Rubicon Technology Inc (RBCN:NAQ)

Recent Share Price: $6.95
Accounting: U.S. GAAP
Fiscal Year: Dec. 31
Market Cap: $19.2 million
Filings:

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Rubicon Technology, Inc. is 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 apply 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 IR 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.

In 2016, they made an aggressive strategic move to cut their business by 80%.

Rubicon provided sapphire products to the LED and mobile device markets, which are the largest markets for sapphire. But due to significant investment in sapphire production in China, which has resulted in oversupply and low pricing, the business became a loss-maker. RBCN tried to stay in the LED substrate market by limiting their product offering to six-inch diameter wafers, but that didn’t work either.  As a result, in 2016, RBCN announced they would limit their focus to the optical and industrial sapphire markets, which they believe to be the higher-end markets with better growth prospects and exited the LED and mobile device markets.

With the decision to exit the LED market, Rubicon closed their plant in Penang, Malaysia and are attempting to sell the real estate and equipment located there. Rubicon stopped production activities in November 2016 and ceased all operations in Penang, Malaysia in December 2016. Their wafer patterning equipment in Penang, Malaysia was sold in the fourth quarter of 2016 for $4.5 million, and they have structured and begun an auction process to attempt to sell the polishing and fabrication equipment. Additionally, their Malaysia real estate is currently on the market.

With their decision to focus on smaller optical and industrial sapphire markets, Rubicon has excess crystal growth and fabrication capacity in the U.S. They are in the process of consolidating operations into their leased spaces in Bensenville, Illinois and Franklin Park, Illinois and vacating their largest owned facility in Batavia, Illinois. The relocation is now near completion and they are planning a second auction for the excess equipment in the Batavia plant in the next 60 days.

The plant itself is a special purpose facility with extensive enhancements to power and water-cooling systems required for crystal growth production. We are also actively selling this property and our initial focus is to seek a buyer that is interested in both the building and improved infrastructure.   [2017 10-K]

With the shutdown of their Malaysia operations and downsizing of their U.S. operations, Rubicon has reduced their overall company headcount from 220 at September 30, 2016, to 40 at February 28, 2017. The company states that they have been careful to maintain the employee knowledge base in their strategic markets built over the past 15 years.

With the cessation of their LED-related production activities at their Malaysia facility, in future periods they expect their LED revenue will cease. They anticipate that their sales will be almost exclusively from optical and industrial sapphire components. The following table summarizes optical revenue for each of the last three years:

Optical revenue
(in thousands)
% of total
revenue
2016 $ 4,568 23 %
2015 $ 5,086 21 %
2014 $ 7,057 15 %

Rubicon is actively evaluating the acquisition of profitable companies both in and outside of the sapphire market in order to accelerate growth and to utilize their substantial net tax loss carry-forwards.

Because acquisitions are being given greater consideration, in February 2017, we commenced a search for a new Chief Executive Officer  with more extensive experience in mergers and acquisitions. On March 16, 2017, we announced the appointment of Timothy E. Brog as our new President and CEO, effective as of March 17, 2017. Mr. Brog has served on our Board of Directors since May 2016 and will continue to serve as a director of the Company.

At December 31, 2017, Rubicon had separate Federal and Illinois NOLs of $177.9 million and $212.0 million, respectively, which begin to expire in 2021 and 2019, respectively.

 

Recent History

On December 28, severed the relationship with Grant Thorton and hired Marcum — probably to reduce their accounting fees.

On December 18, Rubicon announced the implementation of a Section 382 Rights Agreement (poison pill) to protect their NOLs.

On November 24, Michael Zapata of Sententia Capital Management filed a 13D indicating 143,120 shares purchased for $1,175,516 ($8.21 sh).  On November 27, Sententia sent a letter to the company requesting board representation.  They recently purchased 62,482 shares:

TRANSACTIONS IN THE COMMON SHARES EFFECTED BY THE REPORTING PERSON IN THE LAST 60 DAYS

Reporting Person

Date

Shares Purchased

Price Per Share

Sententia Group, LP

10/25/2017

1260

$7.89

Sententia Group, LP

10/27/2017

8600

$7.70

Sententia CI-I, LP

10/27/2017

5800

$7.70

Sententia CI-I, LP

11/22/2017

1400

$8.32

Sententia CI-I, LP

11/24/2017

43247

$8.50

Sententia CI-I, LP

11/27/2017

2175

$8.46

On November 20, Don Aquilano resigned as a member of board.

On November 16, Jeff Gramm of Bandera Partners bought 221,784 shares from Cross Atlantic Technology Fund II, L.P for $1,774,272 ($8.00 sh) and filed a 13D.  Jeff was immediately elected to the board as a Class III director with a term to 2019.  [Jeff Gramm and Tim Brog have a history of working together.]

On May 5, completed a 1-for-10 reverse stock split of its common stock.

On March 17, Weissman stepped down and Timothy E. Brog was hired as the new CEO. Mr. Brog has served on the Board since May 2016 and will continue to serve as a director. He will receive a base salary of $306,000, $150,000 annual bonus package, plus 900,000 [90,000 post reverse split] restricted stock units which vest before March 15, 2021 at 15,000 shares at prices at or above $6.50, $8.00, $9.50, $11.00, $12.50, and $14.00, respectively.

Don Aquilano, Chairman of the Board of Directors, said, “The Board looks forward to working with Timothy on his ideas relating to the core sapphire business, the sale of real estate and excess assets and our previously stated desire to explore various alternatives to enhance stockholder value, including potentially through acquiring an existing business, establishing a new venture, or other investment opportunities in order to utilize our substantial net operating losses. He is an accomplished executive, with extensive investment, legal, management and financial experience. We welcome his insights as we pursue the appropriate path forward to drive long-term stockholder value. I also want to thank Bill for his tireless effort on behalf of Rubicon during a very challenging period where global excess capacity of sapphire drove prices to record low levels, particularly in two high volume markets, LED and mobile devices.”

On February 21, 2017, the company sent a letter to shareholders reaffirming their objective to significantly downsize operations and to limit their focus to the smaller but growing optical and industrial segments of the sapphire market, where there are good margin opportunities, and to quickly exit the mainstream LED and mobile device segments of the sapphire market where pricing has gone through the floor. They stopped production in November and ceased all operations in December 2016 at their off-shore facility in Malaysia.  They reduced headcount from 226 to 40 and are packing production facilities in the U.S. for sale.
On February 14, the Board determined to reduce the size of the Board to five members to be effective as of May 3, 2017.
In addition, because acquisitions are being given greater consideration by the Board, the Board has decided to commence a search for a new Chief Executive Officer (“CEO”) with more extensive experience in mergers and acquisitions. William F. Weissman, the current CEO, is expected to stay with the Company until a new CEO is hired. As of February 14, 2017, Mr. Weissman has agreed to step down from the Board if a new CEO joins the Company in order for the new CEO to assume Mr. Weissman’s position on the Board.
Stock Ownership
Holder Shares % Held
Bandera Partners LLC  258.26k 9.5%
Ariel Investments LLC  182.83k 6.7%
Aldebaran Capital LLC  160.37k 5.9%
Sententia Cap Mgmt LLC 143.12k 5.2%
Timothy Brog (CEO) 37k 1.4%
Michael E. Mikolajczyk (Chairman) 38.222k 1.4%

Valuation

Assets (in thousands) 12/31/17  Est. Liquidating Value 
Cash and cash equivalents  $11,544  $11,544
Restricted cash  $181  $181
Short-term investments  $6,451  $6,451
Accounts receivable, net  $718 75%  $539
Inventories  $3,030 50%  $1,515
Other inventory supplies  $837 50%  $419
Prepaid expenses and other current assets  $270
Assets held for sale  $11,202 50%  $5,601
Total current assets  $34,233  $26,249
Total Liabilities  $1,715  $1,715
 $32,518    $24,534
Shares Outstanding 2,703
(per share)  $12.03  $9.08
Discount 58%   77%

Disclosure: We own shares in Rubicon Technology Inc (RBCN:NAQ).

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