniture and fixtures 8 8
Leasehold improvements — 4,624
Total cost 6,400 11,556
Accumulated depreciation and amortization (3,672 ) (10,741 )
Property and equipment, net $ 2,728 $ 815 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 $355,000 and $1.2 million for the years ended December 31, 2018 and 2017,
respectively. The
estimated useful lives are as follows:
Asset
description Life
Buildings 39 years
Machinery,
equipment and tooling 3-10 years
Leasehold
improvements Lesser of life of lease or economic life
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,
2018 2017
(in thousands)
Balance, beginning of period $ 15 $ 27
Charged to cost of sales 23 20
Actual product warranty expenditures (30 ) (32 )
Balance, end of period $ 8 $ 15 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, 2018 and 2017. 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, 2018 and 2017, the Company had $1.5 million
and $1.2 million, respectively, on deposit at foreign financial institutions. For each of the years ended December 31, 2018
and 2017, the Company had $6.8 million on deposit at financial institutions in excess of amounts insured by the (FDIC) and other
foreign governmental insurance agencies. 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 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 years ended December 31, 2018 and 2017, $56,000
and $394,000, respectively, of revenue was recorded. The performance obligations under this contract have been completed in the
year ended December 31, 2018. 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 $8,000 and $15,000 for the years ended December 31, 2018 and 2017, respectively. 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. R&D expense was $122,000 and $962,000 for the years ended December 31, 2018 and 2017,
respectively. 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, 2018 and 2017. 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 2011 through 2017 are open to examination by tax authorities for Federal purposes. Due to NOL
carryforwards at the State level, tax years ended 2006 and 2008 through 2017 are open to examination by state tax authorities.
Tax years 2013 through 2017 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, 2018 and 2017,
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. A summary of the components of comprehensive loss for the years ended December 31, 2018 and 2017, follows:
Year ended December 31,
2018 2017
(in thousands)
Unrealized loss on investments, net of tax $ (1 ) $ (2 )
Unrealized loss on currency translation (1 ) (1 )
Ending balance $ (2 ) $ (3 ) 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, 2018, 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 34,000 shares of the Company’s common stock that would have had an anti-dilutive
effect at December 31, 2018. Diluted
net loss per common share was the same as basic net loss per common share for the year ended December 31, 2017, because the
effects of potentially dilutive securities were anti-dilutive. New
accounting pronouncements adopted In
January 2016, the FASB issued ASU No. 2016-01 (“ASU 2016-01”), Financial Instruments – Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities. Further clarifications were made in February 2018 with
the issuance of ASU No. 2018-03 (“ASU 2018-03”). The amended guidance requires certain equity investments that are
not consolidated and not accounted for under the equity method to be measured at fair value with changes recognized in net income
rather than as a component of accumulated other comprehensive income (loss). It further states that an entity may choose to measure
equity investments that do not have readily determinable fair values using a quantitative approach, or measurement alternative,
which is equal to its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly
transactions for the identical or a similar investment of the same issuer. The adoption of ASU 2016-01 and ASU 2018-03 did not
have a material impact on the Company’s financial statements. In
April 2016, the FASB issued ASU No. 2016-10 (“ASU 2016-10”), Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing. This update clarifies how an entity identifies performance obligations related to customer
contracts as well as helps to improve the operability and understanding of the licensing implementation guidance. The amendments
in this update affect the guidance in ASU No. 2014-09, (“ASU 2014-09”), Revenue from Contracts with Customers (Topic
606), which supersedes most of the current revenue recognition requirements. The underlying principle is that an entity will recognize
revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange
for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized.
Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction
price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances.
The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows
arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning
on or after December 15, 2017. The guidance permits the use of either a retrospective or cumulative effect transition method.
In May 2016, the FASB issued ASU No. 2016-12, (“ASU 2016-12”), Revenue from Contracts with Customers (Topic 606):
Narrow-Scope Improvements and Practical Expedients. This update clarifies the objectives of collectability, sales and other taxes,
noncash consideration, contract modifications at transition, completed contracts at transition and technical correction. The amendments
in this update affect the guidance in ASU 2014-09. In September 2017, the FASB issued additional amendments providing clarification
and implementation guidance. The Company’s revenue is primarily generated from the sale of finished products to customers.
Sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks
and rewards transfer. These are largely unaffected by the new standard, as they closely align with the new standards principles
relating to the measurement of revenue and timing of recognition. The Company adopted Topic 606 effective January 1, 2018, using
the full retrospective transition method. As the underlying principles of the new standard, relating to the measurement of revenue
and the timing of recognition, are closely aligned with the Company’s current business model and practices, the adoption
of ASU 2014-09 did not have a material impact on the consolidated financial statements. In
August 2016, the FASB issued ASU No. 2016-15 (“ASU 2016-15”), Statement of Cash Flows (Topic 230): Classification
of Certain Cash Receipts and Cash Payments which adds or clarifies guidance on the classification of certain cash receipts and
payments in the statement of cash flows. The standard addresses eight specific cash flow issues with the objective of reducing
diversity in practice. ASU 2016-15 is effective for the interim and annual periods beginning after December 15, 2017, with early
adoption permitted. The Company’s adoption of ASU 2016-15 did not have a material impact on its consolidated financial statements. In November 2016, the FASB issued ASU
No. 2016-18 (“ASU 2016-18”), Statement of Cash Flows (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, 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. As of December 31, 2017, cash and cash equivalents of $11,544,000 and restricted cash of $181,000 on the consolidated balance
sheet are presented on the consolidated statement of cash flows as $11,725,000 as the end-of-year balance of cash, cash equivalents
and restricted cash. 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. The Company’s adoption of ASU 2018-02 did not have a material
impact on its consolidated financial statements. Recent
accounting pronouncements In
February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842) 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 Company does not expect the adoption of ASU
2018-07 effective January 1, 2019, to have any material impact on the consolidated financial statements, as the Company has not
entered into any 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. |
