Rubicon Technology, Inc. - Annual Report: 2018 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

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)

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐   No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes ☐    No ☒

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 ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒    No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of June 30, 2018, there were 2,368,834 shares of common stock outstanding held by non-affiliates of the registrant, with an aggregate market value of the common stock (based upon the closing price of these shares on the NASDAQ Capital Market) of approximately $18,690,100.

The number of shares of the registrant’s common stock outstanding as of the close of business on March 19, 2019 was 2,735,247.

Documents incorporated by reference:

Portions of the Registrant’s Proxy Statement for its 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K provided, that if such Proxy Statement is not filed with the Commission within 120 days after the end of the fiscal year covered by this Form 10-K, an amendment to this Form 10-K shall be filed no later than the end of such 120-day period.

TABLE OF CONTENTS

PART I

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

Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Before investing in our common stock, investors should be aware that the occurrence of the risks, uncertainties and events described in the section entitled “Risk Factors” and elsewhere in this Annual Report could have a material adverse effect on our business, results of operations and financial condition. These risks and uncertainties include the adoption of sapphire as a material in new applications, our successful development and the market’s acceptance of new products; our ability to sell certain assets, including those in Malaysia and underutilized assets in the U.S., and the prices we receive therefor; our ability to make effective acquisitions and successfully integrate newly acquired businesses into existing operations; our ability to effectively utilize net operating loss carryforwards; dependence on key customers; our ability to secure new business and retain customers; changes in demand or the average selling prices of sapphire products; the failure to achieve the margins we expect, whether due to our own operations or changes in the market for our products; our ability to successfully qualify our products with customers and potential customers; potential disruptions in our supply of electricity; changes in our product mix; the outcome of the testing of new products and processes or the testing of our existing products for new applications; the failure of third parties performing services for us to do so successfully; our ability to protect our intellectual property rights; the competitive environment; and the cost of compliance with environmental standards. Although we believe that the expectations reflected in the forward-looking statements are reasonable, forward-looking statements are inherently subject to known and unknown risks, including business, economic and other risks and uncertainties that may cause actual results to be materially different from those discussed in these forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report, other than as may be required by applicable law or regulation. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.

You should read this Annual Report and the documents that we reference in this Annual Report and have filed with the Securities and Exchange Commission (the “SEC”) as exhibits with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

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

ITEM 1. BUSINESS OVERVIEW

We are a vertically integrated, advanced materials provider specializing in monocrystalline sapphire for applications in optical and industrial systems. We design, assemble and maintain our own proprietary crystal growth furnaces to grow high-purity, low-stress, ultra-low-defect-density sapphire crystals. We use our proprietary crystal growth technology to produce high-quality sapphire products to meet our customers’ exacting specifications. Sapphire is a desirable material for high-performance applications due to its hardness and strength, transparency in the visible and infrared spectrum, thermal conductivity, thermal shock resistance, abrasion resistance, high melting point and chemical inertness. As a result, it is ideally suited for extreme environments in a range of industries where material durability is just as important as optical clarity. We believe that we continue to have a reputation as one of the highest quality sapphire producers in the market. We provide optical and industrial sapphire products in various shapes and sizes, including round and rectangular windows and blanks, domes, tubes and rods.

Historically, we have also provided sapphire products to the LED and mobile device markets, which are the largest markets for sapphire. However, given competitive pressures in those markets, in the fourth quarter of 2016 we announced our decision to limit our focus to the optical and industrial sapphire markets and exit the LED market. Following this decision, we developed a plan to close our Malaysia facility and scale down and consolidate our remaining operations in the U.S. In 2017 and 2018, we completed individual sales and held auctions for assets located in Malaysia and at each of our U.S. properties, resulting in the sale of certain of our excess equipment and consumable assets. We continue to seek buyers for a few pieces of our remaining unsold Malaysia equipment. In September 2018, we completed the sale of our manufacturing and office facility located in Batavia, Illinois. We are pursuing the sale of our parcel of land in Batavia, Illinois, and the sale or lease of our 65,000 square-foot manufacturing facility in Penang, Malaysia. The timing on the sale or lease of this real estate is difficult to predict.

We manage direct sales, grow and fabricate sapphire parts and ship from our Bensenville, Illinois, facility. Previously, we leased this property, and it served as the headquarters of our operations and one of our growth facilities. In the third quarter of 2018, we vacated our leased Franklin Park, Illinois, facility due to the expiration of our lease. In September 2018, we completed the purchase of our Bensenville property and consolidated all of our operations into this facility.

We operate in a very competitive market. Our ability to expand our optical and industrial business and the acceptance of new product offerings are difficult to predict. Our total sales backlog was approximately $1.2 million and $470,000 as of February 28, 2019 and 2018, respectively.

In addition, since our optical and industrial sapphire business serves smaller markets than our historical undertakings, we are actively evaluating the acquisition of profitable companies outside of the sapphire market in order to utilize our substantial net operating loss (“NOL”) tax carryforwards.

We are a Delaware corporation incorporated on February 7, 2001. Our common stock is listed on the NASDAQ Capital Market under the ticker symbol “RBCN.”

INDUSTRY OVERVIEW

Sapphire is utilized in optical and industrial applications. It is used for windows and optics for aerospace, sensor, medical, semiconductor, instrumentation, electronics and laser applications due to its wide-band transmission, superior strength, chemical and scratch resistance and high strength-to-weight ratio. Sapphire’s physical and optical properties also make it very well suited for defense applications such as electro-optical and sensor suite windows for military fighter jets, helicopters, unmanned air vehicles and ships, forward-looking infrared windows for commercial and business aircrafts, as well as missile domes, submarine windows and components and transparent armor for military vehicles. We believe that these markets may be growing as new applications for sapphire emerge for larger size and higher quality sapphire components.

TECHNOLOGY

Our proprietary crystal growth technique, which we refer to as ES2, produces high-quality sapphire crystals for use in our sapphire products. ES2 is derived from the standard Kyropoulos method of crystal growth. We developed this technique with the goal of establishing greater control over the crystal growth process while maintaining minimal temperature variations. Unlike other techniques, during the ES2 technique, the growing sapphire crystal exists in an unconstrained, low-stress environment inside a closed growth chamber. The closed system allows for enhanced control of the melt, resulting in a higher quality of crystals. The temperature gradient between the melt and the crystal in the ES2 technique is significantly lower than in other crystal growth techniques. We believe that these aspects of the ES2 technique enable us to grow crystals that have a significantly lower dislocation density, higher crystal purity and greater uniformity than sapphire crystals grown using other techniques. The ES2 technique provides an inherent annealing process once the crystal is fully grown. This thermal annealing is an integral means of relieving stress in the crystal during the ES2 process. We have demonstrated the ability to readily scale our ES2 technology in a production environment while maintaining high crystal quality even as crystal boule size is increased.

Our furnace environments are controlled by closed-loop control systems and the overall crystal growth process is run with minimal operator intervention. A single operator can supervise the control of multiple ES2 furnaces simultaneously, which reduces costs.

We have now completed crystal growth development for our Large Area Net-Shaped Crystal Extraction (“LANCE”) technology, which is a technology designed to produce very large, thick sapphire windows. This technology was developed with government funding under a contract with the Air Force Research Laboratory. We have completed the growth of the window blank deliverables on this project, including the largest size sapphire window in the world at 36 x 18 x 0.8 inch dimensions. The project was completed in 2018. We will continue to refine the process to improve yield; however, our main focus now is the development of the market for these larger windows. The product has been displayed at trade shows and has attracted interest both from military and industrial product developers. In addition, we are exploring other potential strategies to maximize the value of the LANCE technology.

PRODUCTS

We believe the developing optical and industrial markets require large-diameter sapphire products, high-quality sapphire and ultra-thin double-side polished windows and wafers which may be beyond the capability of many sapphire suppliers. In addition, military and defense applications often require a U.S.-based source for their parts. We believe we continue to have a reputation for producing the highest quality optical-grade sapphire. We also have the ability to maintain the same high quality in crystals of very large sizes, to support a strong and developing U.S. customer base, and to provide very high performance ultra-thin double-side polished sapphire products, which we believe positions us well in the optical, laser, and epitaxial growth markets.

We provide optical and industrial sapphire products in various shapes and sizes, including round and rectangular windows and blanks, domes, tubes and rods. These optical sapphire products are qualified and used in equipment for a wide variety of end markets and high performance applications, including defense and aerospace, specialty lighting, instrumentation, sensors and detectors, semiconductor process equipment, electronic substrates, medical and laser applications.

We believe we offer the industry’s largest sapphire windows and highest quality, ultra-thin, double-side polished windows and substrates. Our product lines include very thin, double-side polished windows as thin as 300 microns for 6” optical diameter substrates, and also very large-area blanks and polished windows. We offer round C-plane sapphire windows up to 11” in diameter and A-plane windows up to 18” in diameter with UV grade windows up to 13.5” in diameter. We also have produced sapphire window blanks at 36” x 18” x 0.8” dimensions.

RESEARCH AND DEVELOPMENT

In 2018 and 2017, our research and development (“R&D”) expenses totaled $122,000 and $962,000, respectively. The scope of R&D projects has been reduced, and we expect R&D expenses to be lower in 2019.

MANUFACTURING

The process of growing crystal begins by heating the raw material, aluminum oxide, until it reaches an ideal temperature above its melting point. This ideal temperature is essential for our process because it allows us to produce high-purity crystals with very low defect rates. Following the heating, a seed rod is inserted in the melted material as the material is being cooled to crystallize into a boule. Following the growth process, each boule is rigorously inspected by using polarized lighting and magnification to find imperfections, such as bubbles, dislocations and granular deposits within the crystal. We then drill the resulting boules into cylindrical cores using our custom high-precision crystal orientation equipment and proprietary processes. For some of our parts, the cores are then finished through an outsourcing model using trusted partners.

We are dedicated to quality assurance throughout our entire operation. We employ detailed material traceability from raw material to finished product. Our quality system is certified as ISO9001:2000.

All of our long-lived assets are located in the U.S. and Malaysia. While there are long-lived assets in Malaysia, we are attempting to sell them, as that facility is shut down and is not an active part of our operations. For more information see Note 2 – Segment Information to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

SALES AND MARKETING

We market and sell our products through our direct sales force to customers. Our direct sales force includes experienced and technically sophisticated sales professionals and engineers who are knowledgeable in the development, manufacturing and use of sapphire windows and other optical materials. Our sales staff works with customers during all stages of the manufacturing process, from developing the precise composition of the parts through manufacturing and processing the parts to the customers’ specifications.

A key component of our marketing strategy is developing and maintaining strong relationships with our customers. We achieve this by working closely with our customers to optimize our products for their production processes. In addition, we are able to develop long-term relationships with key customers by offering product specification assistance, providing direct access to enable them to evaluate and audit our operations, delivering high-quality products and providing superior customer service. We believe that maintaining close relationships with our customers’ senior management and providing technical support improves customer satisfaction.

In order to increase brand recognition of our products and our Company in general, we publish technical articles, distribute promotional materials and participate in industry trade shows and conferences.

CUSTOMERS

Our principal customers have been defense subcontractors, industrial manufacturers, fabricators and resellers. A substantial portion of our sales have been to a small number of customers. In 2018, our top three customers (each greater than 10% of our revenues) accounted for, in the aggregate, approximately 44% of our revenue and in 2017, the top two customers accounted for approximately 31% of our revenue. Although we are attempting to diversify and expand our customer base, we expect our sales to continue to be concentrated among a small number of customers. However, we also expect that our significant customers may change from time to time. No other customer accounted for 10% or more of our revenues during 2018 or 2017.

INTELLECTUAL PROPERTY

We rely primarily upon a combination of know-how, patents, trade secret laws and non-disclosure agreements with employees, customers and potential customers to protect our intellectual property. However, we believe that factors such as the technological and innovative abilities of our personnel, the success of our ongoing product development efforts and our efforts to maintain trade secret protection are more important than patents in maintaining our competitive position.

COMPETITION

The markets for high-quality sapphire products are very competitive and have been characterized by rapid technological change. The products we produce must meet certain demanding requirements to succeed in the marketplace. Although we are a well established sapphire producer, we face significant competition from other established providers of similar products as well as from new and potential entrants into our markets.

We have several competitors that compete directly with us. We believe that the key competitive factors in our markets are:

We believe the developing optical and industrial markets require cost effective high-quality sapphire, large-diameter sapphire products and ultra-thin double-side polished windows and wafers, which we have the capabilities to provide while certain other sapphire producers may not. In addition, defense applications often require a U.S.-based source for sapphire. We believe we continue to have a reputation for producing the highest quality sapphire in the market. We believe this positions us well with competitive advantages in the markets for optical and industrial sapphire.

ENVIRONMENTAL REGULATION

In our manufacturing process, we use water, oils, slurries, acids, adhesives and other industrial chemicals. We are subject to a variety of federal, state and local laws regulating the discharge of these materials into the environment or otherwise relating to the protection of the environment. These include statutory and regulatory provisions under which we are responsible for the management of hazardous materials we use and the disposition of hazardous wastes resulting from our manufacturing processes. Failure to comply with such provisions, whether intentional or inadvertent, could result in fines and other liabilities to the government or third parties, injunctions requiring us to suspend or curtail operations or other remedies, which could have a material adverse effect on our business. The cost of complying with environmental regulation is not material.

EMPLOYEES

As of December 31, 2018, we had 15 full-time employees and one part-time consultant, of which 10 employees worked in technology and operations. None of our employees are represented by a labor union. We consider our employee relations to be good.

OTHER INFORMATION

You may access, free of charge, our reports filed with the SEC (for example, our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K and any amendments to those forms) over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available through our Internet website (www.rubicontechnology.com). Reports filed with or furnished to the SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC. Alternatively, if you would like a paper copy of any such SEC report (without exhibits) or document, write to Investor Relations, Rubicon Technology, Inc., 900 East Green Street, Bensenville, Illinois 60106, and a copy of such requested document will be provided to you, free of charge. The information found on our website is not part of this or any other report filed with or furnished to the SEC.

You should carefully read the risk factors set forth below, together with the financial statements, related notes and other information contained in this Annual Report on Form 10-K. Our business is subject to a number of important risks and uncertainties, some of which are described below. The risks described below, however, are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also impair our business operations. Any of these risks may have a material adverse effect on our business, financial condition, results of operations and cash flows. Please refer to the discussion of “forward-looking statements” on page one of this Annual Report on Form 10-K in connection with your consideration of the risk factors and other important factors that may affect future results described below.

We have incurred significant losses in prior periods and may incur losses in the future.

We have incurred significant losses in prior periods and may incur significant losses in the future. These losses may have an adverse effect on our ability to attract new customers or retain existing customers. We have incurred net losses of $17.8 million, $62.9 million and $77.8 million in 2017, 2016 and 2015, respectively. Although we have recorded net income of $963,000 in 2018, there can be no assurance that we will have sufficient revenue to achieve profitability in future periods.

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

Our management and Board of Directors are continuing to review strategic alternatives with a goal of providing greater value to our stockholders. These alternatives could result in, among other things, modifying or eliminating certain of our operations, selling material assets, seeking additional financing, selling the business, making investments, effecting a merger, consolidation or other business combination, partnering or other collaboration agreements, or potential acquisitions or recapitalizations, in one or more transactions. In connection with the Board of Directors’ continuing review of alternatives, in 2016, the Board of Directors determined to exit the LED and mobile device markets, scale down and consolidate remaining operations in the U.S. and limit our focus on the optical and industrial sapphire markets. There is no assurance that we will be able to successfully expand our optical and industrial sapphire business or that we will obtain market acceptance for any new product offerings in these markets.

Pursuant to our decision to scale down and consolidate our operations in the U.S., in September 2018, we completed the sale of our manufacturing and office facility located in Batavia, Illinois. Additionally, during 2017 and 2018, we sold certain of our excess equipment located in the U. S. and Malaysia and we are continuing our efforts to sell remaining excess equipment. There is no assurance that we will be able to sell any additional excess equipment at prices favorable to us, or at all. Our Batavia, Illinois, parcel of land remains for sale and our Malaysia land and facility remain for sale or lease. There is no assurance that we will be able to sell or lease any land or facilities at prices favorable to us.

There can be no assurance that our continued exploration of strategic alternatives will result in the identification of additional alternatives or that any transaction will be consummated. The process of exploring strategic alternatives may be costly and may be time consuming, distracting to management and disruptive to our business operations. If we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected. We also cannot provide assurance that any potential transaction, investment or other alternative identified, evaluated and consummated, will provide greater value to our stockholders than that reflected in the current stock price. Any potential transaction or investment would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends and the availability of financing to us on reasonable terms.

We may acquire other businesses, products or technologies; if we do, we may be unable to integrate them with our business effectively or at all, which may adversely affect our business, financial condition and operating results.

If we find appropriate opportunities and have adequate funding, we may acquire other businesses, product lines or technologies. However, if we acquire a business, product line or technology, the process of integration may produce unforeseen operating difficulties and expenditures and may absorb significant attention of our management that would otherwise be available for the ongoing development of our business. Further, the acquisition of a business may result in the assumption of unknown liabilities or create risks with respect to our existing relationships with suppliers and customers. If we make acquisitions, we may issue shares of stock that dilute other stockholders, expend cash, incur debt, assume contingent liabilities or create additional expenses related to amortizing intangible assets, any of which may adversely affect our business, financial condition or operating results.

If we are unable to raise additional capital when needed, we may not be able to execute our business plan or the acquisition of other businesses.

We may require additional capital to fund operations, capital expenditures and the introduction of new products or the acquisition of other businesses. We may finance future cash needs through public or private equity offerings, debt financings, corporate collaborations or licensing arrangements. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our acquisition opportunities. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through corporate collaborations or licensing arrangements, it may be necessary to relinquish some rights to our technologies or our new products, or grant licenses on terms that may not be favorable to us. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. Introducing newly developed products to the market often requires investment before revenue is generated from those products. We currently have no commitments or arrangements for any additional financing to fund our product research and development programs. However, we may need to raise substantial additional capital in the future to complete the development and commercialization of our new products or to acquire new businesses or technology.

We believe our existing cash, cash equivalents and short-term investments and interest thereon, will be sufficient to fund our projected operating requirements for at least the next twelve months. However, if our success in generating sufficient operating cash flow or our use of cash in the next twelve months were to significantly adversely change, we may not have enough funds available to continue operating at our current level in future periods. A limitation of funds available may raise concerns about our ability to continue to operate. Such concerns may limit our ability to obtain financing and some customers may not be willing to do business with us.

Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

We rely on third parties for certain finishing steps for our products, including the slicing and polishing of our sapphire crystal.

In order to reduce product costs and improve cash flow, we use third parties for certain finishing functions for our products, including the slicing and polishing of our sapphire crystal inventory. These types of services are only available from a limited number of third parties. Our ability to successfully outsource these finishing functions will substantially depend on our ability to develop, maintain and expand our strategic relationship with these third parties. Any impairment in our relationships with the third parties performing these functions, in the absence of a timely and satisfactory alternative arrangement, could have a material adverse effect on our business, results of operations, cash flow and financial condition. In addition, we do not control any of these third parties or the operation of their facilities, and we may not be able to adequately manage and oversee the third parties performing our finishing functions. Accordingly, any difficulties encountered by these third parties that result in product defects, delays or defaults on their contractual commitments to us could adversely affect our business, financial condition and results of operations. In addition, their facilities may be vulnerable to damage or interruption from natural disasters, inclement weather conditions, power loss, acts of terrorism and similar events. A decision to close a facility without adequate notice as a result of these or other unanticipated problems at the facility could result in lengthy interruptions in their services to us; and any loss or interruption of these services could significantly increase our expenses, cause us to default on our obligations to our customers and/or otherwise adversely affect our business. Furthermore, the outsourcing of our finishing steps, such as slicing and polishing of wafers, may not continue to be available at reasonable prices or on commercially reasonable terms, or at all.

Our gross margins could fluctuate as a result of changes in our product mix and other factors, which may adversely impact our operating results.

We anticipate that our gross margins will fluctuate from period to period as a result of the mix of products that we sell in any given period. We are working to increase sales of higher margin products, introduce new differentiated products and lower our costs. There can be no assurance that we will be successful in improving our gross margin mix. If we are not successful, our overall gross margin levels and operating results in future periods would continue to be adversely impacted. Increased competition and the adoption of alternatives to our products, more complex engineering requirements, lower demand and other factors may lead to a further downward shift in our product margins, leading to price erosion and lower revenues for us in the future.

The markets in which we operate are very competitive, and many of our competitors and potential competitors are larger, more established and better capitalized than we are.

The markets for selling high-quality sapphire products are very competitive and have been characterized by rapid technological change. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses, and failure to increase, or the loss of, market share or expected market share, any of which would likely seriously harm our business, operating results and financial condition.

Some of our competitors and potential competitors are substantially larger and have greater financial, technical, marketing and other resources than we do. Given their capital resources, the large companies with which we compete, or may compete in the future, are in a better position to substantially increase their manufacturing capacity and research and development efforts or to withstand any significant reduction in orders by customers in our markets. Such larger companies typically have broader product lines and market focus and thus are not as susceptible to downturns in a particular market. Some of our competitors also receive government subsidies, which could create a competitive advantage. We would be at a competitive disadvantage if our competitors bring their products to market earlier, if their products are more technologically capable than ours, or if any of our competitors’ products or technologies becomes preferred in the industry. Moreover, we cannot assure you that existing or potential customers will not develop their own products, or acquire companies with products that are competitive with our products. Any of these competitive threats could have a material adverse effect on our business, operating results or financial condition.

The average selling prices of sapphire products have historically been volatile and in recent years sapphire product prices have been increasingly depressed.

Historically, our industry has experienced volatility in product demand and pricing. However, in the last five years, the sales prices for our sapphire products have trended downward due to an over-supply of products in the market. In some countries, government programs support sapphire producers who would otherwise be unprofitable; in such circumstances, sapphire may be sold at prices below cost for an extended period of time, depressing market prices, to the detriment of our gross margins. This has had a significant adverse impact on our profitability and our results of operations. Moreover, changes in average selling prices of our products as a result of competitive pricing pressures increased sales discounts and new product introductions by our competitors could have a significant impact on our profitability. Although we attempt to optimize our product mix, introduce new products, reduce manufacturing costs and pass along certain increases in costs to our customers in order to lessen the effect of decreases in selling prices, we may not be able to successfully do so in a timely manner or at all, and our results of operations and business may be harmed.

Our future operating results may fluctuate significantly, which makes our future results difficult to predict and could cause our operating results for particular periods to fall below expectations.

Our revenues and operating results have fluctuated in the past and are likely to fluctuate in the future. These fluctuations are due to a number of factors, many of which are beyond our control. In connection with the Board of Directors’ continuing review of alternatives with a goal of providing greater value to our stockholders, on September 12, 2016, we announced the Board’s decision to limit our business focus to the optical and industrial sapphire markets and to exit the LED and mobile device markets. The optical and industrial sapphire markets are smaller markets than our historical undertakings and there is no assurance that we will be able to successfully expand our optical and industrial sapphire business, or that such shift in focus will ultimately improve our profitability or operating results.

Some of the factors that will affect operating results include, among others:

The foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our quarterly or annual operating results. Likewise, if we acquire any new business, whether or not in the sapphire market, the operating results of that business will be subject to the same risks as are listed above. If our revenues or operating results fall below the expectations of investors or any securities analysts that may publish research on our Company, the price of our common stock would likely decline.

We depend on a few customers for a major portion of our sales and our results of operations would be adversely impacted if they reduce their order volumes.

Historically, we have earned, and believe that in the future we will continue to earn, a substantial portion of our revenue from a small number of customers. In 2018 our top three customers accounted for, in the aggregate, approximately 44% of our revenue and in 2017 our top two customers accounted for approximately 31% of our revenue. If we were to lose one of our major customers or have a major customer significantly reduce its volume of business with us, our revenues and profitability would be materially reduced unless we are able to replace such demand with other orders promptly. We expect to continue to be dependent on our major customers, the number and identity of which may change from period to period.

We generally sell our products on the basis of purchase orders. Thus, most of our customers could cease purchasing our products with little or no notice and without penalties. In addition, delays in product orders could cause our quarterly revenue to vary significantly. A number of factors could cause our customers to cancel or defer orders, including interruptions to their operations due to a downturn in their industries, natural disasters, delays in manufacturing their own product offerings into which our products are incorporated, securing other sources for the products that we manufacture or developing such products internally.

Our products must meet exacting specifications and undetected defects may cause customers to return or stop buying our products.

Our customers establish demanding specifications for quality, performance and reliability that our products must meet. While we inspect our products before shipment, they still may contain undetected defects. If defects occur in our products, we could experience lost revenue, increased costs, delays in, or cancellations or rescheduling of orders or shipments, product returns or discounts, or damage to our reputation, any of which would harm our operating results and our business.

If the market acceptance of newly developed products does not meet our expectations or our efforts to enhance existing products are not successful, our future operating results may be harmed.

The development of new products may require substantial investment in development efforts. If our newly developed products do not achieve market acceptance, we may be unable to generate anticipated revenue and our operating results could be harmed.

Our continuing efforts to enhance our current products and to develop new products involve several risks, including:

If we are unable to attract or retain qualified personnel, our business and product development efforts could be harmed.

Our success depends on our continued ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, manufacturing, administrative and sales and marketing personnel. Competition for these individuals is intense, and we may not be able to successfully recruit, assimilate or retain sufficiently qualified personnel. In particular, we may encounter difficulties in recruiting and retaining a sufficient number of qualified technical personnel. The inability to attract and retain necessary technical, managerial, manufacturing, administrative and sales and marketing personnel could harm our ability to obtain new customers and develop new products and could adversely affect our business and operating results. In addition, the loss of the services, or distraction, of our senior management for any reason could adversely affect our business, operating results and financial condition.

We are dependent on the continued services and performances of certain senior management employees such as sales management and the head of operations.

Our future success is dependent on the continued services and contributions of our senior management who must work together effectively in order to design and produce our products, expand our business, increase our revenue and improve our operating results. The loss of services of our senior management for any reason could adversely affect our business, operating results and financial condition.

We are subject to risks from international sales that may harm our operating results.

In 2018 and 2017, revenue from international sales for our optical and industrial markets products was approximately 30% and 37%, respectively, of our total optical and industrial markets revenue. We expect that revenue from international sales will continue to be a portion of our total revenue for the foreseeable future. Our international sales are subject to a variety of additional risks, including risks arising from:

Our future success will depend on our ability to anticipate and effectively manage these and other risks associated with our international sales. Our failure to manage any of these risks could harm our business, operating results and financial condition.

Our gross margins and profitability may be adversely affected by energy costs.

Most of our power consumption takes place in our crystal growth facility in the U.S. Electricity prices could increase due to overall changes to the price of energy due to conditions in the Middle East, natural gas shortages in the U.S. and other economic conditions and uncertainties regarding the outcome and implications of such events. Once our current purchase agreements expire, if electricity prices increase significantly, we may not be able to pass these price increases through to our customers on a timely basis, if at all, which could adversely affect our gross margins and results of operations.

The protection of our intellectual property rights and the defense of claims of infringement against us by third parties may subject us to costly litigation.

Other companies might allege that we are infringing certain of their patents or other rights. If we are unable to resolve these matters satisfactorily, or to obtain licenses on acceptable terms, we may face litigation. Any litigation to enforce patents issued to us, to protect trade secrets or know-how possessed by us or to defend us or indemnify others against claimed infringement of the rights of others could have a material adverse effect on our financial condition and operating results. Regardless of the validity or successful outcome of any such intellectual property claims, we may need to expend significant time and expense to protect our intellectual property rights or to defend against claims of infringement by third parties, which could have a material adverse effect on us. If we lose any such litigation where we are alleged to infringe the rights of others, we may be required to:

Any of these outcomes could have an adverse effect on our business, results of operations or financial condition.

We are subject to numerous environmental laws and regulations, which could expose us to environmental liabilities, increase our manufacturing and related compliance costs or otherwise adversely affect our business and operating results.

In our manufacturing process, we use water, oils, slurries, acids, adhesives and other industrial chemicals. We are subject to a variety of foreign, federal, state and local laws and regulations governing the protection of the environment. These environmental laws and regulations include those relating to the use, storage, handling, discharge, emission, disposal and reporting of toxic, volatile or otherwise hazardous materials used in our manufacturing processes. These materials may have been or could be released into the environment at properties currently or previously operated by us, at other locations during the transport of the materials, or at properties to which we send substances for treatment or disposal. If we were to violate or become liable under environmental laws and regulations or become non-compliant with permits required at some of our facilities, we could be held financially responsible and incur substantial costs, including investigation and cleanup costs, fines and civil or criminal sanctions, third-party property damages or personal injury claims. In addition, new laws and regulations or stricter enforcement of existing laws and regulations could give rise to additional compliance costs and liabilities.

Our operations are concentrated in one facility, and the unavailability of this facility could harm our business.

Our manufacturing, research and development, sales and marketing, and administrative activities are concentrated in one facility located in Bensenville, Illinois. Going forward, this will be our sole operating facility. Should a casualty, natural disaster, inclement weather, an outbreak of disease, power loss, an act of terrorism or similar event affect the Chicagoland area, our operations could be significantly impacted. We may not be able to replicate the manufacturing capacity and other operations of our Bensenville facility or such replication could take significant time and resources to accomplish. The disruption from such an event could adversely affect or interrupt entirely our ability to conduct our business.

We are dependent on information technology, and disruptions, failures or security breaches of our information technology infrastructure could have a material adverse effect on our operations. In addition, increased information technology security threats and more sophisticated computer crime pose a risk to our systems, networks, products and services.

We rely on information technology networks and systems, including the Internet and cloud services, many of which are managed by third parties, to securely process, transmit and store electronic information of financial, marketing, legal and regulatory nature to manage our business processes and activities. Although we have implemented enhanced controls around our information technology systems, these systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases, power outages, hardware failures, telecommunication failures, user errors, natural disasters, terrorist attacks or other catastrophic events. If any of our significant information technology systems suffer severe damage, disruption or shutdown, and our disaster recovery and business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results, or our operations may be disrupted, exposing us to performance failures with customers. In addition, cybersecurity threats, such as computer viruses, attacks by computer hackers or other cybersecurity threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. There can be no assurance that our security controls and safeguard measures taken to improve our cybersecurity protection will be sufficient to mitigate all potential risks to our systems, networks and data. Potential consequences of a cybersecurity attack include disruption to systems, corruption of data, unauthorized release of confidential or otherwise protected information, reputational damage, litigation with third parties. The amount of insurance coverage we maintain may be inadequate to cover claims or liabilities related to a cybersecurity attack.

Our U.S. NOL carryforwards may expire or could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code (“IRC”) or if changes are made to the IRC.

We have significant U.S. NOL carryforwards. Under federal tax laws, we can carry forward and use our NOLs to reduce our future U.S. taxable income and tax liabilities until such NOL carryforwards expire in accordance with the IRC of 1986, as amended. Our NOL carryforwards provide a benefit to us, if fully utilized, of significant future tax savings. However, our ability to use these tax benefits in future years will depend upon the amount of our federal and state taxable income. If we do not have sufficient federal and state income in future years to use the benefits before they expire, we will permanently lose the benefit of the NOL carryforwards. Our ability to use the tax benefits associated with our NOL carryforwards is dependent upon our generation of future taxable profits and our ability to successfully identify and consummate suitable acquisitions or investment opportunities.

Additionally, Section 382 and Section 383 of the IRC provide an annual limitation on our ability to utilize our NOL carryforwards, as well as certain built-in losses, against the future U.S. taxable income in the event of a change in ownership, as defined under the IRC. While we have implemented a stockholder’s right plan to protect our NOL carryforwards, there is no assurance that we will not experience a change in ownership in the future as a result of changes in our stock ownership, and any such subsequent changes in ownership for purposes of the IRC could further limit our ability to use our NOL carryforwards.

Under the recently enacted Tax Cut and Jobs Act, U.S. NOLs generated on or after January 1, 2018, could be limited to 80% of taxable income. If other changes were made to the IRC, they could impact our ability to utilize our NOLs. Accordingly, any such occurrences could adversely affect our financial condition, operating results and cash flows.

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

The trading price of our common stock has been and will likely continue to be volatile due to various factors, some of which are beyond our control, and each of which could adversely affect our stockholders’ value.

Factors related to our Company and our business, as well as broad market and industry factors, may adversely affect the market price of our common stock, regardless of our actual operating performance. Such factors that could cause fluctuations in our stock price include, among other things:

Our certificate of incorporation, bylaws and Delaware law may discourage takeovers and business combinations that our stockholders might consider in their best interests.

A number of provisions in our certificate of incorporation and bylaws, as well as anti-takeover provisions of Delaware law, may have the effect of delaying, deterring, preventing or rendering more difficult a change in control of Rubicon that our stockholders might consider in their best interests. These provisions include:

These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.

The foregoing provisions of our certificate of incorporation and bylaws may also make it difficult for stockholders to replace or remove our management. These provisions may facilitate management entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in the best interests of our stockholders.

We are subject to litigation risks, including securities class action litigation, which may be costly to defend.

All industries, including ours, are subject to legal claims, including securities litigation. When the market price of a stock declines significantly, due to factors such as trends in the stock market in general, broad market and industry fluctuations or operating performance, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. This sort of litigation can be particularly costly and may divert the attention of our management and our resources in general. We have been subject to securities class action litigation in the past, as disclosed in our previous filings with the SEC. Due to the inherent uncertainty of the litigation process, the resolution of any particular legal claim or proceeding (including by settlement) could have a material effect on our business, financial condition, results of operations or cash flows. Further, uncertainties resulting from the initiation and continuation of securities or other litigation could harm our ability to obtain credit and financing for our operations and to compete in the marketplace.

Our Board of Directors does not intend to declare or pay any dividends to our stockholders in the foreseeable future.

The declaration, payment and amount of any future dividends will be made at the discretion of our Board of Directors and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors the Board of Directors considers relevant. There is no plan to pay dividends in the foreseeable future, and if dividends are paid, there can be no assurance with respect to the amount of any such dividend.

Disclosure under this item is not required, as the registrant is a smaller reporting company.

Our executive, research and development, growth and manufacturing functions are located in our Bensenville, Illinois, 30,000 square-foot facility that we purchased in September 2018. Previously, we leased this property, and it served as the headquarters of our operations and one of our growth facilities. In the third quarter of 2018, we vacated our leased Franklin Park, Illinois, facility due to the expiration of our lease. In September 2018, we completed the purchase of our Bensenville property and consolidated all of our operations into this facility.

In addition, we own a parcel of land in Batavia, Illinois, which was acquired in 2012 for future expansion, and a 65,000 square-foot facility in Penang, Malaysia, previously used for manufacturing operations. Both of these properties are currently available for sale or lease and being marketed.

From time to time, we, our subsidiaries and/or our directors and officers may be named in claims arising in the ordinary course of business. Management believes that there are no pending legal proceedings involving us or any of our subsidiaries that will, individually or in the aggregate, have a material adverse effect on our consolidated results of operations or financial condition.

In October 2018, we received a summons from Bartmann, Perales & Dolter, LLC, the former lessor of the Franklin Park, Illinois, property we leased previously, alleging that we owe $175,000 in overdue rent payments, property taxes and restoration costs. We intend to vigorously defend against these allegations and have asserted a counterclaim pursuant to the terms of the lease agreement for reimbursement of costs and expenses to maintain the condition and repair for said property.

Not applicable.

PART II

Market Information

Our common stock trades on the NASDAQ Capital Market under the symbol “RBCN”. The following table sets forth the high and low sales prices for our common stock as reported on the NASDAQ for the periods indicated:

Holders

As of March 6, 2019, our common stock was held by approximately 19 stockholders of record and there were 2,735,247 shares of our common stock outstanding.

Dividend Policy

We have never declared or paid cash dividends on our common stock. We currently intend to retain future earnings to finance the growth and development of our business and we do not anticipate declaring or paying any cash dividends in the foreseeable future. The declaration, payment and amount of any future dividends will be made at the discretion of our Board of Directors.

Disclosure under this item is not required as the registrant is a smaller reporting company.

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

In November 2018, our Board of Directors authorized a program to repurchase up to $3 million of our common stock. Our share repurchase program does not obligate us to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated and/or open market transactions. The timing, price and volume of repurchases will be based upon market conditions, relevant securities laws and other factors. The stock repurchase program expires on November 19, 2021, and may be terminated at any time.

Share repurchase activity during the year ended December 31, 2018, was as follows:

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. You should review the “Risk Factors” section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.

OVERVIEW

We are a vertically integrated, advanced materials provider specializing in monocrystalline sapphire for applications in optical and industrial systems. We design, assemble and maintain our own proprietary crystal growth furnaces to grow high-purity, low-stress, ultra-low-defect-density sapphire crystals. We use our proprietary crystal growth technology to produce high-quality sapphire products to meet our customers’ exacting specifications. Sapphire is a desirable material for high-performance applications due to its hardness and strength, transparency in the visible and infrared spectrum, thermal conductivity, thermal shock resistance, abrasion resistance, high melting point and chemical inertness. As a result, it is ideally suited for extreme environments in a range of industries where material durability is just as important as optical clarity. We believe that we continue to have a reputation as one of the highest quality sapphire producers in the market. We provide optical and industrial sapphire products in various shapes and sizes, including round and rectangular windows and blanks, domes, tubes and rods.

Historically, we have also provided sapphire products to the LED and mobile device markets, which are the largest markets for sapphire. However, given competitive pressures in those markets, in the fourth quarter of 2016 we announced our decision to limit our focus to the optical and industrial sapphire markets and exit the LED market. Following this decision, we developed a plan to close our Malaysia facility, and scale down and consolidate our remaining operations in the U.S. In 2017 and 2018, we completed individual sales and held auctions for assets located in Malaysia and at each of our U.S. properties, resulting in the sale of certain of our excess equipment and consumable assets. We continue to seek buyers for a few pieces of our remaining unsold Malaysia equipment. In September 2018, we completed the sale of our manufacturing and office facility located in Batavia, Illinois. We are pursuing the sale of our parcel of land in Batavia, Illinois, and the sale or lease of our 65,000 square-foot manufacturing facility in Penang, Malaysia. The timing on the sale or lease of this real estate is difficult to predict.

We manage direct sales, grow and fabricate sapphire parts and ship from our facility located in Bensenville, Illinois. Previously, we leased this property, and it served as the headquarters of our operations and one of our growth facilities. In the third quarter of 2018, we vacated our leased Franklin Park, Illinois, facility due to the expiration of our lease. In September 2018, we completed the purchase of our Bensenville property and consolidated all of our operations into this facility.

We operate in a very competitive market. Our ability to expand our optical and industrial business and acceptance of new product offerings are difficult to predict.

In addition, our current optical and industrial sapphire business serves smaller markets than our historical undertakings, therefore, we are actively evaluating the acquisition of profitable companies outside of the sapphire market to utilize our substantial NOL carryforwards.

Historically, a significant portion of our revenue has been derived from sales to relatively few customers. For the year ended December 31, 2018, we had three customers individually that accounted for approximately 18%, 16% and 10% of revenue. For the year ended December 31, 2017, we had two customers individually that accounted for approximately 18% and 13% of revenue. Our principal customers have been defense subcontractors, industrial manufacturers, fabricators and resellers. No other customer individually accounted for 10% or more of our revenues during the years ended December 31, 2018 and 2017. We expect our sales to continue to be concentrated among a small number of customers. However, we also expect that our significant customers may change from time to time.

We sell our products on a global basis and historically derived a significant portion of our revenue from customers outside of the U.S., with the majority of our sales to the Asian and European markets. Following the decision to limit our focus to the optical and industrial sapphire markets, a major source of our revenue is derived from the North American market. For the year ended December 31, 2018, the North American and Asian markets accounted for 87% and 12% of our revenue, respectively. For the year ended December 31, 2017, the North American and Asian markets accounted for 80% and 19% of our revenue, respectively. All of our revenue and corresponding accounts receivable are denominated in U.S. dollars. Substantially all of our revenue is generated by our direct sales force and we expect this to continue in the future. For more information about our revenues by country, see Note 2 – Segment Information of our Consolidated Financial Statements included in this Annual Report on Form 10-K. For a discussion of risks associated with our international sales see the risk factor captioned “We are subject to risks from international sales that may harm our operating results” under Item 1A “Risk Factors”.  

Financial operations

Revenue. Our revenue consists of sales of optical and industrial sapphire products sold as blanks or polished windows. Products are made to varying specifications, such as crystal planar orientations and thicknesses. With the focus on smaller optical and industrial markets and the consolidation of our operations in the U.S., we expect in future periods our revenue will continue to be primarily from the sale of optical materials. Our R&D revenue in recent years has been related to LANCE, our large rectangular window development project which was completed in 2018. As a result, our R&D revenue, as a percentage of total revenue, was lower in 2018. We recognize revenue once the performance obligation is satisfied, when the product is manufactured to the customer’s specification and, based upon shipping terms, title, control of the product and risk of loss transfer to the customer. Research and development revenue from our government contract is recognized as related costs and fees are incurred. Delays in product orders or changes to the timing of shipments could cause our quarterly revenue to vary significantly. All of our revenue and corresponding accounts receivable are denominated in U.S. dollars. Substantially all of our revenue is generated by our direct sales force and we expect this to continue in the future.

Cost of goods sold. Our cost of goods sold consists primarily of manufacturing materials, labor, manufacturing-related overhead such as utilities, depreciation, rent, provisions for excess and obsolete inventory reserves, idle plant charges, outsourcing costs, freight and warranties. We purchase materials and supplies to support current and future demand for our products. We are subject to variations in the cost of consumable assets from period to period because we do not have long-term fixed-price agreements with our suppliers. We currently outsource some of our production processes and needs.

Gross profit (loss). Our gross profit (loss) has been and will continue to be affected by a variety of factors, including average sales prices of our products, product mix, our ability to reduce manufacturing costs, idle plant charges and fluctuations in the costs of electricity, production supplies and other manufacturing overhead costs.

General and administrative expenses. General and administrative expenses (“G&A”) consist primarily of compensation and associated costs for employees in finance, information technology and administrative activities, charges for accounting, legal services, insurance and stock-based compensation.

Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries and associated costs for employees engaged in sales activities, product samples, charges for participation in trade shows and travel.

Research and development expenses. Research and development (“R&D”) expenses include costs related to engineering personnel, materials and other product development related costs. R&D is expensed as incurred.

(Gain) loss on sale or disposal of assets. (Gain) loss on sale or disposal of assets represents the difference between the amount of proceeds from sale of our property, equipment and consumable assets and their respective net book values. When the amount of proceeds exceeds the net book value of an underlying asset, we record this favorable variance as a gain on sale or disposal of assets. Alternatively, when the net book value of an asset exceeds the amount of proceeds recovered from sale or disposal of this asset, such unfavorable variance is recorded as a loss on sale or disposal of assets.

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

Provision for income tax.  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 NOL carryforwards as of December 31, 2018, 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, 2018 and 2017, a valuation allowance has been recorded against the net U.S. and Malaysia deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence. Until an appropriate level of sustained profitability is attained, we expect to maintain a full valuation allowance on our U.S. and Malaysia net deferred tax assets. Any U.S. and Malaysia tax benefits or tax expense recorded on the Consolidated Statement of Operations will be offset with the corresponding adjustment from the use of the NOL carryforward asset which currently has a full valuation allowance. 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.

Stock-based compensation. The majority of our stock-based compensation relates primarily to our Board of Directors and administrative personnel and is accounted for as a G&A expense. For the years ended December 31, 2018 and 2017, our stock-based compensation expense was $381,000 and $897,000, respectively.

RESULTS OF OPERATIONS

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

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

Comparison of years ended December 31, 2018 and 2017

Revenue. Revenue was $3.9 million for the year ended December 31, 2018, and $5.0 million for the year ended December 31, 2017, a decrease of $1.1 million. Revenue from our optical and industrial sapphire business decreased by $828,000 due to an increased emphasis on limiting our sales to profitable orders in 2018, fluctuations in demand and timing of orders. Additionally, as we have completed our government contract, the total revenue attributable to this contract recorded in the year ended December 31, 2018, amounted to $56,000, which resulted in a decrease in such revenue of $338,000 from the year ended December 31, 2017.

Gross profit (loss). Gross profit was $16,000 for the year ended December 31, 2018 and gross loss was $5.5 million for the year ended December 31, 2017, a difference of $5.5 million. This decrease in gross loss was primarily related to the cost of write-down of excess raw material, crystal boule and core inventories and consumable assets of $3.0 million recorded during the year ended December 31, 2017. For the year ended December 31, 2018, we experienced a decrease in gross loss due to an increase in pricing and a decrease in production costs of $2.4 million, as a result of improved production efficiency. Additionally, we recorded lower costs incurred in connection with our consolidation of operations and moving of manufacturing equipment of $191,000. This was partially offset by $66,000 of estimated expenses for the restoration of our leased facilities that we may incur in order to comply with the terms of their respective leases.

General and administrative expenses. G&A expenses were $2.2 million and $4.5 million for the years ended December 31, 2018 and 2017, respectively, a decrease of $2.3 million. The decrease was partially attributable to a reduction in employee compensation costs of $852,000 on a lower headcount, of which $93,000 of the decrease was related to a lower executive stock grant compensation and $458,000 was related to the employee severance compensation cost recorded for the year ended December 31, 2017. We also recorded lower legal and stockholders meeting expenses of $560,000 for the year ended December 31, 2018. This decrease was related to the SEC compliance counsel cost incurred in the year ended December 31, 2017. In addition, we experienced a decrease in the administrative office maintenance and connectivity costs of $340,000 on renegotiated contracts, a decrease in the board of directors’ compensation costs of $260,000 and a decrease in insurance costs of $121,000 on renegotiated policy contracts. We also recorded lower audit and tax consulting expense of $127,000.

Sales and marketing expenses. Sales and marketing expenses were $376,000 and $775,000 for the years ended December 31, 2018 and 2017, respectively, a decrease of $399,000. The decrease in sales and marketing expenses was primarily attributable to a decrease in employee compensation costs of $367,000 on lower headcount and a decrease in travel and other costs related to sales and marketing of $32,000.

Research and development expenses. R&D expenses were $122,000 and $962,000 for the years ended December 31, 2018 and 2017, respectively, a decrease of $840,000. The decrease in research and development expenses was attributable to a decrease in employee compensation costs of $738,000 on a lower headcount and a decrease in project and equipment costs and other related expenses of $102,000.

(Gain) loss on sale or disposal of assets. Following the decision in 2016 to limit our focus to the smaller optical and industrial sapphire markets, we have held multiple auctions and completed individual sales of a significant amount of the excess equipment and consumable assets located in the U.S. and Malaysia. As a result of these sales, for the year ended December 31, 2018, we recorded gain on sale or disposal of assets of $3.4 million, of which $2.5 million was attributable to the sale of fully depreciated and previously written down equipment, and $380,000 was attributable to the sale of previously written down consumable assets, small tools and equipment. Additionally, in the third quarter of 2018, we completed the sale of our manufacturing and office facility located in Batavia, Illinois, which had a net book value of $5.9 million. The net proceeds for the property were approximately $6.4 million, and we recorded a gain on sale of this asset of $504,000.

For the year ended December 31, 2017, we recorded a loss on sale or disposal of assets of $1.1 million, which was primarily attributable to the loss on the sale of machinery and equipment.

Long-lived asset impairment charges. With the scaling down of our U.S. operations, for the year ended December 31, 2017, we reduced the net book value of certain U.S. and Malaysia machinery and equipment and recorded an asset impairment charge of $1.0 million on lower than expected sales prices for assets held for sale and identification of additional assets that will not be needed to support current operations. Additionally, for the year ended December 31, 2017, the expected sale price for the Batavia, Illinois, facility and the parcel of land we own in Batavia, Illinois, was further reduced resulting in recording of an additional impairment charge of $4.0 million.

We did not record any additional asset impairment expenses for the year ended December 31, 2018. 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 asset usage, marketplace and other factors used in determining the current fair value.

Other income. Other income was $352,000 and $161,000 for the years ended December 31, 2018 and 2017, respectively, an increase in other income of $191,000. The increase in other income was primarily due to better money management and an increase in interest rates, causing an increase in the interest income of $245,000 on short-term investment securities. This was partially offset by an increase in the realized loss on foreign currency translation of $54,000.

Income tax (expense) benefit. We are subject to income taxes in the U.S. and Malaysia. On a quarterly basis, we assess the recoverability of deferred tax assets and the need for a valuation allowance. For the year ended December 31, 2018, a valuation allowance has been included in the 2018 forecasted effective tax rate. At December 31, 2018, we continue to be in a three-year cumulative loss position; therefore, as of December 31, 2018, we maintained a full valuation allowance on our U.S. and Malaysia net deferred tax assets and until an appropriate level of profitability is attained, we expect to maintain a full valuation allowance going forward. 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.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”) which, among other provisions, reduced the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. The SEC issued guidance, Staff Accounting Bulletin 118, on accounting for the tax effects of the Act. The guidance allowed us to record provisional amounts for those impacts, with the requirement that the accounting be completed in a period not to exceed one year from the date of enactment. We have completed our accounting for the tax effects of enactment of the Act. The deemed inclusion from the repatriation tax increased from $3.9 million at the time of provision to $5.0 million at the time the calculation was finalized for the tax return. The increase of the inclusion related primarily to the refinement of Malaysia earnings and profits. As we are in a full valuation allowance position (as described above), an equal benefit adjustment was recorded for the impact of the increase of the deemed repatriation tax. The tax provision for the years ended December 31, 2018 and 2017, is based on an estimated combined statutory effective tax rate. For the year ended December 31, 2018 and 2017, we recorded a tax expense of $24,000 and $88,000, respectively, for an effective tax rate of 2.4% and (0.5%), respectively. For the years ended December 31, 2018 and 2017, the difference between our effective tax rate and the U.S. federal 21% statutory rate and state 7.5% (net of federal benefit) statutory rate was primarily related to the change in our U.S. and Malaysia NOL valuation allowances, U.S. R&D credit, Malaysia foreign tax rate differential and Malaysia withholding taxes.

At December 31, 2018, we had separate Federal and Illinois NOL carryforwards of $181.1 million and $195.0 million, respectively, which begin to expire in 2021 and 2020, respectively. With the adoption of ASU 2016-09 in 2017, we recorded a deferred tax asset related to $26.4 million of unrecorded federal and state NOLs attributable to stock option exercises. NOLs attributable to the stock option exercise were fully offset by the valuation allowance (as described above). We have recorded an uncertain tax position of $2.6 million that further reduces the net operating loss deferred tax assets reported in the financial statements. In addition, at December 31, 2018, we had Federal and Illinois research and development credits and Illinois investment tax credit of $662,000, $66,000 and $23,000, respectively, which begin to expire in 2019.

LIQUIDITY AND CAPITAL RESOURCES

We have historically funded our operations using a combination of issuances of common stock and cash generated from our operations.

As of December 31, 2018, we had cash and short-term investments totaling $25.6 million, including cash of $8.4 million held in deposits at major banks, $2.8 million invested in money market funds and $14.4 million of short-term investments including U.S. Treasury securities, investment grade commercial paper, FDIC guaranteed certificates of deposit, common stock and corporate notes.

We plan to limit our capital expenditures to only those required under existing obligations or as otherwise necessary to realize value from the development, commercialization or sale of products.

Cash flows from operating activities

The following table represents the major components of our cash flows from operating activities for the years ended December 31, 2018 and 2017:

Cash used in operating activities was $1.1 million for the year ended December 31, 2018. During such period, we generated a net income of $963,000, including non-cash items of ($2.7) million, and an increase in cash from net working capital of $602,000. The net working capital cash increase was primarily driven by a decrease in the work-in-process, finished goods and consumable asset inventories of $976,000. Additionally, we experienced a decrease in prepaid expenses and other assets of $146,000 due to a decrease in prepaid lease expense and deposits on expired lease agreements and consolidation of operations in our Bensenville property, which we purchased in the third quarter of 2018. This was partially offset by a decrease in accounts payable of $182,000 and a decrease in other accruals of $185,000 on lower spending. Additionally, we recorded lower net accrued real estate taxes of $153,000 due to the sale of our Batavia facility and the purchase of our Bensenville facility.

Cash used in operating activities was $2.0 million for the year ended December 31, 2017. During such period, we generated a net loss of $17.8 million, which included non-cash charges of $8.3 million, and an increase in cash from net working capital of $7.5 million. The net working capital cash increase was driven by a decrease in inventory of $5.0 million primarily related to a decrease in raw materials of $2.6 million due to sales and a write-down of excess raw materials and decrease in work-in-process and finished goods inventories of $2.4 million due to a write-down of excess inventory and downsized operations. Additionally, we experienced a decrease in accounts receivable of $1.9 million on decreased revenue and improved collections and a decrease in prepaid and other assets of $1.6 million due to excess consumable asset disposals and write-downs and on amounts collected on asset sales. This decrease was partially offset by a decrease in accounts payable and other accruals of $569,000 on timing of payments and due to downsized operations and a decrease in corporate income and franchise tax accrual of $273,000 on a reduced state franchise tax.

Cash flows from investing activities

The following table represents the major components of our cash flows from investing activities for the years ended December 31, 2018 and 2017:

Net cash provided by investing activities was $831,000 for the year ended December 31, 2018, primarily due to the proceeds from sales of our Batavia facility of approximately $6.4 million and proceeds from sales of equipment and other assets of $4.6 million, as the result of the auctions we held and completion of individual sales at our U.S. and Malaysia locations. Additionally, we recorded $201,000 of proceeds from sale of investments on an increased investment activity. This was partially offset by the purchases of investments in U.S. Treasury securities and commercial paper of $8.1 million and the purchase of our Bensenville office and manufacturing facility of $2.3 million.

Net cash used in investing activities was $3.9 million for the year ended December 31, 2017. We used proceeds from disposal of assets in connection with our decision to exit the LED market of $2.5 million and proceeds from the sale of investments of $57,000 to fund our operations. This was partially offset by the $6.5 million used to purchase investment securities.

Cash flows from financing activities

Net cash used in financing activities was $79,000 for the year ended December 31, 2018, which was primarily due to purchases of our treasury stock. Additionally, cash used to settle net equity awards was $14,000.

Net cash used in financing activities was $189,000 for the year ended December 31, 2017, which represents cash used to settle net equity awards.

Future liquidity requirements

We believe that our existing cash, cash equivalents, anticipated cash flows from operating activities and proceeds from sales or lease of fixed assets will be sufficient to meet our anticipated cash needs for at least the next twelve months from the date of filing of this report. However, if our ability to generate sufficient operating cash flow or our use of cash in the next twelve months were to significantly adversely change, we may not have enough funds available to continue operating at our current level in future periods. Our cash needs include cash required to fund our operations. 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with the accounting principles generally accepted in the U.S. requires us to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying notes. We base our estimates on historical experience and various other assumptions that we believe to be reasonable. Although these estimates are based on our present best knowledge of the future impact on the Company of current events and actions, actual results may differ from these estimates, assumptions and judgments.

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 transactions.

Rubicon Technology Worldwide LLC and Rubicon Technology Hong Kong Limited assets and liabilities are translated into U.S. dollars at exchange rates existing at the respective balance sheet dates and capital accounts at historical exchange rates. The results of operations are translated into U.S. dollars at the average exchange rates during the respective period. Translation adjustments resulting from fluctuations in exchange rates for Rubicon Technology Worldwide LLC and Rubicon Technology Hong Kong Limited are recorded as a separate component of accumulated other comprehensive income (loss) within stockholders’ equity.

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).

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 in accordance with ASC Topic 606, Revenue From Contracts with Customers (“Topic 606”) which was adopted on January 1, 2018, using the full retrospective transition method. Adoption of Topic 606 had no impact on periods reported. Under Topic 606, we recognize revenue when performance obligations under a purchase order or signed quotation are satisfied. Our business practice commits us to manufacture and deliver product upon acceptance of a customer’s purchase order or signed quotation (“agreement”). The agreement with the customer includes specifications of the product to be delivered, price, expected ship date and payment terms. Our agreements generally do not contain variable, financing, rights of return or non-cash components. There are no up-front costs to develop the production process. The performance obligation is satisfied at the point in time (single performance obligation) when the product is manufactured to the customer’s specification, as performance does not create an asset with an alternative use to us. Accordingly, revenue is recognized when product is shipped, and control of the product, title and risk of loss transfer to a customer. We grant credit terms considering normal collection risk. If there is doubt about collection, full prepayment for the order is required. Any payments received prior to shipment are recorded as deferred revenue and included in Advance Payments in the Consolidated Balance Sheets.

We recognize R&D revenue in the period during which the related costs are incurred over the contractually defined period. 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. The deliverables under the contract included development of machinery and technology to be able to produce large area sapphire windows, prove the concept of growing large windows with that equipment and delivery of large-area sapphire windows. We record R&D revenue on a gross basis as costs are incurred, plus a portion of the fixed fee over a period of time as the obligations (machinery, proof of concept and finished windows) are completed following the input method of measuring progress which recognizes revenue as resources are consumed, labor hours expended and costs are incurred. As of December 31, 2018, this contract has been completed and the full amount of revenue of $4.7 million allowable per the contract has been recognized.

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

All of our revenue is denominated in U.S. dollars.

Inventory valuation

We value our inventory at the lower of cost or net realizable value. Net realizable value is determined based on an estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. Raw materials cost is determined using the first-in, first-out method, and work-in-process and finished goods costs are determined on a standard cost basis which includes materials, labor and overhead. 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 years ended December 31, 2018 and 2017, we determined we had finished goods inventory that was excess or obsolete and recorded an adjustment which reduced inventory and increased costs of goods sold by $284,000 and $1.4 million, respectively. Based on these sales prices, we recorded for the years ended December 31, 2018 and 2017, a lower of cost or net realizable value adjustment which reduced inventory and increased cost of goods sold by $6,000 and $97,000, respectively.

In connection with our exit from the LED market, we determined we had excess raw material inventory and recorded a write-down of $2.4 million for the year ended December 31, 2017. We also recorded a write-down of excess two-inch diameter core inventory of $310,000 and consumable assets write-down expense of $256,000. For the year ended December 31, 2018, we recorded additional write-down of the consumable assets of $63,000. We did not record any additional write-downs of our raw materials and two-inch diameter core inventories for the year ended December 31, 2018.

In addition, for the year ended December 31, 2017, we determined we had excess inventory of lower-quality sapphire crystals and recorded an adjustment which reduced inventory and increased cost of goods sold by $451,000. We did not record any additional adjustments of sapphire crystals in the year ended December 31, 2018, as we sold some of our lower-quality crystals at a price exceeding the book value of these crystals.

Our method of estimating excess and obsolete inventory has remained consistent for all periods presented. 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 year ended December 31, 2017, we determined that we were not operating at capacity and recorded costs associated with lower utilization of equipment and staff of $2.1 million. For the year ended December 31, 2018, we significantly reduced our costs attributable to lower utilization of equipment and staff due to consolidation of our operations in our Bensenville, Illinois, facility, and recorded $723,000 of such costs.

Investments

We invest our available cash primarily in U.S. Treasury securities, investment grade commercial paper, FDIC guaranteed certificates of deposit, common stock and corporate notes. Investments classified as available-for-sale debt securities are carried at fair value with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Investments in equity securities are reported at fair value, with both realized and unrealized gains and losses recorded in other income (expense), in the Consolidated Statements of Operations. Investments in which 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 debt 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 December 31, 2018 and 2017, no impairment was recorded.

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. If a receivable is deemed uncollectible, and the account balance differs from the allowance provided, the specific amount is written off to bad debt expense. 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.

Assets held for sale and long-lived assets

When circumstances, such as adverse market conditions, indicate that the carrying value of a long-lived asset may be impaired, we perform an analysis to review the recoverability of the asset’s carrying value using estimates of the undiscounted cash flows (excluding interest charges) from the expected future operations of the asset. These estimates consider factors such as expected future operating income, operating trends and prospects, as well as the effects of demand, competition and other factors. If the analysis indicates that the carrying value is not recoverable from future cash flows, an impairment loss is recognized to the extent that the carrying value exceeds the estimated fair value. The estimated fair value of assets is determined using appraisal techniques which assume the highest and best use of the asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date. Any impairment losses are recorded as operating expenses, which reduce net income.

In connection with the decision in 2016 to limit our focus to the optical and industrial sapphire markets and exit the LED market, we developed a plan to close our Malaysia facility, scale down and consolidate remaining operations in the U.S. and sell additional assets that would not be needed. We evaluated our U.S. and Malaysia asset portfolios to identify assets needed for our current business strategy and excess assets that were no longer needed. We determined we had excess machinery, equipment and facilities. Excess U.S. and Malaysia assets were evaluated based on assuming an orderly liquidation plan, which considers economic obsolescence and sales of comparable equipment, as it is our intention to sell these assets. Additionally, we evaluated our U.S. assets continuing to be used in operations using a cost and market approach to determine the current fair value.

As a result, for the year ended December 31, 2017, we recorded an impairment charge of $1.0 million on lower than expected sales prices for certain machinery and equipment held for sale, and identification of assets that will not be needed to support our current operations. Additionally, for the year ended December 31, 2017, we recorded an impairment charge of $4.0 million on our U.S. and Malaysia land and building assets on lower than expected sale price. For the year ended December 31, 2018, we reviewed the current fair value of our assets and concluded no adjustments were needed. 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 asset usage, marketplace and other factors used in determining the current fair value.

In September 2018, we completed the sale of our 134,400 square-foot manufacturing and office facility located in Batavia, Illinois, with the net book value of $5.9 million. The sale price for the property was $6.7 million, we realized net proceeds of approximately $6.4 million after the payment of real estate taxes, brokerage and legal fees, transfer taxes and other expenses, and recorded a gain on sale of this asset of $504,000.

In the year ended December 31, 2018, we completed individual sales and held auctions for equipment and consumable assets located at each of our U.S. properties, resulting in the sale of certain of our excess U.S. equipment and consumable assets, which had a total net book value of $1.6 million. In the beginning of 2018, we intended to sell a certain number of our crystal growth furnaces. Due to our changed needs and business plan, we reduced the number of furnaces we wanted to sell. The difference in the number of furnaces we originally intended to sell and the number we actually disposed of, had a net book value of $236,000. The additional furnaces that we decided to retain were reclassified from current assets held for sale to fixed assets held and used at December 31, 2018. Additionally, in the year ended December 31, 2018, we completed sales of Malaysia equipment with a total net book value of $131,000. Based on these sales, a gain on disposal of equipment and consumable assets of $2.9 million was recorded for the year ended December 31, 2018. Unsold excess Malaysia equipment continued to be classified as current assets held for sale at December 31, 2018.

We are pursuing the sale of our parcel of land in Batavia, Illinois, and the sale or lease of our 65,000 square-foot manufacturing facility located in Penang, Malaysia. Although we cannot assure the timing of these sales, these properties were classified as current assets held for sale at December 31, 2018 and 2017, as it is our intention to complete these sales within the next twelve-month period.

In September 2018, we completed the purchase of our property located in Bensenville, Illinois. The purchase price for the property was approximately $2.3 million. Previously, we leased the Bensenville property and it was the headquarters of our operations and one of our growth facilities. We used our cash on hand to purchase the property.

Stock-based compensation 

We grant stock-based compensation in the form of stock options, restricted stock units (“RSUs”) and restricted stock. We expense stock options based upon the fair 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 is 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 24.43% was based on our past history of forfeitures.

All stock options are 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.

We used a Monte Carlo simulation model valuation technique to determine the fair value of RSUs granted in 2017 and 2018 to a key executive pursuant to an employment agreement, because the awards vest based upon achievement of market price targets of our common stock. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award and calculates the fair value of each RSU. The daily expected stock price volatility is based on a four-year historical volatility of our common stock. The daily expected dividend yield is based on annual expected dividend payments. The average daily risk-free interest rate is based on the three-year treasury yield as of the grant date. Each of the tranches is calculated to have its own fair value and requisite service period. The fair value of each tranche is amortized over the requisite or derived service period, which is up to four years.

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.

All option grants are granted at an exercise price per share equal to the closing market price of our common stock on the day before 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 value of the common stock at December 31, 2018, there was $44,500 of intrinsic value arising from 34,000 stock options exercisable or outstanding.

For more information on stock-based compensation, see Note 7 – Stock Incentive Plans to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

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 that is difficult to overcome on a “more likely than not” standard through objectively verifiable data. Under the accounting standards, verifiable evidence will have 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, 2018, a valuation allowance has been recorded against the net U.S. and Malaysia deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence. Any U.S. and Malaysia tax benefit or tax expense recorded on the Consolidated Statement of Operations will be offset with a corresponding adjustment from the use of the NOL carryforward asset which currently has a full valuation allowance. 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.

Accounting for uncertainty in income taxes

We recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. At December 31, 2018 and 2017, we had $1.1 million of unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded on our financial statements as an offset to the valuation allowance related to tax positions taken in 2012. We recognize interest and/or penalties related to income tax matters in income tax expense. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the years ended December 31, 2018 and 2017.

We are subject to taxation in the U.S., Malaysia and in a U.S. state jurisdiction. Due to the existence of NOL carryforwards, tax years ended December 31, 2001 through 2006, 2008, 2009 and 2011 through 2017 are open to examination by tax authorities for Federal purposes. Due to NOL carryforwards at the State level, tax years ended 2006 and 2008 through 2017 are open to examination by state tax authorities. Tax years 2013 through 2017 are open to examination by the Malaysia Inland Revenue Board.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 to the Consolidated Financial Statements for a discussion of new accounting standards.

OFF-BALANCE SHEET ARRANGEMENTS

None.

Disclosure under this item is not required as the registrant is a smaller reporting company.

Our Consolidated Financial Statements, together with the related notes and the report of independent registered public accounting firm, are set forth on the pages indicated in Item 15 of this Annual Report on Form 10-K and are incorporated by reference herein.

None.

Management’s Evaluation of Disclosure Controls and Procedures.

An evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (together, our “certifying officers”), of the effectiveness of the design and operation of 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”)) as of the end of the year covered by this report. Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed by us in our periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, our certifying officers concluded that these disclosure controls and procedures were effective as of December 31, 2018.

Management’s Report on Internal Control over Financial Reporting

The financial statements were prepared by management, which is responsible for their integrity and objectivity and for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).

The Company’s internal control over financial reporting is designed 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. The Company’s internal control over financial reporting includes those policies and procedures that:

There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to the financial statement preparation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time.

Management assessed the design and effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth in 2013 Internal Control—Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on management’s assessment using those criteria, as of December 31, 2018, management concluded that the Company’s internal control over financial reporting was effective.

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. The Company’s internal controls over financial reporting were not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2018, that our certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

None.

PART III

The Information required by Items 401, 405, 407(d)(4) and 407(d)(5) of Regulation S-K will be included under the captions “Proposal 1: Election of Directors,” “Executive Compensation – Executive Officers,” “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters – Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance – Committees of the Board of Directors and Meetings – Audit Committee” in our proxy statement for our 2019 Annual Meeting of Stockholders and is incorporated by reference herein. If such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K, an amendment to this Form 10-K shall be filed not later than the end of such 120-day period.

We have adopted a Code of Ethics that applies to all of our employees, officers and directors. A copy of the Code of Ethics is available on our website at www.rubicontechnology.com, and any waiver from the Code of Ethics will be timely disclosed on the Company’s website as will any amendments to the Code of Ethics.

The information required by Item 402 of Regulation S-K will be included under the captions “Executive Compensation” and “Director Compensation” in our proxy statement for our 2019 Annual Meeting of Stockholders and is incorporated by reference herein. If such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K, an amendment to this Form 10-K shall be filed not later than the end of such 120-day period.

Securities Authorized for Issuance under Equity Compensation Plans

The following table represents securities authorized for issuance under, the Rubicon Technology Inc. 2007 Stock Incentive Plan, as amended and restated, and the Rubicon Technology Inc. 2016 Stock Incentive Plan as of December 31, 2018.

Equity Compensation Plan Information

The information required by Item 403 of Regulation S-K will be included under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in our proxy statement for our 2019 Annual Meeting of Stockholders and is incorporated by reference herein. If such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K, an amendment to this Form 10-K shall be filed not later than the end of such 120-day period.

The information required by Item 404 of Regulation S-K will be included under the caption “Certain Relationships and Related Party Transactions” in our proxy statement for our 2019 Annual Meeting of Stockholders and is incorporated by reference herein. The information required by Item 407(a) of Regulation S-K will be included under the caption “Corporate Governance - Director Independence” in our proxy statement for our 2019 Annual Meeting of Stockholders and is incorporated by reference herein. If such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K, an amendment to this Form 10-K shall be filed not later than the end of such 120-day period.

The information required by this Item will be included under the caption “Ratification of Selection of Independent Registered Public Accounting Firm” in our proxy statement for our 2019 Annual Meeting of Stockholders and is incorporated by reference herein. If such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K, an amendment to this Form 10-K shall be filed not later than the end of such 120-day period.

PART IV

(a) Financial statements. The following Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K.

(b) 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 Annual Report on Form 10-K and are incorporated by reference.

(c) Financial statement schedules not listed above have been omitted because they are inapplicable, are not required under applicable provisions of Regulation S-X, or the information that would otherwise be included in such schedules is contained in the registrant’s financial statements or accompanying notes.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 22, 2019.

KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Timothy E. Brog and Inga A. Slavutsky, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 22, 2019.

EXHIBIT INDEX

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

Rubicon Technology, Inc.

INDEX TO FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of

Rubicon Technology, Inc. and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Rubicon Technology, Inc. and Subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Marcum LLP

Marcum llp

We have served as the Company’s auditor since 2017.

Chicago, Illinois

March 22, 2019

Rubicon Technology, Inc.

Consolidated Balance Sheets

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

Rubicon Technology, Inc.

Consolidated Statements of Operations

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

Rubicon Technology, Inc.

Consolidated Statements of Comprehensive Income (Loss)

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

Rubicon Technology, Inc.

Consolidated Statements of Stockholders’ Equity

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

Rubicon Technology, Inc.

Consolidated Statements of Cash Flows