Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark one)

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

for the quarterly period ended March 31, 2010

or

 

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

for the transition period from              to             

Commission file number 001-33834

 

 

RUBICON TECHNOLOGY, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   36-4419301

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

9931 Franklin Avenue

Franklin Park, Illinois

  60131
(Address of Principal Executive Offices)   (Zip Code)

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

 

 

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

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

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

 

Large accelerated filer

 

¨

   Accelerated filer   x

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

   Smaller reporting company   ¨

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

As of May 5, 2010 the Registrant had 20,271,171 shares of common stock, par value $0.001 per share, outstanding.

 

 

 


Table of Contents

RUBICON TECHNOLOGY, INC.

Quarterly Report on Form 10-Q

For the quarterly period ended March 31, 2010

TABLE OF CONTENTS

 

         Page
Part I      Financial Information    2
 

Item 1.

   Consolidated Financial Statements (unaudited)    2
     Consolidated Balance Sheets (unaudited) – March 31, 2010 and December 31, 2009    2
     Consolidated Statements of Operations (unaudited) – Three months ended March 31, 2010 and 2009    3
     Consolidated Statements of Cash Flows (unaudited) – Three months ended March 31, 2010 and 2009    4
     Notes to Consolidated Financial Statements (unaudited)    5
 

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    14
 

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    21
 

Item 4.

   Controls and Procedures    22
Part II      Other Information    22
 

Item 1.

   Legal Proceedings    22
 

Item 1A.

   Risk Factors    22
 

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    23
 

Item 3.

   Defaults Upon Senior Securities    23
 

Item 4.

   Reserved    23
 

Item 5.

   Other Information    23
 

Item 6.

   Exhibits    23
Signatures    24
Exhibit Index    25

 

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Table of Contents

PART I FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

Rubicon Technology, Inc.

 

Consolidated balance sheets

 

     March 31,
2010
    December 31,
2009
 
  

(unaudited)

(in thousands other than
share data)

 

Assets

    

Cash and cash equivalents

   $ 12,505      $ 3,860   

Restricted cash

     7        8   

Short-term investments

     28,966        40,716   

Accounts receivable, net

     7,311        4,967   

Inventories, net

     6,635        6,597   

Spare parts

     2,535        2,133   

Prepaid expenses and other current assets

     1,477        1,311   
                

Total current assets

     59,436        59,592   

Property and equipment, net

     42,025        39,525   

Investments

     2,000        2,000   

Other assets

     187        69   
                

Total assets

   $ 103,648      $ 101,186   
                

Liabilities and stockholders’ equity

    

Accounts payable

   $ 1,685      $ 2,056   

Accrued payroll

     1,028        515   

Corporate income and franchise taxes

     128        171   

Accrued and other current liabilities

     1,182        1,004   
                

Total current liabilities

     4,023        3,746   
                

Commitments and contingencies (Note 9)

    

Stockholders’ equity

    

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

     —          —     

Common stock, $0.001 par value, 85,000,000 shares authorized, 21,521,146 and 21,482,558 shares issued and outstanding

     21        21   

Additional paid-in capital

     262,590        261,974   

Treasury stock, at cost, 1,249,975 shares

     (5,661     (5,661

Accumulated other comprehensive income

     (16     (10

Accumulated deficit

     (157,309     (158,884
                

Total stockholders’ equity

     99,625        97,440   
                

Total liabilities and stockholders’ equity

   $ 103,648      $ 101,186   
                

The accompanying notes are an integral part of these statements.

 

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Table of Contents

Rubicon Technology, Inc.

 

Consolidated statements of operations

 

     Three months ended
March  31,
 
   2010     2009  
  

(unaudited)
(in thousands, other than

share and per share data)

 

Revenue

   $ 11,516      $ 2,338   

Cost of goods sold

     7,363        4,946   
                

Gross profit (loss)

     4,153        (2,608

Operating expenses:

    

General and administrative

     2,141        1,135   

Sales and marketing

     257        243   

Research and development

     212        152   
                

Income (loss) from operations

     1,543        (4,138
                

Other income:

    

Interest income

     97        257   

Realized loss on foreign currency translation

     (40     —     

Realized gain on investments

     15        13   
                

Total other income

     72        270   
                

Income (loss) before income taxes

     1,615        (3,868

Income tax expense

     (40 )     —     
                

Net income (loss)

   $ 1,575      $ (3,868
                

Net income (loss) per common share

    

Basic

   $ 0.08      $ (0.19
                

Diluted

   $ 0.07      $ (0.19
                

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

    

Basic

     20,244,347        20,280,160   

Diluted

     21,437,861        20,280,160   

The accompanying notes are an integral part of these statements.

 

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Rubicon Technology, Inc.

 

Consolidated statements of cash flows

 

     Three months ended
March 31,
 
   2010     2009  
  

(unaudited)

(in thousands)

 

Cash flows from operating activities

    

Net income (loss)

   $ 1,575      $ (3,868

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities

    

Depreciation and amortization

     1,398        1,296   

Stock-based compensation

     465        226   

Realized gain on investments

     (15     (13

Changes in operating assets and liabilities:

    

Accounts receivable

     (2,344     996   

Inventories

     (38     (212

Spare parts

     (402     678   

Prepaid expenses and other current assets

     (166     304   

Accounts payable

     (371     (1,234

Accrued payroll

     513        (301

Corporate income and franchise taxes

     (43     (183

Accrued and other current liabilities

     152        (72
                

Net cash provided by (used in) operating activities

     724        (2,383
                

Cash flows from investing activities

    

Purchases of property and equipment

     (3,857     (525

Sales of investments

     11,750        3,369   
                

Net cash provided by investing activities

     7,893        2,844   
                

Cash flows from financing activities

    

Deferred offering costs

     (118     —     

Proceeds from exercise of options

     151        3   

Restricted cash

     1        (4

Purchase of treasury stock

     —          (2,577
                

Net cash provided by (used in) financing activities

     34        (2,578
                

Net effect of currency translation

     (6     —     

Net increase (decrease) in cash and cash equivalents

     8,645        (2,117

Cash and cash equivalents, beginning of period

     3,860        7,629   
                

Cash and cash equivalents, end of period

   $ 12,505      $ 5,512   
                

Supplemental disclosures of non-cash transactions

    

Unrealized gain on investments

   $ 15      $ 115   

The accompanying notes are an integral part of these statements.

 

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Rubicon Technology, Inc.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

1. BASIS OF PRESENTATION

Interim financial data

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 for Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the Company’s annual report filed on Form 10-K for the fiscal year ended December 31, 2009. In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentation of the results of operations have been included. Operating results for the three month period ended March 31, 2010 are not necessarily indicative of results that may be expected for the year ending December 31, 2010.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Rubicon Worldwide LLC and Rubicon Sapphire Technology (Malaysia) SDN BHD. All intercompany transactions and balances have been eliminated in consolidation.

Investments

The Company invests available cash primarily in investment grade commercial paper, corporate notes and government securities. While the Company’s investment policy no longer includes auction-rate securities as an approved investment, the Company continues to hold auction-rate securities purchased prior to the policy change. The Company also holds put options associated with an agreement with UBS, AG (see “Auction-rate securities put options” below). Investments classified as available-for-sale securities are carried at fair market value with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Investments in trading securities are reported at fair value, with both realized and unrealized gains and losses recorded in other income (expense), in the Consolidated Statement of Operations. Investments in which the Company has the ability and intent, if necessary, to liquidate in order to support its current operations, are classified as short-term.

The Company reviews its available-for-sale securities investments at the end of each quarter for other-than-temporary declines in fair value based on the specific identification method. The Company considers various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, changes in underlying credit ratings, forecasted recovery, its ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. When the Company concludes that an other-than-temporary impairment has resulted, the difference between the fair value and carrying value is written off and recorded as a charge on the Consolidated Statement of Operations. As of March 31, 2010, no impairment was recorded.

Auction-rate securities put options (“ARS Put Options”)

In October 2008, the Company entered into an agreement that provides the Company with the right, but not the obligation, to sell all of its auction-rate securities to UBS, AG for par value during the period from June 30, 2010 to July 2, 2012. The ARS Put Options will provide the Company with the opportunity to recover the estimated unrealized loss on its ARS investments. The Company recorded the fair value of the ARS Put Options upon receipt and included it in short-term investments at March 31, 2010. The Company values ARS Put Options at fair value using a discounted cash flow model. Unrealized gains and losses related to the ARS Put Options are recognized in earnings. See Note 4—Investments for additional information regarding the ARS Put Options.

Treasury Stock

The Company records treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock.

 

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Inventories

Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method, and includes materials, labor and overhead. The Company reduces the carrying value of its inventories for differences between the cost and the estimated net realizable value, taking into account usage, expected demand, technological obsolescence and other information. Inventories are composed of the following:

 

     March 31,
2010
    December 31,
2009
 
   (in thousands)  

Raw materials

   $ 3,768      $ 3,982   

Work in progress

     1,527        1,277   

Finished goods

     1,824        2,788   
                
     7,118        8,047   

Reserve for obsolescence and realization

     (484     (1,450
                
   $ 6,635      $ 6,597   
                

The change in inventory reserves is comprised of the disposal of obsolete inventory and a change in standard cost to net realizable value and changes to costs and expenses. The table below details such changes (in thousands):

 

Inventory reserves at December 31, 2009

   $ (1,450

Disposal of obsolete inventory

     472   

Change in standard cost to net realizable value

     331   

Changes to costs and expenses

     163   
        

Inventory reserves at March 31, 2010

   $ (484
        

Property and equipment

Property and equipment consisted of the following:

 

     March 31,
2010
    December 31,
2009
 
   (in thousands)  

Land and land improvements

   $ 623      $ 623   

Machinery, equipment and tooling

     49,242        48,125   

Leasehold improvements

     7,667        6,985   

Furniture and fixtures

     728        715   

Information systems

     559        546   

Construction in progress

     6,434        4,361   
                

Total cost

     65,253        61,355   

Accumulated depreciation and amortization

     (23,228     (21,830
                

Property and equipment, net

   $ 42,025      $ 39,525   
                

Revenue recognition

The Company recognizes revenue from product sales when earned. Revenue is recognized when, and if, evidence of an arrangement is obtained and the other criteria to support revenue recognition are met, including:

 

 

Persuasive evidence of an arrangement exists. The Company requires evidence of a purchase order with the customer specifying the terms and specifications of the product to be delivered, typically in the form of a signed quotation or purchase order from the customer.

 

 

Title has passed and the product has been delivered. Title passage and product delivery generally occur when the product is delivered to a common carrier.

 

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The price is fixed or determinable. All terms are fixed in the signed quotation or purchase order received from the customer. The purchase orders do not contain rights of cancellation, return, exchange or refund.

 

 

Collection of the resulting receivable is reasonably assured. The Company’s standard arrangement with customers includes 30 day payment terms. Customers are subject to a credit review process that evaluates the customers’ financial position and their ability to pay. Collectability is determined by considering the length of time the customer has been in business and history of collections. If it is determined that collection is not probable, no product is shipped and no revenue is recognized unless cash is received in advance.

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

 

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Net income (loss) per share

Net income (loss) per share is as follows for the three months ended March 31, 2010 and 2009:

 

     Three months ended
March  31,
 
   2010    2009  

Net income (loss) (in thousands):

   $ 1,575    $ (3,868

Net income (loss) per share:

     

Basic

   $ 0.08    $ (0.19
               

Diluted

   $ 0.07    $ (0.19
               

Weighted average common shares outstanding used in:

     

Basic

     20,244,347      20,280,160   

Diluted

     21,437,861      20,280,160   

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted-average number of dilutive common shares outstanding during the period. Dilutive shares outstanding are calculated by adding to the weighted shares outstanding any common stock equivalents from outstanding stock options and warrants based on the treasury stock method.

Diluted net loss per share is the same as basic net loss per share for the three months ended March 31, 2009 because the effects of potentially dilutive securities were anti-dilutive.

At March 31, 2009 the Company had the following anti-dilutive securities outstanding which were excluded from the calculation of diluted net loss per share:

 

Warrants

   76,757

Stock options

   62,244
    
   139,001
    

Recent Accounting Pronouncements

On January 21, 2010 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, amending Accounting Standards Codification (ASC) 820 (formerly Statement of Financial Accounting Standards No. 157). New disclosures related to transfers in and out of Level 1 and Level 2 measurements and separate disclosures about purchases, shares, issuances, and settlements relating to Level 3 measurements are required. ASU 2010-06 clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the Level 3 measurements disclosures about purchases, shares, issuances, and settlements which is effective for fiscal years beginning after December 15, 2010. The adoption of ASU 2010-06 did not have a material impact on the Company’s financial condition or results of operations.

On February 24, 2010 the FASB issued ASU 2010-09, which amends ASC 855 to address certain implementation issues related to an entity’s requirement to perform and disclose subsequent events procedures. ASU 2010-09 requires entities to evaluate subsequent events through the date the financial statements are issued. ASU 210-09 is effective immediately for financial statements that are issued or available to be issued. The adoption of ASU 2010-09 did not have a material impact on the Company’s financial condition or results of operations. See Note 10 for disclosures associated with adoption of this standard.

3. SEGMENT INFORMATION

The Company evaluates operations as one reportable segment, as it only reports profit and loss information on an aggregate basis to its chief operating decision maker.

 

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

 

     Three months ended
March  31,
   2010    2009
   (in thousands)

Asia

   $ 9,102    $ 537

North America

     2,111      1,615

Europe

     303      186
             

Revenue

   $ 11,516    $ 2,338
             

4. INVESTMENTS

The Company invests available cash primarily in investment grade commercial paper, corporate notes and government securities. The Company’s short-term investments balance of $29.0 million as of March 31, 2010, is comprised of US Treasury securities of $13.0 million, auction-rate securities and put options of $9.7 million, corporate notes and bonds of $3.2 million and FDIC guaranteed certificates of deposit of $3.1 million. The Company’s investments, except for the auction-rate securities, put options and long-term investments, are classified as available-for-sale securities and are carried at fair market value with unrealized gains and losses recorded in accumulated other comprehensive income (loss).

While the Company’s investment policy no longer includes auction-rate securities as an approved investment, the Company continues to hold auction-rate securities purchased prior to the policy change. In February 2008, the Company began experiencing failed auctions of its entire auction-rate securities portfolio, resulting in its inability to sell these securities in the short term. All of these auction-rate securities are AAA rated by one or more of the major credit rating agencies and have contractual maturities from 2036 to 2045. Further, all of these securities are collateralized by student loans, and approximately 99% of the collateral qualifies under the Federal Family Education Loan Program and is guaranteed by the US government. The Company is receiving the underlying cash flows on all its auction-rate securities. The Company is unable to predict if these funds will become available before their maturity dates. The Company also holds put options associated with an agreement with UBS, AG related to the auction-rate securities purchased through them. It is the Company’s intent to exercise these put options at the first available date, therefore, the auction-rate securities and the related put options have been classified as short-term investments as of March 31, 2010. The auction-rate securities are trading securities recorded at fair value and unrealized gains and losses are reported as part of gain on investments in the Consolidated Statements of Operations. The Company’s long-term investments at March 31, 2010 consist of a $2.0 million investment in Peregrine Semiconductor, Corp. (a customer) Series D-1 Preferred shares.

As noted above, in October 2008 the Company entered into an agreement with UBS, AG, which provides the Company certain rights to sell to UBS, AG the auction-rate securities that were purchased through them. As of March 31, 2010, the Company held $9.7 million par value auction-rate securities purchased from UBS, AG. The Company has the option to sell these securities to UBS, AG at par value from June 30, 2010 through July 2, 2012. UBS, AG, at its discretion, may purchase or sell these securities on the Company’s behalf at any time provided the Company receives par value for the securities sold. The issuers of the auction-rate securities continue to have the right to redeem the securities at their discretion. The agreement also permits the Company to establish a demand revolving credit line in an amount equal to the par value of the securities at a net no cost. If the Company’s debt is determined to be rated below investment grade or is not rated, the amount that can be borrowed is limited to 75% of the market value of the auction-rate securities. As of March 31, 2010, the Company had no loans outstanding under this agreement.

The Company’s right to sell the auction-rate securities to UBS, AG, commencing on June 30, 2010, represents put options for a payment equal to the par value of the auction-rate securities. The Company values the put options at their estimated fair value using a discounted cash flow model. During the three months ended March 31, 2010, the Company recorded a loss of $55,279, representing the change in fair value of the put options. The Company also recorded during the three ended March 31, 2010, a gain of $70,803, representing the change in fair value of the auction-rate securities. Both the gain and loss from recording the change in fair value of the put options and auction-rate securities were recorded in gain (loss) on investments in the Consolidated Statements of Operations.

The Company values the auction-rate securities and put options using a discounted cash model that weighs various factors, including interest rates and expected holding period. At March 31, 2010, the fair value recorded on the balance sheet of auction-rate securities and ARS put options was $8.6 million and $1.1 million, respectively. The Company believes this is a fair value of these investments at March 31, 2010.

The investment in Peregrine Semiconductor Corp. (Peregrine) is accounted for as a cost method investment.

 

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The following table presents the amortized cost, and gross unrealized gains and losses on all securities at March 31, 2010 (in thousands):

 

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

Short-term Investments:

           

U.S. Treasury securities and agency (taxable)

   $ 13,021      —      $ 5    $ 13,016

Corporate Notes/Bonds (taxable)

     3,170      —        9      3,161

FDIC guaranteed certificates of deposit (taxable)

     3,080      2      —        3,082

Auction rate securities

     8,611      —        —        8,611

Auction rate securities put options

     1,096      —        —        1,096
                           

Total short-term investments

   $ 28,978    $ 2    $ 14    $ 28,966
                           

Long-term Investments:

           

Peregrine Semiconductor, Corp. Series D-1 Preferred shares

   $ 2,000    $ —      $ —      $ 2,000
                           

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

 

   

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

 

   

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

 

   

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

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of March 31, 2010:

 

     Level 1    Level 2    Level 3    Total

Cash Equivalents:

           

Money market funds

   $ 10,994    $ —      $ —      $ 10,994

Investments:

           

Available-for-sales securities—current

     —        19,259      —        19,259

Trading securities—non-current

     —        —        9,707      9,707
                           

Total

   $ 10,994    $ 19,259    $ 9,707    $ 39,960
                           

Level 3 assets consist of AAA-rated municipal bonds with an auction reset feature (auction rate securities) whose underlying assets are generally student loans which are substantially backed by the federal government and auction rate security put options. As of March 31, 2010, it is the Company’s intent to exercise the auction rate securities put options at the first available date; therefore, the Company has classified its investment in auction rate securities as short-term investments. These investments were valued at fair value as of March 31, 2010.

 

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The following table provides a summary of changes in fair value of the Company’s Level 3 financial asset as of March 31, 2010 (in thousands):

 

     Level 3  

Balance at January 1, 2010

   $ 10,092   

Redemption of auction rate securities

     (400

Net recognized gains and (losses)

     15   
        

Balance at March 31, 2010

   $ 9,707   
        

In addition to the debt securities noted above, the Company had approximately $1.5 million of time deposits included in cash and cash equivalents as of March 31, 2010.

5. RELATED PARTY TRANSACTIONS

In November 2008, the Company purchased 1,345,444 shares of Peregrine Series D-1 Preferred shares for a total of $2.0 million, which represents less than 1% of shares outstanding. The terms and stock price of the purchase were the same as for the other investors who participated. Peregrine is a customer of the Company. For the three months ended March 31, 2010, revenue from Peregrine was $1,002,000. As of March 31, 2010, accounts receivable from Peregrine was $612,500. The pricing terms and conditions of the sales to Peregrine are similar to those available to the Company’s other non-related customers.

6. SIGNIFICANT CUSTOMERS

For the three months ended March 31, 2010, the Company had three customers that accounted for 25%, 15% and 12% of its revenue and for the three months ended March 31, 2009, the Company had three customers that accounted for approximately 34%, 19% and 14% of its revenue.

Customers individually representing more than 10% of trade receivables accounted for approximately 57% and 68% of accounts receivable as of March 31, 2010 and December 31, 2009, respectively. The Company grants credit to customers based on an evaluation of their financial condition. Losses from credit sales are provided for in the financial statements.

7. STOCKHOLDERS’ EQUITY

Common Stock

As of March 31, 2010, the Company had 85,000,000 shares of common stock authorized with a par value of $0.001 and the Company had reserved 2,177,058 shares of common stock for issuance upon the exercise of outstanding common stock options. Also, 852,909 shares of the Company’s common stock were reserved for future grants of stock options (or other similar equity instruments) under the Company’s 2001 Equity Plan (the “2001 Plan”) and 2007 Stock Incentive Plan (the “2007 Plan”) as of March 31, 2010. In addition, 281,561 shares of the Company’s common stock were reserved for future exercise of outstanding warrants as of March 31, 2010.

Warrants

For the three months ended March 31, 2010, no common stock warrants were exercised. At March 31, 2010 and December 31, 2009, there were 281,561 common stock warrants outstanding.

Treasury Stock

In November 2008, the Company authorized a stock repurchase program to purchase up to $15.0 million of common stock over a period of two years. The stock repurchase program authorizes the Company to repurchase shares of its common stock in the open market at times and prices considered appropriate by the Company depending upon prevailing market conditions and other corporate considerations. The treasury shares are accounted for using the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. For the three months ended March 31, 2010, no shares were repurchased.

8. STOCK INCENTIVE PLANS

The Company sponsors a stock option plan, the 2001 Plan, which allows for the grant of incentive and nonqualified stock options for the purchase of common stock. Each option entitles the holder to purchase one share of common stock at the specified option exercise price. The exercise price of each incentive stock option granted must not be less than the fair market value on the grant date. At the discretion of management and with the approval of the Board of Directors, the Company may grant options under the 2001 Plan. Management and the Board of Directors determine vesting periods and expiration dates at the time of the grant.

 

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In August 2007, the Company adopted the 2007 Plan, which allows for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards and bonus shares. The maximum number of shares which may be awarded or sold under the 2007 Plan is 2,307,692 shares. The Board of Directors has appointed a committee to administer the plan. The plan committee determines the type of award to be granted, the fair market value, the number of shares covered by the award, and the time when the award vests and may be exercised.

The Company uses the Black-Scholes option pricing model to value stock options issued after January 1, 2006. The Company uses historical stock prices of companies which it considers as a peer group as the basis for its volatility assumptions. The assumed risk-free rates were based on US Treasury rates in effect at the time of grant with a term consistent with the expected option lives. The expected term is based upon the vesting term of the Company’s options, a review of a peer group of companies, and expected exercise behavior. The forfeiture rate is based on past history of forfeited options. The expense is being allocated using the straight-line method. For the three months ended March 31, 2010 and 2009, the Company recorded $465,471 and $162,302 of stock compensation expense, respectively. As of March 31, 2010, the Company has $3,439,174 of total unrecognized compensation cost related to non-vested awards granted under the Company’s stock-based plans that it expects to recognize over a weighted-average period of 2.95 years. The Company accounts for options issued prior to January 1, 2006 under the intrinsic value method.

The following table summarizes the activity of the stock incentive and equity plans as of March 31, 2010 and changes during the three months then ended:

 

     Shares
available
for grant
    Number of
options
outstanding
    Weighted-
average option
exercise price
   Number of
restricted
stock and
board
shares
issued

At December 31, 2009

   874,269      2,194,286      $ 9.48    34,863

Authorized

   —            

Granted

   (21,751   21,751        17.94    —  

Exercised

   —        (38,588     3.92   

Cancelled/forfeited

   391      (391     3.91    —  
                   

At March 31, 2010

   852,909      2,177,058      $ 9.66    34,863
                   

The weighted average fair value per share of options granted for the three months ended March 31, 2010 was $17.94, and the fair value of each option grant was estimated at the date of grant using the Black-Scholes option-pricing model using an expected term of 5.4 years, risk-free interest rates of 0.38% - 0.75%, respectively, expected volatility of 60% and no dividend yield. The Company used an expected forfeiture rate of 27.54%.

For the three months ended March 31, 2010 and 2009, the Company recorded $28,499 of stock compensation expense related to restricted stock.

A summary of the Company’s non-vested options during the three month period ended March 31, 2010 is presented below:

 

     Options     Weighted-average
exercise price

Non-vested at January 1, 2010

   1,500,639      $ 2.26

Granted

   21,751        17.94

Vested

   (200,535     4.08

Forfeited

   (387     3.91
            

Non-vested at March 31, 2010

   1,321,468      $ 11.37
            

An analysis of restricted stock issued is as follows:

 

Non-vested restricted stock as of December 31, 2009

   8,453   

Granted

   —     

Vested

   (1,846
      

Non-vested restricted stock as of March 31, 2010

   6,607   
      

 

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9. COMMITMENTS AND CONTINGENCIES

Purchase Commitments

The Company has entered into agreements to purchase land, equipment and components to construct furnaces. These agreements will result in the Company purchasing buildings, equipment or components for a total cost of approximately $12,893,000 with deliveries occurring through December 2010.

Litigation

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

10. SUBSEQUENT EVENTS

On April 16, 2010, the Company purchased a 134,400 square foot building in Batavia, Illinois to be used for the expansion of crystal growth and fabrication operations. The purchase price is $7,000,000. A payment of $250,000 was made at signing and the remainder paid at closing.

We evaluated the events or transactions occurring between the balance sheet date and the date of issuance of the financial statements to determine if any would require recognition or disclosure in the financial statements. There were no material subsequent events, except as described above.

 

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

All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q 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” as defined in the 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,” and the like, and/or future-tense or conditional constructions such as “will,” “may,” “could,” “should,” etc. (or the negative thereof). Items contemplating or making assumptions about actual or potential future sales, market size and trends or operating results also constitute forward-looking statements.

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

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

You should read this Quarterly Report, the documents that we reference in this Quarterly Report and have filed with the SEC as exhibits and our Annual Report on Form 10-K for the year ended December 31, 2009 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.

OVERVIEW

We are an advanced electronic materials provider that develops, manufactures and sells monocrystalline sapphire and other innovative crystalline products for Light-Emitting Diodes (“LEDs”), radio frequency integrated circuits (“RFICs”), blue laser diodes, optoelectronics and other optical applications. The emergence of sapphire in commercial volumes at competitive prices has enabled the development of new technologies such as high brightness (“HB”) white, blue and green LEDs and highly-integrated RFICs. We apply our proprietary crystal growth technology to produce high-quality sapphire products efficiently to supply our end-markets, and we work closely with our customers to meet their quality and delivery needs.

We are a vertically-integrated manufacturer of high-quality sapphire substrates and optical windows that are used in a variety of high-growth, high-volume end-market applications. Our largest product line is two inch to four inch sapphire wafers for use in LEDs and blue laser diodes for solid state lighting and electronic applications. In addition, we sell six inch sapphire wafers that are used for Silicon-on-Sapphire (“SOS”) RFICs, as well as products for military, aerospace, sensor and other applications. We have also extended our technology, which gives us the ability to produce cores and wafers of up to twelve inches in diameter to support next-generation LED and SOS RFIC production. We currently sell six and eight inch wafers to LED chip manufacturers for their research and development efforts toward moving production on to these larger diameter substrates. We have also developed the ability to produce large diameter circular and rectangular sapphire windows for use in various optical window applications.

Our revenue consists of sales of sapphire materials sold in core, as-cut, as-ground and polished forms in two, three, four, six and eight inch diameters as well as optical materials sold as blanks or polished windows. Products are made to varying specifications, such as crystal planar orientations and thicknesses.

Historically, a significant portion of our revenue has been derived from sales to relatively few customers. For the three months ended March 31, 2010, we had three customers that accounted for approximately 25%, 15% and 12% of our revenue and for the three months ended March 31, 2009, we had three customers that accounted for approximately for 34%, 19% and 14% of our revenue. Other than as discussed above, none of our customers accounted for more than 10% of our revenue for such periods. Although we are attempting to diversify and expand our customer base, we expect our revenue to continue to be concentrated among a small number of customers. We expect that our significant customers may change from period to period.

 

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We recognize revenue upon shipment to our customers. We derive a significant portion of our revenue from customers outside of the United States. The majority of our sales are to the Asian market and we expect that region to continue to be a major source of revenue for us. All of our revenue is denominated in US dollars.

Our revenue in the first quarter of 2009 was significantly impacted by the global recession. Much of the sapphire we sell into the marketplace goes into LED lighting for consumer electronics. Consumer spending on these products declined during the recession, which decreased demand for our products. Toward the end of 2009, demand for sapphire began to strengthen as consumers resumed spending on consumer electronics, driven, in part, by the introduction of new products such as LED backlit LCD televisions. With the increased demand, average selling prices for our products in the three months ended March 31, 2010 increased 20% sequentially from the fourth quarter of 2009. We expect demand and average selling prices to continue to improve in 2010, although it is difficult to predict the magnitude and timing of further increases.

We manufacture and ship our products from our facilities in the Chicago metropolitan area. We have approximately 102,600 square feet of manufacturing and office space. We are currently building a 65,000 square foot facility in Penang, Malaysia, which will process sapphire grown by us in our Illinois facilities into finished cores and wafers. We anticipate this facility to open in the fourth quarter of 2010. We also acquired in April 2010 a 134,400 square foot building in Batavia, Illinois to expand our crystal growth operations. We anticipate this facility will begin operations in the fourth quarter of 2010.

Our cost of goods sold consists primarily of manufacturing materials, labor, manufacturing-related overhead such as utilities, depreciation and rent, provisions for excess and obsolete inventory reserves, freight and warranties. We manufacture our products at our Franklin Park, Illinois and Bensenville, Illinois manufacturing facilities based on customer orders. We purchase materials and supplies to support such demand. We are subject to variations in the cost of raw materials and consumables from period to period because we do not have long-term fixed-price agreements with our suppliers.

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

Other income (expense) consists of interest income and expense and realized gains and losses on investments and currency translation. For the three months ended March 31, 2010, interest income was $97,000 partially offset by a realized loss on currency translation of $40,000. For the three months ended March 31, 2009, interest income was $257,000.

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. A full valuation allowance is provided as management cannot conclude that it is more likely than not that our deferred tax assets will be realized. At March 31, 2010, we had approximately $55.6 million in net operating loss carryforwards (“NOLs”). We believe that we are not restricted in our ability to use the full amount of the NOLs, nor is there a limit to the amount of NOLs that may be used in any given year, however, we will update our analysis in 2010 and the results of that analysis may indicate an ownership change. If an ownership change is determined, the utilization of the NOLs may be limited. As of March 31, 2010, no tax benefit has been recognized for these loss carryforwards.

We anticipate our capital expenditures will be between $35 million and $45 million in 2010. These expenditures will be primarily focused on expansion projects in Illinois and Malaysia. Our capital expenditures in the first quarter 2010 were $3.9 million.

 

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RESULTS OF OPERATIONS

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

 

     Three months ended
March 31,
 
   2010    2009  
   (in millions)  

Revenue

   $ 11.5    $ 2.3   

Cost of goods sold

     7.4      4.9   
               

Gross profit (loss)

     4.1      (2.6
               

Operating expenses:

     

General and administrative

     2.1      1.1   

Sales and marketing

     0.3      0.2   

Research and development

     0.2      0.2   
               

Total operating expenses

     2.6      1.5   
               

Income (loss) from operations

     1.5      (4.1

Other income

     0.1      0.2   
               

Income (loss) before income taxes

     1.6      (3.9

Income tax expense

     —        —     
               

Net income (loss)

   $ 1.6    $ (3.9
               

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

 

     Three months ended
March 31,
 
   2010     2009  
   (percentage of total)  

Revenue

   100   100

Cost of goods sold

   64      213   
            

Gross profit (loss)

   36      (113
            

Operating expenses:

    

General and administrative

   18      47   

Sales and marketing

   3      9   

Research and development

   2      9   
            

Total operating expenses

   23      65   
            

Income (loss) from operations

   13      (178

Other income (expense)

   1      9   
            

Income (loss) before income taxes

   14      (169

Income tax expense

   —        —     
            

Net income (loss)

   14   (169 )% 
            

Revenue. Revenue was $11.5 million for the three months ended March 31, 2010 and $2.3 million for the three months ended March 31, 2009, an increase of $9.2 million. We experienced a significant increase in revenue across most product lines and diameters due to increased demand for our products as the market rebounded significantly. Revenue from the sale of core products for the three months ended March 31, 2010 increased by $8.3 million, of which $8.2 million was attributed to volume and $103,000 due to an increase in pricing. This was partially offset by a decrease in as cut sales of $954,000 attributed to focusing production on higher margin core products. We also increased our sales of polished wafers by $1.4 million as demand for these products increased in both the SOS RFIC and LED markets. We also had higher revenue of $358,000 from optical products due to increased sales of sapphire for military, sensor and instrumentation applications. For the remainder of 2010, we expect pricing on all product lines to continue to strengthen as we currently expect the demand for sapphire to remain high.

Gross profit (loss). Gross profit was $4.1 million for the three months ended March 31, 2010 compared to a gross loss of $2.6 million for the three months ended March 31, 2009, an increase of $6.7 million. The increase in gross profit is primarily attributable to higher revenue of $9.2 million and better utilization of equipment and staff, which led to improved operating leverage and higher throughput.

 

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General and administrative expenses. G&A expenses were $2.1 million for the three months ended March 31, 2010 and $1.1 million for the three months ended March 31, 2009, an increase of $970,000. The increase was primarily due to $360,000 from higher bonus costs due to no performance bonus earned in 2009, higher bad debt expense of $176,000 as 2009 included a reduction of our reserve on collection of an over 90 day past due receivable, and $200,000 in increased stock option expense for executives. We also incurred higher corporate taxes of $67,000, increased legal fees of $62,000, increased recruiting costs of $32,000 relating to our Malaysian employees, and $29,000 in higher salary and payroll tax expenses associated with salary increases.

Sales and marketing expenses. Sales and marketing expenses were $257,000 for the three months ended March 31, 2010 and $243,000 for the three months ended March 31, 2009, an increase of $14,000. The increase in sales and marketing expenses is attributable to additional salary and payroll taxes of $25,000 associated with annual salary increases, an increase in travel of $9,000 in support of meeting with potential and existing customers partially offset by a decrease in marketing expenses of $19,000 on timing of trade shows.

Research and development expenses. R&D expenses were $212,000 for the three months ended March 31, 2010 and $152,000 for the three months ended March 31, 2009, an increase of $60,000. The increase was primarily attributable to higher payroll costs of $42,000 due to an increase in headcount and an increase in spending on research projects of $20,000.

Other income (expense). Other income was $73,000 for the three months ended March 31, 2010 and $270,000 for the three months ended March 31, 2009, a decrease in net other income of $197,000. The decrease was due to lower interest income of $159,000 as a result of lower investment principal and lower interest rates and realized loss on currency translation of $40,000.

LIQUIDITY AND CAPITAL RESOURCES

We historically funded our operations using a combination of issuances of common stock and preferred stock, a working capital line of credit and term loans, and cash generated from our operations.

As of March 31, 2010, we had cash and short term investments totaling $41.5 million, including cash of $1.5 million held in deposits at major banks, $11.0 million invested in money market funds and $29.0 million invested in short term certificates of deposit, state and local bonds, auction-rate securities and put options, and U.S. treasury securities. Our long term investment consists of a $2.0 million investment in Peregrine Semiconductor, Corp. (one of our customers) Series D1 preferred stock. In February 2008, we began experiencing failed auctions of our entire auction-rate securities portfolio, resulting in our inability to sell these securities in the short term. All of the auction-rate securities are AAA rated by one or more of the major credit rating agencies and have contractual maturities from 2036 to 2045. Further, all of these securities are collateralized by student loans, and approximately 99% of the collateral qualifies under the Federal Family Education Loan Program and is guaranteed by the US government. We are receiving the underlying cash flows on all of our auction-rate securities. We are unable to predict if these funds will become available before their maturity dates. We also hold put options associated with an agreement with UBS, AG related to the auction-rate securities purchased through them. It is our intent to exercise these put options at the first available date. Therefore, the auction-rate securities and the related put options have been classified as short-term investments as of March 31, 2010.

In October 2008, we entered into an agreement with UBS, AG, which provides us with certain rights to sell to UBS, AG all of our auction-rate securities that were purchased through them. We have the option to sell these securities to UBS, AG at par value from June 30, 2010 through July 2, 2012. UBS, AG, at its discretion, may purchase or sell these securities on our behalf at any time provided we receive par value for the securities sold. The issuers of the auction-rate securities continue to have the right to redeem the securities at their discretion. The agreement also permits us to establish a demand revolving credit line in an amount equal to the par value of the securities at a net no cost. If our debt is determined to be rated below investment grade or is not rated, the amount that can be borrowed is limited to 75% of the market value of the auction-rate securities. As of March 31, 2010, we had no loans outstanding under this agreement.

Our right to sell the auction-rate securities to UBS, AG commencing on June 30, 2010 represents put options for a payment equal to the par value of the auction-rate securities. We value the put options at their estimated fair value using a discounted cash flow model. During the three months ended March 31, 2010 and 2009, we recorded a realized loss of $55,279 and $505,463, respectively, representing the changes in fair value of the put options. We also recorded during the three months ended March 31 2010 and 2009, a gain of $70,803 and $518,934 respectively, representing the changes in fair value of the auction-rate securities. Both the gain and loss from recording the change in fair value of the put options and auction-rate securities were recorded in gain (loss) on investments in the Consolidated Statements of Operations. We do not expect to need access to the auction-rate securities capital prior to the maturity of the auction-rate security put options.

 

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Cash flows from operating activities

The following table represents the major components of our cash flows from operating activities for the three months ended March 31, 2010 and 2009:

 

     Three months ended
March 31,
 
   2010     2009  
   (in thousands)  

Net income (loss)

   $ 1,575      $ (3,868

Non-cash items:

    

Depreciation and amortization

     1,398        1,296   

Stock based compensation and other, net

     450        213   
                

Total non-cash items:

     1,848        1,509   
                

Working capital:

    

Accounts receivable

     (2,344     996   

Accounts payable

     (371     (1,234

Other accruals

     622        (556

Inventories

     (38     (212

Prepaid expenses and other current assets

     (568     982   
                

Total working capital items:

     (2,699     (24
                

Net cash provided by (used in) operating activities

   $ 724      $ (2,383
                

Cash provided by operating activities was $724,000 for the three months ended March 31, 2010. During such period, we generated net income of $1.6 million and we incurred non-cash expenses of $1.8 million, including depreciation and amortization expense of $1.4 million and stock-based compensation expense of $465,000. During such period, cash from net working capital decreased $2.7 million, which was comprised of an increase in accounts receivable of $2.3 million due to higher sales volumes, a decrease in accounts payable of $371,000 due to timing of payments, an increase in other accruals of $622,000 consisting primarily of an increase in accrued payroll of $513,000 from increased headcount and bonus accrual, and an increase in prepaid expenses of $568,000 due to timing of furnace replacement parts.

Cash used in operating activities was $2.4 million for the three months ended March 31, 2009. During such period, we generated a net loss of $3.9 million and we incurred non-cash expenses of $1.5 million, including depreciation and amortization expense of $1.3 million and stock-based compensation expense of $226,000. We experienced a decrease during such period in accounts receivable of $996,000 as sales declined, a decrease in accounts payable of $1.2 million as purchases declined and a decrease in spare parts of $678,000 primarily due to not replenishing stock used due to lower production volumes. We also experienced a decrease in accrued payroll of $301,000 due to pay outs of bonuses earned in the first half of 2008 and a decrease in corporate income and franchise taxes of $183,000 due to payment of 2008 taxes due.

Cash flows from investing activities

Net cash provided by investing activities was $7.9 million and $2.8 million for the three months ended March 31, 2010 and 2009, respectively. During the three months ended March 31, 2010, we used approximately $1.8 million to add crystal growth furnaces, $345,000 toward the purchase of an additional facility, and $302,000 to upgrade our current facilities and add to existing capacity in other areas. We also used approximately $1.4 million in the construction of our facility in Malaysia. This was partially offset by sales of investments of $11.8 million which were used to fund operations and capital spending. During the three months ended March 31, 2009, we used approximately $456,000 to add crystal growth furnaces and approximately $57,000 to upgrade existing capacity in other areas. This was partially offset by sales of investments of $3.4 million which were used to fund operations, capital spending and our stock repurchases. We are planning on expanding our crystal growth facilities in Illinois and are building a facility in Malaysia that will support post crystal growth manufacturing. It is difficult to predict the timing of capital expenditures on these projects, but we anticipate the total cost of these projects to be between $60 million and $65 million to be spent over a two year period, and expect our 2010 capital expenditures to be between $35 million and $45 million.

Cash flows from financing activities

Net cash provided by (used in) financing activities was $34,000 and ($2.6) million for the three months ended March 31, 2010 and 2009, respectively. Net cash provided by financing activities for the three months ended March 31, 2010 reflects proceeds from the exercise of stock options of $151,000 partially offset by deferred offering costs of $118,000. Net cash used in financing activities for the three months ended March 31, 2009 reflects stock repurchases of $2.6 million.

 

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Future liquidity requirements

We are increasing our production capacity by adding an additional crystal growth facility in Batavia, Illinois and building a post crystal growth operation facility in Malaysia on the parcel of land we purchased in October 2009. We began these expansion projects in the fourth quarter of 2009 and anticipate these new facilities opening in the fourth quarter of 2010. While some new capacity will be available at the time we open these facilities, we anticipate that it will take twelve months from the opening of these facilities to install all necessary equipment and have these facilities fully functional. We believe that our existing cash, cash equivalents, investments, and anticipated cash flows from operating activities will be sufficient to continue our expansion projects for the next twelve months. However, we may seek to secure debt or additional equity financing over the next year to provide additional liquidity. Our cash needs include cash required to fund our operations, taking into account the capital needed to fund our planned expansions in the US and Asia. 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. If we obtain debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. If we are unable to obtain financing on terms favorable to us, we may be unable to successfully execute our business plan.

Contractual obligations

The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments at March 31, 2010. Changes in our business needs, as well as actions by third parties and other factors, may cause these estimates to change. Because these estimates are complex and necessarily subjective, our actual payments in future periods are likely to vary from those presented in the table. The following table sets forth information relating to our contractual obligations at March 31, 2010:

 

     Payments due in
   Total    Less than 1
year
   1-3
years
   3-5
years
   More than 5
years
   (in millions)

Purchase order obligations

   $ 1,724,000    $ 1,724,000      —        —        —  

Building purchase and construction obligations

   $ 11,169,000    $ 11,169,000      —        —        —  
                                  

Total contractual obligations

   $ 12,893,000    $ 12,893,000    $ —      $ —      $ —  
                                  

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Revenue recognition

We recognize revenue from sales of products when:

 

 

Persuasive evidence of an arrangement exists. We require evidence of a purchase order with the customer specifying the terms and specifications of the product to be delivered, typically in the form of a signed quotation or purchase order from the customer.

 

 

Title has passed and the product has been delivered. Title passage and product delivery generally occurs when the product is delivered to a common carrier.

 

 

The price is fixed or determinable. All terms are fixed in the signed quotation or purchase order received from the customer. The purchase orders do not contain rights of cancellation, return, exchanges or refunds.

 

 

Collection of the resulting receivable is reasonably assured. Our standard arrangement with customers includes 30 day payment terms. Customers are subject to a credit review process that evaluates each customer’s financial position and its ability to pay. We determine collectability by considering the length of time the customer has been in business and our history of collections with that customer. If we determine that collection is not probable, no product is shipped and no revenue is recognized unless cash is received in advance.

Contract research revenue is recognized as services are performed. We execute agreements with our customers that clearly describe the scope of the project, the services we will provide, ownership of any tangible or intangible assets generated as part of the project, and the amount of consideration we will receive.

 

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There are no significant judgments or estimates associated with our revenue recognition policies or processes. All of our revenue is denominated in US dollars.

Inventory valuation

We value our inventory at the lower of cost or market. Market is determined based on net realizable value. Cost is determined for raw materials on a first-in, first-out basis and work in process and finished goods are based on actual costs. 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. Recoveries of previously written-down inventory are recognized only when the related inventory is sold and revenue has been recognized. Inventory reserves decreased in the three months ended March 31, 2010 by $966,000 primarily on disposal of obsolete inventory, resetting of standard costs on certain inventory items to net realizable value and ability to sell previously determined excess quantities. Based on improved demand and pricing of our products, we believe that it is unlikely that significant adjustments for inventory obsolescence will occur in 2010. Our method of estimating excess and obsolete inventory has remained consistent for all periods presented. However, if our recognition of excess or obsolete inventory is, or if our estimates of our inventory’s potential utility become, less favorable than currently expected, additional inventory reserves may be required. We determine our normal operating capacity and record as expense costs attributable to lower utilization of equipment and staff. For the three months ended March 31, 2010 and 2009, we determined we were not operating at capacity and recorded as expense costs associated with lower utilization of equipment and staff of $284,000 and $2.9 million, respectively. With the improved demand, we believe that it is unlikely that additional significant adjustments for lower utilization of equipment and staff will occur in 2010.

Investments

We invest available cash primarily in investment grade commercial paper, corporate notes, government securities and auction rate securities. Investments classified as available-for-sale securities are carried at fair market value with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Investments in trading securities are reported at fair value, with both realized and unrealized gains and losses recorded in other income (expense), net in the Consolidated Statement of Operations. Investments in which we have the ability and intent, if necessary, to liquidate in order to support our current operations are classified as short-term. Our long-term investments at March 31, 2010, consist of a $2.0 million investment in Peregrine Semiconductor, Corp. (a customer) Series D-1 Preferred shares.

We review our available-for-sale securities investments at the end of each quarter for other-than-temporary declines in fair value based on the specific identification method. We consider various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, changes in underlying credit ratings, forecasted recovery, our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. When we conclude that an other-than-temporary impairment has resulted, the difference between the fair value and carrying value is written off and recorded as a charge on the Consolidated Statement of Operations. As of March 31, 2010, no impairment was recorded.

In October 2008, we entered into an agreement that provides us with the right, but not the obligation, to sell all our auction-rate securities to UBS, AG for par value during the period from June 30, 2010 to July 2, 2012 (the “ARS Put Options”). The ARS Put Options provide us with the opportunity to recover the estimated unrealized loss on our ARS investments. We recorded the fair value of the ARS Put Options upon receipt. It is our intent to exercise these put options at the first available date, therefore, the auction-rate securities and the related put options have been classified as short-term investments as of March 31, 2010. We value the put options at their estimated fair value using a discounted cash flow model. Unrealized gains and losses related to the ARS Put Options are recognized in earnings. We value the auction-rate securities and ARS Put Options using a discounted cash flow model that weights various factors including interest rates and expected holding period. At March 31, 2010, the fair value recorded on the balance sheet of auction-rate securities and ARS Put Options was $8.6 million and $1.1 million, respectively.

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

 

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Stock-based compensation

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

The expected term represents the weighted-average period that our stock options are expected to be outstanding and is based upon the vesting term of our options, a review of a peer group of companies, and expected exercise behavior. Until November 2007, we were operating as a private company, and, as a result, we were unable to use our actual price volatility data. Therefore, we estimate the volatility of our common stock based on volatility of similar entities over the expected term of our stock options. We base the risk-free interest rate that we use in the option pricing model on US 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 27.54% was based on our past history of forfeitures.

We allocate stock based compensation costs using a straight-line method which amortizes the fair value of each option on a straight-line basis over the service period.

Based on the variables affecting the valuation of our common stock and the method used for allocating compensation costs, we recognized $465,000 in stock compensation expense during the three months ended March 31, 2010.

Valuation methodologies employed

All option grants made during the three months ended March 31, 2010 and 2009 were granted at an exercise price per share equal to the closing market price of our common stock on 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.

The aggregate intrinsic value of all stock options outstanding at March 31, 2010, based on the fair market value of the common stock at March 31, 2010, was $22.9 million.

RECENT ACCOUNTING PRONOUNCEMENTS

On January 21, 2010 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, amending Accounting Standards Codification (ASC) 820 (formerly Statement of Financial Accounting Standards No. 157). New disclosures related to transfers in and out of Level 1 and Level 2 measurements and separate disclosures about purchases, shares, issuances, and settlements relating to Level 3 measurements are required. ASU 2010-06 clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the Level 3 measurements disclosures about purchases, shares, issuances, and settlements which is effective for fiscal years beginning after December 15, 2010. The adoption of ASU 2010-06 did not have a material impact on our financial condition or results of operations.

On February 24, 2010 the FASB issued ASU 2010-09, which amends ASC 855 to address certain implementation issues related to an entity’s requirement to perform and disclose subsequent events procedures. ASU 2010-09 requires entities to evaluate subsequent events through the date the financial statements are issued. ASU 210-09 is effective immediately for financial statements that are issued or available to be issued. The adoption of ASU 2010-09 did not have a material impact on our financial condition or results of operations. See Note 10 for disclosures associated with adoption of this standard.

OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2010, there have been no material changes in the off-balance sheet arrangements disclosed in the Management’s Discussion and Analysis section of our Annual Report on Form 10-K for the year ended December 31, 2009.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

For the first three months ended March 31, 2010, except as noted below, there were no material changes in the information regarding market risk contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Foreign currency exchange risk. To date, substantially all of our international sales have been transacted in US dollars. With our expansion in Malaysia, we may have exposure to foreign currency exchange rates. We currently do not enter into foreign currency hedging transactions.

 

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ITEM 4. CONTROLS AND PROCEDURES

Management’s evaluation of disclosure controls and procedures

Based on evaluations at March 31, 2010, our chief executive officer and chief financial officer, with the participation of the management team, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that material information relating to the Company is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in internal control over financial reporting

Our management, including our certifying officers, believes that a controls system, no matter how well designed and operated, is based in part upon certain assumptions about the likelihood of future events, and therefore can only provide reasonable, not absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Our certifying officers have concluded that there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the three months ended March 31, 2010, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

 

ITEM 1. LEGAL PROCEEDINGS

From time to time we may be named in claims arising in the ordinary course of business. Currently, there are no legal proceedings or claims pending against us or involving us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business or financial condition.

 

ITEM 1A. RISK FACTORS

Our business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond our control. We have identified a number of these risk factors in our Annual Report on Form 10-K for the year ended December 31, 2009, which factors should be taken into consideration when reviewing the information contained in this report. There have been no material changes with regard to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities

None.

Use of Proceeds

Our Registration Statement on Form S-1 (333-145880) covering the initial public offering of our shares of common stock was declared effective by the SEC on November 15, 2007.

The net offering proceeds to us after deducting expenses totaled approximately $81.0 million. As of March 31, 2010, we had used approximately $7.6 million of the net proceeds to repay borrowings outstanding under the revolving line of credit financing agreement with Hercules Technology Growth Capital, Inc. and to pay related fees and expenses. We also have used $5.7 million to repurchase shares of our common stock, $2.0 million to purchase Series D-1 preferred shares of Peregrine Semiconductor Corp. (one of our customers) and $28.1 million on capital expenditures and $1.8 million for working capital and general corporate purposes. We intend to use the remaining $35.8 million of the net proceeds for our production capacity expansion project, working capital and other general corporate purposes.

Issuer Purchases of Equity Securities

In November 2008, we announced a repurchase plan approved by our Board of Directors authorizing the purchase of up to $15.0 million of our outstanding common stock over a period of two years. The stock repurchase program authorizes us to purchase shares of our common stock in the open market at times and prices considered appropriate by us depending upon prevailing market conditions and other corporate considerations. There was no stock repurchased for the three months ended March 31, 2010.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. RESERVED

 

ITEM 5. OTHER INFORMATION

None.

 

ITEM 6. EXHIBITS

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

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 5, 2010.

 

Rubicon Technology, Inc.
By   /s/ Raja M. Parvez
  Raja M. Parvez
  Chief Executive Officer and President
By   /s/ William F. Weissman
  William F. Weissman
  Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

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EXHIBIT INDEX

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

 

Exhibit No.

  

Description

  

Incorporation by Reference

3.1    Eighth Amended and Restated Certificate of Incorporation of Rubicon Technology, Inc.    Filed as Exhibit 3.1 to Amendment No. 2, filed on November 1, 2007, to the registrant’s Registration Statement on Form S-1 (File No. 333-145880)
3.2    Amended and Restated Bylaws of Rubicon Technology, Inc.    Filed as Exhibit 3.2 to Amendment No. 2, filed on November 1, 2007, to the registrant’s Registration Statement on Form S-1 (File No. 333-145880)
10.1      Agreement for Purchase and Sale of Real Estate, dated February 16, 2010, by and between Rubicon Technology, Inc. and Douglas Business Center, LLC.   
31.1      Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   
31.2      Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   
32.1      Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   

 

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