Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark one)

x Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended June 30, 2016

or

 

¨ Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                      to                      

Commission file number 001-33834

 

 

RUBICON TECHNOLOGY, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   36-4419301

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

900 East Green Street

Bensenville, Illinois

  60106
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: (847) 295-7000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of August 5, 2016 the Registrant had 26,829,532 shares of common stock, par value $0.001 per share, outstanding.

 

 

 


Table of Contents

RUBICON TECHNOLOGY, INC.

Quarterly Report on Form 10-Q

For the quarterly period ended June 30, 2016

TABLE OF CONTENTS

 

               Page  
Part I    Financial Information      3   
   Item 1.   

Consolidated Financial Statements

     3   
     

Consolidated Balance Sheets (unaudited) – June 30, 2016 and December 31, 2015

     3   
     

Consolidated Statements of Operations (unaudited) – Three and six months ended June 30, 2016 and 2015

     4   
     

Consolidated Statements of Comprehensive Loss (unaudited) – Three and six months ended June 30, 2016 and 2015

     5   
     

Consolidated Statements of Cash Flows (unaudited) – Six months ended June 30, 2016 and 2015

     6   
     

Notes to Consolidated Financial Statements (unaudited)

     7   
   Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     19   
   Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     31   
   Item 4.   

Controls and Procedures

     32   
Part II    Other Information      32   
   Item 1.    Legal Proceedings      32   
   Item 1A.    Risk Factors      32   
   Item 6.    Exhibits      33   
Signatures      34   
Exhibit Index      35   

 

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PART I FINANCIAL INFORMATION

 

ITEM 1. Consolidated Financial Statements

Rubicon Technology, Inc.

Consolidated balance sheets

 

     June 30,
2016
    December 31,
2015
 
     (unaudited)        
    

(in thousands, other than

share data)

 

Assets

    

Cash and cash equivalents

   $ 17,067      $ 21,216   

Restricted cash

     182        170   

Short-term investments

     1,007        8,895   

Accounts receivable, net

     2,737        1,738   

Inventories

     21,210        21,333   

Other inventory supplies

     5,566        5,717   

Prepaid expenses and other current assets

     586        1,188   

Assets held for sale

     1,329        —     
  

 

 

   

 

 

 

Total current assets

     49,684        60,257   

Property and equipment, net

     53,027        57,569   

Other assets

     868        1,416   
  

 

 

   

 

 

 

Total assets

   $ 103,579      $ 119,242   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Accounts payable

   $ 3,664      $ 3,256   

Accrued payroll

     220        164   

Accrued and other current liabilities

     422        1,328   

Corporate income and franchise taxes

     110        207   

Accrued real estate taxes

     234        238   

Short-term loan payable

     1,500        1,500   

Advance payments

     29        9   
  

 

 

   

 

 

 

Total current liabilities

     6,179        6,702   

Deferred tax liability

     218        554   
  

 

 

   

 

 

 

Total liabilities

     6,397        7,256   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity

    

Preferred stock, $0.001 par value, 5,000,000 undesignated shares authorized, no shares issued or outstanding

     —          —     

Common stock, $0.001 par value, 40,000,000 shares authorized and 28,602,354 and 28,007,811 shares issued; 26,827,510 and 26,232,967 shares outstanding

     29        28   

Additional paid-in capital

     374,293        373,565   

Treasury stock, at cost, 1,774,844 shares

     (12,148 )     (12,148 )

Accumulated other comprehensive loss

     (24 )     (33 )

Accumulated deficit

     (264,968 )     (249,426 )
  

 

 

   

 

 

 

Total stockholders’ equity

     97,182        111,986   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 103,579      $ 119,242   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

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Rubicon Technology, Inc.

Consolidated statements of operations

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2016     2015     2016     2015  
     (unaudited)  
    

(in thousands, other than

share data)

 

Revenue

   $ 3,535      $ 7,106      $ 7,822      $ 16,016   

Cost of goods sold

     7,586        12,261        17,292        26,280   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross loss

     (4,051 )     (5,155 )     (9,470 )     (10,264 )

Operating expenses:

        

General and administrative

     2,695        2,188        4,462        4,256   

Sales and marketing

     361        354        752        692   

Research and development

     652        603        1,231        1,036   

Loss on disposal of assets

     126        22        126        22   

Asset impairment charge

     265        —          265        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (8,150 )     (8,322 )     (16,306 )     (16,270 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest income

     19        21        43        37   

Interest expense

     (36 )     (24 )     (71 )     (47 )

Realized (loss) gain on foreign currency translation

     (216     (204     467        (561
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (233     (207     439        (571
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (8,383 )     (8,529 )     (15,867 )     (16,841 )

Income tax benefit (expense)

     174        (51     325        (87
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (8,209 )   $ (8,580 )   $ (15,542 )   $ (16,928 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share

        

Basic

   $ (0.31 )   $ (0.33 )   $ (0.59 )   $ (0.65 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.31 )   $ (0.33 )   $ (0.59 )   $ (0.65 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding used in computing net loss per common share

     26,296,398        26,142,261        26,261,506        26,135,768   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

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Rubicon Technology, Inc.

Consolidated statements of comprehensive loss

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2016     2015     2016     2015  
     (unaudited)  
     (in thousands)  

Net loss

   $ (8,209 )   $ (8,580 )   $ (15,542 )   $ (16,928 )

Other comprehensive income:

        

Unrealized gain on investments, net of tax

     —          4        5        10   

Unrealized gain on currency translation

     6        —          4        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     6        4        9        10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (8,203 )   $ (8,576 )   $ (15,533 )   $ (16,918 )
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

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Rubicon Technology, Inc.

Consolidated statements of cash flows

 

     Six months ended
June 30,
 
     2016     2015  
     (unaudited)  
     (in thousands)  

Cash flows from operating activities

    

Net loss

   $ (15,542 )   $ (16,928 )

Adjustments to reconcile net loss to net cash used in operating activities

    

Depreciation and amortization

     3,291        6,602   

Net loss on disposal of assets

     126        22   

Asset impairment charge

     265        —     

Stock-based compensation

     731        647   

Deferred taxes

     (337 )     79   

Changes in operating assets and liabilities:

    

Accounts receivable

     (999 )     379   

Inventories

     693        124   

Other inventory supplies

     232        875   

Prepaid expenses and other assets

     1,164        369   

Accounts payable

     330        (1,169 )

Accrued payroll

     49        59   

Corporate income and franchise taxes

     (97 )     (132 )

Advanced payments

     20        13   

Accrued and other current liabilities

     (919 )     (28 )
  

 

 

   

 

 

 

Net used in operating activities

     (10,993 )     (9,088 )
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of property and equipment

     (660 )     (342 )

Proceeds from disposal of assets

     190          

Purchases of investments

     (18     (1,136 )

Proceeds from sale of investments

     7,912        8,500   
  

 

 

   

 

 

 

Net cash provided by investing activities

     7,424        7,022   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from exercise of options

            4   

Taxes paid related to net share settlement of equity awards

     (1     (8

Restricted cash

     (12 )     (12 )
  

 

 

   

 

 

 

Net cash used in financing activities

     (13     (16
  

 

 

   

 

 

 

Net effect of currency translation

     (567 )     473   

Net decrease in cash and cash equivalents

     (4,149     (1,609

Cash and cash equivalents, beginning of period

     21,216        24,353   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 17,067      $ 22,744   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

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Rubicon Technology, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

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, as amended, for the fiscal year ended December 31, 2015. 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 six months periods ended June 30, 2016 are not necessarily indicative of results that may be expected for the year ending December 31, 2016.

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 Worldwide LLC, Rubicon Sapphire Technology (Malaysia) SDN BHD, Rubicon Technology Hong Kong Limited and Rubicon Technology Korea Yuhan Hosea. All intercompany transactions and balances have been eliminated in consolidation.

Foreign currency translation and transactions

Rubicon Worldwide LLC, Rubicon Technology Hong Kong Limited and Rubicon Technology Korea Yuhan Hosea’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 Worldwide LLC, Rubicon Technology Hong Kong Limited and Rubicon Technology Korea Yuhan Hosea 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).

Investments

The Company invests available cash primarily in investment grade commercial paper, certificates of deposit guaranteed by the Federal Deposit Insurance Corporation (the “FDIC), corporate notes 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 income (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. As of June 30, 2016, no impairment was recorded.

 

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Accounts receivable

The majority of the Company’s accounts receivable are due from manufacturers serving the light-emitting diode (“LED”) and 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 for doubtful accounts by considering a number of factors, including the length of time a customer’s balance 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 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:

 

     June 30,
2016
     December 31,
2015
 
     (in thousands)  

Beginning balance

   $ 389       $ 140   

Net allowance adjustments

     (224      235   

Accounts charged off, less recoveries

     (61      14   
  

 

 

    

 

 

 

Ending balance

   $ 104       $ 389   
  

 

 

    

 

 

 

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 weighted-average 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. At times in 2016 and 2015, the Company has accepted sales orders for core and wafer products at prices lower than cost. Based on these sales prices, the Company has recorded for the three and six months ended June 30, 2016, a lower of cost or market adjustment which reduced inventory and increased cost of goods sold by $204,000 and $1.1 million, respectively. For the three and six months ended June 30, 2015, the Company accepted orders for small diameter core and wafer products at prices lower than cost and recorded an adjustment which reduced inventory and increased costs of goods sold by $815,000 and $1.1 million, respectively. Inventories are composed of the following:

 

     June 30,
2016
     December 31,
2015
 
     (in thousands)  

Raw materials

   $ 6,758       $ 7,346   

Work in progress

     10,491         9,920   

Finished goods

     3,961         4,067   
  

 

 

    

 

 

 
   $ 21,210       $ 21,333   
  

 

 

    

 

 

 

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.

 

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Property and equipment

Property and equipment consisted of the following:

 

     June 30,
2016
     December 31,
2015
 
     (in thousands)  

Land and land improvements

   $ 2,540       $ 4,133   

Buildings

     26,103         26,097   

Machinery, equipment and tooling

     50,695         50,364   

Leasehold improvements

     7,141         7,141   

Furniture and fixtures

     816         816   

Information systems

     1,121         1,105   

Construction in progress

     1,280         1,327   
  

 

 

    

 

 

 

Total cost

     89,696         90,983   

Accumulated depreciation and amortization

     (36,669 )      (33,414 )
  

 

 

    

 

 

 

Property and equipment, net

   $ 53,027       $ 57,569   
  

 

 

    

 

 

 

Long-lived assets

The Company reviews property and equipment for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. If such events or changes in circumstances occur, the Company will recognize an impairment loss if the undiscounted future cash flows expected to be generated by the assets are less than the carrying value of the related asset. The impairment loss would adjust the asset to its fair value.

In evaluating the recoverability of long-lived assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of such assets. If the fair value estimates or related assumptions change in the future, the Company may be required to record impairment charges related to property and equipment. Asset recoverability is first measured by comparing the assets’ carrying amount to their expected future undiscounted net cash flows to determine if the assets are impaired. If such assets are considered to be impaired, the impairment recognized is measured based on the amount by which the carrying amount of the assets exceeds the fair value.

In response to the Company’s current period operating losses combined with our history of continuing operating losses, the Company evaluates the recoverability of certain property and equipment. In the third quarter of 2015, the overall outlook for the sapphire market continued to be volatile as industry analysts reported significant worldwide over capacity, and pricing of sapphire products reached historical lows. Based on the Company’s quarterly assessment using the most recent projections, impairment to these assets was indicated as of September 30, 2015, as the recoverable amount of undiscounted cash flows did not exceed the carrying amount of these assets, and the Company recorded an asset impairment charge on machinery, equipment and facilities. At June 30, 2016, the Company reviewed the current fair market value and concluded no additional adjustments were needed except as noted below.

The Company is actively pursuing sale of extra land the Company owns in Batavia, Illinois. The property has a book value of $1.6 million and it is the Company’s intention to complete a sale within the next twelve-month period. Therefore, this property was reclassified as a current asset held for sale in the quarter ended June 30, 2016. Since the expected sale price is below the book value of the property, for the three and six months ended June 30, 2016, an impairment charge of $265,000 was recorded.

The Company will continue to assess its long-lived assets to ensure the carrying amount of these assets is still appropriate given any changes in the marketplace and other factors used in determining the current fair market value.

Revenue recognition

Revenue recognized includes product sales and billings for costs and fees for government contracts.

 

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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 cash 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 six months ended June 30, 2016, $112,000 and $209,000 of revenue was recorded, respectively, and for the three and six months ended June 30, 2015, $144,000 and $286,000 of revenue was recorded, respectively. The total value of the contract is $4.7 million, of which $4.2 million has been recorded through June 30, 2016.

The Company does not provide maintenance or other services and it does not have sales that involve multiple elements or deliverables.

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 six months ended June 30, 2016 because the effects of potentially dilutive securities are anti-dilutive.

As of June 30, 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 and there were no outstanding warrants.

At June 30, 2015, the Company had the following anti-dilutive securities outstanding which were excluded from the calculation of diluted net loss per share:

 

     June 30,
2015
 

Warrants

     —     

Stock options

     8,102   
  

 

 

 

Total

     8,102   
  

 

 

 

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 six months ended June 30, 2016 and for the twelve months ended December 31, 2015, other comprehensive loss includes the unrealized loss on investments and foreign currency translation adjustments.

 

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The following table summarizes the components of accumulated comprehensive loss:

 

     June 30,
2016
     December 31,
2015
 
     (in thousands)  

Unrealized loss on investments

   $ (12 )    $ (17 )

Unrealized loss on currency translation

     (12 )      (16 )
  

 

 

    

 

 

 

Ending balance

   $ (24 )    $ (33 )
  

 

 

    

 

 

 

Recent accounting pronouncement

In August 2014, the FASB issued ASU No. 2014-15 (“ASU 2014-15”), Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern . The standard requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management must evaluate whether it is probable that known conditions or events, considered in the aggregate, would raise substantial doubt about the entity’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 standard requires management’s mitigation plans to alleviate the doubt or a statement of the substantial doubt about the entity’s ability to continue as a going concern to be disclosed in the financial statements. The standard is effective for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted. The Company is evaluating the impact, if any, of adopting ASU 2014-15 on its financial statements.

In July 2015, the FASB issued ASU No. 2015-11 (“ASU 2015-11”), Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this ASU require an entity to measure in-scope inventory at the lower of cost and net realizable value, further clarifying consideration for net realizable value as estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. This ASU more closely aligns the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). For public business entities, ASU 2015-11 is effective for annual periods and interim periods beginning after December 15, 2016. The amendments in this ASU are prospectively applied with earlier adoption permitted. The Company is evaluating this guidance and does not believe the adoption will significantly impact the presentation of its financial condition, results of operations and disclosures.

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 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. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. The Company is evaluating the impact, if any, of adopting ASU 2016-09 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 . The Company is evaluating the impact, if any, of adopting ASU 2014-09 and its updates, ASU 2016-10 and ASU 2016-12, on its consolidated financial statements.

 

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3. 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.

Revenue is attributed by geographic region based on ship-to location of the Company’s customers. The following table summarizes revenue by geographic region:

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2016      2015      2016      2015  
     (in thousands)      (in thousands)  

Germany

   $ 1,449       $ 1,131       $ 2,987       $ 1,641   

United States

     694         998         1,806         2,521   

Korea

     642         1,261         1,064         1,986   

Taiwan

     425         1,211         808         2,913   

Canada

     190         72         423         518   

Israel

     120         291         291         614   

China

     1         1,813         3         5,163   

Other

     14         329         440         660   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 3,535       $ 7,106       $ 7,822       $ 16,016   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes revenue by product type:

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2016      2015      2016      2015  
     (in thousands)      (in thousands)  

Core

   $ 689       $ 4,029       $ 1,158       $ 9,138   

Wafer

     1,830         1,742         4,175         3,633   

Optical

     904         1,191         2,280         2,959   

Research & development

     112         144         209         286   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 3,535       $ 7,106       $ 7,822       $ 16,016   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes assets by geographic region:

 

     June 30,
2016
     December 31,
2015
 
     (in thousands)  

United States

   $ 75,040       $ 88,916   

Malaysia

     28,491         30,276   

Other

     48         50   
  

 

 

    

 

 

 

Total assets

   $ 103,579       $ 119,242   
  

 

 

    

 

 

 

 

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4. INVESTMENTS

The Company invests available cash primarily in corporate notes and government securities. The Company’s short-term investments as of June 30, 2016 are comprised of $1.0 million corporate notes and bonds. The Company’s investments are classified as available-for-sale securities and are carried at fair market value with unrealized gains and losses recorded in accumulated other comprehensive income (loss).

The following table presents the amortized cost and gross unrealized gains and losses on all securities at June 30, 2016:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Short-term investments:

           

Corporate notes/bonds

   $ 1,007       $ —        $ —        $ 1,007   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term investments

   $ 1,007       $ —        $ —        $ 1,007   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the amortized cost, and gross unrealized gains and losses on all securities at December 31, 2015:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Short-term investments:

           

FDIC guaranteed certificates of deposit

   $ 1,920       $ —        $ —        $ 1,920   

Corporate notes/bonds

     6,980         —          5         6,975   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term investments

   $ 8,900       $ —        $ 5       $ 8,895   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company values its investments at fair value, defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard below describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

 

    Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

    Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

    Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s fixed income available-for-sale securities consist of high quality, investment grade commercial paper, corporate notes and government securities. The Company values these securities based on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. The valuation techniques used to measure the fair value of the Company’s financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques.

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of June 30, 2016:

 

     Level 1      Level 2      Level 3      Total  
     (in thousands)  

Cash equivalents:

           

Money market funds

   $ 13,628       $ —        $ —         $ 13,628   

Investments:

           

Available-for-sales securities—current:

           

Corporate notes/bonds

     —           1,007         —           1,007   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,628       $ 1,007       $ —         $ 14,635   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of December 31, 2015:

 

     Level 1      Level 2      Level 3      Total  
     (in thousands)  

Cash equivalents:

           

Money market funds

   $ 17,702       $ —         $ —         $ 17,702   

Investments:

           

Available-for-sales securities—current:

           

FDIC guaranteed certificates of deposit

     —           1,920         —           1,920   

Corporate notes/bonds

     —           6,975         —           6,975   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,702       $ 8,895       $ —         $ 26,597   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition to the debt securities noted above, the Company had approximately $3.4 million and $3.5 million of time deposits included in cash and cash equivalents as of June 30, 2016 and December 31, 2015, respectively.

5. SIGNIFICANT CUSTOMERS

For the three months ended June 30, 2016, the Company had three customers individually that accounted for approximately 39%, 18%, and 12% of revenue. For the three months ended June 30, 2015, the Company had four customers individually that accounted for approximately 16%, 15%, 14% and 11% of revenue. For the six months ended June 30, 2016, the Company had three customers that accounted for approximately 37%, 14% and 10% of revenue. For the six months ended June 30, 2015, the Company had one customer that accounted for approximately 23% of revenue. No other customers accounted for more than 10% of revenue for these reported periods in 2016 and 2015.

Customers individually representing more than 10% of trade receivables accounted for approximately 72% and 57% of accounts receivable as of June 30, 2016 and December 31, 2015, 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.

 

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6. STOCKHOLDERS’ EQUITY

Common Stock

As of June 30, 2016, the Company had reserved 3,102,257 shares of common stock for issuance upon the exercise of outstanding common stock options and the vesting of restricted stock units. Also, 2,229,803 shares of the Company’s common stock were reserved for future grants of stock options (or other similar equity instruments) under the Rubicon Technology, Inc. 2016 Stock Incentive Plan (the “2016 Plan”) as of June 30, 2016.

Warrants

For the three and six months ended June 30, 2016, the Company had no common stock warrants outstanding.

7. STOCK INCENTIVE PLANS

The Company sponsored a stock option plan, the Rubicon Technology, Inc. 2001 Equity Plan, as amended (the “2001 Plan”), which allowed for the granting of incentive and nonqualified stock options for the purchase of common stock. The maximum number of shares that could be awarded or sold under the 2001 Plan was 1,449,667 shares. Each option granted under the 2001 Plan entitles the holder to purchase one share of common stock at the specified option exercise price. The exercise price of each incentive stock option granted could not be less than the fair market value on the grant date. Management and the Board of Directors determined vesting periods and expiration dates at the time of the grant. On August 2, 2011, the 2001 Plan expired.

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, performance awards and bonus shares. The maximum number of shares that could be awarded under the 2007 Plan was 4,407,692 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 2016 Plan. Any existing awards under the 2007 Plan remain outstanding in accordance with their current terms under the 2007 Plan.

On June 24, 2016, the Company’ 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, restricted stock units, performance awards and bonus shares. The Compensation Committee of the Company’s Board of Directors 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, 2,229,803 shares of the Company’s common stock plus any shares subject to outstanding awards under the 2007 Plan that subsequently expires 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 after January 1, 2006. 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 six months ended June 30, 2016, the Company recorded $151,000 and $312,000, respectively, of stock option compensation expense. For the three and six months ended June 30, 2015, the Company recorded $185,000 and $385,000, respectively, of stock option compensation expense. As of June 30, 2016, the Company has $1.0 million of total unrecognized compensation cost related to non-vested awards granted under the Company’s stock-based plans that it expects to recognize over a weighted-average period of 2.64 years. The Company accounts for options issued prior to January 1, 2006 under the intrinsic value method.

The following table summarizes the activity of the stock incentive and equity plans as of June 30, 2016 and changes during the six 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, 2016

     732,270        2,851,568      $ 7.07         201,455         454,021   

Authorized

     1,900,000        —          —           —           —     

Granted

     (640,470 )     48,420        1.06         592,050         —     

Exercised/Issued

     —          —          —           —           (3,702

Cancelled/forfeited

     238,003        (189,559 )     9.16         —          (58,491
  

 

 

   

 

 

      

 

 

    

 

 

 

At June 30, 2016

     2,229,803        2,710,429      $ 6.81         793,505         391,828   
  

 

 

   

 

 

      

 

 

    

 

 

 

 

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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 June 30, 2016 and 2015, there was no intrinsic value of the options outstanding and exercisable. The weighted average fair value per share of options granted for the six months ended June 30, 2016 was $1.06 and the fair value of each option grant was estimated at the date of grant using the Black-Scholes option pricing model using an expected term of 5.1 years, risk-free interest rates of 1.24% - 1.73%, expected volatility of 65% and no dividend yield. The Company used an expected forfeiture rate of 23.1%.

A summary of the Company’s non-vested options during the six month period ended June 30, 2016 is presented below:

 

     Options      Weighted-
average
exercise
price
 

Non-vested at January 1, 2016

     1,251,961       $ 2.23   

Granted

     48,420         1.06   

Vested

     (76,425 )      5.38   

Forfeited

     (86,292 )      2.04   
  

 

 

    

 

 

 

Non-vested at June 30, 2016

     1,137,664       $ 1.98   
  

 

 

    

 

 

 

For the three and six months ended June 30, 2016 the Company recorded $67,000 and $138,000, respectively, of restricted stock unit (“RSU”) expense. As of June 30, 2016, there was $485,000 of unrecognized compensation cost related to the non-vested RSUs. This cost is expected to be recognized over a weighted-average period of 1.96 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, 2016

     454,021       $ 1.92      

Granted

     —           —        

Vested

     (3,702      3.94      

Cancelled

     (58,491      3.39      
  

 

 

    

 

 

    

 

 

 

Non-vested at June 30, 2016

     391,828       $ 1.68       $ 266,443   
  

 

 

    

 

 

    

 

 

 

For the three and six months ended June 30, 2016, the Company recorded $143,000 and $281,000, respectively, of stock compensation expense related to restricted stock. For the three and six months ended June 30, 2015, the Company recorded $73,000 and $146,000, 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, 2016

     15,200   

Granted

     592,050   

Vested

     (137,075
  

 

 

 

Non-vested restricted stock as of June 30, 2016

     470,175   
  

 

 

 

 

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8. COMMITMENTS AND CONTINGENCIES

Purchase Commitments

The Company has entered into agreements for electricity and to purchase equipment and components to construct furnaces. These agreements will result in the Company purchasing electricity, equipment or components for a total cost of approximately $4.6 million with deliveries occurring through December 2017.

Litigation

From time to time, the Company experiences routine litigation in the normal course of its business. The management of the Company does not believe any pending litigation, other than as set forth below, will have a material adverse effect on the financial condition or results of operations of the Company.

On April 30, 2015, Firerock Global Opportunity Fund LP filed a complaint in the Northern District of Illinois asserting federal securities claims against the Company, certain officers, its directors and the underwriters in the Company’s March 2014 stock offering. The complaint sought as a remedy either money damages or rescission of the March 2014 offering, plus attorneys’ fees. On October 29, 2015, after mediation and subsequent discussions, the parties reached a settlement agreement in principle. On January 27, 2016, the United States District Court for the Northern District of Illinois granted a motion for preliminary approval of the agreement, and on May 20, 2016, a final judgment and order of dismissal was granted. The settlement included a release of all defendants, and dismissal of the case against all defendants with prejudice. The Company recorded for the year ended December 31, 2015 an expense of $1.1 million of which $900,000 is the amount the Company contributed to the settlement and paid on February 17, 2016. The remaining costs of the settlement were covered by the Company’s insurance carriers.

On November 19, 2015, the Carolyn Piper Smithhisler Living Trust, derivatively on behalf of Rubicon Technology Inc., filed a complaint in the Eighteenth Judicial Circuit of Illinois against the Company’s Board of Directors and certain senior officers seeking to remedy alleged breaches of fiduciary duties and other violations of the law, failure to implement an effective system of internal controls, and failure to oversee the public statements made by the Company and certain individual defendants. The complaint sought as a remedy to recover damages against the individual defendants for the benefit of the Company and to require the Company to reform and improve its corporate governance and internal procedures plus attorneys’ fees. After extensive discussions, the parties informed the court on May 2, 2016 that they had reached a settlement agreement in principle. The proposed settlement provides for the Company to adopt certain governance changes and to pay certain amounts. On May 23, 2016, the court issued an order granting preliminary approval of the proposed settlement. On July 11, 2016, plaintiff’s unopposed motion for final approval of stockholder derivative settlement fee and expense amount and service award was filed. On August 1, 2016, the court issued a final judgment approving the settlement and an order of dismissal was granted. The Company’s insurance carriers are expected to cover substantially all of the settlement payments and related expenses, including legal fees.

9. 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 June 30, 2016, a valuation allowance has been included in the 2016 forecasted effective tax rate. The Company is in a cumulative loss position for the past three years, which is considered significant negative evidence that is difficult to overcome on a “more likely than not” standard through objectively verifiable data. Under the accounting standards objective verifiable evidence is given greater weight than subjective evidence such as the Company’s projections for future growth. Based on an evaluation in accordance with the accounting standards, as of December 31, 2015, a valuation allowance has been recorded against the net U.S. deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence. At June 30, 2016, 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 six months ended June 30, 2016 is based on an estimated combined statutory effective tax rate. The Company recorded for the three and six months ended June 30, 2016 a tax benefit of $174,000 and $325,000, respectively, for an effective tax rate of 2.1% and 2.0%, respectively. For the three and six months ended June 30, 2016, 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 and Malaysia foreign tax rate differential.

 

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10. CREDIT FACILITY

On January 2, 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 provides 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 are limited to 40% of the aggregate outstanding on the revolving line of credit and $10.0 million in aggregate. The Company has 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 maintains liquidity of $20.0 million or greater with the lending institution, then the borrowing interest rate options are LIBOR plus 2.25% or the Wall Street Journal prime rate. There is an unused revolving line facility fee of 0.375% per annum. The facility is secured by a first priority interest in substantially all of the Company’s personal property, excluding intellectual property. The Company is required to maintain an adjusted quick ratio of 1.40 to 1.00, maintain operating and other deposit accounts with the bank or bank’s affiliates of 25% of the Company’s total worldwide cash, securities and investments, and the Company can pay dividends or repurchase capital stock only with the bank’s consent during the three-year term. In August 2015, the Company entered into an amendment agreement with the bank to extend the senior secured facility through January 2, 2018. Under the amended agreement, advances against inventory are 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 the facility fee on the unused portion of the revolving line was adjusted to 0.50% per annum. All other terms and conditions remained the same. As of June 30, 2016 the Company had borrowed $1.5 million against this facility electing a borrowing rate of LIBOR plus 2.75% and had additional available borrowing capacity of $2.0 million under this facility. The agreement contains a subjective acceleration clause and requires the Company to maintain a lockbox. As a result, the Company has classified the debt as a current liability on its balance sheet. For the three and six months ended June 30, 2016, the Company recorded interest expense of $36,000 and $71,000, respectively, which includes $31,000 and $63,000, respectively, of interest expense charged on the unused portion of the facility. For the six months ended June 30, 2015, the Company did not draw on this facility. For the three and six months ended June 30, 2015, the Company recorded $24,000 and $47,000, respectively, of interest expense charged on the unused portion of the facility.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q, including statements regarding our estimates, expectations, beliefs, intentions, projections or strategies for the future, results of operations, financial position, net sales, projected costs, prospects and plans and objectives of management for future operations may be “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward looking statements can be identified by the use of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” “forecast,” “prospects,” “goals,” “potential,” “likely,” and the like, and/or future-tense or conditional constructions such as “will,” “may,” “could,” “should,” etc. (or the negative thereof). Items contemplating or making assumptions about actual or potential future sales, market size and trends or operating results also constitute forward-looking statements.

Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Before investing in our common stock, investors should be aware that the occurrence of the risks, uncertainties and events described in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, as amended, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 and elsewhere in this Quarterly Report, could have a material adverse effect on our business, results of operations and financial condition.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, forward-looking statements are inherently subject to known and unknown business, economic and other risks and uncertainties that may cause actual results to be materially different from those discussed in these forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report, other than as may be required by applicable law or regulation. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.

You should read this Quarterly Report, the documents that we reference in this Quarterly Report and have filed with the SEC as exhibits and our Annual Report on Form 10-K, as amended, for the year ended December 31, 2015 with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

Unless otherwise indicated, the terms “Rubicon,” the “Company,” “we,” “us,” and “our” refer to Rubicon Technology, Inc. and our consolidated subsidiaries.

OVERVIEW

We are a vertically integrated, advanced materials provider specializing in monocrystalline sapphire for applications in light-emitting diodes (“LEDs”), optical systems and specialty electronic devices. Sapphire is also used as an exterior component in mobile devices, specifically camera lens covers, dual flashes and home buttons on certain newer model smartphones and as the crystal covering the faces of certain smart watches. Sapphire was adopted for use on the home button on certain smartphones because of the scratch resistance and increased touch capacitance it offers, which are important characteristics to ensure the effectiveness of the fingerprint recognition security built into the device. In addition, some consumer electronics original equipment manufacturers (“OEMs”) are using full sapphire faceplates for smartphones, in limited volume. However, substantial capacity has been added recently by competitors in China which has significantly limited the opportunity for other sapphire producers in this application. If sapphire smartphone faceplates were widely adopted, this would become the world’s largest application for sapphire and open up greater opportunity with this application. We apply our proprietary crystal growth technology to produce high-quality sapphire products efficiently to supply both high-volume and niche end-markets, and we work closely with our customers to meet their quality and delivery needs.

Currently, the LED market remains the largest consumer of sapphire. For the LED market, we currently sell two to six-inch material in core form and four, six and eight-inch material in polished and PSS wafer form. Eight-inch wafers are sold primarily for customers’ research and development efforts at this time. We have the ability to produce cores and wafers of up to twelve inches in diameter to support production of chips for next-generation LED and other electronic applications. Larger sapphire also has current applications in the optical markets. In other semiconductor markets, we sell primarily six-inch wafers used in certain Radio Frequency Integrated Circuits (“RFIC”) products.

We have been focusing our efforts on a newer product offering, patterned sapphire substrates or “PSS”. High-Brightness LED chip manufacturers etch a pattern onto the surface of the sapphire wafer in the early stages of their production process in order to improve light output. We have leveraged our capability in producing larger diameter sapphire wafers to offer pre-patterned, larger diameter (six-inch) wafers to the LED market.

 

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Given the increased competition in the LED and mobile device markets, we have been increasing our focus on developing opportunities in and products for the optical/industrial sapphire market, particularly for applications that require high quality sapphire in larger formats where we believe we have a competitive advantage. In addition to supplying our traditional customers in this market, we are engaged in ongoing discussions with the developers of new applications for sapphire and have begun supplying them with samples, but it is difficult to predict the timing, size and profitability of these potential new market opportunities.

Currently our largest product lines are:

 

    sapphire cores, four inches in diameter, which our customers further process into wafers for use in LED applications and into components such as lens covers for mobile devices;

 

    six-inch sapphire wafers that are used as substrates for the manufacture of LED chips and to a lesser extent for other semiconductor applications such as Silicon-on-Sapphire (“SoS”) RFICs;

 

    six-inch PSS wafers which are polished wafers that undergo additional processes of photolithography and dry plasma etching to produce a patterned surface which enhances LED light extraction efficiency (“LEE”); and

 

    optical sapphire components in various shapes and sizes, including round and rectangular windows and blanks, domes, tubes and rods. These optical sapphire products are used in equipment for a wide variety of end markets, including defense and aerospace, medical devices, oil and gas drilling, semiconductor manufacturing and other markets.

We recognize research and development revenue in the period during which the related costs and fees are incurred.

Historically, a significant portion of our revenue has been derived from sales to relatively few customers. For the three months ended June 30, 2016, we had three customers individually that accounted for approximately 39%, 18% and 12% of revenue and for the three months ended June 30, 2015, we had four customers individually that accounted for approximately 16%, 15%, 14% and 11% of revenue. For the six months ended June 30, 2016, we had three customers that accounted for approximately 37%, 14% and 10% of revenue. For the six months ended June 30, 2015, we had had one customer that accounted for approximately 23% of revenue. Other than as discussed above, none of our customers accounted for more than 10% of our revenue for such periods. Although we are continuing to diversify and expand our customer base, we expect our revenue to continue to be concentrated among a small number of customers. We expect that our significant customers may change from period to period.

We recognize revenue based upon shipping terms with our customers and from our government contract as costs and fees are incurred. Delays in product orders or changes to the timing of shipments could cause our quarterly revenue to vary significantly. We derive a significant portion of our revenue from customers outside of the U.S. Historically, the majority of our sales have been to customers located in Asia. All of our revenue and corresponding accounts receivable are denominated in U.S. dollars.

We manufacture and ship our products from our facilities in the Chicago metropolitan area and from our facility in Penang, Malaysia. We have approximately 226,400 square feet of manufacturing and office space in Batavia, Franklin Park and Bensenville, Illinois and a 65,000 square foot facility in Penang, Malaysia, which processes sapphire grown by us in our Illinois facilities into finished cores and wafers. Our Malaysia facility currently finishes the majority of our core, wafer and PSS production. In March 2012, we acquired additional land in Batavia, Illinois to expand our crystal growth capacity, though that land is now being offered for sale.

Our cost of goods sold consists primarily of manufacturing materials, labor, manufacturing-related overhead such as utilities, depreciation and rent, provisions for excess and obsolete inventory reserves, freight and warranties. We purchase materials and supplies to support such current and future demand. We are subject to variations in the cost of raw materials and consumables from period to period because we do not have long-term fixed-price agreements with most of our suppliers. We mitigate the potential impact of fluctuations in energy costs by entering into long-term purchase agreements. Once our current agreements expire, if electricity prices increase significantly, we may not be able to pass these price increases through to our customers on a timely basis, if at all, which could adversely affect our gross margins and results of operations.

Our operating expenses are comprised of sales and marketing, research and development (“R&D”), and general and administrative (“G&A”) expenses. G&A expenses consist primarily of salaries and associated costs for employees in finance, human resources, information technology and administrative activities, charges for accounting, legal, and insurance fees, and stock-based compensation. The majority of our stock-based compensation relates to administrative personnel and is accounted for as a G&A expense.

Other income (expense) consists of interest income, interest expense and realized gains and losses on investments and currency translation.

 

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We account for income taxes under the asset and liability method whereby the expected future tax consequences of temporary differences between the book value and the tax basis of assets and liabilities are recognized as deferred tax assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to be recognized. Our analysis of ownership changes that limit the utilization of our net operating loss (“NOL”) carryforwards as of June 30, 2016, shows no impact on such utilization. We are 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. Based on an evaluation in accordance with the accounting standards, as of December 31, 2015, a valuation allowance has been recorded against the net U.S. deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence. At June 30, 2016, we continue to be in a three year cumulative loss position, therefore, a full valuation allowance was provided on our U.S. and Malaysia net deferred tax assets and no tax benefit will be recorded until we can conclude that it is more likely than not that our deferred tax assets will be realized.

We anticipate our capital expenditures will be closely controlled and only as required under existing obligations or as otherwise necessary to realize value from the development, commercialization or sale of products. We have a commitment to purchase a new tool that will enable us to provide the higher volume samples and pilot-production capacity which are required for customers to fully qualify and commercialize new products which will result in an additional capital expenditure of approximately $1.0 million. Our capital expenditures in the six months ended June 30, 2016 were $660,000.

We are reviewing a variety of alternatives with a goal of providing greater value to our stockholders. These alternatives could result in, among other things, modifying or eliminating certain of our operations, selling material assets or business segments, seeking additional financing, a sale of the business, a merger, consolidation or other business combination, partnering or other collaboration agreements, potential acquisitions or recapitalizations, or we may continue to operate with our current business plan and strategy. We cannot provide assurance that this process will result in the consummation of any transaction, or that the consummation of any transaction will provide greater value to our stockholders.

RESULTS OF CONSOLIDATED OPERATIONS THREE MONTHS ENDED JUNE 30, 2016 AND 2015

The following table sets forth our consolidated statements of operations for the periods indicated:

 

     Three months ended
June 30,
 
     2016      2015  
     (in millions)  

Revenue

   $ 3.5       $ 7.1   

Cost of goods sold

     7.6         12.3   
  

 

 

    

 

 

 

Gross loss

     (4.1 )      (5.2 )
  

 

 

    

 

 

 

Operating expenses:

     

General and administrative

     2.7         2.2   

Sales and marketing

     0.4         0.3   

Research and development

     0.6         0.6   

Loss on disposal of assets

     0.1           

Asset impairment charge

     0.3           
  

 

 

    

 

 

 

Total operating expenses

     4.1         3.1   
  

 

 

    

 

 

 

Loss from operations

     (8.2 )      (8.3 )

Other income (expense)

     (0.2      (0.2
  

 

 

    

 

 

 

Loss before income taxes

     (8.4 )      (8.5 )

Income tax benefit (expense)

     0.2         (0.1
  

 

 

    

 

 

 

Net loss

   $ (8.2 )    $ (8.6 )
  

 

 

    

 

 

 

 

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The following table sets forth our consolidated statements of operations as a percentage of revenue for the periods indicated:

 

     Three months ended
June 30,
 
     2016     2015  
     (percentage of total)  

Revenue

     100 %     100 %

Cost of goods sold

     215        173   
  

 

 

   

 

 

 

Gross loss

     (115 )     (73 )
  

 

 

   

 

 

 

Operating expenses:

    

General and administrative

     77        31   

Sales and marketing

     10        4   

Research and development

     18        9   

Loss on disposal of assets

     3        —     

Asset impairment charge

     8        —     
  

 

 

   

 

 

 

Total operating expenses

     116        44   
  

 

 

   

 

 

 

Loss from operations

     (231 )     (117 )

Other income (expense)

     (7 )     (3 )
  

 

 

   

 

 

 

Loss before income taxes

     (238 )     (120 )

Income tax benefit (expense)

     6        (1
  

 

 

   

 

 

 

Net loss

     (232 )%     (121 )%
  

 

 

   

 

 

 

Revenue. Revenue was $3.5 million and $7.1 million for the three months ended June 30, 2016 and 2015, respectively, a decrease of $3.6 million. We experienced lower revenue from sales of our core products by $3.4 million, of which $2.5 million was attributable to a decrease in volume and $857,000 was attributable to a decrease in price. Revenue from sales of our polished wafers was flat. An increase in polished wafers sold to the LED market of $549,000 was partially offset by a decrease of $461,000 on polished wafers sold to the SoS market. A $352,000 decrease in revenue from non-PSS polished wafers sales was offset by a $440,000 increase in revenue from sales of PSS wafers. We also had decreased revenue of $235,000 from optical products due to a softening in the sales of sapphire for sensor and instrumentation applications. We anticipate pricing to remain challenging for at least the next several quarters. We have continued to focus our sales of wafer products on PSS wafers where we believe there is greater margin opportunity. In addition to pursuing our PSS potential, we are working on building our optical business by expanding our product offerings and growing our customer base in order to diversify our product offerings. We operate in an extremely volatile market, so the amount of price or volume change and acceptance of new product offerings is difficult to predict.

Gross loss. Gross loss was $4.1 million and $5.2 million for the three months ended June 30, 2016 and 2015, respectively, a decrease in gross loss of $1.1 million. The decrease in gross loss was attributable to lower production costs on lower sales volumes of $808,000. For the three months ended June 30, 2016 and 2015, products were sold below cost resulting in a lower of cost or market adjustment which reduced inventory and increased cost of goods sold by $204,000 and $815,000, respectively. For the three months ended June 30, 2016 and 2015, we were not operating at capacity due to lower demand, and recorded as an expense $2.1 million and $1.6 million, respectively, of costs associated with the under-utilization of equipment and staff.

General and administrative expenses . G&A expenses were $2.7 million and $2.2 million for the three months ended June 30, 2016 and 2015, respectively, an increase of $505,000. The increase was primarily attributable to increased costs of $900,000 related to our 2016 proxy solicitation and annual meeting process which involved a contested director election, partially offset by lower bad debt expense of $161,000 on lower revenue and improved collections, lower employee compensation costs of $143,000 on lower headcount and a decrease in recruiting costs of $95,000.

Sales and marketing expenses. Sales and marketing expenses were $360,000 and $354,000 for the three months ended June 30, 2016 and 2015, respectively, an increase of $6,000. The increase in sales and marketing expenses was primarily attributable to increased employee compensation costs of $30,000 partially offset by a decrease in marketing samples of $22,000.

Research and development expenses. R&D expenses were $652,000 and $602,000 for the three months ended June 30, 2016 and 2015, respectively, an increase of $50,000. The increase was primarily attributable to increased employee compensation costs of $102,000 on increased headcount partially offset by a decrease in project expenses of $50,000.

Asset impairment charge. We are actively pursuing the sale of extra land we own in Batavia, Illinois. The property has a book value of $1.6 million and since the expected sale price is below the book value of the property, for the three months ended June 30, 2016, an impairment charge of $265,000 was recorded. There were no impairment charges for the three months ended June 30, 2015.

Other income (expense). Other expense was $233,000 and $207,000 for the three months ended June 30, 2016 and 2015, respectively, an increase of $26,000. The increase was due to an increase in realized loss on foreign currency translation of $12,000 and increased interest expense of $12,000.

 

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Income tax benefit (expense). In accordance with ASC740 “Accounting for Income Taxes” (“ASC740”), we evaluate our deferred income tax assets quarterly to determine if valuation allowances are required or should be adjusted. ASC740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. We are in a cumulative loss position for the past three years, which is considered significant negative evidence by the accounting standards that is difficult to overcome on a “more likely than not” standard through objectively verifiable data. The accounting standards attribute greater weight to objective negative evidence than to subjective positive evidence, such as our projections for future growth. Based on this evaluation, as of December 31, 2015, a valuation allowance has been recorded against the net U.S. deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence. At June 30, 2016 we continue to be in a three year cumulative loss position, therefore, until an appropriate level of profitability is attained, we expect to maintain a valuation allowance on net deferred tax assets related to future U.S. and Malaysia tax benefits and will no longer accrue tax benefits or tax expense on our Consolidated Statement of Operations. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our 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 months ended June 30, 2016 is based on an estimated combined statutory effective tax rate. For the three months ended June 30, 2016, the difference between the Company’s effective tax rate of 2.2% 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 and Malaysia foreign tax rate differential.

 

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RESULTS OF CONSOLIDATED OPERATIONS SIX MONTHS ENDED JUNE 30, 2016 AND 2015

The following table sets forth our consolidated statements of operations for the periods indicated:

 

     Six months ended
June 30,
 
     2016      2015  
     (in millions)  

Revenue

   $ 7.8       $ 16.0   

Cost of goods sold

     17.3         26.3   
  

 

 

    

 

 

 

Gross loss

     (9.5 )      (10.3 )
  

 

 

    

 

 

 

Operating expenses:

     

General and administrative

     4.5         4.3   

Sales and marketing

     0.7         0.7   

Research and development

     1.2         1.0   

Loss on disposal of assets

     0.1         —     

Asset impairment charge

     0.3         —     
  

 

 

    

 

 

 

Total operating expenses

     6.8         6.0   
  

 

 

    

 

 

 

Loss from operations

     (16.3 )      (16.3 )

Other income (expense)

     0.4        (0.6 )
  

 

 

    

 

 

 

Loss before income taxes

     (15.9 )      (16.9 )

Income tax benefit

     0.3         —     
  

 

 

    

 

 

 

Net loss

   $ (15.6 )    $ (16.9 )
  

 

 

    

 

 

 

The following table sets forth our consolidated statements of operations as a percentage of revenue for the periods indicated:

 

     Six months ended
June 30,
 
     2016     2015  
     (percentage of total)  

Revenue

     100 %     100 %

Cost of goods sold

     221        164   
  

 

 

   

 

 

 

Gross loss

     (121 )     (64 )
  

 

 

   

 

 

 

Operating expenses:

    

General and administrative

     57        27   

Sales and marketing

     10        4   

Research and development

     16        7   

Loss on disposal of assets

     2        —     

Asset impairment charge

     3        —     
  

 

 

   

 

 

 

Total operating expenses

     88        38   
  

 

 

   

 

 

 

Loss from operations

     (209 )     (102 )

Other income (expense)

     6        (4
  

 

 

   

 

 

 

Loss before income taxes

     (203 )     (106 )

Income tax benefit

     4        —     
  

 

 

   

 

 

 

Net loss

     (199 )%     (106 )%
  

 

 

   

 

 

 

Revenue. Revenue was $7.8 million and $16.0 million for the six months ended June 30, 2016 and 2015, respectively, a decrease of $8.2 million. We experienced lower revenue from sales of our core products by $8.1 million, of which $6.7 million was attributable to a decrease in volume and $1.4 million was attributable to a decrease in price. We experienced higher revenue from sales of our polished wafers by $542,000 which was the result of a $1.6 million increase in polished wafers sold to the LED market partially offset by $1.0 million in lower sales of polished wafers sold to the SoS market. The $1.6 million increase in polished wafers sold to the LED market reflects a $100,000 increase in sales of non-PSS polished wafers and an increase of $1.5 million in sales of PSS wafers. We also had decreased revenue of $599,000 from optical products due to a decrease in the sales of sapphire for sensor and instrumentation applications. Demand for our core products was weak for the six months ended June 30, 2016 due to decreased demand from the LED back lighting market. We anticipate pricing to remain challenging for at least the next several quarters. We have continued to focus our sales of wafer products on PSS wafers where we believe there is greater margin opportunity. In addition to pursuing our PSS potential, we are working on building our optical business by expanding our product offerings and growing our customer base in order to diversify our product offerings. We operate in an extremely volatile market, so the amount of price or volume change and acceptance of new product offerings is difficult to predict.

 

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Gross loss. Gross loss was $9.5 million and $10.3 million for the six months ended June 30, 2016 and 2015, respectively, a decrease in gross loss of $793,000. The decrease in gross loss was primarily attributable to lower production costs on lower sales volumes of $1.1 million. For the six months ended June 30, 2016 and 2015, products were sold below cost resulting in a lower of cost or market adjustment which reduced inventory and increased cost of goods sold by $815,000 and $1.1 million, respectively. For the six months ended June 30, 2016 and 2015, due to the lower demand, we were not operating at capacity and recorded costs of $4.5 million and $3.8 million, respectively, associated with the under-utilization of equipment and staff as an expense.

General and administrative expenses. G&A expenses were $4.5 million and $4.3 million for the six months ended June 30, 2016 and 2015, respectively, an increase of $205,000. The increase was primarily attributable to increased costs of $900,000 related to our 2016 proxy solicitation and annual meeting process, which involved a contested director election, partially offset by lower employee compensation costs of $231,000 on lower headcount, lower recruiting and immigration assistance costs of $221,000, lower bad debt expense of $153,000 on improved collections, lower investor relations expenditures of $134,000 and a decrease in travel costs of $60,000.

Sales and marketing expenses. Sales and marketing expenses were $752,000 and $692,000 for the six months ended June 30, 2016 and 2015, respectively, an increase of $60,000. The increase was primarily due to higher employee compensation costs on increased headcount.

Research and development expenses. R&D expenses were $1.2 million and $1.0 million for the six months ended June 30, 2016 and 2015, respectively, an increase of $195,000. The increase was primarily attributable to increased employee compensation costs of $269,000 partially offset by a decrease in project costs of $83,000.

Asset impairment charge. We are actively pursuing the sale of extra land we own in Batavia, Illinois. The property has a book value of $1.6 million and since the expected sale price is below the book value of the property, for the six months ended June 30, 2016, an impairment charge of $265,000 was recorded. There were no impairment charges for the six months ended June 30, 2015.

Other income (expense). Other income was $439,000 for the six months ended June 30, 2016 and other expense was $571,000 for the six months ended June 30, 2015, a decrease in other expense of $1.1 million. The decrease was primarily due to a decrease in realized losses on foreign currency translation of $1.1 million.

Income tax benefit. In accordance with ASC740 “Accounting for Income Taxes” (“ASC740”), we evaluate our deferred income tax assets quarterly to determine if valuation allowances are required or should be adjusted. ASC740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. We are in a cumulative loss position for the past three years, which is considered significant negative evidence by the accounting standards that is difficult to overcome on a “more likely than not” standard through objectively verifiable data. The accounting standards attribute greater weight to objective negative evidence than to subjective positive evidence, such as our projections for future growth. Based on this evaluation, as of December 31, 2015, a valuation allowance has been recorded against the net U.S. deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence. At June 30, 2016 we continue to be in a three year cumulative loss position, therefore, until an appropriate level of profitability is attained, we expect to maintain a valuation allowance on net deferred tax assets related to future U.S. and Malaysia tax benefits and will no longer accrue tax benefits or tax expense on our Consolidated Statement of Operations. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our 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 six months ended June 30, 2016 is based on an estimated combined statutory effective tax rate. For the six months ended June 30, 2016, the difference between our effective tax rate of 2.1% 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 and Malaysia foreign tax rate differential.

LIQUIDITY AND CAPITAL RESOURCES

We have historically funded our operations using a combination of issuances of common stock and cash generated from our operations. To fund operations, starting in December 2015, and from time to time in the six months ended June 30, 2016, we borrowed and subsequently repaid $1.5 million from our credit facility. As of June 30, 2016 we had $1.5 million of outstanding borrowing under our credit facility.

As of June 30, 2016, we had cash and short term investments totaling $18.1 million, including cash of $3.5 million held in deposits at major banks, $13.6 million invested in money market funds and $1.0 million of short-term investments in corporate notes and bonds.

 

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Cash flows from operating activities

The following table represents the major components of our cash flows from operating activities for the six months ended June 30, 2016 and 2015:

 

     Six months ended
June 30,
 
   2016      2015  
   (in millions)  

Net loss

   $ (15.5 )    $ (16.9 )

Non-cash items:

     

Depreciation and amortization

     3.3         6.6   

Stock based compensation and other, net

     1.1         0.7   

Deferred taxes

     (0.4      —     
  

 

 

    

 

 

 

Total non-cash items:

     4.0         7.3   
  

 

 

    

 

 

 

Working capital:

     

Accounts receivable

     (1.0      0.4   

Inventories

     0.7         0.1   

Prepaid expenses and other assets

     1.4         1.2   

Accounts payable

     0.3         (1.2 )

Other accruals

     (0.9      —     
  

 

 

    

 

 

 

Total working capital items:

     0.5         0.5   
  

 

 

    

 

 

 

Net cash used in operating activities

   $ (11.0 )    $ (9.1 )
  

 

 

    

 

 

 

Cash used in operating activities was $11.0 million for the six months ended June 30, 2016. During such period, we generated a net loss of $15.5 million, non-cash expenses of $4.0 million, and an increase in cash from net working capital of $500,000. The net working capital decrease was driven by a decrease in inventory of $693,000 primarily related to a decrease in raw materials, and a decrease in other prepaid expenses of $1.4 million primarily related to a decrease in prepaid furnace and machinery components. This decrease was partially offset by an increase in accounts receivable of $1.0 million on timing of customer payments and a decrease in other accruals of $910,000 due to payment of a litigation settlement of $900,000 and timing of other payments.

Cash used in operating activities was $9.1 million for the six months ended June 30, 2015. During such period, we generated a net loss of $16.9 million, non-cash expenses of $7.3 million, and an increase in cash from net working capital of $500,000. The net working capital decrease was driven by a decrease in accounts receivable of $379,000 on timing of customer payments, a decrease in inventory of $124,000 primarily related to a decrease in raw materials, and a decrease in other prepaid expenses of $1.2 million primarily related to a decrease in prepaid furnace components. This increase was partially offset by a decrease in accounts payable of $1.2 million due to timing of payments.

Cash flows from investing activities

The following table represents the major components of our cash flows from investing activities for the six months ended June 30, 2016 and 2015:

 

     Six months ended
June 30,
 
     2016      2015  
     (in millions)  

Purchases of property and equipment:

     

Machinery & equipment for coating process

   $ (0.7    $ —     

Polishing platform and PSS machinery and equipment

     —           (0.3
  

 

 

    

 

 

 

Total purchases of property and equipment:

     (0.7 )      (0.3 )
  

 

 

    

 

 

 

Purchases of investments

     —           (1.1 )

Proceeds from disposal of assets

     0.2         —     

Proceeds from sale of investments

     7.9         8.5   
  

 

 

    

 

 

 

Net cash used in investing activities

   $ 7.4       $ 7.1   
  

 

 

    

 

 

 

Net cash provided by investing activities was $7.4 million for the six months ended June 30, 2016. During the six months ended June 30, 2016, we used approximately $660,000 on the purchase of equipment for our new coating process and used proceeds from the sale of investments of $7.9 million to fund operations and capital spending.

 

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Net cash provided by investing activities was $7.1 million for the six months ended June 30, 2015. During the six months ended June 30, 2015, we used approximately $342,000 on the purchase of equipment primarily for our facility in Penang, Malaysia. We used proceeds from the sale of investments of $8.5 million partially offset by the purchases of investments of $1.1 million to fund operations and capital spending.

We anticipate our capital expenditures will be closely controlled and only as required under existing obligations or as otherwise necessary to realize value from the development, commercialization or sale of products. We have a commitment to purchase a new tool that will enable us to provide the higher volume samples and pilot-production capacity which are required for customers to fully qualify and commercialize new products which will result in an additional capital expenditure of approximately $1.0 million. Our capital expenditures in the six months ended June 30, 2016 were $660,000.

Cash flows from financing activities

Net cash used in financing activities was $13,000 for the six months ended June 30, 2016, which represents cash used to settle net equity awards of $1,000, and a change in restricted cash of $12,000. Net cash used in financing activities was $16,000 for the six months ended June 30, 2015, which represents cash used to settle net equity awards of $8,000, and a change in restricted cash of $12,000 offset by proceeds from the exercise of options of $4,000.

Future liquidity requirements

We believe that our existing cash, cash equivalents and investments, and anticipated cash flows from operating activities and our secured credit facility will be sufficient to meet our anticipated cash needs for at least the next twelve months. However, if we are not able to reduce our use of cash in the next twelve months, we may not have enough funds available to continue operating at our current level in future periods. Our cash needs include cash required to fund our operations, and the capital needed to fund any future expansion in the U.S. and Asia and investments in new product development. If the assumptions underlying our business plan regarding future revenues and expenses change, or if unexpected opportunities or needs arise, we may seek to raise additional cash by selling equity or convertible debt securities. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. On April 19, 2016, we received notice from the Listing Qualifications Department of NASDAQ stating that we are not in compliance with NASDAQ’s minimum bid price requirement of $1.00 per share, because the closing bid price for our stock was below $1.00 for 30 consecutive business days. We have a grace period of 180 calendar days, or until October 17, 2016, to regain compliance with the minimum closing bid price requirement for continued listing and we may be eligible for an additional 180 calendar days grace period if we elect to, and qualify for, the transfer of our common stock to the NASDAQ Capital Market. In order to regain compliance, the closing bid price of our common stock must be at least $1.00 per share for a minimum of ten consecutive business days. In the event we do not regain compliance within the applicable grace period(s), our common stock will be subject to delisting by NASDAQ. If our common stock were to be delisted, this would significantly impact our ability to raise funds through the issuance of equity. If we obtain additional debt financing or draw further on our credit facility, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. If we are unable to obtain financing, we may be unable to continue operations or successfully execute our business plan.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We consider to be critical those accounting policies that require our most subjective or complex judgments, which often result from a need to make estimates about the effect of matters that are inherently uncertain, and that are among the most important of our accounting policies in the portrayal of our financial condition and results of operations. We believe the following to be our critical accounting policies, including the more significant estimates and assumptions used in preparation of our financial statements.

Foreign currency translation and transaction

Rubicon Worldwide LLC, Rubicon Technology Hong Kong Limited and Rubicon Technology Korea Yuhan Hosea’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 Worldwide LLC, Rubicon Technology Hong Kong Limited and Rubicon Technology Korea Yuhan Hosea are recorded as a separate component of accumulated other comprehensive income (loss) within stockholders’ equity.

We have 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. We record these gains and losses in other income (expense).

 

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Foreign currency transaction gains and losses are generated from the effects of exchange rate changes on transactions denominated in a currency other than our functional currency, 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. We record these gains and losses in other income (expense).

Revenue recognition

We recognize revenue from sales of products and billings for costs and fees from government contracts.

Product Sales

 

    Persuasive evidence of an arrangement exists. We require evidence of a purchase order with the customer specifying 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 occurs 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. The purchase orders do not contain rights of cancellation, return, exchanges or refunds.

 

    Collection of the resulting receivable is reasonably assured. Our standard arrangement with customers includes payment terms. Customers are subject to a credit review process that evaluates each customer’s financial position and its ability to pay. We determine collectability by considering the length of time the customer has been in business and our history of collections with that customer. If we determine that collection is not probable, no product is shipped and no revenue is recognized unless cash is received in advance.

In July 2012, we signed a contract with the Air Force Research Laboratory to produce large-area sapphire windows on a cost plus fixed fee basis. We recognize revenue from this contract in the period during which the related costs are incurred over the contractually defined period. We expect to complete our contract in 2017.

We do not provide maintenance or other services and the Company does not have sales that involve multiple elements or deliverables.

Inventory valuation

We value our inventory at the lower of cost or market. Market is determined based on net realizable value. Raw materials cost is determined using the first-in, first-out method, and work-in-process and finished goods costs are determined on a weighted-average cost basis which includes materials, labor and overhead. We establish inventory reserves when conditions exist that suggest inventory may be in excess of anticipated demand or is obsolete based on customer required specifications. We evaluate the ability to realize the value of our inventory based on a combination of factors, including forecasted sales, estimated current and future market value and changes in customers’ product specifications. For the six months ended June 30, 2016, we accepted sales orders for core and wafer products at prices lower than our cost. Based on these sales prices, we recorded for the six months ended June 30, 2016 an adjustment which increased costs of goods sold and reduced inventory by $204,000 and $1.1 million, respectively. We expect pricing on these products to remain challenging at least for the next few quarters. Our method of estimating excess and obsolete inventory has remained consistent for all periods presented. However, if our recognition of excess or obsolete inventory is, or if our estimates of our inventory’s potential utility become, less favorable than currently expected, additional inventory reserves may be required. We determine our normal operating capacity and record as an expense costs attributable to lower utilization of equipment and staff. For the three and six months ended June 30, 2016, we determined that we were not operating at capacity and recorded costs associated with lower utilization of equipment and staff of $2.1 million and $4.5 million, respectively. For the remainder of 2016, it is likely that we will incur additional costs due to lower utilization of equipment and staff.

Investments

We invest available cash primarily in investment grade commercial paper, FDIC guaranteed certificates of deposit, corporate notes 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 income (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 we have the ability and intent, if necessary, to liquidate in order to support our current operations are classified as short-term.

We review our 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. We consider 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, our 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 we conclude 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. As of June 30, 2016, no impairment was recorded.

 

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Allowance for doubtful accounts

We estimate the allowance for doubtful accounts based on an assessment of the collectability of specific customer accounts. The determination of risk for collection is assessed on a customer-by-customer basis considering our historical experience and expected future orders with the customer, changes in payment patterns, and recent information we have about the current status of our accounts receivable balances. If we determine that a specific customer is a risk for collection, we provide a specific allowance for credit losses to reduce the net recognized receivable to the amount we reasonably believe will be collected. We believe that, based on the customers to whom we sell and the nature of our agreements with them, our estimates are reasonable. Our method of estimating collectability has remained consistent for all periods presented and with past collections experience.

Long-Lived assets

We review property and equipment for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. If such events or changes in circumstances occur, we will recognize an impairment loss if the undiscounted future cash flows expected to be generated by the assets are less than the carrying value of the related asset. The impairment loss would adjust the asset to its fair value.

In evaluating the recoverability of long-lived assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of such assets. If our fair value estimates or related assumptions change in the future, we may be required to record impairment charges related to property and equipment. Asset recoverability is first measured by comparing the assets’ carrying amount to their expected future undiscounted net cash flows to determine if the assets are impaired. If such assets are considered to be impaired, the impairment recognized is measured based on the amount by which the carrying amount of the assets exceeds the fair value.

In response to our current period operating losses combined with our history of continuing operating losses, we evaluated the recoverability of certain property and equipment. In the third quarter of 2015, the overall outlook for the sapphire market continued to be volatile as industry analysts reported significant worldwide over capacity and pricing of sapphire products reached historical lows. Based on our quarterly assessment using the most recent projections, impairment to these assets was indicated as of September 30, 2015, as the recoverable amount of undiscounted cash flows did not exceed the carrying amount of these assets and we recorded an asset impairment charge on machinery, equipment and facilities. At June 30, 2016, we reviewed the current fair market value and concluded no additional adjustments were needed except as noted below.

We are actively pursuing the sale of extra land we own in Batavia, Illinois. The property has a book value of $1.6 million and it is our intention to complete a sale within the next twelve-month period. Therefore, this property was reclassified as a current asset held for sale. Since the expected sale price is below the book value of the property, for the three and six months ended June 30, 2016, an impairment charge of $265,000 was recorded.

We will continue to assess our long-lived assets to ensure the carrying amount of these assets is still appropriate given any changes in the marketplace and other factors used in determining the current fair market value.

Stock-based compensation

We expense stock options based upon the fair market value on the date of grant. We use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model will be affected by assumptions regarding a number of complex and subjective variables. These variables include our expected stock volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates, forfeitures and expected dividends.

The expected term represents the weighted-average period that our stock options are expected to be outstanding and is based upon five years of historical data. We estimate the volatility of our common stock based on a five year historical stock price. We base the risk-free interest rate that we use in the option pricing model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and, therefore, use an expected dividend yield of zero in the option pricing model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The current forfeiture rate of 23.1% was based on our past history of forfeitures.

We allocate stock based compensation costs using a straight-line method which amortizes the fair value of each option on a straight-line basis over the service period. Based on the variables affecting the valuation of our common stock and the method used for allocating compensation costs, we recognized $151,000 and $312,000 in stock compensation expense during the three and six months ended June 30, 2016, respectively.

 

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All option grants made during the three and six months ended June 30, 2016 and 2015 were granted at an exercise price per share equal to the closing market price of our common stock on the last market trading day prior to the date of grant. Therefore, there is no intrinsic value because the exercise price per share of each option was equal to the fair value of the common stock on the date of grant.

Based on the fair market value of the common stock at June 30, 2016, there is no aggregate intrinsic value of all stock options outstanding and exercisable.

Income tax valuation allowance

Evaluating the need for and amount of a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all the positive and negative evidence available to determine whether all or some portion of the deferred tax assets will not be realized. A valuation allowance must be established for deferred tax assets when it is more likely than not (a probability level of more than 50 %) that they will not be realized. In general, “realization” refers to the incremental benefit achieved through the reduction in future taxes payable or an increase in future taxes refundable from the deferred tax assets, assuming that the underlying deductible differences and carryforwards are the last items to enter into the determination of future taxable income. In determining our valuation allowance, we consider the source of taxable income including taxable income in prior carryback years, future reversals of existing temporary differences, the required use of tax planning strategies, and future taxable income exclusive of reversing temporary differences and carryforwards. We are in a cumulative loss position for the past three years, which is considered significant negative evidence by the accounting standards 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 our projections for future growth. Based on an evaluation in accordance with the accounting standards, as of December 31, 2015, a valuation allowance has been recorded against the net U.S. deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence. At June 30, 2016 we continue to be in a three year cumulative loss position, therefore until an appropriate level of profitability is attained, we expect to maintain a full valuation allowance on our U.S. and Malaysia net deferred tax assets.

Recent accounting pronouncement

In August 2014, the FASB issued ASU No. 2014-15 (“ASU 2014-15”), Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern . The standard requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management must evaluate whether it is probable that known conditions or events, considered in the aggregate, would raise substantial doubt about the entity’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 standard requires management’s mitigation plans to alleviate the doubt or a statement of the substantial doubt about the entity’s ability to continue as a going concern to be disclosed in the financial statements. The standard is effective for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted. We are evaluating the impact, if any, of adopting ASU 2014-15 on our financial statements.

In July 2015, the FASB issued ASU No. 2015-11 (“ASU 2015-11”), Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this ASU require an entity to measure in-scope inventory at the lower of cost and net realizable value, further clarifying consideration for net realizable value as estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. This ASU more closely aligns the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). For public business entities, ASU 2015-11 is effective for annual periods and interim periods beginning after December 15, 2016. The amendments in this ASU are prospectively applied with earlier adoption permitted. We are evaluating this guidance and do not believe the adoption will significantly impact the presentation of our financial condition, results of operations and disclosures.

In January 2016, the FASB issued ASU 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. We are evaluating the impact, if any, of adopting ASU 2016-01 on our 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. We are evaluating the impact, if any, of adopting ASU 2016-02 on our financial statements.

 

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In March 2016, 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. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. We are evaluating the impact, if any, of adopting ASU 2016-09 on our 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 help 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 . We are evaluating the impact, if any, of adopting ASU 2014-09 and its updates, ASU 2016-10 and ASU 2016-12, on our consolidated financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As of June 30, 2016, there were no material changes in the information regarding market risk contained in our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2015.

 

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ITEM 4. CONTROLS AND PROCEDURES

Management’s evaluation of disclosure controls and procedures

Based on evaluations at June 30, 2016, our chief executive officer and chief financial officer (together, our “certifying officers”), with the participation of the management team, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that material information relating to the Company is accumulated and communicated to management, including our certifying officers, as appropriate to allow timely decisions regarding required disclosures.

Changes in internal control over financial reporting

Our certifying officers have concluded that there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

 

ITEM 1. LEGAL PROCEEDINGS

On April 30, 2015, Firerock Global Opportunity Fund LP filed a complaint in the Northern District of Illinois asserting federal securities claims against the Company, certain officers, its directors and the underwriters in the Company’s March 2014 stock offering. The complaint sought as a remedy either money damages or rescission of the March 2014 offering, plus attorneys’ fees. On October 29, 2015, after mediation and subsequent discussions, the parties reached a settlement agreement in principle. On January 27, 2016 the United States District Court for the Northern District of Illinois granted a motion for preliminary approval of the agreement, and on May 20, 2016, a final judgment and order of dismissal was granted. The settlement included a release of all defendants, and dismissal of the case against all defendants with prejudice. The Company recorded for the year ended December 31, 2015 an expense of $1.1 million of which $900,000 is the amount the Company contributed to the settlement and paid on February 17, 2016. The remaining costs of the settlement were covered by the Company’s insurance carriers.

On November 19, 2015, the Carolyn Piper Smithhisler Living Trust, derivatively on behalf of Rubicon Technology Inc., filed a complaint in the Eighteenth Judicial Circuit of Illinois against the Company’s Board of Directors and certain senior officers seeking to remedy alleged breaches of fiduciary duties and other violations of the law, failure to implement an effective system of internal controls, and failure to oversee the public statements made by the Company and certain individual defendants. The complaint sought as a remedy to recover damages against the individual defendants for the benefit of the Company and to require the Company to reform and improve its corporate governance and internal procedures plus attorneys’ fees. After extensive discussions, the parties informed the court on May 2, 2016 that they had reached a settlement agreement in principle. The proposed settlement provides for the Company to adopt certain governance changes and to pay certain amounts. On May 23, 2016, the court issued an order granting preliminary approval of the proposed settlement. On July 11, 2016, plaintiff’s unopposed motion for final approval of stockholder derivative settlement fee and expense amount and service award was filed. On August 1, 2016, the court issued a final judgment approving the settlement and an order of dismissal was granted. The Company’s insurance carriers are expected to cover substantially all of the settlement payments and related expenses, including legal fees.

 

ITEM 1A. RISK FACTORS

Our business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond our control. We have identified a number of these risk factors in our Annual Report on Form 10-K as amended for the year ended December 31, 2015, which factors should be taken into consideration when reviewing the information contained in this report. There have been no material changes with regard to the risk factors previously disclosed in our Annual Report on Form 10-K as amended for the year ended December 31, 2015 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, other than as set forth below.

We are exploring and evaluating alternatives with a goal of providing greater value to our stockholders. There can be no assurance that we will be successful in identifying or completing any alternative, or that any such alternative will yield additional value for stockholders.

 

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Our management and Board of Directors are continuing to review alternatives with a goal of providing greater value to our stockholders. These alternatives could result in, among other things, modifying or eliminating certain of our operations, selling material assets or business segments, seeking additional financing, a sale of the business, a merger, consolidation or other business combination, partnering or other collaboration agreements, potential acquisitions or recapitalizations, in one or more transactions, or we may continue to operate with our current business plan and strategy. There can be no assurance that the exploration of alternatives will result in the identification or consummation of any transaction. In addition, we may incur substantial expenses associated with identifying and evaluating potential alternatives. The process of exploring alternatives may be time consuming, distracting to management and disruptive to our business operations and if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected. We also cannot provide assurance that any potential transaction or other alternative, if identified, evaluated and consummated, will provide greater value to our stockholders than that reflected in the current stock price. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, the interest of third parties in our business and the availability of financing to potential buyers on reasonable terms.

 

ITEM 6. EXHIBITS

The exhibits filed or incorporated by reference as a part of this report are listed in the Index to Exhibits which appears following the signature page to this Quarterly Report on Form 10-Q and is incorporated by reference.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 9, 2016.

 

    Rubicon Technology, Inc.
Date: August 9, 2016     By:  

/s/ William F. Weissman

      William F. Weissman
      President and Chief Executive Officer
Date: August 9, 2016     By:  

/s/ Mardel A. Graffy

      Mardel A. Graffy
      Chief Financial Officer

 

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EXHIBIT INDEX

The Exhibits listed below are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q.

 

Exhibit

No.

  

Description

  

Incorporation by Reference

    3.1    Eighth Amended and Restated Certificate of Incorporation of Rubicon Technology, Inc.    Filed as Exhibit 3.1 to the registrant’s Registration Statement on Form S-1/A, filed on November 1, 2007 (File No. 333-145880)
    3.2    Amendment No. 1 to Eighth Amended and Restated Certificate of Incorporation of Rubicon Technology, Inc.    Filed as Appendix A to the registrant’s Definitive Proxy Statement on Schedule 14A, filed on April 29, 2011 (File No. 1-33834)
    3.3    Second Amended and Restated Bylaws of Rubicon Technology, Inc.    Filed as Exhibit 3.3 to the registrant’s Quarterly Report on Form 10-Q, filed on May 10, 2016 (File No. 1-33834)
  10.1    Rubicon Technology, Inc. 2016 Stock Incentive Plan    Filed as Appendix A to the registrant’s Definitive Proxy Statement on Schedule 14A, filed on May 18, 2016 (File No. 1-33834)
  10.2    Form of Notice of Stock Option Grant and Stock Option Agreement pursuant to Rubicon Technology, Inc. 2016 Stock Incentive Plan   
  10.3    Form of Non-Employee Director Restricted Stock Agreement pursuant to Rubicon Technology, Inc. 2016 Stock Incentive Plan   
  10.4    Form of Restricted Stock Unit Agreement pursuant to Rubicon Technology, Inc. 2016 Stock Incentive Plan (with time-based vesting)   
  31.1    Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   
  31.2    Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   
  32.1    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   
101.INS**    XBRL Instance Document   
101.SCH**    XBRL Taxonomy Extension Schema Document   
101.CAL**    XBRL Taxonomy Extension Calculation Linkbase Document   
101.LAB**    XBRL Taxonomy Extension Label Linkbase Document   
101.PRE**    XBRL Taxonomy Extension Presentation Document   
101.DEF**    XBRL Taxonomy Extension Definition Linkbase Document   

 

** Filed electronically with this Quarterly Report on Form 10-Q

 

35

Exhibit 10.2

 

NOTICE OF STOCK OPTION GRANT AND STOCK OPTION AGREEMENT

PURSUANT TO THE

RUBICON TECHNOLOGY, INC. 2016 STOCK INCENTIVE PLAN

You have been granted an option (the “Option”) to purchase Common Stock of Rubicon Technology, Inc. (the “Company”), a Delaware corporation, on the terms and conditions set forth herein. Capitalized terms used without definition in this Notice of Stock Option Grant (the “Notice”) or in the Stock Option Agreement (the “Option Agreement”) of which this Notice is a part, are used as defined in the Rubicon Technology, Inc. 2016 Stock Incentive Plan (the “Plan”) of the Company.

 

Name of Optionee:   

 

Date of Grant:   

 

Vesting Commencement Date:   

 

Type of Option:   

Non-qualified Stock Option

Term:   

Ten (10) years from Date of Grant (subject to earlier termination as provided in the Plan)

This Option is for              shares of Common Stock at an exercise price per share of $             subject to adjustment pursuant to the Plan.

Vesting Schedule : Subject to the other requirements hereof, this Option may be exercised only upon and after, and to the extent that, this Option has vested. The portions of this Option listed below shall vest on each of the dates listed below, provided in each case that Optionee continues to be a Service Provider on such date:

 

Percentage of Shares of

Optioned Stock Vesting

  

Date

[%]

  

[Anniversary of Vesting

Commencement Date]

By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and the Option Agreement to which this Notice is attached. The Option Agreement is a part hereof. Optionee has reviewed the Plan, this Notice and the Option Agreement, and has had an opportunity to obtain the advice of counsel prior to executing this Notice and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan, this Notice and the Option Agreement. Optionee is a resident of the state listed below.

 

OPTIONEE       RUBICON TECHNOLOGY, INC.
     By      

 

  Signature                                                                    Date

     

 

 

 

  Printed Name

     

 

  Printed Name

 

  State of Residence

     

 

  Title




STOCK OPTION AGREEMENT

PURSUANT TO THE

RUBICON TECHNOLOGY, INC. 2016 STOCK INCENTIVE PLAN

 

 

1. Grant of Option .

(a) The Committee of the Company hereby grants to the optionee (the “Optionee”) named in the Notice of Stock Option Grant (the “Notice”) to which this Stock Option Agreement (the “Option Agreement”) is attached an option (the “Option”) to purchase the number of shares, as set forth in such Notice, at the exercise price per share set forth in the Notice (the “Exercise Price”), subject to the terms and conditions of the Rubicon Technology, Inc. 2016 Stock Incentive Plan (the “Plan”), which is incorporated herein by reference. Subject to provisions of the Plan stating otherwise, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. Unless otherwise defined herein, all capitalized terms used in this Option Agreement shall be defined as provided in the Plan.

(b) This Option is not intended to qualify as an Incentive Stock Option under Code Section 422 unless it is so designated in the Notice as an Incentive Stock Option. However, if this Option is designated to be an Incentive Stock Option, to the extent that it exceeds the limit set forth in Code Section 422(d), it shall be treated as a Non-qualified Stock Option.

2. Exercise of Option .

(a) Right to Exercise . Subject to Sections 2(c), 2(d), and 2(e) below, this Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice and the applicable provisions of the Plan, this Option Agreement.

(b) Method of Exercise . The Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the “Exercise Notice”), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee, or personal representative of the Optionee as provided in the Plan, and delivered to an officer of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. The Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

(c) Compliance with Law . No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws, the Plan and this Option Agreement. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares.

(d) Merger, Reorganization or Sale . In the event of any merger, consolidation, or similar reorganization of the Company described in Article 15 of the Plan, if the Option is not assumed or an equivalent option or right is not substituted by the successor corporation or a Parent or Subsidiary of the successor corporation, then the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable, in accordance with Article 15 of the Plan. For the purposes of this Section 2(d), the determination of whether the Option has been assumed or substituted shall be made by the Board, whose determination in that respect shall be final, binding and conclusive.

(e) Death or Disability . Upon the death or Disability of the Optionee, all Shares subject to the Option shall immediately vest, and the Option shall become immediately exercisable with respect to all Shares subject to the Option in accordance with this Option Agreement and the Plan.

3. Method of Payment .

Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

(a) cash; or

(b) certified check; or

 

 

R UBICON T ECHNOLOGY , I NC .

  

 

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S TOCK O PTION A GREEMENT


(c) such other consideration as permitted pursuant to Section 6.6 of the Plan.

4. Non-Transferability of Option .

This Option may not be transferred in any manner otherwise than by the will or by the laws of descent or distribution and may be exercised during the lifetime of the Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

5. Term of Option .

This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. In no event shall this Option be exercisable beyond the earliest to occur of (i) the end of the term set out in the Notice of Grant; (ii) the first anniversary of the date of the termination of the Optionee’s relationship as a Service Provider due to Disability; (iii) the date which is six (6) months after the date of the termination of the Optionee’s relationship as a Service Provider due to death; (iii) the date of the termination of the Optionee’s relationship as a Service Provider for Cause; or (iv) the date which is three (3) months after the date of the termination of the Optionee’s relationship as a Service Provider for any reason other than as set forth in subsections (ii), (iii) or (iv) above.

6. Cancellation of Awards . The Committee may cancel, rescind, suspend, withhold, or otherwise limit or restrict any unexercised, unvested, or unpaid Option at any time if the Optionee is not in compliance with all applicable provisions of the Option Agreement and the Plan, or if the Optionee has engaged in any Adverse Conduct.

(a) Certification of Compliance May Be Required . Upon exercise, payment or delivery pursuant to this Option, the Committee may require the Optionee to certify, in a manner acceptable to the Company, that the Optionee is in compliance with the terms and conditions of the Plan.

(b) Rescission of Awards . For a period of two (2) years following the exercise, payment or delivery of this Option (the “Rescission Period”), the Committee may rescind any such exercise, payment, or delivery of the Option upon its determination that the Optionee has engaged in Adverse Conduct prior to the delivery of the Option or during the Rescission Period. In the event of any such rescission, the Optionee shall pay to the Company the amount of any gain realized or payment received as a result of the rescinded exercise, payment or delivery, in such manner and on such terms and conditions as may be required.

(c) Clawback . In addition to the foregoing, the Option shall be subject to any recoupment or clawback policy that is adopted by, or applicable to, the Company.

7. Restrictions on Transfer .

(a) Securities Law Restrictions . Regardless of whether the offering and sale of Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.

(b) Certificates; Securities Legend . The Company may issue any Shares issuable to the Optionee upon exercise of the Option in uncertificated form, evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company. The Company may issue appropriate instructions to any duly authorized transfer agent of the Company regarding any restrictions on the transfer of such Shares. Any certificates evidencing Shares purchased under this Option Agreement may bear any restrictive legends as are required or deemed advisable by the Company or its counsel. If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing Shares sold under this Option Agreement is no longer required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Shares but without such legend.

(c) Administration . Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 7 shall be conclusive and binding on the Optionee and all other persons.

 

 

R UBICON T ECHNOLOGY , I NC .

  

 

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S TOCK O PTION A GREEMENT


8. Entire Agreement; Governing Law . The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and Optionee. This Option Agreement is governed by the internal substantive laws, but not the choice of law rules, of the State of Illinois.

9. NO PROMISE OR GUARANTEE OF CONTINUED SERVICE . THE OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF THE OPTION PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY OR PURSUANT TO ANY WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE OPTIONEE (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). THE OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS OPTION AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE THE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.

10. Withholding of Taxes . No Shares will be delivered upon exercise of the Option until the Optionee (or the Optionee’s beneficiary) has paid to the Company the minimum statutory amount of the taxes required to be withheld (or such larger amount of taxes that may be permitted to be withheld without resulting in the classification of the Option as a liability award for accounting purposes) under federal, state and local income and employment tax laws (the “Applicable Withholding Taxes”). Optionee shall pay the Applicable Withholding Taxes by check; provided, however, that the Optionee may irrevocably elect, on or before the date of exercise, to pay the Applicable Withholding Taxes by instructing the Company to retain the number of Shares otherwise deliverable upon exercise of the Option (valued at their Fair Market Value on the date of exercise) required to satisfy the Applicable Withholding Taxes, or through any other means that the Committee, in its sole discretion, may permit.

 

 

R UBICON T ECHNOLOGY , I NC .

  

 

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S TOCK O PTION A GREEMENT


EXHIBIT A

RUBICON TECHNOLOGY, INC. 2016 STOCK INCENTIVE PLAN

EXERCISE NOTICE

Rubicon Technology, Inc.

900 East Green Street

Bensenville, Illinois 60106

Attention: Secretary

1. Exercise of Option . Effective as of today,                     , 20    , the undersigned (“Purchaser”) hereby elects to purchase                  shares (the “Shares”) of the Common Stock of Rubicon Technology, Inc. (the “Company”) under and pursuant to the Rubicon Technology, Inc. 2016 Stock Incentive Plan, as amended and restated (the “Plan”) and the Stock Option Agreement dated,                     , 20     (the “Option Agreement”). The purchase price for the Shares shall be $         per Share, as required by the Option Agreement.

2. Deliveries . Purchaser herewith delivers to the Company the full purchase price for the Shares and the full amount of the Applicable Withholding Taxes (as defined in the Option Agreement).

3. Representations of Purchaser . Purchaser acknowledges that Purchaser has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions.

4. Rights as Stockholder . Until the issuance of the Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Purchaser as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 13 of the Plan.

5. Tax Consultation . Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company or any accountant, attorney or other agent of the Company for any tax advice.

 

      Accepted by:
PURCHASER       RUBICON TECHNOLOGY, INC.

 

  Signature

     

 

  By

 

  Printed Name

     

 

  Name

 

  Address

     

 

  Title

 

  Address

     

 

  Date Received

 

 

R UBICON T ECHNOLOGY , I NC .

  

 

Exhibit A

Exercise Notice

  

 

S TOCK O PTION A GREEMENT

Exhibit 10.3

NON-EMPLOYEE DIRECTOR RESTRICTED STOCK AGREEMENT

PURSUANT TO THE

RUBICON TECHNOLOGY, INC. 2016 STOCK INCENTIVE PLAN

Number of Shares of Stock Subject to this Award (the “Restricted Stock”):             

THIS AGREEMENT (the “Agreement”), effective as of             , is entered into by and between Rubicon Technology, Inc., a Delaware corporation (the “Company”) and              (the “Recipient”).

WHEREAS, the Recipient serves as a director of the Company and may serve as a member of one or more of the committees established by the Company’s Board of Directors (the “Board”); and

WHEREAS, the Company desires to grant the Recipient restricted shares of $0.001 par value Common Stock of Company on the terms and conditions contained in this Agreement.

NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt, sufficiency and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows:

 

  1. Definitions

All capitalized terms used herein shall have the meanings set forth in this Section, unless expressly provided otherwise herein.

(a) “Code” shall mean the Internal Revenue Code of 1986, as amended.

(b) “Committee Member” shall mean the Recipient’s status as a member, including as the Chair, of a committee established by the Board and for which the Recipient has received Restricted Stock.

(c) “Compensation Committee” shall mean the Compensation Committee of the Company or, if none, the Board.

(d) “Date of Grant” shall mean the effective date of this Restricted Stock Agreement as set forth above.

(e) “Director” shall mean a member of the Board.

(f) “Disability” shall mean any medically determinable physical or mental impairment that, in the opinion of the Company, based upon medical reports and other evidence satisfactory to the Company, can reasonably be expected to prevent the Recipient from performing substantially all of his or her customary duties as a Director for a continuous period of not less than twelve (12) months.

 

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(g) “Plan” shall mean the Rubicon Technology, Inc. 2016 Stock Incentive Plan as amended, modified or restated from time to time; provided that no amendment, modification or restatement shall adversely change or affect the Recipient’s rights hereunder.

(h) “Stock” shall mean the $0.001 par value Common Stock of the Company or, in the event that the Company becomes a wholly-owned subsidiary of another corporation, the common stock of that entity.

 

  2. Grant of Restricted Stock

The Company hereby awards to the Recipient the Restricted Stock on the terms and conditions set forth herein and subject to the terms of the Plan. In the event of any inconsistency between this Agreement and the Plan, the terms of this Agreement shall control.

 

  3. Restrictions on Transfer

Until vested pursuant to Section 4 of this Agreement:

(a) Prior to vesting, the Restricted Stock may not be transferred, assigned, pledged or hypothecated in any way and will not be subject to execution, attachment or similar process, except by will or under the laws of descent and distribution or pursuant to a domestic relations order issued by a court of competent jurisdiction and, in any event, will be subject to this Agreement.

(b) The Restricted Stock will be canceled immediately upon any attempted transfer, assignment, pledge or hypothecation of this Restricted Stock in violation of this Section 3, and any attempted transfer, assignment, pledge or hypothecation of any Restricted Stock in violation of this Section 3 will be void without further action by the Company and have no effect.

 

  4. Vesting of Restricted Stock

(a) The Restricted Stock may be transferred, assigned, pledged or hypothecated only upon and after vesting. Except as provided in this Section 4, provided the Recipient has served continuously as a Director or a Committee Member of a particular committee, as the case may be, through the respective vesting period, the Restricted Stock attributable to the Recipient’s service as a Director or as a Committee Member of the particular committee (as shown on the Company’s books and records, which shall be conclusive and binding), shall vest according to the following schedule (rounded in each case to the number of full shares):

25% of the Restricted Stock will vest on                     

 

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25% of the Restricted Stock will vest on                     

25% of the Restricted Stock will vest on                     

The remainder of the Restricted Stock will vest on                     

Except as provided below, (i) no portion of the Restricted Stock shall vest after the date the Recipient ceases to be a Director for any reason and any unvested portion of the Restricted Stock theretofore held by the Recipient shall be canceled as of that date, and (ii) no portion of the Restricted Stock attributable to the Recipient’s service as a Committee Member of a particular committee (as shown on the Company’s books and records, which shall be conclusive and binding) shall vest after the date the Recipient ceases to be a Committee Member of such committee for any reason and any unvested portion of the Restricted Stock attributable to such committee service theretofore held by the Recipient shall be canceled as of that date. Notwithstanding the foregoing, if the Recipient dies or suffers a Disability during the vesting period described in this Section 4, and the Recipient was a Director or a Committee Member at the time of such death or Disability, the unvested portion of the Restricted Stock shall automatically vest on the date of death or Disability.

By way of example, if the Recipient has received 200 shares of Restricted Stock because of his service as a Director and 100 shares of Restricted Stock because of his role as a member of the Audit Committee (for a total of 300 shares), and the Recipient resigns from the Audit Committee on April 30 but continues to serve as a Director, as of April 30: 75 shares of the Restricted Stock will be vested, 150 shares of Restricted Stock remain outstanding and unvested (attributable to his service as a Director), and 75 shares of Restricted Stock will be forfeited (formerly attributable to his service as a Committee Member).

(b) The Compensation Committee may, in the event of a sale, merger, consolidation, reorganization, liquidation or change of control of the Company, as described in Article 15 of the Plan, provide for the acceleration of vesting and for settlement, including cash payment, of the Restricted Stock upon or immediately before the effectiveness of such event, in accordance with Article 15 of the Plan.

(c) After being vested, shares of Restricted Stock shall no longer be considered Restricted Stock and shall be released automatically from the terms of this Agreement, except those contained in Sections 9, 10, 11, 13, 14, 15, 16 and 17 hereof.

 

  5. Securities Law Restrictions; Certificates; Stock Power.

The Company shall not be obligated to issue the Restricted Stock until, in the opinion of the Company and its counsel, such transfer and issuance of the Restricted Stock will not involve any violation of applicable federal and state securities laws, the rules and regulations promulgated thereunder, and the requirements of the stock exchange upon which the Stock is listed. The Company may issue the Restricted Shares in uncertificated form. Such uncertificated shares shall be credited to a book entry account maintained by the Company (or its transfer agent) on behalf of the Recipient. As a condition of accepting this award, the Recipient hereby irrevocably appoints the Company as the Participant’s attorney-in-fact, with full power of substitution, to transfer (or provide instructions to the Company’s transfer agent to transfer) such shares on the Company’s books. The Company shall have the right to retain custody of any share certificates for the Restricted Stock that may be issued until such shares vest or are forfeited. If share certificates are issued, the Recipient shall execute and deliver a stock power, endorsed in blank, to the Company, with respect to such shares. Certificates may, if the Committee so determines, bear a legend referring to the restrictions and the instruments to which such shares of Restricted Stock are subject.

 

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  6. Stockholder Rights

The Recipient shall have all of the rights of a stockholder, including the right to vote the shares of Restricted Stock and the right to receive cash dividends, with respect to the shares of Restricted Stock unless and until any unvested shares of the Restricted Stock theretofore held by the Recipient are forfeited or canceled pursuant Section 3(b) or 4 of this Agreement, in which case the Recipient shall have no rights of a stockholder with respect to such forfeited or canceled shares.

 

  7. Dilution

The number of shares subject to this Agreement shall be adjusted as follows: (i) in the event that the number of shares of outstanding Stock is changed by reason of a stock dividend, stock split, recapitalization or combination of shares, the number of shares of Restricted Stock shall be proportionately adjusted; or (ii) in the event of any merger, consolidation or reorganization of the Company with any other corporation or corporations pursuant to which the holders of shares of Stock surrender shares of Stock in exchange for other shares of stock or securities, there shall be substituted for each share of Stock then subject to this Agreement, the number and kind of shares of stock or other securities which the holders of shares of Stock are entitled to receive for each share of Stock surrendered pursuant to the transaction shall be proportionately adjusted. Otherwise, the Recipient acknowledges that, upon the issuance of shares to any person or entity, the Recipient will suffer a corresponding dilution of the Recipient’s interest in the Company.

 

  8. Continued Service Not Presumed

Nothing in this Agreement shall give the Recipient the right to continue as a Director or as a Committee Member or affect any right of the Company or the Board to terminate the Recipient as a Director or as a Committee Member, with or without cause, at any time.

 

  9. Personal Data

In order to grant the Restricted Stock to the Recipient, the Company may have had to and may continue to process the Recipient’s personal data that it currently has on record and/or data it may obtain from the Recipient in the future. Such transfer of personal data may be to outside service providers (such as brokers). The Recipient’s personal data will be treated as private and confidential and will only be used to the extent necessary in relation to the Restricted Stock and to comply with any applicable legal, regulatory, tax or accounting requirements.

 

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By signing this Agreement, the Recipient acknowledges receipt of this notification and consents to the processing and transfer of his/her personal data as described above.

 

  10. Notices

All notices by one party to the other under this Agreement shall be in writing. Any notice under this Agreement to the Company shall be addressed to the Company at 900 East Green St., Unit A, Bensenville, Illinois 60106, to the attention of the Chief Financial Officer, and any notice to the Recipient shall be addressed to the Recipient at the address listed beneath the Recipient’s signature hereto. If mailed by United States mail, properly addressed and proper postage prepaid or if sent by recognized overnight courier service, notice shall be effective on the date of mailing or delivery to such courier. If served personally, notice shall be effective as of the date of delivery to the address of the party to whom the notice is addressed. If the effective date as provided above is not a business day, the effective date shall be the next regular business day. Either party may at any time notify the other in writing of a new address for service of notice upon that party.

 

  11. Severability

If any provision of this Agreement for any reason should be found by any arbitrator or court of competent jurisdiction to be invalid, illegal or unenforceable, in whole or in part, such declaration shall not affect the validity, legality, or enforceability of any remaining provision or portion hereof, which remaining provision or portion shall remain in full force and effect as if this Agreement had been adopted with the invalid, illegal or unenforceable provision or portion eliminated.

 

  12. Headings

The headings and captions utilized in this Agreement shall not be construed to limit or modify the terms or meaning of this Agreement.

 

  13. Agreed Forum

All acts required to be performed by the Recipient hereunder shall be deemed to be performed in Chicago, Cook County, Illinois, and the Recipient hereby submits to the jurisdiction of any state or Federal court located in Chicago, Illinois and waives any and all objections to the jurisdiction of such courts and the venue of any action brought therein.

 

  14. Arbitration

At the election of the Company, any dispute arising under this Agreement will be settled by final and binding arbitration conducted in accordance with and subject to the Commercial Arbitration Rules of the American Arbitration Association. To the extent permitted or required by law, judgment upon the decision rendered in any such arbitration may be entered in any court having jurisdiction thereof, or application may be made to such court for a judicial acceptance of the decision and enforcement thereof.

 

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  15. Equitable Relief

The Company shall be entitled to enforce the terms and provisions of this Agreement by an action for injunction or specific performance or an action for damages or all of them, or may be made the subject of the arbitration proceedings described in the preceding section.

 

  16. Applicable State Law

This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Illinois.

 

  17. Successors and Assigns

Subject to the limitations of the transferability of this Restricted Stock, this Agreement shall be binding upon and inure to the benefit of the heirs, legal representatives, successors and assigns of the parties hereto.

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Non-Employee Director Restricted Stock Agreement as of the day and year first above written.

 

RECIPIENT:

   

THE COMPANY:

Rubicon Technology, Inc.

 

    By:                                                                                           
Name:           Name:
Address:           Title:

 

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Exhibit 10.4

RESTRICTED STOCK UNIT AGREEMENT

PURSUANT TO THE

RUBICON TECHNOLOGY, INC. 2016 STOCK INCENTIVE PLAN

AGREEMENT (the “ Agreement ”), dated as of              (the “ Grant Date ”), between Rubicon Technology, Inc., a Delaware corporation (the “ Company ”), and              (the “ Participant ”). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Rubicon Technology, Inc. 2016 Stock Incentive Plan (the “ Plan ”).

1. Grant of Restricted Stock Units .  The Company hereby awards to the Participant              restricted stock units (the “ RSUs ”) as of the Grant Date. Each RSU represents the right to receive one share of Common Stock upon satisfaction of the vesting conditions in Section 2(a).

2. Terms of Restricted Stock Units .

(a) Vesting .

(i) The RSUs will vest in accordance with the following schedule, provided that the Participant has not incurred a Termination prior to the applicable vesting date:

 

Vesting Date

   Percent Vested

[Anniversary of Grant Date]

   [%]

(ii) The Participant shall forfeit to the Company, without compensation, any and all unvested RSUs (including any unvested additional RSUs credited pursuant to Section 2(b) below) upon the Participant’s Termination for any reason. There shall be no proportionate or partial vesting in the periods between the vesting dates and vesting shall occur only on each vesting date, provided that no Termination has occurred prior to such date.

(iii) When any RSUs become vested, the Company shall promptly (and in no event later than 30 days after vesting) issue and deliver one share of Common Stock (a “ Share ”) for each vested RSU (including each additional vested RSU credited pursuant to Section 2(b) below), subject to applicable withholding. Upon delivery of the Shares, the vested RSUs will be deemed fully settled and will be cancelled.

(b) Dividend Equivalents .  If the Company pays cash or stock dividends on the Common Stock, the Participant will be credited with an additional number of RSUs as provided in Section 9.4 of the Plan.

(c) Cancellation and Rescission of Awards . The Committee may cancel any RSUs (vested or unvested) at any time upon its determination that the Participant has engaged in any Adverse Conduct. In addition, for a period of two (2) years following the payment or delivery of any Shares pursuant to this Agreement (the “Rescission Period”), upon its determination that the Participant has engaged in Adverse Conduct prior to the payment or delivery of any Shares or during the Rescission Period, the Company may rescind any payment or delivery of Shares. In the event of any such rescission, upon demand by the Company, the Participant shall deliver the Shares to the Company and pay to the Company the amount of any proceeds realized or property received as a result of the sale or other disposition of the Shares (or the Fair Market Value of the Shares at the time of any disposition other than for cash), in such manner and on such terms and conditions as may be required. In addition, any RSUs granted pursuant hereto shall be subject to any recoupment or clawback policy that is adopted by, or applicable to, the Company.


(d) Withholding .  The Participant shall pay, or make arrangements to pay, in a manner satisfactory to the Company, an amount equal to the minimum statutory amount of all applicable foreign, federal, state, provincial and local taxes that the Company is required to withhold (or such larger amount of taxes that may be permitted to be withheld without resulting in the classification of the RSUs as a liability award for accounting purposes) at any time. In the absence of such arrangements, any such withholding obligation may, as determined at the sole discretion of the Committee, be satisfied by reducing the number of Shares otherwise deliverable to the Participant by a number of Shares whose Fair Market Value on the applicable vesting date is equal to the amount of such withholding taxes.

(e) Delivery Delay .  The delivery of any Shares may be postponed by the Company for such period as may be required for it to comply with any applicable foreign, federal, state or provincial securities law, or any national securities exchange listing requirements, and the Company is not obligated to issue or deliver any Shares if, in the opinion of counsel for the Company, such issuance or delivery constitutes a violation by the Participant or the Company of any provisions of any applicable foreign, federal, state or provincial law or of any regulations of any governmental authority or any national securities exchange.

3. No Obligation to Continue Employment .  This Agreement is not an agreement of employment. This Agreement does not guarantee that the Company or its Affiliates will employ or retain, or continue to employ or retain, the Participant for any period of time, nor does it modify in any respect the Company’s (or any Affiliate’s) right to terminate or modify the Participant’s employment or compensation.

4. Transferability .  The Participant may not sell, transfer, pledge, hypothecate, assign or otherwise dispose of the RSUs. Any attempted sale, transfer, pledge, hypothecation, assignment or other disposition of the RSUs in violation of the Plan or this Agreement shall be void and of no effect and the Company shall have the right to disregard the same on its books and records and to issue “stop transfer” instructions to its transfer agent.

5. Uncertificated Shares .  Notwithstanding anything else herein, to the extent permitted under applicable foreign, federal, state or provincial law, the Company may issue the Shares in the form of uncertificated shares. Such uncertificated shares shall be credited to a book entry account maintained by the Company (or its designee) on behalf of the Participant. If thereafter certificates are issued with respect to the uncertificated shares, such issuance and delivery of certificates shall be in accordance with the applicable terms of this Agreement and may bear such restrictive legends as deemed necessary or appropriate by the Company or its counsel.

6. Rights as a Stockholder .  The Participant shall have no rights as a stockholder with respect to any Shares unless and until the Participant has become the holder of record of the Shares, and no adjustments will be made for dividends in cash or other property, distributions or other rights in respect of any such Shares, except as otherwise specifically provided for in this Agreement or the Plan.


7. Provisions of Plan Control .  This Agreement is subject to all the terms, conditions and provisions of the Plan, including, without limitation, the amendment provisions thereof, and to such rules, regulations and interpretations relating to the Plan as may be adopted by the Committee and as may be in effect from time to time. The Plan is incorporated herein by reference. By signing and returning this Agreement, the Participant acknowledges having received and read a copy of the Plan and agrees to comply with it, this Agreement and all applicable laws and regulations. If and to the extent that this Agreement conflicts or is inconsistent with the terms, conditions and provisions of the Plan, the Plan shall control, and this Agreement shall be deemed to be modified accordingly. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and supersedes any prior agreements between the Company and the Participant with respect to the subject matter hereof.

8. Amendment .   To the extent applicable, the Board or the Committee may at any time and from time to time amend, in whole or in part, any or all of the provisions of this Agreement to comply with Section 409A of the Code and the regulations thereunder or any other applicable law and may also amend, suspend or terminate this Agreement subject to the terms of the Plan. Except as otherwise provided in the Plan, no modification or waiver of any of the provisions of this Agreement shall be effective unless in writing by the party against whom it is sought to be enforced. This Agreement is intended to comply with the applicable requirements of Section 409A of the Code relating to “short-term deferrals” thereunder, and shall be limited, construed and interpreted in a manner so as to comply therewith.

9. Notices .   Any notice or communication given hereunder shall be in writing and shall be deemed to have been duly given when delivered (i) in person, (ii) by regular United States mail, first class and prepaid, or (iii) by certified United States mail, return receipt requested and proper postage prepaid to the appropriate party at the address set forth below (or such other address as the party shall from time to time specify):

If to the Company, to:

Rubicon Technology, Inc.

900 East Green Street, Unit A

Bensenville, IL 60106

Attention: Chief Financial Officer

If to the Participant, to the address on file with the Company.

10. Miscellaneous .

(a) This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, legal representatives, successors and assigns.

(b) This Agreement shall be governed and construed in accordance with the laws of Delaware (regardless of the law that might otherwise govern under applicable Delaware principles of conflict of laws).

(c) This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one contract.


(d) The failure of any party hereto at any time to require performance by another party of any provision of this Agreement shall not affect the right of such party to require performance of that provision, and any waiver by any party of any breach of any provision of this Agreement shall not be construed as a waiver of any continuing or succeeding breach of such provision, a waiver of the provision itself, or a waiver of any right under this Agreement.

[SIGNATURE PAGE FOLLOWS]


IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written.

 

RUBICON TECHNOLOGY, INC.

By:

   
Name:    

Title:

 

Date:

   

 

PARTICIPANT

By:

 

 

Name:  

 

Date:

 

 

Exhibit 31.1

Certifications

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, William F. Weissman, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Rubicon Technology, Inc. (the “registrant”);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 9, 2016     By:  

/s/ William F. Weissman

      William F. Weissman
      President and Chief Executive Officer

Exhibit 31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Mardel A. Graffy, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Rubicon Technology, Inc. (the “registrant”);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 9, 2016     By:  

/s/ Mardel A. Graffy

      Mardel A. Graffy
      Chief Financial Officer

Exhibit 32.1

Certification Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002,

18 U.S.C. Section 1350

In connection with the Quarterly Report of Rubicon Technology, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his or her knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: August 9, 2016     By:  

/s/ William F. Weissman

      William F. Weissman
      President and Chief Executive Officer
Date: August 9, 2016     By:  

/s/ Mardel A. Graffy

      Mardel A. Graffy
      Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request.