UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☑
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the fiscal year ended December 31, 2017
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: 001-38273
ACM Research, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of Incorporation or
Organization)
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94-3290283
(I.R.S. Employee Identification
No.)
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42307 Osgood Road, Suite I, Fremont, California
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94539
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrant’s
telephone number, including area code:
(510) 445-3700
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Class A
Common Stock, $0.0001 par value per share
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Nasdaq
Global Market
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Securities
registered pursuant to Section 12(g) of the Act:
None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes ☐ No
☑
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
☐
No
☑
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☑ No
☐
Indicate
by check mark whether the registrant has submitted electronically
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 if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer ☐
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Accelerated
filer ☐
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Non-accelerated
file
(Do not check if a smaller
reporting company)
☐
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Smaller
reporting company ☑
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Emerging
growth company ☑
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
☑
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
No ☑
The registrant was not a public company as of the last business day
of its most recently completed second fiscal quarter and therefore
cannot calculate the aggregate market value of its voting and
non-voting common equity held by non-affiliates as of such
date.
As of
March 19, 2018, there were 12,992,768 shares of Class A Common
Stock and 2,409,738 shares of Class B Common Stock
outstanding.
Documents Incorporated By Reference
The
registrant intends to file a proxy statement pursuant to Regulation
14A within 120 days of the end of the fiscal year ended December
31, 2017. Portions of such proxy statement are incorporated by
reference into Part III of this Annual Report on Form
10-K.
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We
conduct our business operations principally through ACM Research
(Shanghai), Inc., or ACM Shanghai, a subsidiary of ACM Research,
Inc., or ACM Research. Unless the context requires otherwise,
references in this report to “our company,”
“our,” “us,” “we” and similar
terms refer to ACM Research, Inc. (including its predecessor prior
to its redomestication from California to Delaware in November
2016) and its subsidiaries, including ACM Shanghai,
collectively.
SAPS,
TEBO and ULTRA C are our trademarks. This report also contains
other companies’ trademarks, registered marks and trade
names, which are the property of those companies.
FORWARD-LOOKING STATEMENTS AND STATISTICAL DATA
Special Note Regarding Forward-Looking Statements
This
Annual Report on Form 10-K, or this report, contains
forward-looking statements that involve risks and uncertainties.
All statements, other than statements of historical facts, included
in this report regarding our strategy, future operations, future
financial position, future revenue, projected costs, prospects,
plans and objectives of management are forward-looking statements.
In some cases, forward-looking statements can be identified by
terms such as “may,” “might,”
“will,” “objective,” “intend,”
“should,” “could,” “can,”
“would,” “expect,” “believe,”
“anticipate,” “project,”
“target,” “design,” “estimate,”
“predict,” “potential,” “plan”
or the negative of these terms, and similar expressions intended to
identify forward-looking statements.
These
statements reflect our current views with respect to future events
and are based on our management’s belief and assumptions and
on information currently available to our management. Although we
believe that the expectations reflected in these forward-looking
statements are reasonable, these statements relate to future events
or our future operational or financial performance, and involve
known and unknown risks, uncertainties and other factors that may
cause our actual results, performance or achievements to be
materially different from any future results, performance or
achievements expressed or implied by these forward-looking
statements. Some of the key factors that could cause actual results
to differ from our expectations include:
●
our expectations
regarding our expenses and revenue, our ability to maintain and
expand gross profit;
●
the rate and degree
of market acceptance of any of our products, particularly in the
People’s Republic of China, or the PRC;
●
the size and growth
of the potential markets for our products and our ability to serve
those markets;
●
the progress and
costs of developing and commercializing new products;
●
our expectations
regarding competition;
●
the anticipated
trends and challenges in our business and the market in which we
operate;
●
our anticipated
growth strategies;
●
our ability to
attract or retain key personnel;
●
our expectations
regarding, and the stability of our, supply chain and
manufacturing;
●
our expectations
regarding federal, state and foreign regulatory requirements,
including export controls, tax law changes and interpretations,
economic sanctions and anti-corruption regulations;
●
regulatory
developments in the United States and foreign
countries;
●
our ability to
obtain and maintain intellectual property protection for our
products; and
●
our use of proceeds
from this offering and the concurrent private
placement.
Any
forward-looking statements made by us in this report speak only as
of the date of our filing of this report with the Securities and
Exchange Commission, or the SEC, and are subject to a number of
risks, uncertainties and assumptions described in “Item 1A.
Risk Factors” and elsewhere in this report. Except as
required by law, we assume no obligation to update these statements
publicly, or to update the reasons actual results could differ
materially from those anticipated in these statements, even if new
information becomes available in the future.
This
report, and the documents that we reference in this report and have
filed as exhibits to this report, should be read completely and
with the understanding that our actual future results may be
materially different from what we expect. We qualify all of our
forward-looking statements by these cautionary
statements.
Industry and Market Data
This
report contains statistical data and estimates, including
forecasts, that are based on independent industry and government
organization publications or other publicly available information,
as well as other information based on our internal sources. While
we are not aware of any misstatements regarding any third-party
data presented in this prospectus, estimates, and in particular
forecasts, involve numerous assumptions and are subject to risks
and uncertainties as well as change based on various factors,
including those discussed under “Item 1A. Risk Factors”
and elsewhere in this report. These and other factors could cause
results to differ materially from those expressed in the estimates
included in this report.
The
following list identifies the sources of certain of the third-party
forecasts and other estimates included in this report, together
with the section or subsection of this report in which that
estimate appears. As of the date of our filing of this report with
the SEC, each of the following sources was publicly available
without charge:
●
PricewaterhouseCoopers,
China’s impact on the
semiconductor industry: 2017 update
, September and November
2017 (“Business—Industry Background—Growing
Influence of the PRC Across the Semiconductor
Industry”);
●
IC Insights, Inc.,
Semiconductor Unit Shipments
Forecast to Exceed 1 Trillion Devices in 2018
,
January 25, 2018 (“Business—Industry
Background”);
●
Semiconductor
Industry Association and Nathan Associates,
Beyond Borders: The Global Semiconductor Value
Chain: How an Interconnected Industry Promotes Innovation and
Growth
, May 2016 (“Business—Industry
Background—Escalating Need for Advanced Chip Manufacturing
Equipment”);
●
Semiconductor
Equipment and Materials International,
World Fab Forward Report,
December 4,
2017 (“Business—Industry Background—Escalating
Need for Advanced Chip Manufacturing
Equipment”);
●
International Trade
Administration of the United States Department of Commerce,
2016 Top Markets Report
Semiconductors and Semiconductor Manufacturing Equipment Country
Case Study
, July 1, 2016
(“Business—Industry Background—Growing Influence
of the PRC Across the Semiconductor Industry”);
and
●
Semiconductor
Equipment and Materials International,
World Fab Forecast Report
, November
2016 (“Business—Our Solutions—China-based
operations”).
P
ART I
I
tem 1.
Business
Overview
We
develop, manufacture and sell single-wafer wet cleaning equipment,
which semiconductor manufacturers can use in numerous manufacturing
steps to remove particles, contaminants and other random defects,
and thereby improve product yield, in fabricating advanced
integrated circuits, or chips. Our Ultra C equipment is designed to
remove random defects from a wafer surface effectively, without
damaging a wafer or its features, even at an increasingly advanced
process node (the minimum line width on a chip) of 22 nanometers,
or nm, or less. Our equipment is based on our innovative,
proprietary Space Alternated Phase Shift, or SAPS, and Timely
Energized Bubble Oscillation, or TEBO, technologies. We developed
our proprietary technologies to enable manufacturers to produce
chips that reach their ultimate physical limitations while
maintaining product yield, which is the percentage of chips on a
wafer that meet manufacturing specifications.
Since
2007 we have focused our development efforts on developing
single-wafer wet cleaning equipment based on differentiated
proprietary technology:
●
Our SAPS
technology, which we introduced in 2009, employs alternating phases
of megasonic waves to deliver megasonic energy to flat and
patterned wafer surfaces in a highly uniform manner on a
microscopic level. We have shown SAPS technology to be more
effective than conventional megasonic and jet spray technologies in
removing random defects across an entire wafer as node sizes shrink
from 300nm to 45nm, including node sizes, for which jet spray
technology has proven to be ineffective.
●
Our TEBO
technology, which we introduced in March 2016, has been developed
to provide effective, damage-free cleaning for both conventional
two-dimensional, or 2D, and three-dimensional, or 3D, patterned
wafers at advanced process nodes. We have demonstrated the
damage-free cleaning capabilities of TEBO technology on 3D
patterned wafers for feature nodes as small as 16nm.
As of
March 19, 2018, we had been issued more than 140 patents in the
United States, the People’s Republic of China or the PRC,
Japan, Korea, Singapore and Taiwan.
We seek
to market our single-wafer wet processing equipment by first
establishing a referenceable base of leading logic and memory chip
makers, whose use of our products can influence decisions by other
manufacturers. Our SAPS technology employs alternating phases of
megasonic waves to deliver megasonic energy to flat and patterned
wafer surfaces in a highly uniform manner on a microscopic level.
We believe this process is helping us penetrate the mature
integrated circuit manufacturing markets and build credibility with
industry leaders. Since beginning to place evaluation SAPS
equipment with a small number of selected customers in 2009, we
have worked on equipment improvements and qualification with those
customers, who include a leading Korean memory chip company and
four leading PRC memory and logic chip foundries. Using a similar
“demo-to-sales” process, we have placed TEBO evaluation
equipment with a leading PRC foundry and a leading Taiwanese
foundry and we recognized revenue from our initial sale of TEBO
equipment in 2016. Our revenue from the selected customers’
purchases of single-wafer wet cleaning equipment totaled $19.3
million, or 53.2% of our revenue, in 2017 and $21.5 million,
or 78.4% of our total revenue, in 2016.
In 2006
we established our operational center in Shanghai, and we currently
conduct substantially all of our development and manufacturing
activities in the PRC. Our Shanghai operations position us near
potential customers in not only the PRC but also Taiwan, Korea and
throughout Asia, giving us increased access to those customers and
reducing shipping and manufacturing costs for equipment they
purchase. We continue to perform strategic planning and marketing
activities in our corporate headquarters in Fremont, California,
and we intend to increase the personnel and functions at our
Fremont headquarters as part of our plan to expand our market
presence in North America and Europe.
Industry Background
Semiconductors are
the foundation of the exponential growth of digital technologies
and applications. For more than thirty years, strong demand for
personal computers, tablet computers, mobile phones and other
digital products has fueled the growth of the semiconductor
industry. Today the migration of computing, networking and storage
to the cloud and the proliferation of “smart”
appliances, buildings, cars and devices—the “Internet
of Things”—are driving semiconductor development and
manufacturing. IC Insights, Inc. (January 2018) estimates that
worldwide semiconductor shipments grew from 103.7 billion
units in 1987 to 986.2 billion units in 2017 and will increase
at a rate of 9.0% to reach 1.1 trillion units in
2018.
Continuing Demand for Faster, Better, Cheaper Chips
New and
enhanced digital applications and products have relied on the
development and deployment of progressively faster and more
powerful—but ever smaller and less
costly—semiconductors known as integrated circuits, or chips.
A chip is an array of transistors and other circuit elements built
on a wafer of substrate material, typically silicon, with wiring
and other interconnects that connect the circuit elements to each
other and to outside devices. Chips store and manipulate data in
binary form, with the two largest categories of integrated circuits
being memory chips, for data storage and retrieval, and logic
chips, for computer processing and control.
For a
half century the number of transistors that can fit in a given area
has roughly doubled every two years, a rate of improvement referred
to as “Moore’s Law.” Chip feature sizes have been
repeatedly scaled down to pack more transistors in smaller chips.
The minimum line width on a chip, known as the node, shrank from
30,000nm in 1963 to 1,000nm in 1989, 90nm in 2003 and 14nm in 2014.
A chip today may contain more than thirty billion transistors, with
features finer than one ten-thousandth of the diameter of a human
hair.
In
recent years, however, the rate of chip improvement delivered
solely by shrinking feature sizes has slowed. At the 22nm node,
transistor and interconnect parameters for conventional chips, in
which features are arrayed in 2D structures, begin to approach
their critical performance limitations. For example,
photolithography, a key chip manufacturing process that projects
193nm laser light through masks to print patterns on a wafer
surface, may be unable to create patterning with sufficient
resolution and selectivity. Moreover, the feature density and power
levels of a 22nm chip may require additional circuit elements, such
as special circuitry to correct errors or to track and adapt to
performance variations, that occupy chip area and increase
cost.
In
order to extend Moore’s Law, chip designers and manufacturers
are developing and implementing technologies and architectures to
transition to advanced chips with 3D structures. Logic chip makers
are rapidly adopting use of 3D, fin-shaped Fin Field Effect
Transistors, or
FinFET
,
which provide faster switching while consuming less power. For
memory chip manufacturers,
3D
NAND
stacks memory cells to deliver greater capacity at
lower cost and
3D cross
point
, a transistor-less memory cell architecture, is being
developed to accelerate processing of massive data sets.
EUV lithography
is a
promising manufacturing technology that could improve patterning
capability and increase feature density at nodes of 5nm and beyond
by extending photolithography to the extreme ultraviolet wavelength
of 13.5nm.
Escalating Need for Advanced Chip Manufacturing
Equipment
Manufacturing steps
differ for logic and memory chips, but all chips are manufactured
in two general processes:
●
In the front-end
fabrication process, hundreds of copies of functional circuitry are
created on a 100–to 300–millimeter, or mm, silicon
wafer over a period of 6 to 8 weeks. A sequence of a few hundred
complex, repetitive steps forms transistors, other circuit elements
and interconnects on the wafer through the deposit and selective
removal of successive material layers, using
photolithography
to create a design,
deposition
to add layers of
materials,
etching
to
remove unwanted exposed materials, and
chemical mechanical planarization
or
CMP
to smooth the surface
for the next cycle of process steps.
●
In the back-end
assembly and testing process, a completed wafer from the front-end
process is cut into individual “dies.” Each die is
tested against specifications and, if compliant, encapsulated in a
package that protects the die and supports critical power and
electrical connections. The resulting chip is then subjected to
final electrical and reliability tests.
Manufacturing
advanced chips at smaller nodes requires a more complex process
flow that incorporates enhanced, more expensive capital equipment,
or tools, to perform increasingly complex process steps, as well as
an increased number of tools to perform a greater number of process
steps per wafer. A chip fabrication plant, or fab, may have more
than 500 highly specialized tools representing more than 70
categories of equipment, all situated in an environmentally
controlled “clean room.” As a result, construction of a
new advanced fab can cost between $5 and $10 billion
(Semiconductor Industry Association/Nathan Associates, May 2016).
Semiconductor Equipment and Materials International or SEMI
(December 2017) estimates that worldwide fab tool billings totaled
$57.0 billion in 2017 and will reach $63.0 billion by 2017, an
increase of 10.5%.
Because
of the significant capital expenditures and manufacturing expenses,
chip makers focus on improving their yield, which is the percentage
of chips on a wafer that conform to specifications. Even with use
of precision tools in a controlled manufacturing environment, a
substantial number of chips may contain defects and be rejected,
directly impacting cost-per-chip and profitability. We estimate
that a 1% decrease in yield can reduce annual profits by $30 to
$50 million for a fab producing dynamic random-access memory,
or DRAM, chips on 100,000 wafers per month—and a 1% yield
loss may decrease profits even more for a fab making logic chips,
which typically have higher prices. Moreover, lower yield may
necessitate greater fab capacity, increasing capital
expenditures.
New
technologies and architectures introduced in transitioning to more
advanced nodes can lead to significant yield loss. We believe chip
manufacturers with state-of-the-art, established fabs for process
nodes of 22nm or more typically target a yield of 90% or more, but
yield can drop to as low as 50% when, for example, a manufacturer
migrates to chips incorporating FinFET. To reduce yield loss, a
manufacturer transitioning to a more advanced node must implement
additional fabrication steps and new process capabilities, which in
turn require innovative, reliable front-end tool
solutions.
Growing Influence of the PRC Across the Semiconductor
Industry
The PRC
is both the largest and the fastest-growing market for
semiconductors. According to a study by PricewaterhouseCoopers
(November 2017), during the ten-year period ending in 2016,
the PRC’s semiconductor consumption grew at a CAGR of 12.0%
while worldwide consumption increased by only 3.2%, and in 2016 the
PRC consumed 58.5% of the world’s semiconductors. The PRC
government is implementing focused policies, including state-led
investment initiatives, that aim to create and support an
independent domestic semiconductor supply chain spanning from
design to final system production. The PRC has already made
significant progress across the principal semiconductor industry
sectors, as shown in the following market information compiled by
PricewaterhouseCoopers (September and November 2017):
●
The chip design, or
“fabless,” industry is the fastest growing segment of
the PRC’s semiconductor industry, with revenue increasing
from $2.3 billion in 2006 to $24.8 billion in 2016, a
CAGR of 26.6%.
●
China’s share
of worldwide semiconductor manufacturing capacity expanded from
7.3% in 2006 to 14.2% in 2016, and its semiconductor manufacturing
revenue increased at a CAGR of 15.4% over the ten-year period
ending in 2016.
●
China’s
semiconductor packaging, assembly and test revenue also grew at a
CAGR of 14.2% over the ten-year period ending in 2015.
The
PRC’s semiconductor tools industry produced less than 0.5% of
the world’s semiconductor manufacturing equipment in 2014
(International Trade Association of U.S. Department of Commerce,
July 2016). The PRC’s governmental goals anticipate
significant growth in all segments of the domestic semiconductor
industry, however, and tool manufacturers with a Chinese presence
should experience support from both upstream and downstream Chinese
companies in the semiconductor supply chain.
Emerging Criticality of Wafer Cleaning
In the
chip fabrication process, random defects such as particles,
residual chemicals and other contaminants can lead directly to
yield loss by distorting images for pattern formation in a
lithographic step, obstructing deposition of a film, blocking an
etch or otherwise impairing chip performance. Random defects can
originate from substrate material, tools, fab personnel, clean room
air and nearly every other aspect of the manufacturing process.
Shapes and sizes of random defects vary widely, and with each
decrease in process node, the dimension of the smallest random
defect that can cause a chip to fail, known as the “killer
defect” size, shrinks.
Chip
fabrication includes steps designed to eliminate random defects
without collapsing patterns, causing loss of materials or otherwise
damaging features. The number of these steps has increased
dramatically with chip complexity. Cleaning is now the most
frequently repeated step in chip fabrication and may be performed
in as many as 200 steps for each wafer. A sub-optimal cleaning
process has repeated opportunities to reduce yield by being either
insufficiently forceful, which leaves random defects behind, or
overly aggressive, which damages the chip. Over the past decade,
fabricators seeking to improve cleaning performance have switched
from batch processes, in which several wafers are processed at the
same time, to single-wafer cleaning tools.
There
are two basic types of cleaning methods.
Wet cleaning
uses liquid chemistry by
applying combinations of solvents, acids and water to spray, scrub,
etch and dissolve random defects.
Dry cleaning
uses gas phase chemistry,
relying on chemical reactions and techniques such as lasers,
aerosols and ozonated chemistries. Wet cleaning typically
outperforms dry cleaning in achieving wafer surface cleanliness and
smoothness, and it is the standard method for single-wafer
cleaning, constituting more than 90% of the cleaning steps in the
fabrication process. RCA clean, a standardized process using hot
alkaline and acidic hydrogen peroxide solutions, has been the
industry standard for wet cleaning for a quarter
century.
Wet
cleaning’s chemistry has not changed appreciably over the
past 25 years, but its implementation has shifted from simple
immersion to increasingly sophisticated techniques such as jet
spraying and megasonic vibration. Jet spray cleaning shoots
high-velocity, tens of micron-sized water droplets at a wafer
surface to remove random defects. Megasonic cleaning transmits
acoustic waves through a fluid bath to produce, in a process known
as transient cavitation, bubble oscillation that dislodges random
defects. The cavitation can dislodge defects unreachable by jet
spray, but the bubbles collapse quickly and can generate energy
that damages wafer features.
As jet
spray and megasonic cleaning techniques have continued to develop,
chip makers have regularly upgraded from simple tanks with on-off
switches to complex, specialized, expensive single-wafer cleaning
tools.
Inadequacy of Traditional Single-Wafer Cleaning
Technologies
At
process nodes of 100nm or more, chips consisted of 2D features and
architectures, which made wafer cleaning relatively
straightforward. Cleaning was most commonly performed in batch
processes using an immersion tool with megasonic energy. Megasonic
vibrations transmit at relatively high frequencies and therefore
create smaller bubbles that remove more-diminutive defects and that
generate lower levels of destructive transient energy when they
collapse.
As
process nodes shrank below 100nm, equipment manufacturers
introduced single-wafer megasonic cleaning tools, which processed
wafers one by one, rather than in batches. Because these tools did
not deliver energy uniformly across the wafer surface,
manufacturers found the tools did not clean wafers thoroughly and
evenly and, increasingly as process nodes continued to shrink, led
to damage to patterned wafer structures. Equipment makers also
began to offer single-wafer cleaning tools that used jet spraying
rather than acoustic vibrations. The physical energyof jet spraying
enabled these tools to be used with less assertive chemicals, which
reduced wafer material loss. Once process nodes reach 45nm,
however, the force of jet sprayed water droplets can damage finer
chip features and jet spraying can fail to eliminate killer
defect-sized contaminants due to its reduced lateral fluid speed as
the fluid approaches the wafer surfaces.
As
process nodes continue to shrink to 22nm and less, finer feature
sizes and denser, more complex architectures make the cleaning
process even more complicated and challenging:
●
Random defects are
harder to remove as the killer defect size decreases. Smaller
random defects are denser and bind to a wafer more strongly than
larger contaminants, and additional energy is required to deliver
greater levels of necessary force to more minuscule
sizes.
●
New 3D
architectures are often more delicate or fragile than 2D
conventional structures. FinFET structures, for example, are
relatively tall, thin and deep, which makes them more susceptible
to damage or destruction by the physical force of jet sprays and
megasonic transient cavitation used in the cleaning
process.
●
New chip
technologies and architectures amplify cleaning challenges. It is,
for example, progressively more difficult to remove random defects
from the bottom of a chip structure, such as a via, as the
“aspect ratio” of the structure’s depth to its
width increases. While conventional 2D structures typically have
aspect ratios of 3-to-1 or less, FinFET structures have aspect
ratios of 10-to-1 currently and are expected to have aspect ratios
in excess of 20-to-1 for future process nodes. Moreover, aspect
ratios for 3D NAND, 3D cross point and other 3D structures may
reach 60-to-1.
Effective,
damage-free cleaning poses a significant challenge for
manufacturers seeking to fabricate chips in the advanced process
nodes available today or introduced in the future, including the
10nm node announced for 2017 and the 7nm node announced for 2018.
In order to extend Moore’s law, chip manufacturers must be
able to remove ever smaller random defects from not only flat wafer
surfaces but also progressively more intricate, finer-featured 3D
chip architectures, in each case without incurring damage or
material loss that curtails yield and profits. Because fabrication
of chips at 22nm or less requires an increasingly complex,
specialized process flow, a next-generation single-wafer cleaning
tool solution should be designed to be easily tailored to meet a
manufacturer’s unique process requirements. The single-wafer
cleaning tools should produce less environmentally harmful chemical
waste and should be easily accessible to manufacturers in the
burgeoning Chinese market.
Our Solutions
We have
developed single-wafer wet cleaning equipment that chip
manufacturers can use in numerous steps of the fabrication process
in order to avoid yield loss at existing and future process nodes.
Using our proprietary technologies, we have designed our wet
cleaning equipment to remove random defects from chip wafers with
fine feature sizes, complex patterning, dense circuit architectures
and high aspect ratios more effectively than traditional jet spray
and transient megasonic technologies. Key elements of our solutions
include:
Differentiated technologies
for advanced chips
.
Our
proprietary single-wafer wet cleaning technologies control the
power intensity and distribution of megasonic cleaning in order to
remove random defects from a wafer surface effectively, without
damaging the wafer or its features, even at process nodes of 22nm
or less. We developed these technologies to help semiconductor
manufacturers produce chips that reach their ultimate physical
limitations.
●
Flat and patterned wafer surfaces.
Our
SAPS technology, which we introduced in 2009, employs alternating
phases of megasonic waves to deliver megasonic energy to flat and
patterned wafer surfaces in a highly uniform manner on a
microscopic level. We have shown SAPS technology to be more
effective than conventional megasonic and jet spray technologies in
removing random defects across an entire wafer as node sizes shrink
from 300nm to 45nm, including node sizes less than 50nm in size,
for which jet spray technology has proven to be ineffective. Based
on their initial mass production experience with SAPS equipment,
customers have increased their use of SAPS equipment by adding
cleaning steps to the manufacturing processes for advanced chips in
order to achieve higher yields and reduce chemical
usage.
●
High-aspect ratio conventional 2D and advanced
3D patterned wafer surfaces.
Our TEBO technology, which we
introduced in March 2016, has been developed to provide effective,
damage-free cleaning for both conventional 2D and 3D patterned
wafers at advanced process nodes. TEBO technology provides
multi-parameter control of bubble cavitation during megasonic
cleaning by using a sequence of rapid pressure changes to force
bubbles to oscillate at controlled sizes, shapes and temperatures.
Because the bubbles oscillate instead of imploding or collapsing,
TEBO technology avoids the pattern damage caused by transient
cavitation in traditional megasonic cleaning processes. We have
demonstrated the damage-free cleaning capabilities of TEBO
technology on patterned wafers for feature nodes as small as 1xnm
(16nm to 19nm), and we have shown that TEBO technology can be
applied in manufacturing processes for patterned chips with 3D
architectures such as FinFET, DRAM, 3D NAND and 3D cross point
memory having aspect ratios as high as 60-to-1. We believe TEBO
technology can be applied for even smaller process nodes. TEBO
tools are currently being evaluated by a selected group of leading
memory and logic chip manufacturers.
China-based
operations
.
In 2006 we
established our operational center in Shanghai, and currently we
conduct substantially all of our development and manufacturing
activities in the PRC. This strategy positions us near potential
customers throughout Asia, giving us increased access to those
customers and reducing shipping and manufacturing costs for
equipment they purchase. SEMI (November 2016) estimates 78% of new
front-end facilities and production lines starting operation from
2017 through 2020 will be constructed in Asia, with 42% expected to
be built in the PRC. Our Shanghai location also gives us access to
a large pool of highly qualified potential employees.
Extensive intellectual
property protection
.
Since our
formation in 1998, we have focused on building a strategic
portfolio of intellectual property to support and protect our key
innovations, including most recently our SAPS and TEBO
technologies. As of March 19, 2018, we had been issued more
than 140 patents in the United States, the PRC, Japan, Korea,
Singapore and Taiwan.
Custom-made wafer assembly
packaging solutions
.
In addition to
our product offerings for single-wafer cleaning in the front-end
wafer fabrication process, we leverage our technology and expertise
to provide a wide range of advanced packaging equipment, such as
coaters, developers, photoresist strippers, scrubbers, wet etchers
and copper-plating tools, to back-end wafer assembly and packaging
factories, particularly in the PRC. For these offerings, we focus
on providing customized equipment with competitive performance,
service and pricing.
Our Strategy
Our
objective is to be the leading global provider of a full range of
wet cleaning equipment for the manufacture of advanced integrated
circuits. To achieve this goal, we are pursuing the following
strategies:
Extend technology
leadership
.
We intend to build upon our technology
leadership
in wet processing by continuing to develop and
refine our differentiated SAPS and TEBO technologies and equipment
to address cleaning challenges presented by the manufacture of
increasingly advanced chip nodes.
Our investment in research and development
totaled $5.1 million, or 14.1% of our revenue, in 2017 and $3.3
million, or 11.9% of our revenue, in 2016. We will continue to
invest in product development and to strengthen our global patent
portfolio in strategic jurisdictions.
Establish referenceable customer
base
.
In
commercializing our SAPS equipment, we placed evaluation equipment
with selected customers, who subsequently purchased additional SAPS
equipment to enable them to add more cleaning steps during their
manufacturing processes. Using a similar
“demo-to-sales” process, we have placed TEBO evaluation
equipment with a leading PRC foundry and a leading Taiwanese
foundry and we recognized revenue from our initial sale of TEBO
equipment in 2016. Based on our market experience, we believe that
implementation of our SAPS and TEBO equipment by selected leading
memory and logic chip manufacturers will encourage evaluation of
our equipment by other manufacturers, who will view the leading
companies’ implementation as a validation of our equipment
that facilitates a shorter evaluation process.
Leverage local presence to address growing
Chinese market
.
The market for semiconductor
manufacturing equipment in the PRC is expected to grow markedly in
the upcoming years. Our experience has shown that chip
manufacturers in the PRC demand equipment meeting their specific
technical requirements and prefer building relationships with local
suppliers. We established our operations in Shanghai a decade ago,
and we will continue to work closely with chip manufacturers in the
PRC and throughout Asia to understand their specific requirements,
encourage them to adopt our SAPS and TEBO technologies, and enable
us to design innovative products and solutions to address their
needs.
Continue to improve performance through
operational excellence.
We actively manage our business
through principles of operational excellence designed to ensure
continuous improvement of our key operational and financial
metrics. As we increase the breadth of our product offerings and
the size of our operations and customer base, we must continue to
develop and implement these principles in order to improve the
efficiency and quality of our operations, satisfy our
customers’ needs, and meet our financial goals.
Pursue strategic acquisitions
and relationships
.
To complement and accelerate our internal growth,
we may pursue acquisitions of businesses, technologies, products or
business relationships that will expand the functionality of our
products, provide access to new markets or customers, or otherwise
complement our existing operations.
We also may seek to expand our product and
service offerings by entering into business relationships involving
additional distribution channels, investments in other enterprises
and joint ventures, or similar arrangements. In September 2017, we
acquired 20% of the outstanding equity of Ninebell, one of our key
subassembly providers.
Our Products and Technologies
We
develop, manufacture and sell single-wafer wet cleaning equipment
usable at numerous steps of the chip manufacturing process flow to
improve product yield for conventional 2D and advanced 3D patterned
chips at small process nodes. Our equipment, which we market and
sell under the brand name “Ultra C,” is designed
to remove random defects from a wafer surface effectively, without
damaging the wafer or its features, even at increasingly advanced
process nodes.
After
incorporating in 1998, we initially focused on developing tools for
manufacturing process steps involving the integration of
ultra-low-K materials and copper. Ultra-low-K materials, which
insulate better than silicon, presented opportunities for size
scaling and performance improvement, and higher conductivity copper
had begun to replace aluminum in forming interconnects. Our early
efforts focused in particular on stress-free copper-polishing
technology, and we sold tools based on that technology in the early
2000s.
In 2006
we established our operational center in Shanghai. This strategic
decision was made to help us establish and build relationships with
chip manufacturers in China and throughout Asia, which helps us to
understand their requirements and to develop innovative
technologies and tools addressing their needs.
In 2007
we began to focus our development efforts on single-wafer
wet-cleaning solutions for the front-end fabrication process. We
have developed innovative, proprietary technologies that
reintroduce megasonic technology to the wafer cleaning process. Our
approach is based on our understanding of the shortfalls and
limitations of previously existing megasonic cleaning technologies
that led to ineffective cleaning and damaged chip features. In 2009
we introduced our proprietary Space Alternated Phase Shift, or
SAPS, megasonic technology, which can be applied in flat patterned
wafer cleaning at numerous steps during the chip fabrication
process. By delivering megasonic energy uniformly across a wafer,
SAPS technology eliminates the particle removal inefficiencies that
characterized traditional megasonic cleaning technologies. In March
2016 we introduced our proprietary Timely Energized Bubble
Oscillation, or TEBO, technology, which can be applied at numerous
steps during the fabrication of small node conventional 2D and 3D
patterned wafers. By providing multi-parameter control of bubble
cavitation during megasonic cleaning, TEBO technology avoids the
fine-pattern damage caused by previously existing megasonic
cleaning processes.
We have
designed our equipment models for SAPS and TEBO solutions using a
modular configuration that enables us to create a wet-cleaning tool
meeting the specific requirements of a customer, while using
pre-existing designs for chamber, electrical, chemical delivery and
other modules. Our modular approach supports a wide range of
customer needs and facilitates the adaptation of our model tools
for use with the optimal chemicals selected to meet a
customer’s requirements. Our tools are offered principally
for use in manufacturing chips from 300mm silicon wafers, but we
also offer solutions for 150mm and 200mm wafers and for nonstandard
substrates, including quartz, sapphire and glass.
In
addition to our SAPS and TEBO tool offerings, we offer a range of
custom-made equipment, such as cleaners, coaters, developers,
photoresist strippers, wet etchers and copper-plating tools, to
back-end wafer assembly and packaging factories, principally in the
PRC.
Space Alternated Phase Shift Cleaning
SAPS Technology
SAPS
technology delivers megasonic energy uniformly to every point on an
entire wafer by alternating phases of megasonic waves in the gap
between a megasonic transducer and the wafer. Radicals for removing
random defects are generated in dilute solution, and the radical
generation is promoted by megasonic energy. Unlike
“stationary” megasonic transducers used by conventional
megasonic cleaning methods, SAPS technology moves or tilts a
transducer while a wafer rotates, enabling megasonic energy to be
delivered uniformly across all points on the wafer, even if the
wafer is warped. The mechanical force of cavitations generated by
megasonic energy enhances the mass transfer rate of dislodged
random defects and improves particle removal
efficiency.
By
delivering megasonic energy in a highly uniform manner on a
microscopic level, SAPS technology can precisely control the
intensity of megasonic energy and can effectively remove random
defects of all sizes across the entire wafer in less total cleaning
time than conventional megasonic cleaning products, without loss of
material or roughing of wafer surfaces. We have conducted trials
demonstrating SAPS technology to be more effective than
conventional megasonic and jet spray cleaning technologies as
defect sizes shrink from 300nm to 45nm. These trials show that SAPs
technology has an even greater relative advantage over conventional
jet spray technology when cleaning defects between 50 and 65nm in
size and that SAPs technology continues to be effective for defects
of sizes between 45 nm and 50nm, for which jet spray technology has
proven to be ineffective.
SAPS Applications
SAPS
megasonic cleaning technology can be applied during the chip
fabrication process to clean wafer surfaces and interconnects. It
also can be used to clean, and lengthen the lifetime of, recycled
test wafers.
Wafer Surfaces.
SAPS technology can
enhance removal of random defects following planarization and
deposition, which are among the most important, and most repeated,
steps in the fabrication process:
●
Post CMP
: Chemical mechanical
planarization, or CMP, uses an abrasive chemical slurry following
other fabrication processes, such as deposition and etching, in
order to achieve a smooth wafer surface in preparation for
subsequent processing steps. SAPS technology can be applied
following each CMP process to remove residual random defects
deposited or formed during CMP.
●
Post Hard Mask Deposition:
As part of
the photolithographical patterning process, a mask is applied with
each deposition of a material layer to prevent etching of material
intended to be retained. Hard masks have been developed to etch
high aspect-ratio features of advanced chips that traditional masks
cannot tolerate. SAPS technology can be applied following each
deposition step involving hard masks that use nitride, oxide or
carbon based materials to achieve higher etch selectivity and
resolution.
For
these purposes, SAPS technology uses environmentally friendly
dilute chemicals, reducing chemical consumption. Chemical types
include dilute solutions of chemicals used in RCA cleaning, such as
dilute hydrofluoric acid and RCA SC-1 solutions, and, for higher
quality wafer cleaning, functional de-ionized water produced by
dissolving hydrogen
,
nitrogen or
carbon dioxide in water containing a small amount of chemicals,
such as ammonia. Functional water removes random defects by
generating radicals, and megasonic excitation can be used in
conjunction with functional water to further increase the
generation of radicals. Functional water has a lower cost and
environmental impact than RCA solutions, and using functional water
is more efficient in eliminating random defects than using dilute
chemicals or de-ionized water alone. We have shown that SAPS
megasonic technology using functional water exhibits high
efficiency in removing random defects, especially particles smaller
than 65nm, with minimal damage to structures.
Interconnects and Barrier Metals.
Each
successive advanced process node has led to finer feature sizes of
interconnects such as contacts, which form electrical pathways
between a transistor and the first metal layer, and vias, which
form electrical pathways between two metal layers. Advanced nodes
have also resulted in higher aspect ratios for interconnect
structures, with thinner, redesigned metal barriers being used to
prevent diffusion. SAPS technology can improve the removal of
residues and other random defects from interconnects during the
chip fabrication process:
●
Post Contact/Via Etch:
Wet etching
processes are commonly used to create patterns of high-density
contacts and vias. SAPS technology can be applied after each such
etching process to remove random defects that could otherwise lead
to electrical shorts.
●
Pre Barrier Metal Deposition
: Copper
wiring requires metal diffusion barriers at the top of via holes to
prevent electrical leakage. SAPS technology can be applied prior to
deposition of barrier metal to remove residual oxidized copper,
which otherwise would adhere poorly to the barrier and impair
performance.
For
these applications, SAPS technology uses environmentally friendly
dilute chemicals such as dilute hydrofluoric acid, RCA SC-1
solution, ozonated de-ionized water and functional de-ionized water
with dissolved hydrogen. These chemical solutions take the place of
piranha solution, a high-temperature mixture of sulfuric acid and
hydrogen peroxide used by conventional wet wafer cleaning
processes. We have shown that SAPS technology exhibits greater
efficiency in removing random defects, and lower levels of material
loss, than conventional processes, and our chemical solutions are
less expensive and more environmentally conscious than piranha
solution.
Recycled Test Wafers.
In addition to
using silicon wafers for chip production, chip manufacturers
routinely process wafers through a limited portion of the front-end
fabrication steps in order to evaluate the health, performance and
reliability of those steps. Manufacturers also use wafers for
non-product purposes such as inline monitoring. Wafers used for
purposes other than manufacturing revenue products are known as
test wafers, and it is typical for twenty to thirty percent of the
wafers circulating in a fab to be test wafers. In light of the
significant cost of wafers, manufacturers seek to re-use a test
wafer for more than one test. As test wafers are recycled, surface
roughness and other defects progressively impair the ability of a
wafer to complete tests accurately. SAPS technology can be applied
to reduce random defect levels of a recycled wafer, enabling the
test wafer to be reclaimed for use in additional testing processes.
For these purposes, SAPS technology includes improved fan filter
units that balances intake and exhaust flows, precise temperature
and concentration controls that ensure better handling of
concentrated acid processes, and two-chemical recycle capability
that reduces chemical consumption.
SAPS Equipment
We
currently offer two models of wet wafer cleaning equipment based on
our SAPS technology, Ultra C SAPS II and Ultra C
SAPS V. Each of these models is a single-wafer,
serial-processing tool that can be
configured to
customer specifications and, in conjunction with appropriate
dilute
|
chemicals, used to remove random defects from wafer surfaces or interconnects and barrier metals as part of the chip front-end fabrication process or for purposes of recycling test wafers. By combining our megasonic and chemical cleaning technologies, we have designed these tools to remove random defects with greater efficacy and efficiency than conventional wafer cleaning processes, with enhanced process flexibility and reduced quantities of chemicals. Each of our SAPS models was initially built to meet specific requirements of a key customer. We expect the sales prices of our SAPS tools generally to range between $2.5 million and $5.0 million, although the sales price of a particular tool will vary depending upon the required specifications. |
SAPS II
was released in 2011. Its key features include:
|
●
compact design, with footprint of 2.65m
x 4.10m x 2.85m (WxDxH), requiring limited clean room floor
space;
●
up to 8 chambers, providing throughput
of up to 225 wafers per hour;
●
double-sided cleaning capability, with
up to 5 cleaning chemicals for process flexibility;
●
2-chemical recycling capability for
reduced chemical consumption;
●
image wafer detection method for
lowering wafer breakage rates; and
●
chemical delivery module for delivery of
dilute hydrofluoric acid, RCA SC-1 solution, functional de-ionized
water and carbon dioxide to each of the chambers.
|
SAPS V,
which was released in 2014, offers increased productivity for chip
manufacturers moving to advanced nodes. SAPS V provides all of the
features and functionality of SAPS II, upgraded as
follows:
|
●
compact design, with footprint of 2.55m
x 5.1m x 2.85m (WxDxH);
●
up to 12 chambers, providing throughput
of up to 375 wafers per hour;
●
chemical supply system integrated into
mainframe;
●
inline mixing method replaces tank
auto-changing, reducing process time; and
●
improved drying technology using hot
isopropyl alcohol and de-ionized water.
|
Timely Energized Bubble Oscillation Cleaning
TEBO Technology
We
developed TEBO technology for application in wet wafer cleaning
during the fabrication of both conventional 2D and 3D patterned
wafers with fine feature sizes. TEBO technology facilitates
effective cleaning even with patterned features too small or
fragile to be addressed by conventional jet spray and megasonic
cleaning technologies.
TEBO
technology solves the problems created by transient cavitation in
conventional megasonic cleaning processes. Cavitation is the
formation of bubbles in a liquid, and transient cavitation is a
process in which a bubble in fluid implodes or collapses. In
conventional megasonic cleaning processes, megasonic energy forms
bubbles and then causes those bubbles to implode or collapse,
blasting destructive high-pressure, high-temperature micro jets
toward the wafer surface. Our internal testing has confirmed that
at any level of megasonic energy capable of removing random
defects, the sonic energy and mechanical force generated by
transient cavitation are sufficiently strong to damage fragile
patterned structures with features less than 70nm.
TEBO
technology provides multi-parameter control of cavitation by using
a sequence of rapid changes in pressure to force a bubble in liquid
to oscillate at controlled sizes, shapes and temperatures, rather
than implode or collapse. As a result, cavitation remains stable
during TEBO megasonic cleaning processes, and a chip fabricator
can, using TEBO technology, apply the level of megasonic energy
needed to remove random defects without incurring the pattern
damage created by transient cavitation in conventional megasonic
cleaning.
We have
demonstrated the damage-free cleaning capabilities of TEBO
technology on customers’ patterned wafers as small as 1xnm
(16nm to 19nm), and we believe TEBO technology will be applicable
in even smaller fabrication process nodes. TEBO technology can be
applied in manufacturing processes for conventional 2D chips with
fine features and advanced chips with 3D structures, including
FinFET, DRAM, 3D NAND and 3D cross point memory aswell as other 3D
architectures that may be developed in the future, such as carbon
nanotubes and quantum devices. As a result of the thorough,
controlled nature of TEBO processes, cleaning time for TEBO-based
solutions may take longer than conventional megasonic cleaning
processes. Conventional processes have proven ineffective, however,
for process nodes of 20nm or less, and we believe the increased
yield that can be achieved by using TEBO technology for nodes up to
70nm can more than offset the cost of the additional time in
utilizing TEBO technology.
TEBO Applications
At
process nodes of 28nm and less, chip makers face escalating
challenges in eliminating nanometric particles and maintaining the
condition of inside pattern surfaces. In order to maintain chip
quality and avoid yield loss, cleaning technologies must control
random defects of diminishing killer defect sizes, without roughing
or otherwise damaging surfaces of transistors, interconnects or
other wafer features. TEBO technology can be applied in numerous
steps throughout the manufacturing process flow for effective,
damage-free cleaning:
●
Memory Chips:
TEBO technology can be
applied in up to a total of 47 steps in the fabrication of a
dynamic random-access memory, or DRAM, chip, consisting of 8 steps
in cleaning ISO structures, 19 steps in cleaning buried gates, and
20 steps in cleaning high aspect-ratio storage nodes and stacked
films.
●
Logic Chips:
In the fabrication process
for a logic chip with a FinFET structure, TEBO technology can be
used in 15 or more cleaning steps.
For
purposes of solving inside pattern surface conditions for memory or
logic chips, TEBO technology uses environmentally friendly dilute
chemicals such as RCA SC-1 and hydrogen gas doped functional
water.
TEBO Equipment
We
currently offer two models of wet wafer cleaning equipment based on
our TEBO technology, Ultra C TEBO II and Ultra C
TEBO V. Each of these models is a single-wafer,
serial-processing tool that can be configured to customer
specifications and, in conjunction with appropriate dilute
chemicals, used at numerous manufacturing processing steps for
effective, damage-free cleaning of chips at process nodes 28nm or
less. TEBO equipment solves the problem of pattern damage caused by
transient cavitation in conventional jet spray and megasonic
cleaning processes, providing better particle removal efficiency
with limited material loss or roughing. TEBO equipment currently is
being evaluated by a select group of leading memory and logic chip
customers, some of which recently have indicated an intent to move
to production. We expect the sales prices of our TEBO tools
generally to range between $3.5 million and $6.5 million, although
the sales price of a particular tool will vary depending upon the
required specifications.
Each
model of TEBO equipment includes:
|
●
an equipment front-end module, or EFEM,
which moves wafers from chamber to chamber;
●
one or more
chamber modules, each equipped with a TEBO megasonic generator
system;
●
an electrical
module to provide power for the tool; and
●
a chemical
delivery module.
|
Ultra C
TEBO II was released in 2016. Its key features
include:
|
●
compact design, with footprint of 2.25m
x 2.25m x 2.85m (WxDxH);
●
up to 8 chambers with an upgraded
transport system and optimized robotic scheduler, providing
throughput of up to 300 wafers per hour;
●
EFEM module consisting of 4 load ports,
transfer robot and 1 process robot; and
●
focus on dilute chemicals contributes to
environmental sustainability and lower cost of
ownership.
|
Ultra C TEBO V
also was introduced in 2016, and its key features
include:
|
●
footprint of 2.45m x 5.30m x 2.85m
(WxDxH);
●
up to 12 chamber modules, providing
throughput of up to 300 wafers per hour;
●
EFEM module consisting of 4 load ports,
1 transfer robot and 1 process robot; and
●
chemical delivery module for delivery of
isopropyl alcohol, dilute hydrofluoric acid, RCA SC-1 solution,
functional de-ionized water and carbon dioxide to each of the
chambers.
|
Custom-Made Wafer Assembly and Packaging Equipment
We
leverage our technology and expertise to provide a range of
single-wafer tools for back-end wafer assembly and packaging
factories, principally in the PRC. We focus on providing
custom-made, differentiated equipment that incorporates
customer-requested features, at a competitive price. The sales
prices for these tools generally range between $500,000 and $1.0
million, and these offerings generated $5.7 million, or 20.9%,
of our revenue in 2016 and $4.2 million, or 13.5%, of our
revenue in 2015.
|
For
example, our Ultra C Coater is used in applying photoresist, a
light-sensitive material used in photolithography to transfer a
pattern from a mask onto a wafer. Coaters typically provide input
and output elevators, shuttle systems and other devices to handle
and transport wafers during the coating process. Unlike most
coaters, the Ultra C Coater is fully automated. In addition, based
on requests from customers, we developed and incorporated the
special function of chamber auto-clean module into the Ultra C
Coater, which further differentiates it from other products in the
market. The Ultra C Coater is designed to deliver improved
throughput and more efficient tool utilization while eliminating
particle generation.
|
|
Our
other advanced packaging tools include: Ultra C Developer,
which applies liquid developer to selected parts of photoresist to
resolve an image; Ultra C PR Megasonic-Assisted Stripper,
which removes photoresist; Ultra C Scrubber, which scrubs and
cleans wafers; and Ultra C Thin Wafer Scrubber, which
addresses a sub-market of cleaning very thin wafers for certain
Asian assembly factories; and Ultra C Wet Etcher, which etches
silicon wafers and copper and titanium interconnects.
Our Customers
As of
December 31, 2017, customers had purchased and deployed more than
30 Ultra C SAPS and TEBO cleaning tools. All of our sales in 2016
and 2017 were to customers located in Asia, and we anticipate that
a substantial majority of our revenue will continue to come from
customers located in this region for the near future. We have
increased our efforts to penetrate the markets in North America and
Western Europe, and we believe we are well positioned to begin
generating sales in those regions.
We
generate most of our revenue from a limited number of customers as
the result of our strategy of initially placing SAPS - and
TEBO-based equipment with a small number of leading chip
manufacturers that are driving technology trends and key capability
implementation. In 2017, 55.2% of our revenue was derived from four
customers: SK Hynix Inc., a leading Korean memory chip company that
accounted for 18.1% of our revenue; Shanghai Integrated Circuit
Research and Development Center Ltd., a public research consortia
for the Chinese semiconductor industry that accounted for 14.1% of
our revenue; JiangYin ChangDian Advanced Packaging Co. Ltd., a
leading PRC foundry that accounted for 12.8% of our revenue; and
Yangtze Memory Technologies Co., Ltd., a leading PRC memory chip
company that, together with one of its subsidiaries, accounted
10.2% of our revenue. In 2016 99.3% of our revenue was derived from
four customers: Shanghai Huali Microelectronics Corporation, a
leading PRC foundry that accounted for 33.7% of our revenue;
Semiconductor Manufacturing International Corporation, a leading
PRC foundry that accounted for 25.0% of our revenue; SK Hynix Inc.
accounted for 24.0% of our revenue; and JiangYin ChangDian Advanced
Packaging Co. Ltd., a leading PRC foundry that accounted for 16.6%
of our revenue.
Based
on our market experience, we believe that implementation of our
equipment by one of our selected leading companies will attract and
encourage other manufacturers to evaluate our equipment, because
the leading company’s implementation will serve as validation
of our equipment and will enable the other manufacturers to shorten
their evaluation processes. We placed our first SAPS-based tool in
2009 as a prototype. We worked closely with the customer for two
years in debugging and modifying the tool, and the customer then
spent two more years of qualification and running pilot production
before beginning volume manufacturing. Our revenue in 2015 included
sales of SAPS-based tools following the customer’s completion
of its qualification process. We expect that the period from new
product introduction to high volume manufacturing will be three
years or less in the future. Please see “Item 1A. Risk
Factors—Risks Related to Our Business and Our
Industry—We depend on a small number of customers for a
substantial portion of our revenue, and the loss of, or a
significant reduction in orders from, one or more of our major
customers could have a material adverse effect on our revenue and
operating results. There are also a limited number of potential
customers for our products.”
Customers continue
to establish joint ventures, alliances and licensing arrangements
that have the potential to positively or negatively impact our
competitive position and market opportunities. A material reduction
in orders from our large customers could adversely affect our
results of operations and projected financial condition. Our
business depends upon the expenditures of semiconductor
manufacturers. Semiconductor manufacturers’ businesses, in
turn, depend on many factors, including their financial capability,
the current and anticipated market demand for integrated circuits,
the global economy and the availability of equipment capacity to
support that demand.
Sales and Marketing
We
market and sell our products worldwide using a combination of our
direct sales force and third-party representatives. We employ
direct sales teams in Asia, Europe and North America, and have
located these teams near our customers, primarily in the PRC,
Korea, Taiwan and the United States. Each sales person has specific
local market expertise. We also employ field application engineers,
who are typically co-located with our direct sales teams, to
provide technical pre- and post-sale support tours and other
assistance to existing and potential customers throughout the
customers’ fab planning and production line qualification and
fab expansion phases. Our field application engineers are organized
by end markets as well as core competencies in hardware, control
system, software and process development to support our
customers.
To
supplement our direct sales teams, we have contacts with several
independent sales representatives in the PRC, Taiwan and Korea. We
select these independent representatives based on their ability to
provide effective field sales, marketing forecast and technical
support for our products. In the case of representatives, our
customers place purchase orders with us directly rather than with
the representatives.
Our
sales have historically been made using purchase orders with agreed
technical specifications. Our sales terms and conditions are
generally consistent with industry practice, but may vary from
customer to customer. We seek to obtain a purchase order three to
four months ahead of the customer’s desired delivery date.
For some customers, we receive a letter of intent three weeks
ahead, followed by the corresponding purchase order five weeks
ahead, of the customer’s desired delivery date. Consistent
with industry practice, we allow customers to reschedule or cancel
orders on relatively short notice. Because of our relatively short
delivery period and our practice of permitting rescheduling or
cancellation, we believe that backlog is not a reliable indicator
of our future revenue.
Our
marketing team focuses on our product strategy and technology road
maps, product marketing, new product introduction processes, demand
assessment and competitive analysis, customer requirement
communication and public relations. Our marketing team also has the
responsibility to conduct environmental scans, study industry
trends and arrange our participation at major trade
shows.
Manufacturing
All of
our products are built to order at our facility in Shanghai. Our
manufacturing facility has a total of 36,000 square feet, with
8,000 square feet of class 10,000 clean room space for product
assembly and testing, plus 800 square feet of class 1 clean room
space for product demonstration purposes. The rest of the area is
used for product sub-assembly, component inventory and
manufacturing related offices. A class designation for a clean room
denotes the number of particles of size 0.5mm or larger permitted
per cubic foot of air. Our manufacturing facility is ISO-9000
certified, and we have implemented certain manufacturing
science-based factory practices such as constraint management,
statistical process control and failure mode and effect analysis
methodology.
In each
of 2016 and 2017, we sourced approximately one-third of the parts
and components ($8.0 million in 2016 and $10.8M in 2017) for our
products from Chinese suppliers and the remaining parts and
components were sourced from suppliers in the United States and, to
a lesser extent, Japan and Korea
We
purchase some of the components and assemblies that we include in
our products from single source suppliers. We believe that we could
obtain and qualify alternative sources to supply these components.
Nevertheless, any prolonged inability to obtain these components
could have an adverse effect on our operating results and could
unfavorably impact our customer relationships. Please see
“Item 1A. Risk Factors—Risks Related to Our Business
and Our Industry—We depend on a limited number of suppliers,
including single source suppliers, for critical components and
assemblies, and our business could be disrupted if they are unable
to meet our needs.”
Research and Development
We
believe that our success depends in part on our ability to develop
and deliver breakthrough technologies and capabilities to meet our
customers’ ever-more challenging technical requirements. For
this reason, we devote significant financial and personnel
resources to research and development. Our research and development
team is comprised of highly skilled engineers and technologists
with extensive experience in megasonic technology, cleaning
processes and chemistry, mechanical design, and control system
design. As of December 31, 2017, approximately half of our research
and development personnel hold advanced technical degrees. To
supplement our internal expertise, we also collaborate with
external research and development entities such as International
SEMATECH, a global consortium of computer chip manufacturers, on
specific areas of interests and retain, as technical advisors,
several experts in semiconductor technology.
For the
foreseeable future we are focusing on enhancing our existing
Ultra C SAPS and TEBO tools and integrating additional
capabilities to meet and anticipate requirements from our existing
and potential customers. Our particular areas of focus include
development of the following:
●
new cleaning steps
for Ultra C SAPS cleaners for application in logic chips and
for DRAM, 3D NAND and 3D cross point memory
technologies;
●
new cleaning steps
for Ultra C TEBO cleaners for FinFET in logic chips, gates in
DRAM, and deep vias in both 3D NAND and 3D cross point memory
technologies;
●
new hardware,
including new system platforms, new chamber structures and new
chemical blending systems; and
●
new software to
integrate new functionalities to improve tool
performance.
Longer
term, we are working on new proprietary process capabilities based
on our existing tool hardware platforms. We are also working to
integrate our tools with third-party tools in adjacent process
areas in the chip manufacturing flow.
Without reduction
by grant amounts received from PRC governmental authorities (see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Key Components of Results
of Operations—PRC Government Research and Development
Funding”), our gross research and development expense totaled
$8.6 million, or 23.4% of revenue, in 2017 and $9.5 million,
or 34.7% of revenue, in 2016. We intend to continue to invest in
research and development to support and enhance our existing
cleaning products and to develop future product offerings to build
and maintain our technology leadership position.
Intellectual Property
Our
success and future revenue growth depend, in part, on our ability
to protect our intellectual property. We control access to and use
of our proprietary technologies, software and other confidential
information through the use of internal and external controls,
including contractual protections with employees, consultants,
advisors, customers, partners and suppliers. We rely primarily on
patent, copyright, trademark and trade secret laws, as well as
confidentiality procedures, to protect our proprietary technologies
and processes. All employees and consultants are required to
execute confidentiality agreements in connection with their
employment and consulting relationships with us. We also require
them to agree to disclose and assign to us all inventions conceived
or made in connection with the employment or consulting
relationship.
We have
aggressively pursued intellectual property since our founding in
1998. We focus our patent efforts in the United States, and, when
justified by cost and strategic importance, we file corresponding
foreign patent applications in strategic jurisdictions such as the
European Union, the PRC, Japan, Korea, Singapore, and Taiwan. Our
patent strategy is designed to provide a balance between the need
for coverage in our strategic markets and the need to maintain
costs at a reasonable level.
As of
December 31, 2017, we had 20 issued patents and numerous pending
applications in the United States. These patents carry expiration
dates from 2018 through 2027. Many of the US patents and
applications have also been filed internationally, in one or more
of the European Union, PRC, Japan, Korea, Singapore and
Taiwan.
Specifically, we
own patents in wafer cleaning, electro-polishing and plating, wafer
preparation, and other semiconductor processing
technologies.
We
currently manufacture advanced single-wafer cleaning systems
equipped with our SAPS and TEBO technologies. Our wafer cleaning
technologies are protected by US Patent Numbers 8580042, 8671961,
9070723 and 9281177, as well as their corresponding international
patents. We have 22 patents granted internationally protecting our
SAPS technologies. We also have filed four international patent
applications for key TEBO technologies in accordance with the
Patent Cooperation Treaty, in anticipation of filing in the U.S.
national phase.
In
addition to the above core technologies, we have patents reflecting
innovations in other aspects of wafer cleaning systems, such as
cleaning solution recycling and wafer holding and positioning.
During a wafer cleaning cycle, multiple cleaning solutions may be
sequentially used. Our cleaning solution recycling technology
prevents cross-contamination and allows recycling of the cleaning
solutions. These innovations are protected by US Patent Numbers
6248222, 6495007, 6749728, 6726823, 6447668 and 7136173, as well as
their corresponding international patents.
We have
technologies for stress-free polishing, or SFP, and electrochemical
plating, or ECP, that are used in certain of our tools. SFP is an
integral part of the CMP process. Our technology was a breakthrough
in electro-chemical-copper-planarization technology when it was
first introduced, because it can polish, stress-free, oxidizing
tantalum barrier layers used in copper low-K interconnects. Our
innovations in SFP and ECP are reflected in US Patent Numbers
6395152, 6837984, 6440295, 6638863, 6391166 and 8518224, and their
corresponding international counterparts.
We also
have technologies in other semiconductor processing areas, such as
wafer preparation and some specific processing steps. The wafer
preparation technology is covered by US Patent Numbers 8383429 and
9295167. The specific processing steps include US Patent Number
7119008 titled “Integrating metal layers with ultra-low-K
dielectrics,” and US Patent Number 8598039 titled
“Barrier layer removal method and
apparatus.”
To date
we have not granted licenses to third parties under the patents
described above. Not all of these patents have been implemented in
products. We may enter into licensing or cross-licensing
arrangements with other companies in the future.
We
cannot assure you that any patents will issue from any of our
pending applications. Any rights granted under any of our existing
or future patents may not provide meaningful protection or any
commercial advantage to us. With respect to our other proprietary
rights, it may be possible for third parties to copy or otherwise
obtain and use our proprietary technology or marks without
authorization or to develop similar technology
independently.
The
semiconductor equipment industry is characterized by vigorous
protection and pursuit of intellectual property rights or
positions, which have resulted in often protracted and expensive
litigation. We may in the future initiate claims or litigation
against third parties to determine the validity and scope of
proprietary rights of others. In addition, we may in the future
initiate litigation to enforce our intellectual property rights or
the rights of our customers or to protect our trade
secrets.
Our
customers could become the target of litigation relating to the
patent or other intellectual property rights of others. This could
trigger technical support and indemnification obligations in some
of our customer agreements. These obligations could result in
substantial expenses, including the payment by us of costs and
damages related to claims of patent infringement. In addition to
the time and expense required for us to provide support or
indemnification to our customers, any such litigation could disrupt
the businesses of our customers, which in turn could hurt our
relations with our customers and cause the sale of our products to
decrease. We do not have any insurance coverage for intellectual
property infringement claims for which we may be obligated to
provide indemnification.
Additional
information about the risks relating to our intellectual property
is provided under “Item 1A. Risk Factors—Risks Relating
to Our Intellectual Property.”
Competition
The
chip equipment industry is characterized by rapid change and is
highly competitive throughout the world. We compete with
semiconductor equipment companies located around the world, and we
may also face competition from new and emerging companies,
including new competitors from the PRC. We consider our principal
competitors to be those companies that provide single-wafer
cleaning products to the market, including Lam Research Corp., DNS
Electronics LLC, Tokyo Electron Ltd., SEMES Co. Ltd., Mujin
Electronics Co., Ltd. and Beijing Sevenstar Science &
Technology Co., Ltd.
Compared to our
company, our current and potential competitors may
have:
●
better established
credibility and market reputations, longer operating histories, and
broader product offerings;
●
significantly
greater financial, technical, marketing and other resources, which
may allow them to pursue design, development, manufacturing, sales,
marketing, distribution and service support of their
products;
●
more extensive
customer and partner relationships, which may position them to
identify and respond more successfully to market developments and
changes in customer demands; and
●
multiple product
offerings, which may enable them to offer bundled discounts for
customers purchasing multiple products or other incentives that we
cannot match or offer.
The
principal competitive factors in our market include:
●
performance of
products, including particle removal efficiency, rate of damage to
wafer structures, high temperature chemistry, throughput, tool
uptime and reliability, safety, chemical waste treatment, and
environmental impact;
●
service support
capability and spare parts delivery time;
●
innovation and
development of functionality and features that are must-haves for
advanced fabrication nodes;
●
ability to
anticipate customer requirements, especially for advanced process
nodes of less than 45nm;
●
ability to identify
new process applications;
●
brand recognition
and reputation; and
●
skill and
capability of personnel, including design engineers, manufacturing
engineers and technicians, application engineers, and service
engineers.
In
addition, semiconductor manufacturers must make a substantial
investment to qualify and integrate new equipment into
semiconductor production lines. Some manufacturers have announced
they will fabricate chips for the 10nm node beginning in 2017 and
the 7nm node commencing in 2018, and we have one customer that
currently is evaluating implementation of our equipment for both
the 10nm and 7nm nodes. Once a semiconductor manufacturer has
selected a particular supplier’s equipment and qualified it
for production, the manufacturer generally maintains that selection
for that specific production application and technology node as
long as the supplier’s products demonstrate performance to
specification in the installed base. Accordingly, we may experience
difficulty in selling to a given manufacturer if that manufacturer
has qualified a competitor’s equipment. If, however, that
cleaning equipment constrains chip yield, we expect, based on our
experience to date, that the manufacturer will evaluate
implementing new equipment that cleans more
effectively.
We
focus on the high-end fabrication market with advanced nodes, and
we believe we compete favorably with respect to the factors
described above. Most of our competitors offer single-wafer
cleaning products using jet spray technology, which has relatively
poor particle removal efficiency for random defects less than 30nm
in size and presents increased risk of damage to the fragile
patterned architectures of wafers at advanced process nodes.
Certain of our competitors offer single-wafer cleaning products
with megasonic cleaning capability, but we believe these products,
which use conventional megasonic technology, are unable to maintain
energy dose uniformity on the entire wafer and often lack the
ability to repeat the requisite uniform energy dose wafer to wafer
in production, resulting in poor efficiency in removing random
defects, longer processing time and greater loss of material. In
addition, these conventional megasonic products generate transient
cavitation, which results in more incidents of damage to wafer
structures with feature sizes of 70nm or less. We design our
cleaning tools equipped with our proprietary SAPS and TEBO
technologies, which we believe offer better performance, including
at advanced process nodes of 22nm or less. Moreover, with our
operations based in Shanghai, we are well positioned to take
advantage of the Chinese government’s policies to develop an
independent domestic semiconductor supply chain.
Employees
As of
December 31 2017, we had 191 full-time equivalent employees, of
whom 22 were in administration, 50 were in manufacturing, 80 were
in research and development, and 39 were in sales and marketing and
customer services. Of these employees, 183 were located in the PRC,
4 were located in Korea and 4 were based in the United
States.
We have
never had a work stoppage, and none of our employees are
represented by a labor organization or subject to any collective
bargaining arrangements. We consider our employee relations to be
good.
I
tem 1A. Risk
Factors
Investing in Class A common stock involves a high degree of risk.
You should consider and read carefully all of the risks and
uncertainties described below, as well as other information
contained in this report, including the consolidated financial
statements and related notes set forth in “Item 1. Financial
Statements” of Part I above, before making an investment
decision. The occurrence of any of the following risks or
additional risks and uncertainties not presently known to us or
that we currently believe to be immaterial could materially and
adversely affect our business, financial condition, results of
operations or cash flows. In any such case, the trading price of
Class A common stock could decline, and you may lose all or part of
your investment. This report also contains forward-looking
statements and estimates that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in
the forward-looking statements as a result of specific factors,
including the risks and uncertainties described below.
Risks Related to Our Business and Our Industry
We have incurred significant losses since our inception and we are
uncertain about our future profitability.
We have
incurred significant losses since our inception in 1998, and as of
December 31, 2017 we had an accumulated deficit of $10.0 million.
We may not be able to generate sufficient revenue to achieve and
sustain profitability. We expect our costs to increase in future
periods, which could negatively affect our future operating results
if our revenue does not increase. In particular, we expect to
continue to expend substantial financial and other resources
on:
●
research and
development, including continued investments in our research and
development team;
●
sales and
marketing, including a significant expansion of our sales
organization, both domestically and internationally, building our
brand, and providing our single-wafer wet cleaning equipment and
other capital equipment, or tools, for evaluation by
customers;
●
the cost of goods
being manufactured and sold for our installed base;
●
expansion of field
service; and
●
general and
administrative expenses, including legal and accounting expenses
related to being a public company.
These
investments may not result in increased revenue or growth in our
business. If we are unable to increase our revenue at a rate
sufficient to offset the expected increase in our costs, then our
business, financial position and results of operations will be
harmed and we may not be able to achieve or maintain profitability
over the long term. Additionally, we may encounter unforeseen
operating expenses, difficulties, complications, delays and other
factors that may result in losses in future periods. If our revenue
growth does not meet our expectations in future periods, our
financial performance may be harmed and we may not achieve or
maintain profitability in the future.
We currently have limited revenue and may not be able to regain or
maintain profitability.
To date
we have only generated limited revenue from sales of our products.
Our revenue totaled $27.4 million in 2016 and $36.5 million in
2017. Our revenue was not sufficient to cover our operating
expenses prior to 2015, and our net income decreased to $2.4
million in 2016 from $7.9 million in 2015. In 2017 we incurred an
operating loss of $0.9 million, as compared to net income of $2.4
million in 2016. Our ability to generate significant revenue and
operate profitably depends upon our ability to commercialize our
Ultra C single-wafer wet cleaning equipment based on our SAPS and
TEBO technologies. Our ability to generate significant product
revenue from our current tools or future tool candidates also
depends on a number of additional factors, including our ability
to:
●
achieve market
acceptance of Ultra C equipment based on SAPS technology as well as
Ultra C equipment based on TEBO technology;
●
increase our
customer base, including the establishment of relationships with
companies in the United States;
●
continue to expand
our supplier relationships with third parties; and
●
establish and
maintain our reputation for providing efficient on-time delivery of
high quality products.
If we
fail to regain and sustain profitability on a continuing basis, we
may be unable to continue our operations at planned levels and be
forced to reduce our operations or even shut down.
We may require additional capital in the future and we cannot give
any assurance that such capital will be available at all or
available on terms acceptable to us and, if it is available,
additional capital raised by us may dilute holders of Class A
common stock.
We may
need to raise funds in the future, depending on many factors,
including:
●
our sales
growth;
●
the costs of
applying our existing technologies to new or enhanced
products;
●
the costs of
developing new technologies and introducing new
products;
●
the costs
associated with protecting our intellectual property;
●
the costs
associated with our expansion, including capital expenditures,
increasing our sales and marketing and service and support efforts,
and expanding our geographic operations;
●
our ability to
continue to obtain governmental subsidies for developmental
projects in the future;
●
future debt
repayment obligations; and
●
the number and
timing of any future acquisitions.
To the
extent that our existing sources of cash, together with any cash
generated from operations, are insufficient to fund our activities,
we may need to raise additional funds through public or private
financings, strategic relationships, or other arrangements.
Additional funding may not be available to us on acceptable terms
or at all. If adequate funding is not available, we may be required
to reduce expenditures, including curtailing our growth strategies
and reducing our product development efforts, or to forego
acquisition opportunities.
If we
succeed in raising additional funds through the issuance of equity
or convertible securities, then the issuance could result in
substantial dilution to existing stockholders. Furthermore, the
holders of these new securities or debt may have rights,
preferences and privileges senior to those of the holders of Class
A common stock. In addition, any preferred equity issuance or debt
financing that we may obtain in the future could have restrictive
covenants relating to our capital raising activities and other
financial and operational matters, which may make it more difficult
for us to obtain additional capital and to pursue business
opportunities, including potential acquisitions.
Our quarterly operating results can be difficult to predict and can
fluctuate substantially, which could result in volatility in the
price of Class A common stock.
Our
quarterly revenue and other operating results have varied in the
past and are likely to continue to vary significantly from quarter
to quarter. Accordingly, you should not rely upon our past
quarterly financial results as indicators of future performance.
Any variations in our quarter-to-quarter performance may cause our
stock price to fluctuate. Our financial results in any given
quarter can be influenced by a variety of factors,
including:
●
the cyclicality of
the semiconductor industry and the related impact on the purchase
of equipment used in the manufacture of integrated circuits, or
chips;
●
the timing of
purchases of our tools by chip fabricators, which order types of
tools based on multi-year capital plans under which the number and
dollar amount of tool purchases can vary significantly from year to
year;
●
the relatively high
average selling price of our tools and our dependence on a limited
number of customers for a substantial portion of our revenue in any
period, whereby the timing and volume of purchase orders or
cancellations from our customers could significantly reduce our
revenue for that period;
●
the significant
expenditures required to customize our products often exceed the
deposits received from our customers;
●
the lead time
required to manufacture our tools;
●
the timing of
recognizing revenue due to the timing of shipment and acceptance of
our tools;
●
our ability to sell
additional tools to existing customers;
●
the changes in
customer specifications or requirements;
●
the length of our
product sales cycle;
●
changes in our
product mix, including the mix of systems, upgrades, spare parts
and service;
●
the timing of our
product releases or upgrades or announcements of product releases
or upgrades by us or our competitors, including changes in customer
orders in anticipation of new products or product
enhancements;
●
our ability to
enhance our tools with new and better functionality that meet
customer requirements and changing industry trends;
●
constraints on our
suppliers’ capacity;
●
the timing of
investments in research and development related to releasing new
applications of our technologies and new products;
●
delays in the
development and manufacture of our new products and upgraded
versions of our products and the market acceptance of these
products when introduced;
●
our ability to
control costs, including operating expenses and the costs of the
components and subassemblies used in our products;
●
the costs related
to the acquisition and integration of product lines, technologies
or businesses; and
●
the costs
associated with protecting our intellectual property, including
defending our intellectual property against third-party claims or
litigation.
Seasonality has
played an increasingly important role in the market for chip
manufacturing tools. The period of November through February has
been a particularly weak period historically for manufacturers of
chip tools, in part because capital equipment needed to support
manufacturing of chips for the December holidays usually needs to
be in the supply chain by no later than October and chip makers in
Asia often wait until after Chinese New Year, which occurs in
January or February, before implementing their capital acquisition
plans. The timing of new product releases also has an impact on
seasonality, with the acquisition of manufacturing equipment
occurring six to nine months before a new release.
Many of
these factors are beyond our control, and the occurrence of one or
more of them could cause our operating results to vary widely. As a
result, it is difficult for us to forecast our quarterly revenue
accurately. Our results of operations for any quarter may not be
indicative of results for future quarters and quarter-to-quarter
comparisons of our operating results are not necessarily
meaningful. Variability in our periodic operating results could
lead to volatility in our stock price. Because a substantial
proportion of our expenses are relatively fixed in the short term,
our results of operations will suffer if revenue falls below our
expectations in a particular quarter, which could cause the price
of Class A common stock to decline. Moreover, as a result of any of
the foregoing factors, our operating results might not meet our
announced guidance or expectations of public market analysts or
investors, in which case the price of Class A common stock could
decrease significantly.
Cyclicality in the semiconductor industry is likely to lead to
substantial variations in demand for our products, and as a result
our operating results could be adversely affected.
The
chip industry has historically been cyclic and is characterized by
wide fluctuations in product supply and demand. From time to time,
this industry has experienced significant downturns, often in
connection with, or in anticipation of, maturing product and
technology cycles, excess inventories and declines in general
economic conditions. This cyclicality could cause our operating
results to decline dramatically from one period to the
next.
Our
business depends upon the capital spending of chip manufacturers,
which, in turn, depends upon the current and anticipated market
demand for chips. During industry downturns, chip manufacturers
often have excess manufacturing capacity and may experience
reductions in profitability due to lower sales and increased
pricing pressure for their products. As a result, chip
manufacturers generally sharply curtail their spending during
industry downturns and historically have lowered their spending
more than the decline in their revenues. If we are unable to
control our expenses adequately in response to lower revenue from
our customers, our operating results will suffer and we could
experience operating losses.
Conversely, during
industry upturns we must successfully increase production output to
meet expected customer demand. This may require us or our
suppliers, including third-party contractors, to order additional
inventory, hire additional employees and expand manufacturing
capacity. If we are unable to respond to a rapid increase in demand
for our tools on a timely basis, or if we misjudge the timing,
duration or magnitude of such an increase in demand, we may lose
business to our competitors or incur increased costs
disproportionate to any gains in revenue, which could have a
material adverse effect on our business, results of operations,
financial condition or cash flows.
The PRC
government is implementing focused policies, including state-led
investment initiatives, that aim to create and support an
independent domestic semiconductor supply chain spanning from
design to final system production. If these policies, which include
loans and subsidies, result in lower demand for equipment than is
expected by equipment manufacturers, the resulting overcapacity in
the chip manufacturing equipment market could lead to excess
inventory and price discounting that could have a material adverse
effect on our business and operating results.
Our success will depend on industry chip manufacturers adopting our
SAPS and TEBO technologies.
To date
our strategy for commercializing our tools has been to place them
with selected industry leaders in the manufacturing of memory and
logic chips, the two largest chip categories, to enable those
leading manufacturers to evaluate our technologies, and then
leverage our reputation to gain broader market acceptance. In order
for these industry leaders to adopt our tools, we need to establish
our credibility by demonstrating the differentiated, innovative
nature of our SAPS and TEBO technologies. Our SAPS technology has
been tested and purchased by industry leaders, but has not
achieved, and may never achieve, widespread market acceptance. We
have initiated a similar commercialization process for our TEBO
technology with a selected group of industry leaders. If these
leading manufacturers do not agree that our technologies add
significant value over conventional technologies or do not
otherwise accept and use our tools, we may need to spend a
significant amount of time and resources to enhance our
technologies or develop new technologies. Even if these leading
manufacturers adopt our technologies, other manufacturers may not
choose to accept and adopt our tools and our products may not
achieve widespread adoption. Any of the above factors would have a
material adverse effect on our business, results of operations and
financial condition.
If our SAPS and TEBO technologies do not achieve widespread market
acceptance, we will not be able to compete
effectively.
The
commercial success of our tools will depend, in part, on gaining
substantial market acceptance by chip manufacturers. Our ability to
gain acceptance for our products will depend upon a number of
factors, including:
●
our ability to
demonstrate the differentiated, innovative nature of our SAPS and
TEBO technologies and the advantages of our tools over those of our
competitors;
●
compatibility of
our tools with existing or potential customers’ manufacturing
processes and products;
●
the level of
customer service available to support our products;
and
●
the experiences our
customers have with our products.
In
addition, obtaining orders from new customers may be difficult
because many chip manufacturers have pre-existing relationships
with our competitors. Chip manufacturers must make a substantial
investment to qualify and integrate wet processing equipment into a
chip production line. Due, in part, to the cost of manufacturing
equipment and the investment necessary to integrate a particular
manufacturing process, a chip manufacturer that has selected a
particular supplier’s equipment and qualified that equipment
for production typically continues to use that equipment for the
specific production application and process node, which is the
minimum line width on a chip, as long as that equipment continues
to meet performance specifications. Some of our potential and
existing customers may prefer larger, more established vendors from
which they can purchase equipment for a wider variety of process
steps than our tools address. Further, because the cleaning process
with our TEBO equipment can be up to five times longer than
cleaning processes based on other technologies, we must convince
chip manufacturers of the innovative, differentiated nature of our
technologies and the benefits associated with using our tools. If
we are unable to obtain new customers and continue to achieve
widespread market acceptance of our tools, then our business,
operations, financial results and growth prospects will be
materially and adversely affected.
If we do not continue to enhance our existing single-wafer wet
cleaning tools and achieve market acceptance, we will not be able
to compete effectively.
We
operate in an industry that is subject to evolving standards, rapid
technological changes and changes in customer demands.
Additionally, if process nodes continue to shrink to ever-smaller
dimensions and conventional two-dimensional chips reach their
critical performance limitations, the technology associated with
manufacturing chips may advance to a point where our Ultra C
equipment based on SAPS and TEBO technologies becomes obsolete.
Accordingly, the future of our business will depend in large part
upon the continuing relevance of our technological capabilities,
our ability to interpret customer and market requirements in
advance of tool deliveries, and our ability to introduce in a
timely manner new tools that address chip makers’
requirements for cost-effective cleaning solutions. We expect to
spend a significant amount of time and resources developing new
tools and enhancing existing tools. Our ability to introduce and
market successfully any new or enhanced cleaning equipment is
subject to a wide variety of challenges during the tool’s
development, including the following:
●
accurate
anticipation of market requirements, changes in technology and
evolving standards;
●
the availability of
qualified product designers and technologies needed to solve
difficult design challenges in a cost-effective, reliable
manner;
●
our ability to
design products that meet chip manufacturers’ cost, size,
acceptance and specification criteria, and performance
requirements;
●
the ability and
availability of suppliers and third-party manufacturers to
manufacture and deliver the critical components and subassemblies
of our tools in a timely manner;
●
market acceptance
of our customers’ products, and the lifecycle of those
products; and
●
our ability to
deliver products in a timely manner within our customers’
product planning and deployment cycle.
Certain
enhancements to our Ultra C equipment in future periods may reduce
demand for our pre-existing tools. As we introduce new or enhanced
cleaning tools, we must manage the transition from older tools in
order to minimize disruptions in customers’ ordering
patterns, avoid excessive levels of older tool inventories and
ensure timely delivery of sufficient supplies of new tools to meet
customer demand. Furthermore, product introductions could delay
purchases by customers awaiting arrival of our new products, which
could cause us to fail to meet our expected level of production
orders for pre-existing tools.
Our success will depend on our ability to identify and enter new
product markets.
We
expect to spend a significant amount of time and resources
identifying new product markets in addition to the market for
cleaning solutions and in developing new products for entry into
these markets. Our TEBO technology took eight years to develop, and
development of any new technology could require a similar, or even
longer, period of time. Product development requires significant
investments in engineering hours, third-party development costs,
prototypes and sample materials, as well as sales and marketing
expenses, which will not be recouped if the product launch is
unsuccessful. We may fail to predict the needs of other markets
accurately or develop new, innovative technologies to address those
needs. Further, we may not be able to design and introduce new
products in a timely or cost-efficient manner, and our new products
may be more costly to develop, may fail to meet the requirements of
the market, or may be adopted slower than we expect. If we are not
able to introduce new products successfully, our inability to gain
market share in new product markets could adversely affect our
ability to sustain our revenue growth or maintain our current
revenue levels.
If we fail to establish and maintain a reputation for credibility
and product quality, our ability to expand our customer base will
be impaired and our operating results may suffer.
We must
develop and maintain a market reputation for innovative,
differentiated technologies and high quality, reliable products in
order to attract new customers and achieve widespread market
acceptance of our products. Our market reputation is critical
because we compete against several larger, more established
competitors, many of which supply equipment for a larger number of
process steps than we do to a broader customer base in an industry
with a limited number of customers. In these circumstances,
traditional marketing and branding efforts are of limited value,
and our success depends on our ability to provide customers with
reliable and technically sophisticated products. If the limited
customer base does not perceive our products and services to be of
high quality and effectiveness, our reputation could be harmed,
which could adversely impact our ability to achieve our targeted
growth.
We operate in a highly competitive industry and many of our
competitors are larger, better-established, and have significantly
greater operating and financial resources than we
have.
The
chip equipment industry is highly competitive, and we face
substantial competition throughout the world in each of the markets
we serve. Many of our current and potential competitors have, among
other things:
●
greater financial,
technical, sales and marketing, manufacturing, distribution and
other resources;
●
established
credibility and market reputations;
●
longer operating
histories;
●
broader product
offerings;
●
more extensive
service offerings, including the ability to have large inventories
of spare parts available near, or even at, customer
locations;
●
local sales forces;
and
●
more extensive
geographic coverage.
These
competitors may also have the ability to offer their products at
lower prices by subsidizing their losses in wet cleaning with
profits from other lines of business in order to retain current or
obtain new customers. Among other things, some competitors have the
ability to offer bundled discounts for customers purchasing
multiple products. Many of our competitors have more extensive
customer and partner relationships than we do and may therefore be
in a better position to identify and respond to market developments
and changes in customer demands. Potential customers may prefer to
purchase from their existing suppliers rather than a new supplier,
regardless of product performance or features. If we are not able
to compete successfully against existing or new competitors, our
business, operating results and financial condition will be
negatively affected.
We depend on a small number of customers for a substantial portion
of our revenue, and the loss of, or a significant reduction in
orders from, one of our major customers could have a material
adverse effect on our revenue and operating results. There are also
a limited number of potential customers for our
products.
The chip manufacturing industry is highly
concentrated, and we derive a significant portion of our revenue
from the sale of our products to a small number of customers. In
2017, 55.2% of our revenue was derived from four customers: SK
Hynix Inc., 18.1%; Shanghai Integrated Circuit Research and
Development Center Ltd., 14.1%; JiangYin ChangDian Advanced
Packaging Co. Ltd., 12.8% and
Yangtze Memory Technologies Co., Ltd,
10.2%.
In 2016, 99.3% of our
revenue was derived from four customers: Shanghai Huali
Microelectronics Corporation, 33.7%; Semiconductor Manufacturing
International Corporation, 25.0%; SK Hynix Inc., 24.0%; and
JiangYin ChangDian Advanced Packaging Co. Ltd., 16.6%. As a
consequence of the concentrated nature of our customer base, our
revenue and results of operations may fluctuate from quarter to
quarter and are difficult to estimate, and any cancellation of
orders or any acceleration or delay in anticipated product
purchases or the acceptance of shipped products by our larger
customers could materially affect our revenue and results of
operations in any quarterly
period.
We may
be unable to sustain or increase our revenue from our larger
customers or offset the discontinuation of concentrated purchases
by our larger customers with purchases by new or existing
customers. We expect a small number of customers will continue to
account for a high percentage of our revenue for the foreseeable
future and that our results of operations may fluctuate materially
as a result of such larger customers’ buying patterns. Thus,
our business success depends on our ability to maintain strong
relationships with our customers. The loss of any of our key
customers for any reason, or a change in our relationship with any
of our key customers, including a significant delay or reduction in
their purchases, may cause a significant decrease in our revenue,
which we may not be able to recapture due to the limited number of
potential customers.
We have
seen, and may see in the future, consolidation of our customer
base. Industry consolidation generally has negative implications
for equipment suppliers, including a reduction in the number of
potential customers, a decrease in aggregate capital spending and
greater pricing leverage on the part of consumers over equipment
suppliers. Continued consolidation of the chip industry could make
it more difficult for us to grow our customer base, increase sales
of our products and maintain adequate gross margins.
Our customers do not enter into long-term purchase commitments, and
they may decrease, cancel or delay their projected purchases at any
time.
In
accordance with industry practice, our sales are on a purchase
order basis, which we seek to obtain three to four months in
advance of the expected product delivery date. Until a purchase
order is received, we do not have a binding purchase commitment.
Our SAPS and TEBO customers to date have provided us with
non-binding one- to two-year forecasts of their anticipated
demands, but those forecasts can be changed at any time, without
any required notice to us. Because the lead-time needed to produce
a tool customized to a customer’s specifications can extend
up to six months, we may need to begin production of tools based on
non-binding forecasts, rather than waiting to receive a binding
purchase order. No assurance can be made that a customer’s
forecast will result in a firm purchase order within the time
period we expect, or at all.
If we
do not accurately predict the amount and timing of a
customer’s future purchases, we risk expending time and
resources on producing a customized tool that is not purchased by a
particular customer, which may result in excess or unwanted
inventory, or we may be unable to fulfill an order on the schedule
required by a purchase order, which would result in foregone sales.
Customers may place purchase orders that exceed forecasted amounts,
which could result in delays in our delivery time and harm our
reputation. In the future a customer may decide not to purchase our
tools at all, may purchase fewer tools than it did in the past or
may otherwise alter its purchasing patterns, and the impact of any
such actions may be intensified given our dependence on a small
number of large customers. Our customers make major purchases
periodically as they add capacity or otherwise implement technology
upgrades. If any significant customers cancel, delay or reduce
orders, our operating results could suffer.
We may incur significant expenses long before we can recognize
revenue from new products, if at all, due to the costs and length
of research, development, manufacturing and customer evaluation
process cycles.
We
often incur significant research and development costs for products
that are purchased by our customers only after much, or all, of the
cost has been incurred or that may never be purchased. We allow new
customers, or existing customers considering new products, to
evaluate products without any payment becoming due unless the
product is ultimately accepted, which means we may invest $1.0 to
$2.0 million in manufacturing a tool that may never be accepted and
purchased or may be purchased months or even years after
production. In the past we have borrowed money in order to fund
first-time purchase order equipment and next-generation evaluation
equipment. When we complete a first-time sale, we may not receive
payment for up to 24 months. Even returning customers may take as
long as six months to make any payments. If our sales efforts are
unsuccessful after expending significant resources, or if we
experience delays in completing sales, our future cash flow,
revenue and profitability may fluctuate or be materially adversely
affected.
Our sales cycle is long and unpredictable, which results in
variability of our financial performance and may require us to
incur high sales and marketing expenses with no assurance that a
sale will result, all of which could adversely affect our
profitability.
Our
results of operations may fluctuate, in part, because of the
resource-intensive nature of our sales efforts and the length and
variability of our sales cycle. A sales cycle is the period between
initial contact with a prospective customer and any sale of our
tools. Our sales process involves educating customers about our
tools, participating in extended tool evaluations and configuring
our tools to customer-specific needs, after which customers may
evaluate the tools. The length of our sales cycle, from initial
contact with a customer to the execution of a purchase order, is
generally 6 to 24 months. During the sales cycle, we expend
significant time and money on sales and marketing activities and
make investments in evaluation equipment, all of which lower our
operating margins, particularly if no sale occurs or if the sale is
delayed as a result of extended qualification processes or delays
from our customers’ customers.
The
duration or ultimate success of our sales cycle depends on factors
such as:
●
efforts by our
sales force;
●
the complexity of
our customers’ manufacturing processes and the compatibility
of our tools with those processes;
●
our
customers’ internal technical capabilities and
sophistication; and
●
our
customers’ capital spending plans and processes, including
budgetary constraints, internal approvals, extended negotiations or
administrative delays.
It is
difficult to predict exactly when, or even if, we will make a sale
to a potential customer or if we can increase sales to our existing
customers. As a result, we may not recognize revenue from our sales
efforts for extended periods of time, or at all. The loss or delay
of one or more large transactions in a quarter could impact our
results of operations for that quarter and any future quarters for
which revenue from that transaction is lost or delayed. In
addition, we believe that the length of the sales cycle and
intensity of the evaluation process may increase for those current
and potential customers that centralize their purchasing
decisions.
Difficulties in forecasting demand for our tools may lead to
periodic inventory shortages or excess spending on inventory items
that may not be used.
We need
to manage our inventory of components and production of tools
effectively to meet changing customer requirements. Accurately
forecasting customers’ needs is difficult. Our tool demand
forecasts are based on multiple assumptions, including non-binding
forecasts received from our customers years in advance, each of
which may introduce error into our estimates. Inventory levels for
components necessary to build our tools in excess of customer
demand may result in inventory write-downs and could have an
adverse effect on our operating results and financial condition.
Conversely, if we underestimate demand for our tools or if our
manufacturing partners fail to supply components we require at the
time we need them, we may experience inventory shortages. Such
shortages might delay production or shipments to customers and may
cause us to lose sales. These shortages may also harm our
credibility, diminish the loyalty of our channel partners or
customers.
A
failure to prevent inventory shortages or accurately predict
customers’ needs could result in decreased revenue and gross
margins and harm our business.
Some of
our products and supplies may become obsolete or be deemed excess
while in inventory due to rapidly changing customer specifications,
changes in product structure, components or bills of material as a
result of engineering changes, or a decrease in customer demand. We
also have exposure to contractual liabilities to our contract
manufacturers for inventories purchased by them on our behalf,
based on our forecasted requirements, which may become excess or
obsolete. Our inventory balances also represent an investment of
cash. To the extent our inventory turns are slower than we
anticipate based on historical practice, our cash conversion cycle
extends and more of our cash remains invested in working capital.
If we are not able to manage our inventory effectively, we may need
to write down the value of some of our existing inventory or write
off non-saleable or obsolete inventory. Any such charges we incur
in future periods could materially and adversely affect our results
of operations.
The
difficulty in forecasting demand also makes it difficult to
estimate our future results of operations and financial condition
from period to period. A failure to accurately predict the level of
demand for our products could adversely affect our net revenue and
net income, and we are unlikely to forecast such effects with any
certainty in advance.
If our tools contain defects or do not meet customer
specifications, we could lose customers and revenue.
Highly
complex tools such as our may develop defects during the
manufacturing and assembly process. We may also experience
difficulties in customizing our tools to meet customer
specifications or detecting defects during the development and
manufacturing of our tools. Some of these failures may not be
discovered until we have expended significant resources in
customizing our tools, or until our tools have been installed in
our customers’ production facilities. These quality problems
could harm our reputation as well as our customer relationships in
the following ways:
●
our customers may
delay or reject acceptance of our tools that contain defects or
fail to meet their specifications;
●
we may suffer
customer dissatisfaction, negative publicity and reputational
damage, resulting in reduced orders or otherwise damaging our
ability to retain existing customers and attract new
customers;
●
we may incur
substantial costs as a result of warranty claims or service
obligations or in order to enhance the reliability of our
tools;
●
the attention of
our technical and management resources may be
diverted;
●
we may be required
to replace defective systems or invest significant capital to
resolve these problems; and
●
we may be required
to write off inventory and other assets related to our
tools.
In
addition, defects in our tools or our inability to meet the needs
of our customers could cause damage to our customers’
products or manufacturing facilities, which could result in claims
for product liability, tort or breach of warranty, including claims
from our customers. The cost of defending such a lawsuit,
regardless of its merit, could be substantial and could divert
management’s attention from our ongoing operations. In
addition, if our business liability insurance coverage proves
inadequate with respect to a claim or future coverage is
unavailable on acceptable terms or at all, we may be liable for
payment of substantial damages. Any or all of these potential
consequences could have an adverse impact on our operating results
and financial condition.
Warranty claims in excess of our estimates could adversely affect
our business.
We have
provided warranties against manufacturing defects of our tools that
range from 12 to 36 months in duration. Our product warranty
requires us to provide labor and parts necessary to repair defects.
To date we have not accrued a significant liability contingency for
potential warranty claims. Warranty claims substantially in excess
of our expectations, or significant unexpected costs associated
with warranty claims, could harm our reputation and could cause
customers to decline to place new or additional orders, which could
have a material adverse effect on our business, results of
operations and financial condition.
We rely on third parties to manufacture significant portions of our
tools and our failure to manage our relationships with these
parties could harm our relationships with our customers, increase
our costs, decrease our sales and limit our growth.
Our
tools are complex and require components and subassemblies having a
high degree of reliability, accuracy and performance. We rely on
third parties to manufacture most of the subassemblies and supply
most of the components used in our tools. Accordingly, we cannot
directly control our delivery schedules and quality assurance. This
lack of control could result in shortages or quality assurance
problems. These issues could delay shipments of our tools, increase
our testing costs or lead to costly failure claims.
We do
not have long-term supply contracts with some of our suppliers, and
those suppliers are not obligated to perform services or supply
products to us for any specific period, in any specific quantities
or at any specific price, except as may be provided in a particular
purchase order. In addition, we attempt to maintain relatively low
inventories and acquire subassemblies and components only as
needed. There are significant risks associated with our reliance on
these third-party suppliers, including:
●
potential price
increases;
●
capacity shortages
or other inability to meet any increase in demand for our
products;
●
reduced control
over manufacturing process for components and subassemblies and
delivery schedules;
●
limited ability of
some suppliers to manufacture and sell subassemblies or parts in
the volumes we require and at acceptable quality levels and prices,
due to the suppliers’ relatively small operations and limited
manufacturing resources;
●
increased exposure
to potential misappropriation of our intellectual property;
and
●
limited warranties
on subassemblies and components supplied to us.
Any
delays in the shipment of our products due to our reliance on
third-party suppliers could harm our relationships with our
customers. In addition, any increase in costs due to our suppliers
increasing the price they charge us for subassemblies and
components or arising from our need to replace our current
suppliers that we are unable to pass on to our customers could
negatively affect our operating results.
Any shortage of components or subassemblies could result in delayed
delivery of products to us or in increased costs to us, which could
harm our business.
The
ability of our manufacturers to supply our tools is dependent, in
part, upon the availability certain components and subassemblies.
Our manufacturers may experience shortages in the availability of
such components or subassemblies, which could result in delayed
delivery of products to us or in increased costs to us. Any
shortage of components or subassemblies or any inability to control
costs associated with manufacturing could increase the costs for
our products or impair our ability to ship orders in a timely
cost-efficient manner. As a result, we could experience
cancellation of orders, refusal to accept deliveries or a reduction
in our prices and margins, any of which could harm our financial
performance and results of operations.
We depend on a limited number of suppliers, including single source
suppliers, for critical components and subassemblies, and our
business could be disrupted if they are unable to meet our
needs.
We
depend on a limited number of suppliers for components and
subassemblies used in our tools. Certain components and
subassemblies of our tools have only been purchased from our
current suppliers to date, and changing the source of those
components and subassemblies may result in disruptions during the
transition process and entail significant delay and expense. We
rely on Product Systems, Inc., or ProSys, as the sole supplier of
megasonic transducers, a key subassembly used in our single-wafer
cleaning equipment. We also rely on Ninebell Co., Ltd., or
Ninebell, which is the principal supplier of robotic delivery
system subassemblies used in our single-wafer cleaning equipment.
An adverse change to our relationship with ProSys or Ninebell would
disrupt our production of single-wafer cleaning equipment and could
cause substantial harm to our business.
With
some of these suppliers, we do not have long-term agreements and
instead purchase components and subassemblies through a purchase
order process. As a result, these suppliers may stop supplying us
components and subassemblies, limit the allocation of supply and
equipment to us due to increased industry demand or significantly
increase their prices at any time with little or no advance notice.
Our reliance on a limited number of suppliers could also result in
delivery problems, reduced control over product pricing and
quality, and our inability to identify and qualify another supplier
in a timely manner.
Moreover, some of
our suppliers may experience financial difficulties that could
prevent them from supplying us with components or subassemblies
used in the design and manufacture of our products. In addition,
our suppliers, including our sole supplier ProSys, may experience
manufacturing delays or shut downs due to circumstances beyond
their control, such as labor issues, political unrest or natural
disasters. Any supply deficiencies could materially and adversely
affect our ability to fulfill customer orders and our results of
operations. We have in the past and may in the future, experience
delays or reductions in supply shipments, which could reduce our
revenue and profitability. If key components or materials are
unavailable, our costs would increase and our revenue would
decline.
We have depended on PRC governmental subsidies to help fund our
technology development since 2008, and our failure to obtain
additional subsidies may impede our development of new technologies
and may increase our cost of capital, either of which could make it
difficult for us to expand our product base.
We
received subsidies from local and central governmental authorities
in the PRC in 2008, 2009 and 2014. These grants have provided a
majority of the funding for our development and commercialization
of stress-free polishing and electro copper-plating technologies.
If we are unable to obtain similar governmental subsidies for
development projects in the future, we may need to raise additional
funds through public or private financings, strategic
relationships, or other arrangements, which could force us to
reduce our efforts to develop technologies beyond SAPS and TEBO. To
the extent that we receive a lower level of, or no, governmental
subsidies in the future, we may need to raise additional funds
through public or private financings, strategic relationships, or
other arrangements.
The success of our business will depend on our ability to manage
any future growth.
We have
experienced rapid growth in our business recently due, in part, to
an expansion of our product offerings and an increase in the number
of customers that we serve. For example, our headcount grew by
18.7% during 2016 and by an additional 28.1% during 2017. We will
seek to continue to expand our operations in the future, including
by adding new offices, locations and employees. Managing our growth
has placed and could continue to place a significant strain on our
management, other personnel and our infrastructure. If we are
unable to manage our growth effectively, we may not be able to take
advantage of market opportunities, develop new products, enhance
our technological capabilities, satisfy customer requirements,
respond to competitive pressures or otherwise execute our business
plan. In addition, any inability to manage our growth effectively
could result in operating inefficiencies that could impair our
competitive position and increase our costs disproportionately to
the amount of growth we achieve. To manage our growth, we believe
we must effectively:
●
hire, train,
integrate and manage additional qualified engineers for research
and development activities, sales and marketing personnel, service
and support personnel and financial and information technology
personnel;
●
manage multiple
relationships with our customers, suppliers and other third
parties; and
●
continue to enhance
our information technology infrastructure, systems and
controls.
Our
organizational structure has become more complex, and we will need
to continue to scale and adapt our operational, financial and
management controls, as well as our reporting systems and
procedures. The continued expansion of our infrastructure will
require us to commit substantial financial, operational and
management resources before our revenue increases and without any
assurances that our revenue will increase.
We are highly dependent on our Chief Executive Officer and
President and other senior management and key
employees
,
and we currently do not have a permanent Chief Financial
Officer.
Our
success largely depends on the skills, experience and continued
efforts of our management, technical and sales personnel, including
in particular Dr. David H. Wang, our Chair of the Board, Chief
Executive Officer, President and founder.
In January 2018 we
notified our former Chief Financial Officer of the termination of
his employment effective January 24, 2018. Our Chief Accounting
Officer, who joined us effective January 24, 2018, currently is
serving as our interim Chief Financial Officer. We are uncertain as
to when we will be able to identify and hire a successor Chief
Financial Office, and we may incur significant expense in
recruiting and hiring such a successor.
If one or more of
our other senior management were unable or unwilling to continue
their employment with us, we may not be able to replace them in a
timely manner. We may incur additional expenses to recruit and
retain qualified replacements. We do not currently maintain key
person life insurance policies on any of our employees. Our
business may be severely disrupted and our financial condition and
results of operations may be materially and adversely affected. In
addition, our senior management may join a competitor or form a
competing company. All of our senior management are at-will
employees, which means either we or the employee
may
terminate their employment at any time. The loss of Dr. Wang or
other key management personnel, including our former Chief
Financial Officer, could significantly delay or prevent the
achievement of our business objectives.
Failure to attract and retain qualified personnel could put us at a
competitive disadvantage and prevent us from effectively growing
our business.
Our
future success depends, in part, on our ability to continue to
attract and retain highly skilled personnel. There is substantial
competition for experienced management, technical and sales
personnel in the chip equipment industry. If qualified personnel
become scarce or difficult to attract or retain for
compensation-related or other reasons, we could experience higher
labor, recruiting or training costs. New hires may require
significant training and time before they achieve full productivity
and may not become as productive as we expect. If we are unable to
retain and motivate our existing employees and attract qualified
personnel to fill key positions, we may experience inadequate
levels of staffing to develop and market our products and perform
services for our customers, which could have a negative effect on
our operating results.
Our ability to utilize certain U.S. and state net operating loss
carryforwards may be limited under applicable tax
laws.
As of
December 31, 2017, we had net operating loss carryforward amounts,
or NOLs, of $20.1 million for U.S. federal income tax purposes and
$536,000 for U.S. state income tax purposes. The federal and state
NOLs will expire at various dates beginning in 2019.
Utilization of
these NOLs could be subject to a substantial annual limitation if
the ownership change limitations under U.S. Internal Revenue Code
Sections 382 and 383 and similar U.S. state provisions are
triggered by changes in the ownership of our capital stock. Such an
annual limitation would result in the expiration of the NOLs before
utilization. Our existing NOLs may be subject to limitations
arising from previous ownership changes
, including in
connection with our initial public offering and concurrent private
placement in November 2017 and any future follow-on public
offerings.
Future changes in our stock ownership, some of
which are outside of our control, could result in an ownership
change. Regulatory changes, such as suspensions on the use of NOLs,
or other unforeseen reasons, may cause our existing NOLs to expire
or otherwise become unavailable to offset future income tax
liabilities. Additionally, U.S. state NOLs generated in one state
cannot be used to offset income generated in another U.S. state.
For these reasons, we may be limited in our ability to realize tax
benefits from the use of our NOLs, even if our profitability would
otherwise allow for it.
Acquisitions that we pursue in the future, whether or not
consummated, could result in other operating and financial
difficulties.
In the
future we may seek to acquire additional product lines,
technologies or businesses in an effort to increase our growth,
enhance our ability to compete, complement our product offerings,
enter new and adjacent markets, obtain access to additional
technical resources, enhance our intellectual property rights or
pursue other competitive opportunities. We may also make
investments in certain key suppliers to align our interests with
such suppliers. If we seek acquisitions, we may not be able to
identify suitable acquisition candidates at prices we consider
appropriate. We cannot readily predict the timing or size of our
future acquisitions, or the success of any future
acquisitions.
To the
extent that we consummate acquisitions or investments, we may face
financial risks as a result, including increased costs associated
with merged or acquired operations, increased indebtedness,
economic dilution to gross and operating profit and earnings per
share, or unanticipated costs and liabilities. Acquisitions may
involve additional risks, including:
●
the acquired
product lines, technologies or businesses may not improve our
financial and strategic position as planned;
●
we may determine we
have overpaid for the product lines, technologies or businesses, or
that the economic conditions underlying our acquisition have
changed;
●
we may have
difficulty integrating the operations and personnel of the acquired
company;
●
we may have
difficulty retaining the employees with the technical skills needed
to enhance and provide services with respect to the acquired
product lines or technologies;
●
the acquisition may
be viewed negatively by customers, employees, suppliers, financial
markets or investors;
●
we may have
difficulty incorporating the acquired product lines or technologies
with our existing technologies;
●
we may encounter a
competitive response, including price competition or intellectual
property litigation;
●
we may become a
party to product liability or intellectual property infringement
claims as a result of our sale of the acquired company’s
products;
●
we may incur
one-time write-offs, such as acquired in-process research and
development costs, and restructuring charges;
●
we may acquire
goodwill and other intangible assets that are subject to impairment
tests, which could result in future impairment
charges;
●
our ongoing
business and management’s attention may be disrupted or
diverted by transition or integration issues and the complexity of
managing geographically or culturally diverse enterprises;
and
●
our due diligence
process may fail to identify significant existing issues with the
target business.
From
time to time, we may enter into negotiations for acquisitions or
investments that are not ultimately consummated. These negotiations
could result in significant diversion of management time, as well
as substantial out-of-pocket costs, any of which could have a
material adverse effect on our business, operating results and
financial condition.
Future declines in the semiconductor industry, and the overall
world economic conditions on which the industry is significantly
dependent, could have a material adverse impact on our results of
operations and financial condition.
Our
business depends on the capital equipment expenditures of chip
manufacturers, which in turn depend on the current and anticipated
market demand for integrated circuits. With the consolidation of
customers within the industry, the chip capital equipment market
may experience rapid changes in demand driven both by changes in
the market generally and the plans and requirements of particular
customers. Global economic and business conditions, which are often
unpredictable, have historically impacted customer demand for our
products and normal commercial relationships with our customers,
suppliers and creditors. Additionally, in times of economic
uncertainty our customers’ budgets for our tools, or their
ability to access credit to purchase them, could be adversely
affected. This would limit their ability to purchase our products
and services. As a result, economic downturns could cause material
adverse changes to our results of operations and financial
condition including:
●
a decline in demand
for our products;
●
an increase in
reserves on accounts receivable due to our customers’
inability to pay us;
●
an increase in
reserves on inventory balances due to excess or obsolete inventory
as a result of our inability to sell such inventory;
●
valuation
allowances on deferred tax assets;
●
restructuring
charges;
●
asset impairments
including the potential impairment of goodwill and other intangible
assets;
●
a decline in the
value of our investments;
●
exposure to claims
from our suppliers for payment on inventory that is ordered in
anticipation of customer purchases that do not come to
fruition;
●
a decline in the
value of certain facilities we lease to less than our residual
value guarantee with the lessor; and
●
challenges
maintaining reliable and uninterrupted sources of
supply.
Fluctuating levels
of investment by chip manufacturers may materially affect our
aggregate shipments, revenue, operating results and earnings. Where
appropriate, we will attempt to respond to these fluctuations with
cost management programs aimed at aligning our expenditures with
anticipated revenue streams, which could result in restructuring
charges. Even during periods of reduced revenues, we must continue
to invest in research and development and maintain extensive
ongoing worldwide customer service and support capabilities to
remain competitive, which may temporarily harm our profitability
and other financial results.
We conduct substantially all of our operations outside the United
States and face risks associated with conducting business in
foreign markets.
All of
our sales in 2016 and 2017 were made to customers outside the
United States. Our manufacturing center has been located in
Shanghai, PRC since 2006 and substantially all of our operations
are located in the PRC. We expect that all of our significant
activities will remain outside the United States in the future. We
are subject to a number of risks associated with our international
business activities, including:
●
imposition of, or
adverse changes in, foreign laws or regulatory
requirements;
●
the need to comply
with the import laws and regulations of various foreign
jurisdictions, including a range of U.S. import laws;
●
potentially adverse
tax consequences, including withholding tax rules that may limit
the repatriation of our earnings, and higher effective income tax
rates in foreign countries where we conduct business;
●
competition from
local suppliers with which potential customers may prefer to do
business;
●
seasonal reduction
in business activity, such as during Chinese, or Lunar, New Year in
parts of Asia and in other periods in various individual
countries;
●
increased exposure
to foreign currency exchange rates;
●
reduced protection
for intellectual property;
●
longer sales cycles
and reliance on indirect sales in certain regions;
●
increased length of
time for shipping and acceptance of our products;
●
greater difficulty
in responding to customer requests for maintenance and spare parts
on a timely basis;
●
greater difficulty
in enforcing contracts and accounts receivable collection and
longer collection periods;
●
difficulties in
staffing and managing foreign operations and the increased travel,
infrastructure and legal and compliance costs associated with
multiple international locations;
●
heightened risk of
unfair or corrupt business practices in certain geographies and of
improper or fraudulent sales arrangements that may impact financial
results and result in restatements of, or irregularities in, our
consolidated financial statements; and
●
general economic
conditions, geopolitical events or natural disasters in countries
where we conduct our operations or where our customers are located,
including political unrest, war, acts of terrorism or responses to
such events.
In
particular, the Asian market is extremely competitive, and chip
manufacturers may be aggressive in seeking price concessions from
suppliers, including chip equipment manufacturers.
We may
not be successful in developing and implementing policies and
strategies that will be effective in managing these risks in each
country in which we do business. Our failure to manage these risks
successfully could adversely affect our business, operating results
and financial condition.
Fluctuation in foreign currency exchange rates may adversely affect
our results of operations and financial position.
Our
results of operations and financial position could be adversely
affected as a result of fluctuations in foreign currency exchange
rates. Although our financial statements are denominated in U.S.
dollars, a sizable portion of our revenues and costs are
denominated in other currencies, primarily the Chinese Renminbi.
Because many of our raw material purchases are denominated in
Renminbi while the majority of the purchase orders we receive are
denominated in U.S. dollars, exchange rates have a significant
effect on our gross margin. We have not engaged in any foreign
currency exchange hedging transactions to date, and any strategies
that we may use in the future to reduce the adverse impact of
fluctuations in foreign currency exchange rates may not be
successful. Our foreign currency exposure with respect to assets
and liabilities for which we do not have hedging arrangements could
have a material impact on our results of operations in periods when
the U.S. dollar significantly fluctuates in relation to unhedged
non-U.S. currencies in which we transact business.
Changes in political and economic policies of the PRC government
may materially and adversely affect our business, financial
condition and results of operations and may result in our inability
to sustain our growth and expansion strategies.
Substantially all
of our operations are conducted in the PRC, and a substantial
majority of our revenue is sourced from the PRC. Accordingly, our
financial condition and results of operations are affected to a
significant extent by economics, political and legal developments
in the PRC.
The
Chinese economy differs from the economies of most developed
countries in many respects, including the extent of government
involvement, level of development, growth rate, and control of
foreign exchange and allocation of resources. Although the PRC
government has implemented measures emphasizing the utilization of
market forces for economic reform, the reduction of state ownership
of productive assets and the establishment of improved corporate
governance in business enterprises, a substantial portion of
productive assets in the PRC are still owned by the government. In
addition, the PRC government continues to play a significant role
in regulating industry development by imposing industrial policies.
The PRC government also exercises significant control over economic
growth in the PRC by allocating resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy,
regulating financial services and institutions, and providing
preferential treatment to particular industries or
companies.
While
the PRC economy has experienced significant growth in the past
three decades, growth has been uneven, both geographically and
among various sectors of the economy. The PRC government has
implemented various measures to encourage economic growth and guide
the allocation of resources. Some of these measures may benefit the
overall PRC economy, but may also have a negative effect on us. Our
financial condition and results of operation could be materially
and adversely affected by government control over capital
investments or changes in tax regulations that are applicable to
us. In the past the PRC government has implemented measures to
control the pace of economic growth, and similar measures in the
future may cause decreased economic activity, which in turn could
lead to a reduction in demand for our products and consequently
have a material adverse effect on our businesses, financial
condition and results of operations.
Although the PRC
government has been implementing policies to develop an independent
domestic semiconductor industry supply chain, there is no
guaranteed time frame in which these initiatives will be
implemented. We cannot guarantee that the implementation of these
policies will result in additional revenue to us or that our
presence in the PRC will result in support from the PRC government.
To the extent that any capital investment or other assistance from
the PRC government is not provided to us, it could be used to
promote the products and technologies of our competitors, which
could adversely affect our business, operating results and
financial condition.
We are subject to government regulation, including import, export,
economic sanctions, and anti-corruption laws and regulations, that
may limit our sales opportunities, expose us to liability and
increase our costs.
Our
products are subject to import and export controls in jurisdictions
in which we distribute or sell our products. Import and exports
control and economic sanctions laws and regulations include
restrictions and prohibitions on the sale or supply of certain
products and on our transfer of parts, components, and related
technical information and know-how to certain countries, regions,
governments, persons and entities.
Various
countries regulate the importation of certain products through
import permitting and licensing requirements and have enacted laws
that could limit our ability to distribute our products. The
exportation, re-exportation, transfers within foreign countries and
importation of our products, including by our partners, must comply
with these laws and regulations, and any violations may result in
reputational harm, government investigations and penalties, and a
denial or curtailment of exporting. Complying with export control
and sanctions laws for a particular sale may be time consuming, may
increase our costs, and may result in the delay or loss of sales
opportunities. If we are found to be in violation of U.S. sanctions
or export control laws, or similar laws in other jurisdictions, we
and the individuals working for us could incur substantial fines
and penalties. Changes in export, sanctions or import laws or
regulations may delay the introduction and sale of our products in
international markets, require us to spend resources to seek
necessary government authorizations or to develop different
versions of our products, or, in some cases, prevent the export or
import of our products to certain countries, regions, governments,
persons or entities, which could adversely affect our business,
financial condition and operating results.
We are
subject to various domestic and international anti-corruption laws,
such as the U.S. Foreign Corrupt Practices Act, as well as similar
anti-bribery and anti-kickback laws and regulations. These laws and
regulations generally prohibit companies and their intermediaries
from offering or making improper payments to non-U.S. officials for
the purpose of obtaining, retaining or directing business. Our
exposure for violating these laws and regulations increases as our
international presence expands and as we increase sales and
operations in foreign jurisdictions.
Breaches of our cybersecurity systems could degrade our ability to
conduct our business operations and deliver products to our
customers, result in data losses and the theft of our intellectual
property, damage our reputation, and require us to incur
significant additional costs to maintain the security of our
networks and data.
We
increasingly depend upon our information technology systems to
conduct our business operations, ranging from our internal
operations and product development and manufacturing activities to
our marketing and sales efforts and communications with our
customers and business partners. Computer programmers may attempt
to penetrate our network security, or that of our website, and
misappropriate our proprietary information or cause interruptions
of our service. Because the techniques used by such computer
programmers to access or sabotage networks change frequently and
may not be recognized until launched against a target, we may be
unable to anticipate these techniques. We have also outsourced a
number of our business functions to third-party contractors,
including our manufacturers, and our business operations also
depend, in part, on the success of our contractors’ own
cybersecurity measures. Accordingly, if our cybersecurity systems
and those of our contractors fail to protect against unauthorized
access, sophisticated cyberattacks and the mishandling of data by
our employees and contractors, our ability to conduct our business
effectively could be damaged in a number of ways, including
sensitive data regarding our employees or business, including
intellectual property and other proprietary data, could be stolen.
Should this occur, we could be subject to significant claims for
liability from our customers and regulatory actions from
governmental agencies. In addition, our ability to protect our
intellectual property rights could be compromised and our
reputation and competitive position could be significantly harmed.
Consequently, our financial performance and results of operations
could be adversely affected.
Our production facilities could be damaged or disrupted by a
natural disaster, war, terrorist attacks or other catastrophic
events.
Our
manufacturing facilities are subject to risks associated with
natural disasters, such as earthquakes, fires, floods tsunami,
typhoons and volcanic activity, environmental disasters, health
epidemics, and other events beyond our control such as power loss,
telecommunications failures, and uncertainties arising out of armed
conflicts or terrorist attacks. A substantial majority of our
facilities as well as our research and development personnel are
located in the PRC. Any catastrophic loss or significant damage to
any of our facilities would likely disrupt our operations, delay
production, and adversely affect our product development schedules,
shipments and revenue. In addition, any such catastrophic loss or
significant damage could result in significant expense to repair or
replace the facility and could significantly curtail our research
and development efforts in a particular product area or primary
market, which could have a material adverse effect on our
operations and operating results.
Our management and auditors identified a material weakness in our
internal control over financial reporting that, if not properly
remediated, could result in material misstatements in our
consolidated financial statements that could cause investors to
lose confidence in our reported financial information and have a
negative effect on the trading price of our stock.
Neither
we nor BDO China Shu Lun Pan Certified Public Accountants LLP, or
BDO China, our independent registered public accounting firm, has
performed a comprehensive assessment of our internal control over
financial reporting, as defined by the American Institute of
Certified Public Accountants, for purposes of identifying and
reporting material weaknesses and other control deficiencies. We
are not currently required to comply with Section 404 of the
Sarbanes-Oxley Act and therefore are not required to assess the
effectiveness of our internal control over financial reporting.
Further, BDO China has not been engaged to express, nor has it
expressed, an opinion on the effectiveness of our internal control
over financial reporting.
In connection with
its audit of our consolidated financial statements as of, and for
the year ended, December 31, 2016, BDO China informed us that it
had identified a material weakness in our internal control over
financial reporting relating to our lack of sufficient qualified
financial reporting and accounting personnel with an appropriate
level of expertise to properly address complex accounting issues
under accounting principles generally accepted in the United
States, or GAAP, and to prepare and review our consolidated
financial statements and related disclosures to fulfill GAAP and
SEC financial reporting requirements. As of December 31, 2017, we
considered we were still in a transitional period to enhance the
quality of our accounting and financial reporting function, we
determined that the above mentioned material weakness had not been
fully remediated. We have taken, and are continuing to take,
remedial measures to improve the effectiveness of our controls,
including by hiring additional accounting and finance personnel and
by engaging outside consulting firms, although we now are also
seeking to identify a qualified candidate to succeed our former
Chief Financial Officer whose employment terminated effective
January 24, 2018.
The
existence of material weaknesses is an indication that there is a
more than remote likelihood that a material misstatement of our
financial statements will not be prevented or detected in a future
period, and the process of designing and implementing effective
internal controls and procedures will be a continual effort that
may require us to expend significant resources to establish and
maintain a system of controls that is adequate to satisfy our
reporting obligations as a public company. We cannot assure you
that the measures we take will be sufficient to remediate the
material weakness identified by BDO China or that we will implement
and maintain adequate controls over our financial processes and
reporting in the future in order to avoid additional material
weaknesses or controlled deficiencies in our internal control over
financing reporting. If our remediation efforts are not successful
or other material weaknesses or control deficiencies occur in the
future, we may be unable to report our financial results accurately
or on a timely basis, which could cause our reported financial
results to be materially misstated and result in the loss of
investor confidence and cause the trading price of Class A common
stock to decline. Moreover, ineffective controls could
significantly hinder our ability to prevent fraud.
Our auditor, as a registered public accounting firm operating in
the PRC, is not permitted to be inspected by the Public Company
Accounting Oversight Board, and consequently investors may be
deprived of the benefits of such inspections.
BDO
China is the independent registered public accounting firm that
issued the audit report included in this report in connection with
our consolidated financial statements as of, and for the years
ended, December 31, 2017 and 2016. BDO China, as an auditor of
companies that are traded publicly in the United States and a firm
registered with the U.S. Public Company Accounting Oversight Board,
or PCAOB, is required by the laws of the United States to undergo
regular inspections by the PCAOB to assess its compliance with the
laws of the United States and applicable professional standards.
BDO China is located in the PRC. The PCAOB is currently unable to
conduct inspections on auditors in the PRC without the approval of
PRC authorities, and therefore BDO China, like other independent
registered public accounting firms operating in the PRC, is
currently not inspected by the PCAOB.
In May
2013 the PCAOB announced that it had entered into a Memorandum of
Understanding on Enforcement Cooperation with the China Securities
Regulatory Commission and the Ministry of Finance of China pursuant
to which the Ministry of Finance established a cooperative
framework between the parties for the production and exchange of
audit documents relevant to investigations in both the PRC and the
United States. More specifically, the Memorandum of Understanding
provides a mechanism for the parties to request and receive from
each other assistance in obtaining documents and information in
furtherance of their investigative duties. In addition the PCAOB is
engaged in continuing discussions with the China Securities
Regulatory Commission and the Ministry of Finance to permit joint
inspections in the PRC of audit firms that are registered with the
PCAOB and to audit PRC companies whose securities are listed on
U.S. stock exchanges.
The
PCAOB’s inspections of firms outside of the PRC have
identified deficiencies in audit procedures and quality control
procedures, and such deficiencies may be addressed as part of the
inspection process to improve future audit quality. The inability
of the PCAOB to conduct inspections of BDO China with respect to
its audit of our consolidated financial statements may make it more
difficult for investors to evaluate BDO China’s audit
procedures and quality control procedures by depriving investors of
potential benefits from improvements that could have been
facilitated by PCAOB inspections.
Risks Relating to Our Intellectual Property
Our success depends on our ability to protect our intellectual
property, including our SAPS and TEBO technologies.
Our
commercial success depends in part on our ability to obtain and
maintain patent and trade secret protection for our intellectual
property, including our SAPS and TEBO technologies and the design
of our Ultra C equipment, as well as our ability to operate without
infringing upon the proprietary rights of others. There can be no
assurance that our patent applications will result in additional
patents being issued or that issued patents will afford sufficient
protection against competitors with similar technology, nor can
there be any assurance that the patents issued will not be
infringed, designed around, or invalidated by third parties. Even
issued patents may later be found unenforceable or may be modified
or revoked in proceedings instituted by third parties before
various patent offices or in courts. The degree of future
protection for our intellectual property is uncertain. Only limited
protection may be available and may not adequately protect our
rights or permit us to gain or keep any competitive advantage. This
failure to properly protect the intellectual property rights
relating to our products and technologies could have a material
adverse effect on our financial condition and results of
operations.
The
patent application process is subject to numerous risks and
uncertainties, and there can be no assurance that we or any of our
future development partners will be successful in protecting our
product candidates by obtaining and defending patents. These risks
and uncertainties include the following:
●
The U.S. Patent and
Trademark Office and various foreign governmental patent agencies
require compliance with a number of procedural, documentary, fee
payment and other provisions during the patent process. There are
situations in which noncompliance can result in abandonment or
lapse of a patent or patent application, resulting in partial or
complete loss of patent rights in the relevant jurisdiction. In
such an event, competitors might be able to enter the market
earlier than would otherwise have been the case.
●
Patent applications
may not result in any patents being issued.
●
Patents that may be
issued may be challenged, invalidated, modified, revoked,
circumvented, found to be unenforceable or otherwise may not
provide any competitive advantage.
●
Our competitors may
seek or may have already obtained patents that will limit,
interfere with, or eliminate our ability to make, use and sell our
potential product candidates.
●
The PRC and other
countries other than the United States may have patent laws less
favorable to patentees than those upheld by U.S. courts, allowing
foreign competitors a better opportunity to create, develop and
market competing product candidates.
In
addition, we rely on the protection of our trade secrets and
know-how. Although we have taken steps to protect our trade secrets
and unpatented know-how, including entering into confidentiality
and non-disclosure agreements with third parties and confidential
information and inventions agreements with key employees, customers
and suppliers, other parties may still obtain this information or
may come upon this information independently. If any of these
events occurs or if we otherwise lose protection for our trade
secrets or proprietary know-how, the value of this information may
be greatly reduced.
We may be involved in lawsuits to protect or enforce our patents,
which could be expensive, time consuming and
unsuccessful.
Competitors may
infringe upon our patents. If our technologies are adopted, we
believe that competitors may try to match our technologies and
tools in order to compete. To counter infringement or unauthorized
use, we may be required to file infringement claims, which can be
expensive and time consuming. An adverse result in any litigation
or defense proceedings, including our current suits, could put one
or more of our patents at risk of being invalidated, found to be
unenforceable or interpreted narrowly and could put our patent
applications at risk of not issuing. Furthermore, because of the
substantial amount of discovery required in connection with
intellectual property litigation, there is a risk that some of our
confidential information could be compromised by disclosure during
litigation. In addition, any future patent litigation, interference
or other administrative proceedings will result in additional
expense and distraction of our personnel. Most of our competitors
are larger than we are and have substantially greater resources,
and they therefore are likely to be able to sustain the costs of
complex patent litigation longer than we could. An adverse outcome
in such litigation or proceedings may expose us to loss of our
proprietary position.
We may not be able to protect our intellectual property rights
throughout the world, which could materially, negatively affect our
business.
Filing,
prosecuting and defending patents on our products or proprietary
technologies in all countries throughout the world would be
prohibitively expensive, and our intellectual property rights in
some countries outside the United States, including the PRC, can be
less extensive than those in the United States. In addition, the
laws of some foreign countries do not protect intellectual property
rights to the same extent as federal and state laws in the United
States. Consequently, competitors may use our technologies in
jurisdictions where we have not obtained patent protection to
develop their own products and may export otherwise infringing
products to territories where we have patent protection but
enforcement is not as strong as that in the United States. These
products may compete with our products, and our patents or other
intellectual property rights may not be effective or sufficient to
prevent them from competing.
Many
companies have encountered significant problems in protecting and
defending intellectual property rights in foreign jurisdictions.
The legal systems of certain countries, particularly certain
developing countries, do not favor the enforcement of patents and
other intellectual property protection, which could make it
difficult for us to stop the infringement of our patents or
marketing of competing products in violation of our proprietary
rights generally. Proceedings to enforce our patent rights in
foreign jurisdictions could result in substantial costs and divert
our efforts and attention from other aspects of our business, could
put our patents at risk of being invalidated or interpreted
narrowly and our patent applications at risk of not issuing, and
could provoke third parties to assert claims against us. We may not
prevail in any lawsuits that we initiate, and the damages or other
remedies awarded, if any, may not be commercially meaningful.
Accordingly, our efforts to enforce our intellectual property
rights around the world may be inadequate to obtain a significant
commercial advantage from the intellectual property that we develop
or license and may adversely affect our business.
If we are sued for infringing intellectual property rights of third
parties, it will be costly and time consuming, and an unfavorable
outcome in that litigation could have a material adverse effect on
our business.
Our
success depends on our ability to develop, manufacture, market and
sell our products without infringing upon the proprietary rights of
third parties. Numerous U.S. and foreign-issued patents and pending
patent applications owned by third parties exist in the fields in
which we are developing products, some of which may contain claims
that overlap with the subject matter of our intellectual property.
A third party has claimed in the past, and others may claim in the
future, that our technology or products infringe their intellectual
property. In some instances third parties may initiate litigation
against us in an effort to prevent us from using our technology in
alleged violation of their intellectual property rights. The risk
of such a lawsuit will likely increase as our size and the number
and scope of our products increase and as our geographic presence
and market share expand.
Any
potential intellectual property claims or litigation commenced
against us could:
●
be time consuming
and expensive to defend, whether or not meritorious;
●
force us to stop
selling products or using technology that allegedly infringes the
third party’s intellectual property rights;
●
delay shipments of
our products;
●
require us to pay
damages or settlement fees to the party claiming
infringement;
●
require us to
attempt to obtain a license to the relevant intellectual property,
which may not be available on reasonable terms or at
all;
●
force us to attempt
to redesign products that contain the allegedly infringing
technology, which could be expensive or which we may be unable to
do;
●
require us to
indemnify our customers, suppliers or other third parties for any
loss caused by their use of our technology that allegedly infringes
the third party’s intellectual property rights;
or
●
divert the
attention of our technical and managerial resources.
Because
patent applications can take many years to issue, there may be
currently pending applications, unknown to us, that may later
result in issued patents upon which our products or technologies
may infringe. Similarly, there may be issued patents relevant to
our products of which we are not aware.
Risks Related to Ownership of Class A Common Stock
The market price of Class A common stock
has been and may continue to be volatile, which could result in
substantial losses for investors purchasing our
shares
Class A
common stock only commenced trading on the Nasdaq Global Market, or
Nasdaq, on November 3, 2017, and the market price of Class A
common stock has been, and could continue to be, subject to
significant fluctuations. The market price of Class A common stock
may fluctuate significantly in response to numerous factors, many
of which are beyond our control, including:
●
actual or
anticipated fluctuations in our revenue and other operating
results;
●
the financial
projections we may provide to the public, any changes in these
projections or our failure to meet these projections;
●
actions of
securities analysts who initiate or maintain coverage of us,
changes in financial estimates by any securities analysts who
follow our company, or our failure to meet these estimates or the
expectations of investors;
●
changes in
projections for the chips or chip equipment industries or in the
operating performance or expectations and stock market valuations
of chip companies, chip equipment companies or technology companies
in general;
●
changes in
operating results;
●
any changes in the
financial projections we may provide to the public, our failure to
meet these projections, or changes in recommendations by any
securities analysts that elect to follow Class A common
stock;
●
additional shares
of Class A common stock being sold into the market by us or our
existing stockholders or the anticipation of such
sales;
●
price and volume
fluctuations in the overall stock market, including as a result of
trends in the economy as a whole;
●
lawsuits threatened
or filed against us;
●
litigation and
other developments relating to our patents or other proprietary
rights or those of our competitors;
●
developments in new
legislation and pending lawsuits or regulatory actions, including
interim or final rulings by judicial or regulatory bodies;
and
●
general economic
trends, including changes in the demand for electronics or
information technology or geopolitical events such as war or acts
of terrorism, or any responses to such events.
In
recent years, the stock market in general, and Nasdaq in
particular, has experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to changes in
the operating performance of the companies whose stock is
experiencing those price and volume fluctuations.
As a newly public company, our stock price may be volatile, and
securities class action litigation has often been instituted
against companies following periods of volatility of their stock
price. Any such litigation, if instituted against us, could result
in substantial costs and a diversion of our management’s
attention and resources.
In the
past, following periods of volatility in the overall market and the
market price of a particular company’s securities, securities
class action litigation has often been instituted against these
companies. This litigation, if instituted against us, could result
in substantial costs and a diversion of our management’s
attention and resources.
An active trading market for Class A common stock may not be
sustained.
Class A
common stock has been listed on Nasdaq only since November 3,
2017, and we cannot assure you that an active trading market for
Class A common stock will be sustained or maintained. The lack of
an active market may impair your ability to sell your shares at the
time you wish to sell them or at a price that you consider
reasonable. The lack of an active market may also reduce the fair
market value of your shares. There can be no assurance that we will
be able to successfully develop or maintain a liquid market for
Class A common stock.
We have broad discretion in the use of the net proceeds from our
initial public offering and the concurrent private placement, and
we may not succeed in using those net proceeds
effectively.
In
November 2017 we issued and sold 2,233,000 shares of Class A common
stock in our initial public offering, or IPO, and an additional
1,333,334 shares of Class A common stock in a private placement,
which we refer to as the concurrent private placement. We cannot
specify with any certainty the particular uses of the net proceeds
that we received from the IPO and the concurrent private placement.
Our management has broad discretion in the application of these net
proceeds, including working capital and other general corporate
purposes, and we may spend or invest these proceeds in a way with
which our stockholders disagree. The failure by management to apply
these funds effectively could harm our business and financial
condition. Pending their use, we may invest the net proceeds in a
manner that does not produce income or that loses
value.
If securities or industry analysts do not publish research or
reports about us, our business or our market, or if they publish
negative evaluations of Class A common stock or the stock of other
companies in our industry, the price of our stock and trading
volume could decline.
The
trading market for Class A common stock will depend in part on the
research and reports that securities or industry analysts publish
about us or our business. If one or more of the analysts who cover
us downgrade the Class A common stock or publish inaccurate or
unfavorable research about our business, the Class A common stock
price would likely decline. In addition, if one or more of these
analysts ceases coverage of the Class A common stock or fails to
publish reports about the Class A common stock on a regular basis,
we could lose visibility in the financial markets, which in turn
could cause the Class A common stock price or trading volume to
decline.
Requirements associated with being a public reporting company will
increase our costs significantly, as well as divert significant
company resources and management attention.
We are
subject to the reporting requirements of the Securities Exchange
Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and
Consumer Protection Act, the listing requirements of Nasdaq, and
other rules and regulations of the SEC. We are working with our
legal, independent accounting and financial advisors to identify
those areas in which changes should be made to our financial and
management control systems to manage our growth and our obligations
as a public reporting company. These areas include corporate
governance, corporate control, disclosure controls and procedures,
and financial reporting and accounting systems. We have made, and
will continue to make, changes in these and other areas. Compliance
with the various reporting and other requirements applicable to
public reporting companies will require considerable time,
attention of management and financial resources. In addition, the
changes we make may not be sufficient to allow us to satisfy our
obligations as a public reporting company on a timely
basis.
The
listing requirements of Nasdaq require that we satisfy certain
corporate governance requirements relating to director
independence, distributing annual and interim reports, stockholder
meetings, approvals and voting, soliciting proxies, conflicts of
interest and a code of conduct. Our management and other personnel
will need to devote a substantial amount of time to ensure that we
comply with all of these requirements. The reporting requirements,
rules and regulations will increase our legal and financial
compliance costs and will make some activities more time-consuming
and costly. These reporting requirements, rules and regulations,
coupled with the increase in potential litigation exposure
associated with being a public company, could also make it more
difficult for us to attract and retain qualified persons to serve
as our directors or executive officers, or to obtain certain types
of insurance, including director and officer liability insurance,
on acceptable terms.
We have never paid and do not intend to pay cash dividends and,
consequently, your ability to achieve a return on your investment
will depend on appreciation in the price of Class A common
stock.
We have
never declared or paid cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the
operation and expansion of our business, and we do not expect to
declare or pay any dividends in the foreseeable future.
Accordingly, you may only receive a return on your investment in
Class A common stock if the market price of Class A common stock
increases.
Our
ability to pay dividends on Class A common stock depends
significantly on our receiving distributions of funds from our
subsidiaries in the PRC. PRC statutory laws and regulations permit
payments of dividends by those subsidiaries only out of their
retained earnings, which are determined in accordance with PRC
accounting standards and regulations that differ from U.S.
generally accepted accounting principles. The PRC regulations and
our subsidiaries’ articles of association require annual
appropriations of 10% of net after-tax profits to be set aside,
prior to payment of dividends, as a reserve or surplus fund, which
restricts our subsidiaries’ ability to transfer a portion of
their net assets to us. In addition, our subsidiaries’
short-term bank loans restrict their ability to pay dividends to
us.
The dual class structure of Class A common stock has the effect of
concentrating voting control with our executive officers and
directors, including our Chief Executive Officer and President,
which will limit or preclude your ability to influence corporate
matters.
Class B
common stock has twenty votes per share and Class A common stock
has one vote per share. As of March 19, 2018, stockholders who hold
shares of Class B common stock, who consist principally of our
executive officers, employees, directors and their respective
affiliates, collectively held 78.8% of the voting power of our
outstanding capital stock. Because of the twenty-to-one voting
ratio between Class B and Class A common stock, holders of Class B
common stock collectively will continue to control a majority of
the combined voting power of Class A common stock and therefore be
able to control all matters submitted to our stockholders for
approval so long as the shares of Class B common stock represent at
least 4.8% of all outstanding shares of Class A and Class B common
stock. This concentrated control will limit or preclude your
ability to influence corporate matters for the foreseeable future.
This concentrated control could also discourage a potential
investor from acquiring Class A common stock due to the limited
voting power of such stock relative to the Class B common stock and
might harm the market price of Class A common stock.
Future
transfers by holders of Class B common stock will result in those
shares converting to Class A common stock, subject to limited
exceptions. The conversion of Class B common stock to Class A
common stock will have the effect, over time, of increasing the
relative voting power of those holders of Class B common stock who
retain their shares in the long term.
Substantial future sales of shares by existing stockholders, or the
perception that such sales may occur, could cause our stock price
to decline.
If our
existing stockholders, particularly our directors and executive
officers, sell substantial amounts of Class A common stock in the
public market, or are perceived by the public market as intending
to sell substantial numbers of shares of Class A common stock, the
trading price of Class A common stock could decline below the
initial public offering price. As of March 19, 2018, only the
shares of Class A common stock sold in the IPO and an additional
113,984 shares not subject to lock-up agreements were freely
tradable in the public market. Holders of substantially all of the
outstanding shares of Class A common stock, including all of our
officers and directors, have entered into contractual lock-up
agreements with the underwriters of the IPO pursuant to which they
have agreed, subject to certain exceptions, not to sell or
otherwise transfer any of their common stock or securities
convertible into or exchangeable for shares of common stock until
May 2, 2018. We and the lead underwriter in the IPO may, however,
permit these holders to sell shares prior to the expiration of the
lock-up agreements with the underwriters. On May 2, 2018, up to
13,169,506 shares of Class A common stock will be eligible for sale
in the public market, including 9,600,558 shares held by directors,
executive officers and other affiliates that will be subject to
volume and other limitations under Rule 144 under the Securities
Act.
Delaware law and provisions in our restated charter and bylaws
could make a merger, tender offer or proxy contest difficult,
thereby depressing the trading price of Class A common
stock.
Our
status as a Delaware corporation and the anti-takeover provisions
of the Delaware General Corporation Law may discourage, delay, or
prevent a change in control by prohibiting us from engaging in a
business combination with an interested stockholder for a period of
three years after the person becomes an interested stockholder,
even if a change of control would be beneficial to our existing
stockholders. Our restated charter and bylaws contain provisions
that may make the acquisition of our company more difficult,
including the following:
●
our dual class
common stock structure provides holders of Class B common stock
with the ability to control the outcome of matters requiring
stockholder approval, even if they own significantly less than a
majority of the total number of outstanding shares of Class A and
Class B common stock;
●
when the
outstanding shares of Class B common stock represent less than a
majority of the combined voting power of common stock:
●
amendments to our
restated charter or bylaws will require the approval of two-thirds
of the combined vote of our then-outstanding shares of Class A and
Class B common stock;
●
vacancies on the
board of directors will be able to be filled only by the board and
not by stockholders;
●
the board, which
currently is not staggered, will be automatically separated into
three classes with staggered three-year terms;
●
directors will only
be able to be removed from office for cause; and
●
our stockholders
will only be able to take action at a meeting and not by written
consent;
●
only our chair, our
chief executive officer or a majority of our directors is
authorized to call a special meeting of stockholders;
●
advance notice
procedures apply for stockholders to nominate candidates for
election as directors or to bring matters before an annual meeting
of stockholders;
●
our restated
charter authorizes undesignated preferred stock, the terms of which
may be established, and shares of which may be issued, without
stockholder approval; and
●
cumulative voting
in the election of directors is prohibited.
As a
Delaware corporation, we are also subject to provisions of Delaware
law, including Section 203 of the Delaware General Corporation Law,
which limits the ability of stockholders holding more than 15% of
our outstanding voting stock from engaging in certain business
combinations with us. Any provision of our charter or bylaws or
Delaware law that has the effect of delaying or deterring a change
in control could limit the opportunity for our stockholders to
receive a premium for their shares of Class A common stock, and
could also affect the price that some investors are willing to pay
for Class A common stock.
Our restated charter designates the Court of Chancery of the State
of Delaware as the sole and exclusive forum for certain litigation
that may be initiated by our stockholders, which could limit our
stockholders’ ability to obtain a favorable judicial forum
for disputes with us or our directors, officers or
stockholders.
Our
restated charter provides that the Court of Chancery of the State
of Delaware will, to the fullest extent permitted by law, be the
sole and exclusive forum for:
●
any derivative
action or proceeding brought on our behalf;
●
any action
asserting a claim of breach of a fiduciary duty owed to us, our
stockholders, creditors or other constituents by any of our
directors, officers, other employees, agents or
stockholders;
●
any action
asserting a claim arising under the Delaware General Corporation
Law, our charter or bylaws, or as to which the Delaware General
Corporation Law confers jurisdiction on the Court of Chancery of
the State of Delaware; or
●
any action
asserting a claim that is governed by the internal affairs
doctrine.
By
becoming a stockholder in our company, you will be deemed to have
notice of and have consented to the provisions of our restated
charter related to choice of forum. The choice of forum provision
in our restated charter may limit our stockholders’ ability
to obtain a favorable judicial forum for disputes with us or any of
our directors, officers, other employees, agents or stockholders,
which may discourage lawsuits with respect to such claims.
Alternatively, if a court were to find the choice of forum
provision contained in our restated charter to be inapplicable or
unenforceable in an action, we may incur additional costs
associated with resolving such action in other jurisdictions, which
could harm our business, results of operations and financial
condition.
Our management team has limited experience managing a public
company.
Prior
to the IPO, none of the current members of our management team had
experience managing a publicly traded company, interacting with
public company investors and complying with the increasingly
complex laws pertaining to public companies. Our management team
may not successfully or efficiently manage our transition to being
a public company subject to significant regulatory oversight and
reporting obligations under the federal securities laws and the
scrutiny of securities analysts and investors. These new
obligations and constituents will require significant attention
from our management team and could divert their attention away from
the day-to-day management of our business, which could materially
adversely affect our business, financial condition and operating
results.
We are currently an “emerging growth company,” and the
reduced disclosure requirements applicable to emerging growth
companies may make Class A common stock less attractive to
investors.
We are
currently an “emerging growth company,” as defined in
the Jumpstart Our Business Startups Act. For so long as we remain
an emerging growth company, we are permitted, and intend, to rely
on exemptions from certain disclosure requirements that are
applicable to other public companies that are not emerging growth
companies. These exemptions include reduced disclosure obligations
regarding executive compensation and exemptions from the
requirements of holding a non-binding advisory vote on executive
compensation and stockholder approval of any golden parachute
payments not previously approved, not being required to comply with
the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act and not being required to comply with any
requirement that may be adopted by the PCAOB regarding mandatory
audit firm rotation or a supplement to the auditor’s report
providing additional information about the audit and the financial
statements. We cannot predict whether investors will find the Class
A common stock less attractive if we rely on these exemptions. If
some investors find the Class A common stock less attractive as a
result, there may be a less active trading market, and more
volatile trading price, for Class A common stock.
We will incur increased costs and demands upon management as a
result of complying with the laws and regulations affecting public
companies, particularly after we are no longer an “emerging
growth company,” which could adversely affect our business,
operating results and financial condition.
As a
public company, and particularly after we cease to be an
“emerging growth company,” we will continue to incur
significant legal, accounting and other expenses. We are subject to
the reporting requirements of the Securities and Exchange Act, the
Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer
Protection Act, and the rules and regulations of Nasdaq. These
requirements have increased and will continue to increase our
legal, accounting and financial compliance costs and have made and
will continue to make some activities more time consuming and
costly. For example, we expect these rules and regulations to make
it more difficult and more expensive for us to obtain director and
officer liability insurance, and we may be required to accept
reduced policy limits and coverage or incur substantially higher
costs to maintain the same or similar coverage. As a result, it may
be more difficult for us to attract and retain qualified
individuals to serve as our executive officers or on the board of
directors, particularly to serve on the audit and compensation
committees.
The
Sarbanes-Oxley Act requires, among other things, that we assess the
effectiveness of our internal control over financial reporting
annually and the effectiveness of our disclosure controls and
procedures quarterly. In particular, beginning with respect to the
year ending December 31, 2018, Section 404 of the Sarbanes-Oxley
Act, or Section 404, will require our management to perform system
and process evaluation and testing to allow it to report on the
effectiveness of our internal control over financial
reporting.
We are
currently evaluating our internal controls, identifying and
remediating deficiencies in those internal controls and documenting
the results of our evaluation, testing and remediation. Please see
“—Our management and auditors identified a material
weakness in our internal control over financial reporting that, if
not properly remediated, could result in material misstatements in
our consolidated financial statements that could cause investors to
lose confidence in our reported financial information and have a
negative effect on the trading price of our
stock.”
Investor
perceptions of our company may suffer if deficiencies are found,
which could cause a decline in the market price of our stock.
Irrespective of compliance with Section 404, any failure of our
internal control over financial reporting could have a material
adverse effect on our stated operating results and harm our
reputation. If we are unable to implement these requirements
effectively or efficiently, it could harm our operations, financial
reporting, or financial results and could result in an adverse
opinion on our internal controls from our independent registered
public accounting firm.
In
addition, changing laws, regulations and standards relating to
corporate governance and public disclosure are creating uncertainty
for public companies, increasing legal and financial compliance
costs and making some activities more time consuming. These laws,
regulations and standards are subject to varying interpretations,
in many cases due to their lack of specificity, and, as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. We intend to invest resources to comply with
evolving laws, regulations and standards, and this investment may
result in increased general and administrative expense and a
diversion of management’s time and attention from
revenue-generating activities to compliance activities. If our
efforts to comply with new laws, regulations and standards differ
from the activities intended by regulatory or governing bodies,
regulatory authorities may initiate legal proceedings against us
and our business may be harmed.
I
tem 1B: Unresolved Staff
Comments
None.
I
tem 2: Properties
We have occupied
our current corporate headquarters in Fremont, California, since
February 2008, under a lease that, as amended in March 2017,
extends through March 2019. We conduct our research and development
and manufacturing and service support operations in a facility of
approximately 60,000 square feet, of which 36,000 square feet is
dedicated to manufacturing, located in the Zhangjiang HiTech
Park in Shanghai, PRC. We have leased this facility since 2007. The
lease terms and its payment terms are subject to modification and
extension with Zhangjiang Group from time to time. The lease with
Zhangjiang Group expired on December 31, 2017 and we are now
leasing the property on a month-to-month basis as we
negotiate the terms of the lease. In addition, we provide sales
support and customer service operations from leased office space in
Jiangying, PRC, Wuxi, PRC, and Icheon,
Korea.
I
tem 3: Legal
Proceedings
From
time to time we may become involved in legal proceedings or may be
subject to claims arising in the ordinary course of our business.
Although the results of litigation and claims cannot be predicted
with certainty, we currently believe that the final outcome of
these ordinary course matters will not have a material adverse
effect on our business, operating results, financial condition or
cash flows. Regardless of the outcome, litigation can have an
adverse impact on us because of defense and settlement costs,
diversion of management resources and other factors.
I
tem 4: Mine Safety
Disclosures
Not
applicable.
P
ART II
I
tem 5: Market for
Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Information Regarding the Trading of Common
Stock
The
Class A common stock has traded on NASDAQ Global Market under the
symbol “ACMR” since November 3, 2017.
Prior to that time,
there was no public market for the Class A common stock.
The
table below lists the high and low sales prices of the Class A
common stock
, as reported by
the Nasdaq Global Market
.
|
|
High
|
Low
|
|
Fourth Quarter 2017
(from November 3, 2017)
|
$
8.48
|
$
4.91
|
The Class B common
stock is not listed or traded on any stock
exchange.
Holders of Common Stock
As of
March 19, 2018, there were 136 holders of record of shares of Class
A common stock and 58 holders of record of shares of Class B
common stock. The actual number of holders of Class A common stock
is substantially greater and includes stockholders who are
beneficial owners and whose shares are held of record by banks,
brokers, and other financial institutions.
Dividends
We have
never declared or paid cash dividends on our capital stock. We
intend to retain all available funds and any future earnings to
support the operation of and to finance the growth and development
of our business and do not anticipate paying any cash dividends in
the foreseeable future. Any future determination to declare cash
dividends on Class A and Class common stock will be made at the
discretion of the board of directors and will depend on various
factors, including our results of operations, financial condition,
liquidity requirements, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of
dividends, restrictions imposed by applicable law, general business
conditions and other factors that the board may deem
relevant.
Our
ability to pay dividends on Class A and Class B common stock
depends significantly on our receiving distributions of funds from
our subsidiaries in the PRC. PRC statutory laws and regulations
permit payments of dividends by those subsidiaries only out of
their retained earnings, which are determined in accordance with
PRC accounting standards and regulations that differ from U.S.
generally accepted accounting principles. The PRC regulations and
our subsidiaries’ articles of association require annual
appropriations of 10% of net after-tax profits to be set aside,
prior to payment of dividends, as a reserve or surplus fund, which
restricts our subsidiaries’ ability to transfer a portion of
their net assets to us. As of December 31, 2017, no cash was
restricted under those PRC regulations or our subsidiaries’
articles because our subsidiaries had never generated net after-tax
profits. In addition, our subsidiaries’ short-term bank loans
restrict their ability to pay dividends to us.
Securities Authorized for Issuance Under Equity Compensation
Plans
The
information required by this item will be set forth in the
definitive proxy statement we will file in connection with our 2018
Annual Meeting of Stockholders and is incorporated by reference
herein.
Sales of Unregistered Securities
Set
forth below is information regarding the shares of capital stock
and options granted by us in 2017 that were not registered under
the Securities Act of 1933.
(1)
We granted stock
options to purchase an aggregate of 336,671 shares of Class A
common stock, with exercise prices ranging from $5.60 to $7.50 per
share.
(2)
We issued an
aggregate of 472,889 shares of Class A common stock pursuant to the
exercise of stock options at per share exercise prices ranging from
$0.75 to $3.00.
(3)
In March 2017 we
issued a warrant to acquire 397,502 shares of Class A common stock
for an aggregate purchase price of $2,981,265.
(4)
In March 2017 we
issued 4,998,508 shares of Series E convertible preferred
stock for an aggregate purchase price of $5,800,000.
(5)
In August 2017 we
issued 1,119,576 shares of Class A common stock for an
aggregate purchase price of $8,396,820.
(6)
In August 2017 we
issued 787,098 shares of Class A common stock for an aggregate
purchase price of $5,903,235.
(7)
In September 2017
we issued 133,334 shares of Class A common stock for an
aggregate purchase price of $1,000,000.
(8)
In November 2017 we
issued 1,333,334 shares of Class A common stock in a concurrent
private placement at a price of $5.60 per share.
(9)
In November 2017 we
issued warrants to acquire an aggregate of 80,000 shares of Class A
common stock for an aggregate purchase price of
$492,800.
The
offers, sales, grants and issuances of the securities described in
paragraphs (1) and (2) were deemed to be exempt from registration
under the Securities Act of 1933 in reliance on Rule 701. The
recipients of such securities were our employees, officers,
directors, bona fide consultants and advisors and received the
securities under our 1998 Stock Option Plan, written compensation
contracts or our 2016 Omnibus Incentive Plan. Appropriate legends
were affixed to the securities issued in these transactions. Each
of the recipients of securities in these transactions had adequate
access, through employment, business or other relationships, to
information about us.
The
offer, sale and issuance of the securities described in paragraphs
(3) through (9) were deemed to be exempt from registration under
the Securities Act in reliance on Section 4(a)(2) of the
Securities Act in that the issuance of the securities to the
accredited investors did not involve a public offering. The
recipients of the securities in these transactions acquired the
securities for investment only and not with a view to or for sale
in connection with any distribution thereof, and appropriate
legends were affixed to the securities issued in these
transactions. The recipients of the securities in these
transactions were accredited investors under Rule 501 of
Regulation D.
Use of Proceeds
The
Registration Statement on Form S-1 (File No. 333- 220451) for the
IPO was declared effective by the SEC on November 2, 2017. Shares
of Class A common stock began trading on the Nasdaq Global Market
on November 3, 2017.
The
underwriters of the IPO were Roth Capital Partners, LLC,
Craig-Hallum Capital Group LLC and The Benchmark Company, LLC. The
offering commenced on November 2, 2017 and did not terminate until
the sale of all of the shares offered.
We paid
to the underwriters of the IPO underwriting discounts and
commissions totaling $841,036 in connection with the sale of
2,233,000 shares of Class A common stock. In addition, we incurred
expenses of $1.9 million which, when added to the underwriting
discounts and commissions, amounted to total expenses of $2.7
million. As a result, the IPO net proceeds, after deducting
underwriting discounts and commissions and offering expenses, were
$17.3 million. No offering expenses were paid directly or
indirectly to any of our directors or officers (or their
associates) or persons owning 10.0% or more of any class of our
equity securities or to any other affiliates.
There
has been no material change in the planned use of IPO proceeds from
that described in the final prospectus filed with the Securities
and Exchange Commission pursuant to Rule 424(b)(4) under the
Securities Act of 1933 on November 3, 2017.
To date
we have applied $7.8 million of the proceeds to purchase
inventories and $1.0 million in our normal course of business
operations.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
None.
Transfer Agent
The
transfer agent and registrar for the Class A common stock and the
Class B common stock is Computershare Trust Company,
N.A.
I
tem 6: Selected Financial
Data
Not
applicable.
I
tem 7: Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis should be read in conjunction
with the audited consolidated financial statements and related
notes included in this report.
In addition to historical information, the
following discussion contains forward-looking statements that
involves risks, uncertainties and assumptions. See
“Forward-Looking Statements and Statistical Data” at
page 4 of this report. Please read “Item1A. Risk
Factors” for a discussion of factors that could cause our
actual results to differ materially from our
expectations.
Overview
We
develop, manufacture and sell single-wafer wet cleaning equipment,
which semiconductor manufacturers can use in numerous manufacturing
steps to remove particles, contaminants and other random defects,
and thereby improve product yield, in fabricating advanced
integrated circuits, or chips. Our Ultra C equipment is designed to
remove random defects from a wafer surface effectively, without
damaging a wafer or its features, even at an increasingly advanced
process node (the minimum line width on a chip) of 22 nanometers,
or nm, or less. Our equipment is based on our innovative,
proprietary Space Alternated Phase Shift, or SAPS, and Timely
Energized Bubble Oscillation, or TEBO, technologies. We developed
our proprietary technologies to enable manufacturers to produce
chips that reach their ultimate physical limitations while
maintaining product yield, which is the percentage of chips on a
wafer that meet manufacturing specifications
We seek
to market our wet processing equipment by first establishing a
referenceable base of leading logic and memory chip makers, whose
use of our products can influence decisions by other manufacturers.
We believe this process will help us to penetrate the mature
integrated circuit manufacturing markets and to build credibility
with industry leaders. We have placed evaluation SAPS equipment
with selected memory and logic chip customers since 2009 and
recognized revenue from SAPS equipment since 2011. Using a similar
“demo-to-sales” process, we began placing TEBO
evaluation equipment with selected customers in 2016 and recognized
revenue from our initial sale of TEBO equipment in December 2016.
As of December 31, 2017, we had sold and deployed more than 30
single-wafer wet cleaning tools. We recognized revenue from the
selected customers’ purchases of single-wafer wet cleaning
equipment
totaling $27.1 million,
or
74.2% of our revenue, in 2017 and $21.5 million, or
78.4% of our revenue, in 2016.
We
market and sell our products worldwide using a combination of our
direct sales force and third-party representatives. We employ
direct sales teams in Asia, Europe and North America, and have
located these teams near our customers, primarily in the
People’s Republic of China, or PRC, Korea, Taiwan and the
United States. To supplement our direct sales teams, we have
contacts with several independent sales representatives in the PRC,
Taiwan and Korea. We also provide after-sales services to our
customers by installing new replacement parts as well as making
small scale modifications to improve our customers’ product
yields.
We
established our operational center in Shanghai in 2006 to help us
establish and build relationships with chip manufacturers in China
and throughout Asia. In addition to our SAPS and TEBO tools, we
offer a range of custom-made wafer assembly and packaging
equipment, such as coaters and developers, to wafer assembly and
packaging factories, principally in the PRC.
Corporate Background
ACM Research
incorporated in California in 1998 and redomesticated to Delaware
in November 2016. Key events in our corporate development have
included:
●
Initially we
focused on developing tools for semiconductor manufacturing process
steps involving the integration of ultra-low-K materials and
copper. In the early 2000s, we sold tools based on stress-free
copper-polishing technology.
●
In 2006 we moved
our operational center to Shanghai, where we began to conduct our
business through our subsidiary ACM Shanghai. This move was made to
help us establish and build relationships with chip manufacturers
in the PRC. We have financed our operations in part through the
sale of minority equity interests in ACM Shanghai.
●
In 2007 we began to
focus our development efforts on single-wafer wet-cleaning
solutions for the front-end chip fabrication process.
●
In 2008 ACM
Shanghai received an initial grant from local and central
governmental authorities in the PRC. The grant relates to the
development and commercialization of 65nm to 45nm stress-free
polishing technology.
●
In 2009 we
introduced SAPS megasonic technology, which can be applied in wet
wafer cleaning at numerous steps during the chip fabrication
process.
●
In 2011 ACM
Shanghai formed a wholly owned subsidiary in the PRC, ACM Research
(Wuxi), Inc., to manage sales and service operations.
●
In 2014 ACM
Shanghai received an additional grant from local and central
governmental authorities in the PRC. The grant relates to the
development of electro copper-plating technology.
●
In March 2016 we
introduced TEBO technology, which can be applied at numerous steps
during the fabrication of small node conventional two-dimensional
and three-dimensional patterned wafers.
●
In March and August
2017, we entered into agreements pursuant to which we will acquire
all of the outstanding minority equity interests in ACM Shanghai by
no later than December 31, 2017, as described below under
“—Recent Equity Transactions—Acquisition of
Outstanding Minority Interests in Our Operating
Company.”
●
In June 2017 we
formed a wholly owned subsidiary in Hong Kong, CleanChip
Technologies Limited, to act on our behalf in Asian markets outside
the PRC by, for example, serving as a trading partner between ACM
Shanghai and its customers, procuring raw materials and components,
performing sales and marketing activities, and making strategic
investments.
●
In September 2017,
ACM effectuated a 1-for-3 reverse stock split, or the Reverse
Split, of Class A and Class B common stock. Unless otherwise
indicated, all share numbers, per share amount, share prices,
exercise prices and conversion rates set forth in those notes and
the accompanying condensed consolidated financial statements have
been adjusted retrospectively to reflect the Reverse
Split.
●
In November 2017
ACM issued 2,233,000 shares of Class A common stock and received
net proceeds of $11,664,000 from our initial public offering, or
the IPO, and concurrently ACM issued additional 1,333,334 shares of
Class A common stock through a private placement for net proceeds
of $7,053,000.
Recent Equity Transactions
Issuance of Warrant
In
December 2016 Shengxin (Shanghai) Management Consulting Limited
Partnership, or SMC, delivered to our subsidiary ACM Shanghai
20,123,500 RMB (approximately $3.0 million as of the date of
funding) in cash, which we refer to as the SMC Investment, for
potential investment pursuant to terms to be subsequently
negotiated. SMC is a PRC limited partnership owned by Jian Wang,
our Vice President, Research and Development and the brother of our
Chair of the Board, Chief Executive Officer and President, David H.
Wang, and other employees of ACM Shanghai. In March 2017 we issued
to SMC a warrant exercisable to purchase 397,502 shares of Class A
common stock at a price of $7.50 per share, for a total exercise
price of approximately $3.0 million. The warrant may be exercised
for cash or on a cashless basis, at the option of SMC, at any time
on or before May 17, 2023 to acquire all, but not less than all, of
the shares of Class A common stock subject to the
warrant.
●
If SMC does not
exercise the warrant by May 17, 2023, ACM Shanghai will be
obligated, subject to approval of PRC governmental authorities and
ACM Shanghai’s equity holders, to deliver an equity interest
of 3.6394% (subject to dilution) in satisfaction of the SMC
Investment.
●
If SMC exercises
the warrant or SMC does not exercise the warrant and the issuance
of the equity interest in ACM Shanghai is not completed by August
17, 2023 due to the inability of the parties to obtain required
governmental or equity holder approvals, then ACM Shanghai will be
obligated to pay to SMC, in satisfaction of the SMC Investment, an
amount equal to approximately $3.0 million.
In
connection with the completion of IPO on November 2, 2017, we
issued a five-year warrant to Roth Capital Partners, LLC, the
Company's IPO underwriter, up to 80,000 shares ("Underwriter's
Warrant) of the Company's Class A common stock at the exercise
price of $6.16. The Underwriter's Warrant is immediately
exercisable and expires on November 1,
2022.
Acquisition of Outstanding Minority Interests in Our Operating
Company
Until
August 31, 2017, ACM Research owned 62.87% of the outstanding
equity interests in ACM Shanghai and three PRC-based third-party
investors held the remaining 37.13% of equity interests, which were
reflected as “non-controlling interests” in our
consolidated balance sheets and related notes. We took the
following actions in order to enable ACM Research to acquire,
consistent with requirements of arrangements previously entered
into in connection with the investors’ acquisition of ACM
Shanghai equity interests, the outstanding non-controlling
interests in ACM Shanghai:
●
In March 2017 we
entered into a securities purchase agreement with Shanghai Science
and Technology Venture Capital Co., Ltd., or SSTVC, which held
18.77% of the ACM Shanghai equity interests. Pursuant to that
agreement, effective as of August 31, 2017, we (a) acquired,
for a purchase price of $5.8 million, SSTVC’s equity
interests in ACM Shanghai and (b) issued to SSTVC, for a
purchase price of $5.8 million, shares of Series E preferred
stock that has converted, upon the closing of the IPO, into
1,666,170 shares of Class A common stock, at an effective
purchase price of $3.48 per share.
●
In August 2017 we
entered into a securities purchase agreement with Shanghai Pudong
High-Tech Investment Co., Ltd., or PDHTI, and its subsidiary Pudong
Science and Technology (Cayman) Co., Ltd., or PST, pursuant to
which we (a) submitted the winning bid, in an auction process
mandated by PRC regulations, to purchase PDHTI’s 10.78%
equity interests in ACM Shanghai
, which we
completed on November 8, 2017,
and (b) issued to PST, on
September 8, 2017, 1,119,576 shares of Class A common
stock for a purchase price of $7.50 per share, representing an
aggregate purchase price of $8.4 million.
●
In August 2017 we
entered into a securities purchase agreement with Shanghai
Zhangjiang Science & Technology Venture Capital Co., Ltd.,
or ZSTVC, and its subsidiary Zhangjiang AJ Company Limited, or
ZJAJ, pursuant to which we (a) submitted the winning bid, in an
auction process mandated by PRC regulations, to purchase
ZSTVC’s 7.58% equity interests in ACM
Shanghai
, which we
completed on November 8, 2017,
and (b) issued to ZJAJ, on
September 8, 2017, 787,098 shares of Class A common stock
for a purchase price of $7.50 per share, or an aggregate purchase
price of $5.9 million.
Since
November 8, 2017, ACM Research has owned all of the outstanding
equity interests in ACM Shanghai.
Strategic Investment in Key Supplier
Ninebell Co., Ltd.,
or Ninebell, which is located in Seoul, Korea, is the principal
supplier of robotic delivery system subassemblies used in our
single-wafer cleaning equipment. On September 6, 2017 we and
Ninebell entered into:
●
an ordinary share
purchase agreement, effective as of September 11, 2017, pursuant to
which, contemporaneously with signing, Ninebell issued to us, for a
purchase price of $1.2 million, ordinary shares representing
20% of Ninebell’s post-closing equity; and
●
a common stock
purchase agreement, effective as of September 11, 2017, pursuant to
which, contemporaneously with signing, we issued 133,334 shares of
Class A common stock to Ninebell for a purchase price of $7.50
per share, or an aggregate purchase price of
$1.0 million.
In
addition, under the ordinary share purchase agreement, Ninebell
granted us a preemptive right for all future issuances of
equity-related securities by Ninebell and the founder of Ninebell,
who is the only other equity holder of Ninebell, granted us a right
of first refusal with respect to any future sales of his equity
securities.
Key Components of Results of Operations
Revenue
We
develop, manufacture and sell single-wafer wet cleaning equipment
and custom-made wafer assembly and packaging equipment. Because we
currently sell our capital equipment, or tools, to a small number
of customers and we customize those tools to fulfill the
customers’ specific requirements, our revenue generation
fluctuates, depending on the length of the sales, development and
evaluation phases:
Sales and Development
. During the sale
process we may, depending on a prospective customer’s
specifications and requirements, need to perform additional
research, development and testing to establish that a tool can meet
the prospective customer’s requirements. We then host an
in-house demonstration of the customized tool prototype. Sales
cycles for orders that require limited customization and do not
require that we develop new technology usually take from 6 to 12
months, while the product life cycle, including the initial design,
demonstration and final assembly phases, for orders requiring
development and testing of new technologies can take as long as 2
to 4 years. As we expand our customer base, we expect to gain more
repeat purchase orders for tools that we have already developed and
tested, which will eliminate the need for a demonstration phase and
shorten the development cycle.
Evaluation Periods
. When a chip
manufacturer proposes to purchase a particular type of tool from us
for the first time, we offer the manufacturer an opportunity to
evaluate the tool for a period that can extend for 24 months or
longer. We do not receive any payment on first-time purchases until
the tool is accepted. As a result, we may spend between $1.0 and
$2.0 million to produce a tool without receiving payment for
more than 24 months or, if the tool is not accepted, without
receiving any payment. Please see “Item 1A. Risk
Factors—Risks Related to Our Business and Our
Industry—We may incur significant expenses long before we can
recognize revenue from new products, if at all, due to the costs
and length of research, development, manufacturing and customer
evaluation process cycles.”
Purchase Orders
. In accordance with
industry practice, sales of our tools are made pursuant to purchase
orders. Each purchase order from a customer for one of our tools
contains specific technical requirements intended to ensure, among
other things, that the tool will be compatible with the
customer’s manufacturing process line. Until a purchase order
is received, we do not have a binding purchase commitment. Our SAPS
and TEBO customers to date have provided us with non-binding one-
to two-year forecasts of their anticipated demands, and we expect
future customers to furnish similar non-binding forecasts for
planning purposes. Any of those forecasts would be subject to
change, however, by the customer at any time, without notice to
us.
Fulfillment
. We seek to obtain a
purchase order for a tool from three to four months in advance of
the expected delivery date. Depending upon the nature of a
customer’s specifications, the lead time for production of a
tool generally will extend from two to four
months. The
lead-time can be as long as six months, however, and in some cases
we may need to begin producing a tool based on a customer’s
non-binding forecast, rather than waiting to receive a binding
purchase order.
We
expect our sales prices generally to range between $2.5 million and
$5.0 million for SAPs tools and between $3.5 million and $6.5
million for TEBO tools. The sales price of a particular tool will
vary depending upon the required specifications. We have designed
equipment models using a modular configuration that we customize to
meet customers’ technical specifications. For example, our
Ultra C models for SAPS and TEBO solutions use modular
configurations that enable us to create a wet-cleaning tool meeting
a customer’s specific requirements, while using pre-existing
designs for chamber, electrical, chemical delivery and other
modules.
Because
of the relatively large purchase prices of our tools, customers
generally pay in installments. For a customer’s repeat
purchase of a particular type of tool, the specific payment terms
are negotiated in connection with acceptance of a purchase order.
Based on our limited experience with repeat sales of SAPS and TEBO
tools, we expect that we will receive an initial payment upon
delivery of a tool in connection with a repeat purchase, with the
balance being paid once the tool has been tested and accepted by
the customer. Our sales arrangements for repeat purchases do not
include a general right of return.
Since
introducing SAPS technology in 2009, we have focused on selling
SAPS-based tools and, beginning in 2016, TEBO-based tools. Our
revenue from sales of single-wafer wet cleaning equipment totaled
$27.1 million, or 74.2% of our revenue, in 2017 and
$21.5 million, or 78.4% of our revenue, in 2016.
We have
generated most of our revenue from a limited number of customers as
the result of our strategy of initially placing SAPS- and
TEBO-based equipment with a small number of leading chip
manufacturers that are driving technology trends and key capability
implementation. In 2017, 55.2% of our revenue was derived from four
customers: SK Hynix Inc., a leading Korean memory chip company that
accounted for 18.1% of our revenue; Shanghai Huali Integrated
Circuit Research and Development Center Ltd., a public research
consortia for the Chinese semiconductor industry that accounted for
14.1% of our revenue; JiangYin ChangDian Advanced Packaging Co.
Ltd., a leading PRC foundry that accounted for 12.8% of our
revenue; and Yangtze Memory Technologies Co., Ltd., a leading PRC
memory chip company that, together with one of its subsidiaries,
accounted for 10.2% of our revenue. In 2016 99.3% of our revenue
was derived from four customers: Shanghai Huali Microelectronics
Corporation, which accounted for 33.7% of our revenue;
Semiconductor Manufacturing International Corporation, a leading
PRC foundry that accounted for 25.0% of our revenue; SK Hynix Inc.,
which accounted for 24.0% of our revenue; and JiangYin ChangDian
Advanced Packaging Co. Ltd., a leading PRC foundry that accounted
for 16.6% of our revenue.
Based
on our market experience, we believe that implementation of our
equipment by one of our selected leading companies will attract and
encourage other manufacturers to evaluate our equipment, because
the leading company’s implementation will serve as validation
of our equipment and will enable the other manufacturers to shorten
their evaluation processes. We placed our first SAPS-based tool in
2009 as a prototype. We worked closely with the customer for two
years in debugging and modifying the tool, and the customer then
spent two more years of qualification and running pilot production
before beginning volume manufacturing. We expect that the period
from new product introduction to high volume manufacturing will be
three years or less in the future. Please see “Item 1A. Risk
Factors—Business—We depend on a small number of
customers for a substantial portion of our revenue, and the loss
of, or a significant reduction in orders from, one or more of our
major customers could have a material adverse effect on our revenue
and operating results. There are also a limited number of potential
customers for our products.”
All of
our sales in 2016 and 2017 were to customers located in Asia, and
we anticipate that a substantial majority of our revenue will
continue to come from customers located in this region for the near
future. We have increased our sales efforts to penetrate the
markets in North America and Western Europe.
We
utilize the guidance set forth in the FASB’s ASC Topic 605,
Revenue Recognition
,
regarding the recognition, presentation and disclosure of revenue
in our financial statements. We recognize revenue when: persuasive
evidence of an arrangement exists; delivery has occurred and the
major risks and remunerations of ownership have been transferred to
the customer; collectability is probable; and the selling price is
fixed or determinable, as described below under
“—Critical Accounting Policies and Significant
Judgments and Estimates—Revenue
Recognition.”
We
offer extended maintenance service contracts to provide services
such as trouble-shooting or fine-tuning tools, and installing spare
parts, following expiration of applicable initial warranty coverage
periods, which for sales to date have extended from 12 to
36 months as described under “—Critical Accounting
Policies and Significant Judgments and
Estimates—Warranty.” A limited number of the
single-wafer wet cleaning tools we have sold to date are no longer
covered by their initial warranties. In 2016 and 2017, we received
payments for parts and labor for service activities provided from
time to time, but as of December 31, 2017 we had not yet entered
into extended maintenance service contracts with respect to any of
the tools for which initial warranty coverage had expired. We
expect to enter into extended maintenance service contracts with
customers as additional initial warranties expire, but we do not
expect revenue from extended maintenance service contracts to
represent a material portion of our revenue in the
future.
The
loss or delay of one or more large sale transactions in a quarter
could impact our results of operations for that quarter and any
future quarters for which revenue from that transaction is lost or
delayed, as described under “Item 1A. Risk
Factors—Risks Related to Our Business and Our
Industry—Our quarterly operating results can be difficult to
predict and can fluctuate substantially, which could result in
volatility in the price of Class A common stock.” It is
difficult to predict accurately when, or even if, we can complete a
sale of a tool to a potential customer or to increase sales to any
existing customer. Our tool demand forecasts are based on multiple
assumptions, including non-binding forecasts received from
customers years in advance, each of which may introduce error into
our estimates. Difficulties in forecasting demand for our tools
make it difficult for us to project future operating results and
may lead to periodic inventory shortages or excess spending on
inventory or on tools that may not be purchased, as further
described in “Item 1A. Risk Factors—Risks Related to
Our Business and Our Industry—Difficulties in forecasting
demand for our tools may lead to periodic inventory shortages or
excess spending on inventory items that may not be
used.”
Cost of Revenue
Cost of
revenue for capital equipment consists primarily of:
●
direct costs, which
consist principally of costs of tool components and subassemblies
purchased from third-party vendors;
●
compensation of
personnel associated with our manufacturing operations, including
stock-based compensation;
●
depreciation of
manufacturing equipment;
●
amortization of
costs of software used for manufacturing purposes;
●
other expenses
attributable to our manufacturing department; and
●
allocated overhead
for rent and utilities.
We are
not party to any long-term purchasing agreements with suppliers.
Please see “Item 1A. Risk Factors—Risks Related to Our
Business and Our Industry—Our customers do not enter into
long-term purchase commitments, and they may decrease, cancel or
delay their projected purchases at any time.”
As our
customer base and tool installations continue to grow, we will need
to hire additional manufacturing personnel. The rates at which we
add customers and install tools will affect the level and time of
this spending. In addition, because we often import components and
spare parts from the United States, we have experienced, and expect
to continue to experience, the effect of the dollar’s growth
on our cost of revenue.
Gross Margin
Our gross margin
was 47.2% in 2017 and 48.7% in 2016. Gross margin may vary from
period to period, primarily related to the level of utilization and
the timing and mix of purchase orders. We expect gross margin to be
between 40% and 45% for the foreseeable future, with direct
manufacturing costs approximating 50% to 55% of revenue and
overhead costs totaling approximately 5% of revenue. The higher
margin in 2016 and 2017 were primarily due to two systems
manufactured under governmental subsidies (see “—PRC
Government Research and Development Funding” below), which
were sold for $1.8 million and $3.7 million in 2016. Costs
associated with these systems were recorded as research and
development expenses as these systems were research and development
in nature and had not reached the final product manufacture stage.
The related research and development expense was recorded as
reduction of our research and development expense as
incurred.
We seek
to maintain our gross margin by continuing to develop proprietary
technologies that avoid pricing pressure for our wet cleaning
equipment. We actively manage our operations through principles of
operational excellence designed to ensure continuing improvement in
the efficiency and quality of our manufacturing operations by, for
example, implementing factory constraint management and change
control and inventory management systems. In addition, our
purchasing department actively seeks to identify and negotiate
supply contracts with improved pricing to reduce cost of
revenue.
A
significant portion of our raw materials are denominated in
Renminbi, or RMB, while the majority of our purchase orders are
denominated in U.S. dollars. As a result, currency exchange rates
may have a significant effect on our gross margin. For further
information, please see “Exchange Rate
Information.”
Operating Expenses
We have
experienced, and expect to continue to experience, growth in the
dollar amount of our operating expenses, as we make investments to
support the anticipated growth of our customer base and the
continued development of proprietary technologies. As we continue
to grow our business, we expect operating expenses to increase in
absolute dollars.
Sales and Marketing
Sales
and marketing expense accounted for 15.1% of our revenue in 2017
and 14.3% of our revenue in 2016. Sales and marketing expense
consists primarily of:
●
compensation of
personnel associated with pre- and after-sales support and other
sales and marketing activities, including stock-based
compensation;
●
sales commissions
paid to independent sales representatives;
●
fees paid to sales
consultants;
●
shipping and
handling costs for transportation of products to
customers;
●
cost of trade
shows;
●
travel and
entertainment; and
●
allocated overhead
for rent and utilities.
Sales
and marketing expense can be significant and may fluctuate, in part
because of the resource-intensive nature of our sales efforts and
the length and variability of our sales cycle. The length of our
sales cycle, from initial contact with a customer to the execution
of a purchase order, is generally 6 to 24 months.
During
the sales cycle, we expend significant time and money on sales and
marketing activities, including educating customers about our
tools, participating in extended tool evaluations and configuring
our tools to customer-specific needs. Sales and marketing expense
in a given period can be particularly affected by the increase in
travel and entertainment expenses associated with the finalization
of purchase orders or the installation of tools.
We
expect that, for the foreseeable future, sales and marketing
expense will increase in absolute dollars, as we continue to invest
in sales and marketing by hiring additional employees and expanding
marketing programs in existing or new markets. We must invest in
sales and marketing processes in order to develop and maintain
close relationships with customers. We are making dollar-based
investments in dollars in order to support growth of our customer
base in the United States, and the relative strength of the dollar
could have a significant effect on our sales and marketing
expense.
Research and Development
Research and
development expense accounted for 14.1% of our revenue in 2017 and
11.9% of our revenue in 2016. Research and development expense
relates to the development of new products and processes and
encompasses our research, development and customer support
activities. Research and development expense consists primarily
of:
●
compensation of
personnel associated with our research and development activities,
including stock-based compensation;
●
costs of components
and other research and development supplies;
●
travel expense
associated with customer support;
●
amortization of
costs of software used for research and development purposes;
and
●
allocated overhead
for rent and utilities.
Some of
our research and development has been funded by grants from the PRC
government, as described in “—PRC Government Research
and Development Funding” below.
We
expect that, for the foreseeable future, research and development
expense will increase in absolute dollars and will range between
10% and 12% of revenue, as we continue to invest in research and
development to advance our technologies. We intend to continue to
invest in research and development to support and enhance our
existing single-wafer wet cleaning products and to develop future
product offerings to build and maintain our technology leadership
position.
General and Administrative
General
and administrative expense accounted for 16.1% of our revenue in
2017 and 9.8% of our revenue in 2016. General and administrative
expense consists primarily of:
●
compensation of
executive, accounting and finance, human resources, information
technology, and other administrative personnel, including
stock-based compensation;
●
professional fees,
including accounting and legal fees;
●
other corporate
expenses; and
●
allocated overhead
for rent and utilities.
We
expect that, for the foreseeable future, general and administrative
expense will increase in absolute dollars, as we incur additional
costs associated with growing our business and operating as a
public company.
Stock-Based Compensation Expense
We
grant stock options to employees and non-employee consultants and
directors, and we accounts for those stock-based awards in
accordance with Accounting Standards Codification, or ASC, Topic
718,
Compensation—Stock
Compensation
and ASC Subtopic 505-50,
Equity-Based Payments to Non-Employees
,
each as adopted by the Financial Accounting Standards Board, or
FASB.
●
Stock-based awards
granted to employees are measured at the fair value of the awards
on the grant date and are recognized as expenses either
(a) immediately on grant, if no vesting conditions are
required, or (b) using the graded vesting method, net of
estimated forfeitures, over the requisite service period. The fair
value of stock options is determined using the Black-Scholes
valuation model. Stock-based compensation expense, when recognized,
is charged to cost of revenue or to the category of operating
expense corresponding to the employee’s service
function.
●
Stock-based awards
granted to non-employees are accounted for at the fair value of the
awards at the earlier of (a) the date at which a commitment
for performance by the non-employee to earn the awards is reached
and (b) the date at which the non-employee’s performance
is complete. The fair value of such non-employee awards is
re-measured at each reporting date using the fair value at each
period end until the vesting date. Changes in fair value between
the reporting dates are recognized by the graded vesting
method.
Cost of
revenue and operating expenses during the periods presented below
have included stock-based compensation as follows:
|
|
2017
|
2016
|
|
|
(in thousands)
|
|
|
Stock-Based Compensation Expense:
|
|
|
|
Cost
of revenue
|
$
21
|
$
11
|
|
Sales
and marketing expense
|
53
|
5
|
|
Research
and development expense
|
50
|
5
|
|
General
and administrative expense
|
1,499
|
362
|
|
|
$
1,623
|
$
383
|
We
recognized stock-based compensation expense to employees of
$
271,000 in
2017 and $92,000 in
2016. As of December 31, 2017 and 2016, there was $729,000 and
$726,000 of total unrecognized employee share-based compensation
expense, net of estimated forfeitures, related to unvested
share-based awards, which are expected to be recognized over a
weighted-average period of 1.72 years and 2.25 years,
respectively.
We
recognized stock-based compensation expense to non-employees of
$1.4 million in 2017 and $291,000 in 2016. The fair value of each
option granted to a non-employee is re-measured at each period end
until the vesting date.
PRC Government Research and Development Funding
ACM
Shanghai has received three grants from local and central
governmental authorities in the PRC. The first grant, which was
awarded in 2008, relates to the development and commercialization
of 65nm to 45nm stress-free polishing technology. The second grant
was awarded in 2009 to fund interest expense on short-term
borrowings. The most recent grant was made in 2014 and relates to
the development of electro copper-plating technology. PRC
governmental authorities provide the majority of the funding,
although ACM Shanghai is also required to invest certain amounts in
the projects.
The PRC
governmental grants contain certain operating conditions, and we
are required to go through a government due diligence process once
the project is complete. The grants therefore are recorded as
long-term liabilities upon receipt, although we are not required to
return any funds we receive. Grant amounts are recognized in our
statements of operations and comprehensive income as
follows:
●
Government
subsidies relating to current expenses are reflected as reductions
of those expenses in the periods in which they are reported. Those
reductions totaled $3.4 million in 2017 and $6.2 million in
2016.
●
Government
subsidies for interest on short-term borrowings are reported as
reductions of interest expense in the periods the interest is
accrued. Those reductions totaled $0 in 2017 and $99,000 in
2016.
●
Government grants
used to acquire depreciable assets are transferred from long-term
liabilities to property, plant and equipment when the assets are
acquired and then the recorded amounts of the assets are credited
to other income over the useful lives of the assets. Related
government subsidies recognized as other income totaled $135,000 in
2017 and $127,000 in 2016.
Net Income Attributable to Non-Controlling Interests
Since
2006 we have conducted our business through our subsidiary ACM
Shanghai, and we have financed our operations in part through sale
of minority equity interests in ACM Shanghai. From January 1,
2015 to August 31, 2017, ACM Research owned 62.87% of the
equity interests of ACM Shanghai and three non-controlling,
unrelated investors held the remaining 37.13%. As described above
under “—Recent Equity Transactions—Acquisition of
Outstanding Minority Interests in Our Operating Company,” ACM
Research (a) acquired an additional 18.77% equity interest from one
of the minority investors as of August 31, 2017 and
(b) acquired the remaining non-controlling interests with the
other two minority investors on November 8, 2017.
How We Evaluate Our Operations
We
present information below with respect to three measures of
financial performance:
●
We define
“adjusted EBITDA” as our net income excluding interest
expense (net), income tax benefit (expense), depreciation and
amortization, and stock-based compensation. We define adjusted
EBITDA to also exclude restructuring costs, although we have not
incurred any such costs to date.
●
We define
“free cash flow” as net cash provided by operating
activities less purchases of property and equipment (net of
proceeds from disposals) and of intangible assets.
●
We define
“adjusted operating income (loss)” as our income (loss)
from operations excluding stock-based compensation.
These
financial measures are not based on any standardized methodologies
prescribed by accounting principles generally accepted in the
United States, or GAAP, and are not necessarily comparable to
similarly titled measures presented by other
companies.
We have
presented adjusted EBITDA, free cash flow and adjusted operating
income (loss) because they are key measures used by our management
and board of directors to understand and evaluate our operating
performance, to establish budgets and to develop operational goals
for managing our business. We believe that these financial measures
help identify underlying trends in our business that could
otherwise be masked by the effect of the expenses that we exclude.
In particular, we believe that the exclusion of the expenses
eliminated in calculating adjusted EBITDA and adjusted operating
income (loss) can provide useful measures for period-to-period
comparisons of our core operating performance and that the
exclusion of property and equipment purchases from operating cash
flow can provide a usual means to gauge our capability to generate
cash. Accordingly, we believe that these financial measures provide
useful information to investors and others in understanding and
evaluating our operating results, enhancing the overall
understanding of our past performance and future prospects, and
allowing for greater transparency with respect to key financial
metrics used by our management in its financial and operational
decision-making.
Adjusted EBITDA,
free cash flow and adjusted operating income (loss) are not
prepared in accordance with GAAP, and should not be considered in
isolation of, or as an alternative to, measures prepared in
accordance with GAAP. There are a number of limitations related to
the use of adjusted EBITDA rather than net income (loss), which is
the nearest GAAP equivalent. Some of these limitations
are:
●
adjusted EBITDA
excludes depreciation and amortization and, although these are
non-cash expenses, the assets being depreciated or amortized may
have to be replaced in the future;
●
we exclude
stock-based compensation expense from adjusted EBITDA and adjusted
operating income (loss), although (a) it has been, and will
continue to be for the foreseeable future, a significant recurring
expense for our business and an important part of our compensation
strategy and (b) if we did not pay out a portion of our
compensation in the form of stock-based compensation, the cash
salary expense included in operating expenses would be higher,
which would affect our cash position;
●
the expenses and
other items that we exclude in our calculation of adjusted EBITDA
may differ from the expenses and other items, if any, that other
companies may exclude from adjusted EBITDA when they report their
operating results;
●
adjusted EBITDA
does not reflect changes in, or cash requirements for, working
capital needs;
●
adjusted EBITDA
does not reflect interest expense, or the requirements necessary to
service interest or principal payments on debt;
●
adjusted EBITDA
does not reflect income tax expense (benefit) or the cash
requirements to pay taxes;
●
adjusted EBITDA
does not reflect historical cash expenditures or future
requirements for capital expenditures or contractual
commitments;
●
although
depreciation and amortization charges are non-cash charges, the
assets being depreciated and amortized will often have to be
replaced in the future, and adjusted EBITDA does not reflect any
cash requirements for such replacements; and
●
adjusted EBITDA
includes expense reductions and non-operating other income
attributable to PRC governmental grants, which may mask the effect
of underlying developments in net income (loss), including trends
in current expenses and interest expense, and free cash flow
includes the PRC governmental grants, the amount and timing of
which can be difficult to predict and are outside our
control.
The
following table reconciles net income (loss), the most directly
comparable GAAP financial measure, to adjusted EBITDA:
|
|
Year Ended December 31,
|
|
|
|
2017
|
2016
|
|
|
(in thousands)
|
|
|
Adjusted EBITDA Data:
|
|
|
|
Net
income (loss)
|
$
(872
)
|
$
2,387
|
|
Interest
expense, net
|
268
|
165
|
|
Income
tax expense
|
547
|
595
|
|
Depreciation
and amortization
|
271
|
187
|
|
Stock-based
compensation
|
1,622
|
383
|
|
Adjusted
EBITDA
|
$
1,836
|
$
3,717
|
Adjusted EBITDA in
2017, as compared with 2016, reflected a decrease of $3.3 million
in net income offset by an increase of $1.2 million in stock-based
compensation. We do not exclude from adjusted EBITDA expense
reductions and non-operating other income attributable to PRC
governmental grants because we consider and incorporate the
expected amounts and timing of those grants in incurring expenses
and capital expenditures. If we did not receive the grants,
our cash expenses therefore would be lower, and our cash position
would not be affected, to the extent we have accurately anticipated
the amounts of the grants. For additional information regarding our
PRC grants, please see “—Key Components of Results of
Operations—PRC Government Research and Development
Funding.”
The
following table reconciles net cash provided by operating
activities, the most directly comparable GAAP financial measure, to
free cash flow:
|
|
Year Ended December 31,
|
|
|
|
2017
|
2016
|
|
|
(in thousands)
|
|
|
Free Cash Flow Data:
|
|
|
|
Net
cash (used in) provided by operating activities
|
$
(8,101
)
|
$
(3,702
)
|
|
Purchases
of property and equipment, net of proceeds from
disposals
|
(651
)
|
(788
)
|
|
Purchases
of intangible assets
|
(115
)
|
(22
)
|
|
Free
cash flow
|
$
(8,867
)
|
$
(4,512
)
|
Free
cash flow in 2017, as compared with 2016, reflected, in addition to
the factors driving net cash used by operating activities, (a)
increases in accounts receivable offset by increases in accounts
payable and (b) increases in stock-based compensation. Consistent
with our methodology for calculating adjusted EBITDA, we do not
adjust free cash flow for the effects of PRC government subsidies,
because we take those subsidies into account in incurring expenses
and capital expenditures.
Adjusted operating
income (loss) excludes stock-based compensation from income (loss)
from operations. Although stock-based compensation is an important
aspect of the compensation of our employees and executives,
determining the fair value of certain of the stock-based
instruments we utilize involves a high degree of judgment and
estimation and the expense recorded may bear little resemblance to
the actual value realized upon the vesting or future exercise of
the related stock-based awards. Furthermore, unlike cash
compensation, the value of stock options, which is an element of
our ongoing stock-based compensation expense, is determined using a
complex formula that incorporates factors, such as market
volatility, that are beyond our control. Management believes it is
useful to exclude stock-based compensation in order to better
understand the long-term performance of our core business and to
facilitate comparison of our results to those of peer companies.
The use of non-GAAP financial measures excluding stock-based
compensation has limitations, however. If we did not pay out a
portion of our compensation in the form of stock-based
compensation, the cash salary expense included in operating
expenses would be higher, which would affect our cash position. The
following tables reflect the exclusion of stock-based compensation
from line items comprising income (loss) from
operations:
|
|
Year Ended December 31,
|
|||||
|
|
2017
|
2016
|
||||
|
|
Actual
|
|
Adjusted
|
Actual
|
|
Adjusted
|
|
|
(GAAP)
|
|
(Non-GAAP)
|
(GAAP)
|
|
(Non-GAAP)
|
|
|
(in thousands)
|
|||||
|
Revenue
|
$
36,506
|
$
—
|
$
36,506
|
$
27,371
|
$
—
|
$
27,371
|
|
Cost
of revenue
|
(19,281
)
|
(21
)
|
(19,260
)
|
(14,042
)
|
(11
)
|
(14,031
)
|
|
Gross
profit
|
17,225
|
(21
)
|
17,246
|
13,329
|
(11
)
|
13,340
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Sales
and marketing
|
(5,500
)
|
(53
)
|
(5,447
)
|
(3,907
)
|
(5
)
|
(3,902
)
|
|
Research
and development
|
(5,138
)
|
(50
)
|
(5,088
)
|
(3,259
)
|
(5
)
|
(3,254
)
|
|
General
and administrative
|
(5,887
)
|
(1,499
)
|
(4,388
)
|
(2,673
)
|
(362
)
|
(2,311
)
|
|
Income
(loss) from operations
|
$
700
|
$
(1,623
)
|
$
2,323
|
$
3,490
|
$
(383
)
|
$
3,873
|
Adjusted operating
loss in 2017, as compared with 2016, reflected an increase of $1.2
million in stock-based compensation expense.
Critical Accounting Policies and Significant Judgments and
Estimates
The
preparation of our consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions in
applying our accounting policies that affect the reported amounts
of assets, liabilities, revenue and expenses, and related
disclosures of contingent assets and liabilities. We base these
estimates and assumptions on historical experience, and evaluate
them on an on-going basis to ensure that they remain reasonable
under current conditions. Actual results could differ from those
estimates. The accounting policies that reflect our more
significant estimates, judgments and assumptions and that we
believe are the most critical to aid in fully understanding and
evaluating our reported financial results include the
following:
Revenue Recognition
We
utilize the guidance set forth in the FASB’s ASC Topic 605,
Revenue Recognition
,
regarding the recognition, presentation and disclosure of revenue
in our financial statements. We recognize revenue when persuasive
evidence of an arrangement exists; delivery has occurred and the
major risks and remunerations of ownership have been transferred to
the customer; collectability is probable; and the selling price is
fixed or determinable.
In
general, we recognize revenue when a tool has been demonstrated to
meet the customer’s predetermined specifications and is
accepted by the customer. If terms of the sale provide for a
lapsing customer acceptance period, we recognize revenue as of the
earlier of the expiration of the lapsing acceptance period and
customer acceptance. In the following circumstances, however, we
recognize revenue upon shipment or delivery, when legal title to
the tool is passed to a customer as follows:
●
when the customer
has previously accepted the same type of tool with the same
specifications and when we can objectively demonstrate that the
tool meets all of the required acceptance criteria;
●
when the sales
contract or purchase order does not contain an acceptance agreement
or a lapsing acceptance provision and when we can objectively
demonstrate that the tool meets all of the required acceptance
criteria;
●
when the customer
withholds acceptance due to issues unrelated to product
performance, in which case revenue is recognized when the system is
performing as intended and meets predetermined specifications;
or
●
when our sales
arrangements do not include a general right of return.
Customization,
production, installation and delivery are essential elements of the
functionality of our delivered tools, but the related services we
offer, principally warranty services, are not essential to tool
functionality. We treat the customization, production, installation
and delivery of tools, together with the provision of related
warranty and other services, as a single unit of accounting in
accordance with the FASB’s ASC Subtopic 605-25,
Revenue Recognition—Multiple
Element Arrangements.
In 2017 and 2016 all of our tools were
sold in stand-alone arrangements.
We
offer post-warranty period services, which consist principally of
the installation and replacement of parts and small-scale
modifications to the equipment. The related revenue and costs of
revenue are recognized when parts have been delivered and
installed, risk of loss has passed to the customer, and collection
is probable. We do not expect revenue from extended maintenance
service contracts to represent a material portion of our revenue in
the future.
Stock-Based Compensation
We
account for grants of stock options based on their grant date fair
value and recognize compensation expense over the vesting periods.
We estimate the fair value of stock options as of the date of grant
using the Black-Scholes option pricing model. Stock options granted
to non-employees are subject to periodic revaluation over their
vesting terms.
Stock-based
compensation expense represents the cost of the grant date fair
value of employee stock option grants recognized over the requisite
service period of the awards (usually the vesting period) on a
straight-line basis, net of estimated forfeitures. We estimate the
fair value of stock option grants using the Black-Scholes option
pricing model, which requires the input of highly subjective
assumptions, including (a) the risk-free interest rate,
(b) the expected volatility of our stock, (c) the
expected term of the award and (d) the expected dividend
yield.
●
Prior to the IPO in
November 2017, the board of directors considered a number of
objective and subjective factors to determine the best estimate of
the fair value of our common stock. The factors included:
contemporaneous third-party valuations of our common stock; the
prices, rights, preferences and privileges of our preferred stock
relative to the common stock; the prices of convertible preferred
stock sold by us to third-party investors; our operating and
financial results; the lack of marketability of our common stock;
the U.S. and global economic and capital market conditions and
outlook; and the likelihood of achieving a liquidity event for the
shares of common stock underlying these stock options, such as an
initial public offering or sale of our company, given prevailing
market conditions. Since the IPO, we have used the market closing
price for the Class A common stock as reported on the Nasdaq Global
Market to determine the fair value of the Class A common
stock.
●
The risk-free
interest rates for periods within the expected life of the option
are based on the yields of zero-coupon U.S. Treasury
securities.
●
Due to a lack of
company-specific historical and implied volatility data, we have
based our estimate of expected volatility on the historical
volatility of a group of similar companies that are publicly
traded. For these analyses, we have selected companies with
comparable characteristics to ours including enterprise value, risk
profile, position within the industry, and with historical share
price information sufficient to meet the expected life of the
stock-based awards. We compute the historical volatility data using
the daily closing prices for the selected companies’ shares
during the equivalent period of the calculated expected term of our
stock-based awards. We will continue to apply this process until a
sufficient amount of historical information regarding the
volatility of our own stock price becomes available.
●
The expected term
represents the period of time that options are expected to be
outstanding. The expected term of stock options is based on the
average between the vesting period and the contractual term for
each grant according to Staff Accounting Bulletin
No. 110.
●
The expected
dividend yield is assumed to be 0%, based on the fact that we have
never paid cash dividends and have no present intention to pay cash
dividends.
For
employee stock option grants made during the years ended December
31, 2017 and 2016, the weighted-average assumptions used in the
Black-Scholes option pricing model to determine the fair value of
those grants were as follows:
|
|
Year Ended December 31,
|
||
|
|
2017
|
|
2016
|
|
Risk-free
interest rate
|
2.21%-2.22%
|
|
2.02%
-2.32%
|
|
Expected
volatility
|
28.62%-29.18%
|
|
29.93%
|
|
Expected
term (in years)
|
6.25
|
|
5.75-6.25
|
|
Expected
dividend yield
|
0%
|
|
0%
|
For
non-employee stock option grants made for the years ended December
31, 2017 and 2016, the weighted-average assumptions used in the
Black-Scholes option pricing model to determine the fair value of
those grants were as follows:
|
|
Year Ended December 31,
|
||
|
|
2017
|
|
2016
|
|
Risk-free interest
rate
|
1.62%-2.43%
|
|
1.00%
-2.25%
|
|
Expected
volatility
|
28.71%-29.41%
|
|
29.93%
|
|
Expected
term
(in years)
|
3.58-6.25
|
|
2.11-6.24
|
|
Expected
dividend yield
|
0%
|
|
0%
|
The
following table summarizes by grant date the number of shares
of common stock underlying stock options granted since
January 1, 2015, as well as the associated per share exercise
price and the estimated fair value per share of common stock on the
grant date:
|
Grant
Dates
|
Number of
Common Shares Underlying
Options Granted
|
Exercise Price
per Common Share
|
Estimated Fair
Value
per
Common Share
|
|
May 1,
2015
|
783,338
|
$
1.50
|
$
1.50
|
|
September 8,
2015
|
263,335
|
1.50
|
1.50
|
|
December 28,
2016
|
1,424,596
|
3.00
|
2.28
|
|
March 9,
2017
|
33,334
|
7.50
|
7.50
|
|
May 9,
2017
|
183,335
|
7.50
|
7.50
|
|
November 2,
2017
|
120,002
|
5.60
|
5.60
|
As
of December 31, 2017, the unrecognized compensation cost related to
outstanding options was $729,000 and is expected to be recognized
as expense over a weighted-average of 1.77 years. As of
December 31, 2016, the unrecognized compensation cost related
to outstanding options was $726,000 and is expected to be
recognized as expense over a weighted-average of 2.25
years.
As
of December 31, 2017, we had outstanding stock options to acquire
an aggregate of 3,372,292 shares of Class A common stock with
an intrinsic value of $9.3 million. Of those outstanding options,
(a) 1,765,112 shares had vested as of December 31, 2017,
representing an intrinsic value of $6.4 million and
(b) 1,607,180 shares were unvested, representing an intrinsic
value of $2.9 million.
Inventory
Inventories consist
of finished goods, raw materials, work-in-process and consumable
materials. Finished goods are comprised of direct materials, direct
labor, depreciation and manufacturing overhead. Inventory is stated
at the lower of cost and net recognizable value of the inventory.
The cost of a general inventory item is determined using the
weighted average method. The cost of an inventory item purchased
specifically for a customized tool is determined using the specific
identification method. Market value is determined as the lower of
replacement cost and net realizable value, which is the estimated
selling price, in the ordinary course of business, less estimated
costs to complete or dispose.
We
assess the recoverability of all inventories quarterly to determine
if any adjustments are required. We write down excess or obsolete
tool-related inventory based on management’s analysis of
inventory levels and forecasted 12-month demand and technological
obsolescence and spare parts inventory based on forecasted usage.
These factors are affected by market and economic conditions,
technology changes, new product introductions and changes in
strategic direction, and they require estimates that may include
uncertain elements. Actual demand may differ from forecasted
demand, and those differences may have a material effect on
recorded inventory values.
Our
manufacturing overhead standards for product costs are calculated
assuming full absorption of forecasted spending over projected
volumes, adjusted for excess capacity. Abnormal inventory costs
such as costs of idle facilities, excess freight and handling
costs, and spoilage are recognized as current period
charges.
Allowance for Doubtful Accounts
Accounts receivable
are reflected in our consolidated balance sheets at their estimated
collectible amounts. A substantial majority of our accounts
receivable are derived from sales to large multinational
semiconductor manufacturers in Asia. We follow the allowance method
of recognizing uncollectible accounts receivable, pursuant to which
we regularly assess our ability to collect outstanding customer
invoices and make estimates of the collectability of accounts
receivable. We provide an allowance for doubtful accounts when we
determine that the collection of an outstanding customer receivable
is not probable. The allowance for doubtful accounts is reviewed on
a quarterly basis to assess the adequacy of the allowance. We take
into consideration (a) accounts receivable and historical bad
debts experience, (b) any circumstances of which we are aware
of a customer’s inability to meet its financial obligations,
(c) changes in our customer payment history, and (d) our
judgments as to prevailing economic conditions in the industry and
the impact of those conditions on our customers. If circumstances
change, such that the financial conditions of our customers are
adversely affected and they are unable to meet their financial
obligations to us, we may need to record additional allowances,
which would result in a reduction of our net income.
Property, Plant and Equipment
Assets
comprising property, plant and equipment are recorded at cost.
Depreciation is recorded on a straight-line basis over the
estimated useful lives of the assets and begins when the assets are
placed in service. Betterments or renewals are capitalized when
incurred. Maintenance and repairs with respect to an asset are
expensed as incurred if they neither materially add to the value of
the asset nor appreciably prolong its life. Assets comprising
plant, property and equipment are reviewed each year to determine
whether any events or circumstances indicate that the carrying
amount of the asset may not be recoverable.
Intangible Assets
Intangible assets
represent the fair value of separately recognizable intangible
assets acquired in connection with our business operations. We
evaluate intangibles for impairment on an annual basis or whenever
events or circumstances indicate that an impairment may have
occurred.
Valuation of Long-Lived Assets
Long-lived assets
are evaluated for impairment whenever events or changes in
circumstance indicate that the carrying value of an asset may not
be fully recoverable or that the useful life is shorter than we had
originally estimated. When these events or changes occur, we
evaluate the impairment of the long-lived assets by comparing the
carrying value of the assets to an estimate of future undiscounted
cash flows expected to be generated from the use of the assets and
their eventual disposition. If the sum of the expected future
undiscounted cash flow is less than the carrying value of the
assets, we recognize an impairment loss based on the excess of the
carrying value over the fair value. No impairment charge was
recognized in 2015, 2016 and 2017.
Income Taxes
Income
taxes are accounted for using the liability method. Under this
method, deferred income tax assets and liabilities are recognized
for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
in which these temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance would be
provided for the deferred tax assets if it is more likely than not
that the related benefit will not be realized.
On a
quarterly basis, we provide income tax provisions based upon an
estimated annual effective income tax rate. The effective tax rate
is highly dependent upon the geographic composition of worldwide
earnings, tax regulations governing each region, availability of
tax credits and the effectiveness of our tax planning strategies.
We carefully monitor the changes in many factors and adjust our
effective income tax rate on a timely basis. If actual results
differ from these estimates, this could have a material effect on
our financial condition and results of operations.
We
maintained a partial valuation allowance as of December 31,
2017 with respect to certain net deferred tax assets based on our
estimates of recoverability. We determined that the partial
valuation allowance was appropriate given our historical operating
losses and uncertainty with respect to our ability to generate
profits from our business model sufficient to take advantage of the
deferred tax assets in all applicable tax
jurisdictions.
The
calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. In
accordance with the authoritative guidance on accounting for
uncertainty in income taxes, we recognize liabilities for uncertain
tax positions based on the two-step process. The first step is to
evaluate the tax position for recognition by determining if the
weight of available evidence indicates that it is more likely than
not that the position will be sustained in audit, including
resolution of related appeals or litigation processes, if any. The
second step is to measure the tax benefit as the largest amount
that is more than fifty-percent likely of being realized upon
ultimate settlement. We reevaluate these uncertain tax positions on
a quarterly basis. This evaluation is based on factors including
changes in facts or circumstances, changes in tax law, effectively
settled issues under audit and new audit activity. Any change in
these factors could result in the recognition of a tax benefit or
an additional charge to the tax provision.
Interest and
penalties related to uncertain tax positions are recorded in the
provision for income tax expense on the consolidated statements of
operations.
Foreign Currency Translation
Our
consolidated financial statements are presented in U.S. dollars,
which is our reporting currency, while the functional currency of
our subsidiaries in the PRC is RMB. Transactions in foreign
currencies are initially recorded at the functional currency rate
prevailing at the date of the transactions. Any difference between
the initially recorded amount and the settlement amount is recorded
as a gain or loss on foreign currency transaction in our
consolidated statements of operations. Monetary assets and
liabilities denominated in a foreign currency are translated at the
functional currency rate of exchange as of the date of a
consolidated balance sheet. Any difference is recorded as a gain or
loss on foreign currency translation in the appropriate
consolidated statement of operations. In accordance with the
FASB’s ASC Topic 830,
Foreign Currency Matters
, we translate
the assets and liabilities into U.S. dollars from RMB using the
rate of exchange prevailing at the applicable balance sheet date
and the consolidated statements of operations and cash flows are
translated at an average rate during the reporting period.
Adjustments resulting from the translation are recorded in
stockholders’ equity as part of accumulated other
comprehensive income.
The PRC
government imposes significant exchange restrictions on fund
transfers out of the PRC that are not related to business
operations. To date these restrictions have not had a material
impact on us because we have not engaged in any significant
transactions that are subject to the restrictions.
Warranty
We have
provided warranty coverage on our tools for 12 to 36 months,
covering labor and parts necessary to repair a tool during the
warranty period. We account for the estimated warranty cost as
sales and marketing expense at the time revenue is recognized.
Warranty obligations are affected by historical failure rates and
associated replacement costs. Utilizing historical warranty cost
records, we calculate a rate of warranty expenses to revenue to
determine the estimated warranty charge. We update these estimated
charges on a regular basis. The actual product performance and
field expense profiles may differ, and in those cases we adjust our
warranty accruals accordingly.
Recent Accounting Pronouncements
The
following description summarizes recent accounting pronouncements
that we have adopted or will be required to adopt in the
future.
In
February 2018, the FASB issued Accounting Standards Update, or ASU,
No. 2018-02,
Income
Statement—Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income
, which provides financial statement
preparers with an option to reclassify stranded tax effects within
accumulated other comprehensive income to retained earnings in each
period in which the effect of the change in the U.S. federal
corporate income tax rate in the Tax Cuts and Jobs Act (or portion
thereof) is recorded. The amendments in this ASU are effective for
all entities for fiscal years beginning after December 15, 2018,
and interim periods within those fiscal years. Early adoption of
ASU 2018-02 is permitted, including adoption in any interim period
for the public business entities for reporting periods for which
financial statements have not yet been issued. The amendments in
this ASU should be applied either in the period of adoption or
retrospectively to each period (or periods) in which the effect of
the change in the U.S. federal corporate income tax rate in the Tax
Cuts and Jobs Act is recognized. We are is currently evaluating the
impact of the adoption of ASU No. 2018-02 on our consolidated
financial statements.
In July
2017 the FASB issued ASU No. 2017-11,
Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815)
:
(Part I) Accounting
for Certain Financial Instruments with Down Round Features, (Part
II) Replacement of the Indefinite Deferral for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and
Certain Mandatorily Redeemable Noncontrolling Interests with a
Scope Exception
, which addresses the complexity of
accounting for certain financial instruments with down round
features. Down round features are features of certain equity-linked
instruments (or embedded features) that result in the strike price
being reduced on the basis of the pricing of future equity
offerings. Current accounting guidance creates cost and complexity
for entities that issue financial instruments (such as warrants and
convertible instruments) with down round features that require fair
value measurement of the entire instrument or conversion option.
For public business entities, the amendments in Part I of this
update are effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2018. For all
other entities, the amendments in Part I of this update are
effective for fiscal years beginning after December 15, 2019, and
interim periods within fiscal years beginning after December 15,
2020. We are currently evaluating the impact of adoption of ASU
2017-11.
In May
2017 the FASB issued ASU No. 2017-09,
Compensation – Stock Compensation (Topic
718): Scope of Modification Accounting
, which provides
guidance on determining which changes to the terms or conditions of
share-based payment awards require an entity to apply modification
accounting under Topic 718. The amendments in this ASU are
effective for all entities for annual periods, and interim periods
within those annual periods, beginning after December 15,
2017. Early adoption is permitted, including adoption in any
interim period, for (a) public business entities for reporting
periods for which financial statements have not yet been issued and
(b) all other entities for reporting periods for which
financial statements have not yet been made available for issuance.
The amendments in this ASU should be applied prospectively to an
award modified on or after the adoption date. We do not expect the
adoption of ASU No. 2017-09 to have a material impact on our
consolidated financial statements.
In
February 2017 the FASB issued ASU No. 2017-05,
Other Income —Gains and Losses from the
Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying
the Scope of Asset Derecognition Guidance and Accounting for
Partial Sales of Nonfinancial Assets,
which clarifies the
scope of nonfinancial asset guidance in Subtopic 610-20. This ASU
also clarifies that derecognition of all businesses and nonprofit
activities (except those related to conveyances of oil and gas
mineral rights or contracts with customers) should be accounted for
in accordance with the derecognition and deconsolidation guidance
in Subtopic 810-10. The amendments in this ASU also provide
guidance on the accounting for so-called “partial
sales” of nonfinancial assets within the scope of Subtopic
610-20 and contributions of nonfinancial assets to a joint venture
or other noncontrolled investee. The amendments in this ASU are
effective for annual reporting reports beginning after December 15,
2017, including interim reporting periods within that reporting
period. We do not expect the adoption of ASU No. 2017-05 to
have a material impact on our consolidated financial
statements.
In
January 2017 the FASB issued ASU No. 2017-04,
Intangibles – Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment
, which
removes Step 2 from the goodwill impairment test. An entity will
apply a one-step quantitative test and record the amount of
goodwill impairment as the excess of a reporting unit’s
carrying amount over its fair value, not to exceed the total amount
of goodwill allocated to the reporting unit. The new guidance does
not amend the optional qualitative assessment of goodwill
impairment. A business entity that is a U.S. Securities and
Exchange Commission filer must adopt the amendments in this ASU for
its annual or any interim goodwill impairment test in fiscal years
beginning after December 15, 2019. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing
dates after January 1, 2017. We do not expect the adoption of ASU
No. 2016-18 to have a material impact on our consolidated
financial statements.
In
November 2016 the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230):
Restricted Cash
, which requires that a statement of cash
flows explain the change during the period in the total of cash,
cash equivalents, and amounts generally described as restricted
cash or restricted cash equivalents. Therefore, amounts generally
described as restricted cash and restricted cash equivalents should
be included with cash and cash equivalents when reconciling the
beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. The amendments in this ASU do not provide
a definition of restricted cash or restricted cash equivalents. The
amendments in this ASU are effective for public business entities
for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. We are currently
evaluating the impact of the adoption of ASU No. 2016-18 on our
consolidated financial statements.
In
August 2016 the FASB issued Accounting Standards Update, or ASU,
No. 2016-15,
Statement of
Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments
, which addresses the following cash flow
issues: (a) debt prepayment or debt extinguishment costs;
(b) settlement of zero-coupon debt instruments or other debt
instruments with coupon interest rates that are insignificant in
relation to the effective interest rate of the borrowing;
(c) contingent consideration payments made after a business
combination; (d) proceeds from the settlement of insurance
claims; (e) proceeds from the settlement of corporate-owned
life insurance policies, including bank-owned life insurance
policies; (f) distributions received from equity method
investees; (g) beneficial interests in securitization
transactions; and (h) separately identifiable cash flows and
application of the predominance principle. The amendments in this
ASU are effective for public business entities for fiscal years
beginning after December 15, 2017 and interim periods within
those fiscal years and are effective for all other entities for
fiscal years beginning after December 15, 2018 and interim
periods within fiscal years beginning after December 15, 2019.
Early adoption is permitted, including adoption in an interim
period. We are currently evaluating the impact of the adoption of
ASU No. 2016-15 on our consolidated financial
statements.
In
April 2016 the FASB issued ASU No. 2016-09,
Compensation—Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment
Accounting
, which simplifies several aspects of the
accounting for employee stock-based payment transactions. The areas
for simplification in ASU No. 2016-09 include the income
tax consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. The
amendments in this ASU will be effective for annual periods
beginning after December 15, 2016 and interim periods within
those annual periods. The adoption of ASU No. 2016-09 did not
have a material impact on our consolidated financial
statements.
In
February 2016 the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. The
amendments in this update create Topic 842,
Leases
, and supersede the leases
requirements in Topic 840,
Leases
.
Topic 842 specifies the
accounting for leases. The objective of Topic 842 is to establish
the principles that lessees and lessors shall apply to report
useful information to users of financial statements about the
amount, timing and uncertainty of cash flows arising from a lease.
The main difference between Topic 842 and Topic 840 is the
recognition of lease assets and lease liabilities for those leases
classified as operating leases under Topic 840. Topic 842 retains a
distinction between finance leases and operating leases. The
classification criteria for distinguishing between finance leases
and operating leases are substantially similar to the
classification criteria for distinguishing between capital leases
and operating leases in the previous leases guidance. The result of
retaining a distinction between finance leases and operating leases
is that under the lessee accounting model in Topic 842, the effect
of leases in the statement of comprehensive income and the
statement of cash flows is largely unchanged from previous GAAP.
The amendments in ASU No. 2016-02 are effective for
fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years for public business
entities. Early application of the amendments in
ASU No. 2016-02 is permitted. We are currently evaluating
the impact of the adoption of ASU No. 2016-02 on our
consolidated financial statements.
In
November 2015 the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance
Sheet Classification of Deferred Taxes
.
Topic 740,
Income Taxes
, requires an entity to
separate deferred income tax liabilities and assets into current
and noncurrent amounts in a classified statement of financial
position. Deferred tax liabilities and assets are classified as
current or noncurrent based on the classification of the related
asset or liability for financial reporting. Deferred tax
liabilities and assets that are not related to an asset or
liability for financial reporting are classified according to the
expected reversal date of the temporary difference. To simplify the
presentation of deferred income taxes, the amendments in
ASU No. 2015-17 require that deferred income tax
liabilities and assets be classified as noncurrent in a classified
statement of financial position. For public business entities, the
amendments in this update are effective for financial statements
issued for annual periods beginning after December 15, 2016,
and interim periods within those annual periods. The adoption of
ASU No. 2015-17 did not have a material impact on our
consolidated financial statements.
In July
2015 the FASB issued ASU No. 2015-11,
Inventory (Topic 330): Simplifying the
Measurement of Inventory
.
The amendments in this update
require an entity to measure inventory within the scope of
ASU No. 2015-11 (the amendments in
ASU No. 2015-11 do not apply to inventory that is
measured using last-in, first-out or the retail inventory method.
The amendments apply to all other inventory, which includes
inventory that is measured using first-in, first-out or average
cost) at the lower of cost and net realizable value. Net realizable
value is the estimated selling prices in the ordinary course of
business, less reasonably predictable costs of completion, disposal
and transportation. Subsequent measurement is uncharged for
inventory measured using last-in, first-out or the retail inventory
method. The amendments in ASU No. 2015-11 more closely
align the measurement of inventory in GAAP with the measurement of
inventory in International Financial Reporting Standards.
ASU No. 2015-11 is effective for public business entities
for fiscal years beginning after December 15, 2016, including
interim periods within those fiscal years. The amendments in
ASU No. 2015-11 should be applied prospectively with
earlier application permitted as of the beginning of an interim or
annual reporting period. The adoption of ASU No. 2015-11 did
not have a material impact on our consolidated financial
statements. The relevant descriptions have been included in the
inventory accounting policy.
In
August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial
Statements—Going Concern
. The amendments in this
update require management to evaluate whether there are conditions
and
events that raise
substantial doubt about an entity’s ability to continue as a
going concern for both annual and
interim reporting. The guidance
is effective for us for the annual period ended after
December 15,
2016
and interim periods thereafter. Management performed an evaluation
of the our ability to fund operations and to continue as a going
concern according to ASC Topic 205-40,
Presentation of Financial
Statements—Going Concern
. The adoption of ASU
No. 2014-15 did not have a material impact on our consolidated
financial statements.
In May
2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic
606)
. ASU No. 2014-09 supersedes the revenue recognition
requirements in “Revenue Recognition (Topic 605)”, and
requires entities to recognize revenue when it transfers promised
goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled to in
exchange for those goods or services. The FASB issued ASU No.
2015-14,
Revenue from Contracts
with Customers (Topic 606)
:
Deferral of the Effective Date
in
August 2015. The amendments in ASU No. 2015-14 defer the effective
date of ASU No. 2014-09. Public business entities, certain
not-for-profit entities, and certain employee benefit plans should
apply the guidance in ASU No. 2014-09 to annual reporting periods
beginning after December 15, 2017, including interim reporting
periods within that reporting period. Earlier adoption is permitted
only as of annual reporting periods beginning after December 15,
2016, including interim reporting periods within that reporting
period.Further to ASU No. 2014-09 and ASU No. 2015-14, the FASB
issued ASU No. 2016-08,
Revenue
from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net)
in March
2016, ASU No. 2016-10,
Revenue
from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing
in April 2016, ASU No. 2016-12,
Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients
, and ASU No. 2016-20,
Technical Corrections and Improvements to
Topic 606, Revenue from Contracts with Customers
,
respectively. The amendments in ASU No. 2016-08 clarify the
implementation guidance on principal versus agent considerations,
including indicators to assist an entity in determining whether it
controls a specified good or service before it is transferred to
the customers. ASU No. 2016-10 clarifies guideline related to
identifying performance obligations and licensing implementation
guidance contained in the new revenue recognition standard. The
updates in ASU No. 2016-10 include targeted improvements based on
input the FASB received from the Transition Resource Group for
Revenue Recognition and other stakeholders. It seeks to proactively
address areas in which diversity in practice potentially could
arise, as well as to reduce the cost and complexity of applying
certain aspects of the guidance both at implementation and on an
ongoing basis. ASU No. 2016-12 addresses narrow-scope improvements
to the guidance on collectability, non-cash consideration, and
completed contracts at transition. Additionally, the amendments in
this ASU provide a practical expedient for contract modifications
at transition and an accounting policy election related to the
presentation of sales taxes and other similar taxes collected from
customers. The amendments in ASU No. 2016-20 represents changes to
make minor corrections or minor improvements to the Codification
that are not expected to have a significant effect on current
accounting practice or create a significant administrative cost to
most entities. The effective date and transition requirements for
ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No.
2016-20 are the same as ASU No. 2014-09. The Company will adopt ASU
No. 2014-09, ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and
ASU No. 2016-20 at January 1, 2018.
The
Company has substantially completed the implementation of these
ASUs and has identified the necessary changes to its policies,
business processes, systems and controls. Whilst the Company has
finalized the analysis of its revenue contracts applying the above
guidance, and will adopt FASB ASC Topic 606,
Revenue from Contracts with Customers
,
effective January 1, 2018, using the modified retrospective
transition approach. Under this approach, FASB ASC Topic 606 would
apply to all new contracts initiated on or after January 1, 2018.
For existing contracts that have remaining obligations as of
January 1, 2018, any difference between the recognition criteria in
these ASUs and the Company's current revenue recognition practices
would be recognized using a cumulative effect adjustment to the
opening balance of accumulated deficit. The Company has concluded
that its revenue recognition will remain the same as previously
reported and will not have material impacts to its consolidated
financial statements.
Results of Operations
The
following table sets forth our results of operations for the
periods presented, as percentages of revenue.
|
|
Year
Ended December 31,
|
|
|
|
2017
|
2016
|
|
Revenue
|
100.0
%
|
100.0
%
|
|
Cost
of revenue
|
52.8
|
51.3
|
|
Gross
margin
|
47.2
|
48.7
|
|
Operating
expenses:
|
|
|
|
Sales
and marketing
|
15.1
|
14.3
|
|
Research
and development
|
14.1
|
11.9
|
|
General
and administrative
|
16.1
|
9.7
|
|
Total
operating expenses, net
|
45.3
|
35.9
|
|
Income
from operations
|
1.9
|
12.8
|
|
Interest
expense, net
|
(0.7
)
|
(0.6
)
|
|
Other
income (expense), net
|
(2.4
)
|
(1.3
)
|
|
Income
(loss) before income taxes
|
(1.1
)
|
10.9
|
|
Income
tax (expense) benefit
|
(1.5
)
|
(2.2
)
|
|
Net
income (loss)
|
(2.6
)
|
8.7
|
|
Less:
Net income (loss) attributable to non-controlling
interests
|
(1.5
)
|
4.9
|
|
Net
income (loss) attributable to ACM Research, Inc.
|
(1.1
)%
|
3.8
%
|
Comparison of Year ended December 31, 2017 and 2016
Revenue
|
|
Year ended
December 31,
|
% Change
|
|
|
|
2017
|
2016
|
2016 v 2017
|
|
|
(in
thousands)
|
|
|
|
Revenue
|
$
36,506
|
$
27,371
|
33
%
|
The
increase in revenue of $9.1 million for 2017 reflected increases in
revenue of $5.6 million from single-wafer cleaning equipment, $3.0
million from advanced packaging equipment and $500,000 from service
and parts. Our revenue for 2017 compared to 2016 reflected sales of
$8.8 million to two new customers and an increase of $300,000 in
sales to existing customers.
Cost of Revenue and Gross Margin
|
|
Year
Ended
December
31,
|
% Change
|
|
|
|
2017
|
2016
|
2016 v
2017
|
|
|
(in
thousands)
|
|
|
|
Cost of
revenue
|
$
19,281
|
$
14,042
|
37.3
%
|
|
Gross
profit
|
$
17,225
|
$
13,329
|
29.2
|
|
Gross
margin
|
47.2
%
|
48.7
%
|
(1.5
)%
|
Cost of revenue increased $5.2 million, and gross
profit increased $3.9 million, for 2017 compared to 2016,
reflecting the growth in sales. Gross margin decreased 1.5%,
primarily due to sales of relatively lower-margin tools to new
customers for 2017. The higher margins in 2016 and 2017 were
primarily due to two systems manufactured under governmental
subsidies
(see
“—PRC Government Research and Development
Funding” below), which were sold for $1.8 million in 2017 and
$3.7 million in 2016. Costs associated with these systems were
recorded as research and development expenses as these systems were
research and development in nature and had not reached the final
product manufacture stage.
The
related research and development expense was recorded as reduction
of our research and development expense as
incurred.
Operating Expenses
|
|
Year
Ended
December
31,
|
% Change
|
|
|
|
2017
|
2016
|
2016 v
2017
|
|
|
(in
thousands)
|
|
|
|
Sales and marketing
expense
|
$
5,500
|
$
3,907
|
40.77
%
|
|
Research and
development expense
|
5,138
|
3,259
|
57.66
|
|
General and
administrative expense
|
5,887
|
2,673
|
120.24
|
|
Total operating
expenses, net
|
$
16,525
|
$
9,839
|
67.95
%
|
Sales and marketing expense
increased
$1.6 million in 2017 as compared to 2016, primarily due to an
increase in employee salaries and sales services.
Research and development expense
increased $1.9 million for 2017 as compared to 2016, principally as
a result of increases in employee salaries and research and
development parts. Research and development expense represented
14.1% of our revenue in 2017 and 11.9% of our revenue in 2016.
Without reduction by grant amounts received from PRC governmental
authorities (see “—Key Components of Results of
Operations—PRC Government Research and Development
Funding”), gross research and development expense totaled
$8.6 million, or 23.4% of revenue, in 2017 and $9.5million, or
34.7%
of revenue, in 2016.
General and administrative expense
increased $3.2 million in 2017 as compared to 2016, principally
resulting from preparations to become a public company. These costs
reflected increases of $1.2 million in stock-based compensation
expense, $1.3 million in professional fees, and $523,000 in
personnel costs due to the increase of headcount.
Other Income and Expenses
|
|
Year
Ended
December
31,
|
% Change
|
|
|
|
2017
|
2016
|
2016 v
2017
|
|
|
(in
thousands)
|
|
|
|
Interest expense,
net
|
$
(268
)
|
$
(165
)
|
62.4
%
|
|
Other income
(expense), net
|
(792
)
|
(343
)
|
(131
)
|
Interest expense
consists of interest incurred from outstanding short-term
borrowings. Interest expense increased to $277,000 in 2017 from
$181,000 in 2016, principally as a result of increased borrowings
under short-term bank loans. We earn interest income from
depositary accounts. Interest income was nominal in 2017 and
2016.
Other
income, net primarily reflects (a) gains or losses recognized from
the effect of exchange rates on our foreign currency-denominated
asset and liability balances, (b) depreciation of assets acquired
with government subsidies, as described under “—Key
Components of Results of Operations—PRC Government Research
and Development Funding” above, and (c) losses we recognized
upon dispositions of fixed assets.
Income Tax (Expense) Benefit
The
following presents components of income tax (expense) benefit for
the indicated periods:
|
|
Year Ended December 31,
|
|
|
|
2017
|
2016
|
|
Current:
|
(in thousands)
|
|
|
U.S.
federal
|
$
-
|
$
-
|
|
U.S.
state
|
-
|
(1
)
|
|
Foreign
|
-
|
-
|
|
Total
current tax expense
|
-
|
(1
)
|
|
Deferred:
|
|
|
|
U.S.
federal
|
-
|
-
|
|
U.S.
state
|
-
|
-
|
|
Foreign
|
(547
)
|
(594
)
|
|
Total
deferred tax expense
|
(547
)
|
(594
)
|
|
Total
income tax expense
|
$
(547
)
|
$
(595
)
|
Our
effective tax rate differs from statutory rates of 34% for U.S.
federal income tax purposes and 15% to 25% for Chinese income tax
purpose due to the effects of the valuation allowance and certain
permanent differences as it pertains to book-tax differences in the
value of client equity securities received for services. Our two
PRC subsidiaries, ACM Shanghai and ACM Wuxi, are liable for PRC
corporate income taxes at the rates of 15% and 25%, respectively.
Pursuant to the Corporate Income Tax Law of the PRC, our PRC
subsidiaries generally would be liable for PRC corporate income
taxes as a rate of 25%. According to Guoshuihan 2009 No. 203,
an entity certified as an “advanced and new technology
enterprise” is entitled to a preferential income tax rate of
15%. ACM Shanghai was certified as an “advanced and new
technology enterprise” in 2012 and again in 2016, with an
effective period of three years.
We file
income tax returns in the United States and state and foreign
jurisdictions. Those federal, state and foreign income tax returns
are under the statute of limitations subject to tax examinations
for 2009 through 2016. To the extent we have tax attribute
carryforwards, the tax years in which the attribute was generated
may still be adjusted upon examination by the Internal Revenue
Service or state or foreign tax authorities to the extent utilized
in a future period.
We
intend to reinvest indefinitely our PRC earnings as of December 31,
2017 outside of the United States, and we therefore have not
provided for taxes with respect to the remissions of such earnings
from the PRC to the United States.
On
December 22, 2017, the 2017 Tax Cuts and Jobs Act was enacted into
law. The new legislation contains several key tax provisions that
affect us, including a one-time mandatory transition tax on
accumulated foreign earnings and a reduction of the corporate
income tax rate to 21% effective January 1, 2018. We are required
to recognize the effect of the tax law changes in the period of
enactment, such as determining the transition tax, remeasuring our
U.S. deferred tax assets and liabilities as well as reassessing the
net realizability of our deferred tax assets and
liabilities.
Liquidity and Capital Resources
Initially we funded
our operations principally through issuances of four series of
convertible preferred stock from our formation in 1998 through 2001
and issuances of convertible and term promissory notes in 2003 and
2004. We issued additional convertible and term promissory notes in
2005 and 2006 in anticipation of moving our operational center to
Shanghai in 2006, and following that transition, our new subsidiary
ACM Shanghai raised funds through sales of its non-controlling
equity interests in 2007, 2008 and 2009. Prior to 2016, we also
funded our operations with (a) subsidies received from PRC
governmental authorities pursuant to grants made in 2008, 2009 and
2014, (b) short-term borrowings by ACM Shanghai from local
financial institutions in 2009 and each year since 2011 through
2015, (c) additional issuances of term promissory notes in
2013, 2014 and 2015, and (d) operating cash flow in 2015.
Since January 1, 2016, we have funded our technology
development and operations through:
●
issuances of two
additional series of convertible preferred stock in 2016 and the
third quarter of 2017;
●
an investment
deposit in 2016 made in connection with issuance of a Class A
common stock warrant in March 2017;
●
short-term
borrowings by ACM Shanghai from local financial institutions in
2016 and the first nine months of 2017;
●
operating cash flow
in 2017; and
●
the IPO and the
concurrent private placement in November 2017.
We
believe our existing cash and cash equivalents (including our net
proceeds of the IPO and the concurrent private placement), our cash
flow from operating activities and short-term bank borrowings by
ACM Shanghai will be sufficient to meet our anticipated cash needs
for at least the next twelve months. We do not expect that our
anticipated cash needs for the next twelve months will require our
receipt of any PRC government subsidies. Our future working capital
needs will depend on many factors, including the rate of our
business and revenue growth, the payment schedules of our
customers, and the timing of investment in our research and
development as well as sales and marketing. To the extent our cash
and cash equivalents, cash flow from operating activities and
short-term bank borrowings are insufficient to fund our future
activities, we may need to raise additional funds through
additional bank credit arrangements or public or private debt or
equity financings. We also may need to raise additional funds in
the event we determine in the future to effect one or more
acquisitions of businesses, technologies and products. If
additional funding is required, we may not be able to obtain bank
credit arrangements or to affect an equity or debt financing on
terms acceptable to us or at all.
Sources of Funds
Equity and Equity-Related Securities
From
January 1, 2016 to March 19, 2018, we have received gross
proceeds of $54.2 million from sales of common stock, convertible
preferred stock and a warrant, as described below.
Common Stock
. We have sold
shares of common stock as follows:
|
Issue
Date
|
|
Transaction
|
Gross Proceeds
|
|
|
|
|
(in thousands)
|
|
2016
|
|
Option
exercises
|
$
584
|
|
2017
|
|
Option
exercises
|
396
|
|
September
2017
|
|
Private
placements
|
15,300
|
|
November
2017
|
|
IPO
|
12,504
|
|
November
2017
|
|
Concurrent
private placement
|
7,467
|
|
2018
|
|
Option
Exercises
|
62
|
|
|
|
$
36,313
|
|
Convertible Preferred Stock
. In
2016 we received gross proceeds of $9.0 million from sales of
shares of Series F convertible preferred stock that converted,
upon completion of the IPO, into 1,221,099 shares of Class A
common stock, for an effective purchase price of $7.50 per share.
In 2017 we received gross proceeds of $5.8 million from sales
of shares of Series E convertible preferred stock that
converted, upon completion of the IPO, into 1,666,170 shares of
Class A common stock, for an effective purchase price of $3.48
per share.
Warrant
. In December 2016
SMC delivered to ACM Shanghai RMB 20,123,000 ($3.0 million as of
the date of funding) in cash for potential investment pursuant to
terms to be subsequently negotiated. In March 2017 we issued to SMC
a warrant exercisable to purchase 397,502 shares of Class A common
stock at a price of $7.50 per share, for a total exercise price of
$3.0 million.
Indebtedness
ACM Shanghai Short-Term Loan
Facilities
. ACM Shanghai is a party to short-term borrowing
with three banks, as follows:
|
Lender
|
|
Agreement
Date
|
|
|
Maturity Date
|
|
|
Annual
Interest Rate
|
|
|
Maximum
Borrowing Amount(1)
|
|
Amount
Outstanding at December 31, 2017(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
||
|
Bank of
China Pudong Branch
|
|
August 2017
|
|
|
March 2018
|
|
|
4.80
|
%
|
|
RMB30,000
|
|
RMB14,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$4,590
|
|
$2,219
|
|
|
Bank of
Shanghai Pudong Branch
|
|
August 2017
|
|
|
October 2018
|
|
|
5.66
|
|
|
RMB25,000
|
|
RMB13,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3,825
|
|
$2,111
|
|
|
Shanghai Rural
Commercial Bank
|
|
November 2017
|
|
|
November 2018
|
|
|
5.44-5.66
|
|
|
RMB5,000
|
|
RMB5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$765
|
|
$765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB60,000
|
|
RMB33,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$9,180
|
|
$5,095
|
|
(1)
Converted to dollars as of December 31, 2017
All of
the amounts owing under the line of credit with Bank of China
Pudong Branch are secured by ACM Shanghai’s intellectual
property. All of the amounts owing under the lines of credit with
Bank of Shanghai Pudong Branch and Shanghai Rural Commercial Bank
are guaranteed by David Wang, our Chair of the Board, Chief
Executive Officer and President.
Cash Flow from Operating Activities
Our
operations used cash flow of $3.7 million in 2016 and $8.1 million
in 2017. Our cash flow from operating activities is influenced by
(a) the amount of cash we invest in personnel and technology
development to support anticipated future growth in our business,
(b) increases in the number of customers using our products and
services, and (c) the amount and timing of payments by
customers.
Government Research and Development Grants
As
described under “—Key Components of Results of
Operations—PRC Government Research and Development
Funding,” ACM Shanghai has received research and development
grants from local and central PRC governmental authorities. ACM
Shanghai received grants totaling $6.6 million in 2016 and $2.5
million in 2017. Not all grant amounts are received in the year in
which a grant is awarded. Because of the nature and terms of the
grants, the amounts and timing of payments under the grants are
difficult to predict and vary from period to period. In addition,
we expect to apply for additional grants when available in the
future, but the grant application process can extend for a
significant period of time and we cannot predict whether, or when,
we will determine to apply for any such grants.
Working Capital
The
following table sets forth selected working capital
information:
|
|
December 31, 2017
|
|
|
(in thousands)
|
|
Cash
and cash equivalents
|
$
17,681
|
|
Accounts
receivable, less allowance for doubtful amounts
|
26,762
|
|
Inventory
|
15,388
|
|
Working
capital
|
41,097
|
Our
cash and cash equivalents at December 31, 2017 were unrestricted
and held for working capital purposes. ACM Shanghai, our only
direct PRC subsidiary, is, however, subject to PRC restrictions on
distributions to equity holders. We currently intend for ACM
Shanghai to retain all available funds any future earnings for use
in the operation of its business and do not anticipate its paying
any cash dividends.
We have
not entered into, and do not expect to enter into, investments for
trading or speculative purposes. Our accounts receivable balance
fluctuates from period to period, which affects our cash flow from
operating activities. Fluctuations vary depending on cash
collections, client mix, and the timing of shipment and acceptance
of our tools.
Uses of Funds
Capital Expenditures
During
2017 we continued to invest in equipment and infrastructure
improvements for our manufacturing and research and development
facilities and, to a lesser extent, leasehold improvements for our
administrative facilities. Our capital expenditures totaled
$766,000 in 2017.
Our
capital expenditures totaled $795,000 in 2016. Substantially all of
the capital expenditures were made to purchase equipment or improve
infrastructure for our research and development and manufacturing
facilities.
We
estimate that our capital expenditures in 2018 will total
approximately $3.2 million. The extent of these investments may be
affected by the pace with which we add new customers and obtain
additional purchase orders. We are not currently party to any
purchase contracts related to future capital
expenditures.
Effects of Inflation
Inflation and
changing prices have not had a material effect on our business, and
we do not expect that they will materially affect our business in
the foreseeable future. Any impact of inflation on cost of revenue
and operating expenses, especially employee compensation costs, may
not be readily recoverable in the price of our product
offerings.
Off-Balance Sheet Arrangements
As of
December 31, 2017 and 2016, we did not have any significant
off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of Regulation S-K of the SEC.
Emerging Growth Company Status
We are
an “emerging growth company” as defined in the
Jumpstart Our Business Startups Act, or JOBS Act, and may take
advantage of provisions that reduce our reporting and other
obligations from those otherwise generally applicable to public
companies. We may take advantage of these provisions until the
earliest of December 31, 2022 or such time that we have annual
revenue greater than $1.0 billion, the market value of our capital
stock held by non-affiliates exceeds $700 million or we have issued
more than $1.0 billion of non-convertible debt in a three-year
period. We have chosen to take advantage of some of these
provisions, and as a result we may not provide stockholders with
all of the information that is provided by other public companies.
We have, however, irrevocably elected not to avail ourselves, as
would have been permitted by Section 107 of the JOBS Act, of the
extended transition period provided in Section 7(a)(2)(B) of the
Securities Act of 1933 for complying with new or revised accounting
standards, and we therefore will be subject to the same new or
revised accounting standards as public companies that are not
emerging growth companies
I
tem 7A: Quantitative and
Qualitative Disclosures about Market Risk
Not
applicable.
I
tem 8.
Financial Statements
and Supplementary
Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
Consolidated Financial Statements
|
74
|
|
|
|
|
Report of Independent Registered Public Accounting
Firm
|
74
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2017 and
2016
|
75
|
|
|
|
|
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the Years ended December 31, 2017 and 2016
|
76
|
|
|
|
|
Consolidated Statements of Changes in Redeemable Convertible
Preferred Stock and Stockholders’ Equity (Deficit) for the
Years ended December 31, 2017 and 2016
|
77
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Years ended December 31, 2017 and
2016
|
78
|
|
|
|
|
Notes to Consolidated Financial Statements
|
79
|
|
|
|
Report of Independent Registered Public Accounting
Firm
The
Board of Directors and Stockholders of
ACM Research, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of ACM
Research, Inc. and its subsidiaries (the “Company”) as
of December 31, 2017 and 2016, the related consolidated statements
of operations and comprehensive income (loss), changes in
redeemable convertible preferred stock and stockholders’
equity (deficit), and cash flows for each of the two years in the
period ended December 31, 2017, and the related notes (collectively
referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial
position of the Company at December 31, 2017 and 2016, and the
results of its operations and its cash flows for each of the two
years in the period ended December 31, 2017
,
in conformity with accounting principles generally
accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements.
We believe that our audits provide a reasonable
basis for our opinion.
/s/ BDO
China Shu Lun Pan Certified Public Accountants LLP
We have
served as the Company's auditor since 2015.
Shenzhen,
The People’s Republic of China
March
22, 2018
ACM RESEARCH, INC.
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Assets
|
(in thousands, except
share data)
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$
17,681
|
$
10,119
|
|
Accounts receivable,
less allowance for doubtful accounts of $0 and $0 as of December
31, 2017 and 2016, respectively (note 3)
|
26,762
|
16,026
|
|
Other
receivables
|
2,491
|
1,763
|
|
Inventory (note
4)
|
15,388
|
11,666
|
|
Prepaid
expenses
|
546
|
720
|
|
Other current
assets
|
46
|
53
|
|
Total
current assets
|
62,914
|
40,347
|
|
Property, plant and
equipment, net (note 5)
|
2,340
|
2,262
|
|
Intangible assets,
net
|
106
|
17
|
|
Deferred tax assets
(note 17)
|
1,294
|
1,841
|
|
Investment in
affiliates, equity method (note 11)
|
1,237
|
-
|
|
Total
assets
|
$
67,891
|
$
44,467
|
|
|
|
|
|
Liabilities,
Redeemable Convertible Preferred Stock and Stockholders’
Equity (Deficit)
|
|
|
|
Current
liabilities:
|
|
|
|
Short-term borrowings
(note 6)
|
$
5,095
|
$
4,761
|
|
Notes
payable
|
11
|
11
|
|
Investors’
deposits (note 8)
|
-
|
2,902
|
|
Warrant liability
(note 9)
|
3,079
|
—
|
|
Accounts payable
(including amounts due to a related party of $2,118and $508 at
December 31, 2017 and 2016, respectively (note
12))
|
7,419
|
5,173
|
|
Advances from
customers
|
143
|
215
|
|
Income taxes
payable
|
44
|
44
|
|
Other payables and
accrued expenses (including amounts due to a related-party of
$2,024 and $1,883 as of December 31, 2017 and 2016, respectively
(note 12) (note 7))
|
6,026
|
3,963
|
|
|
|
|
|
Total
current liabilities
|
21,817
|
17,069
|
|
Other long-term
liabilities (note 10)
|
6,217
|
6,879
|
|
Total
liabilities
|
28,034
|
23,948
|
|
|
|
|
|
Commitments
and contingencies (Note 18)
|
|
|
|
Redeemable
convertible preferred stock, with par value $0.0001 as of December
31, 2017 and 2016:
|
|
|
|
Series A: 385,000
shares authorized, no shares issued or outstanding as of December
31, 2017; 385,000 shares issued and outstanding as of December 31,
2016 (liquidation value of $0 and $308 at December 31, 2017 and
2016)
|
-
|
288
|
|
Series B: 1,572,000
shares authorized, no shares issued or outstanding as of December
31, 2017; 1,572,000 issued and outstanding as of December 31, 2016
(liquidation value of $0 and $1,572 at December 31, 2017 and
2016)
|
-
|
1,572
|
|
Series C: 1,360,962
shares authorized, no shares issued or outstanding as of December
31, 2017; 1,360,962 issued and outstanding as of December 31, 2016
(liquidation value of $0 and $2,041 at December 31,2017 and
2016).
|
-
|
2,041
|
|
Series D: 2,659,975
shares authorized, no shares issued or outstanding as of December
31, 2017; 1,326,642 shares issued and outstanding as of December
31, 2016 (liquidation value of $0 and $4,975 at December 31, 2017
and 2016)
|
-
|
4,975
|
|
Series E: 10,718,530
shares authorized, no shares issued or outstanding as of December
31, 2017 and 2016
|
-
|
-
|
|
Series F: 6,000,000
shares authorized, no shares issued or outstanding as of December
31, 2017; 3,663,254 issued and outstanding as of December 31, 2016
(liquidation value of $0 and $9,158 at December 31, 2017 and
2016)
|
-
|
9,158
|
|
Total
redeemable convertible preferred stock (note
15)
|
-
|
18,034
|
|
Stockholders’
equity (deficit):
|
|
|
|
Common stock –
Class A, with par value $0.0001: 100,000,000 shares authorized,
12,935,546 shares issued and outstanding as of December 31, 2017;
100,000,000 shares authorized and 2,228,740 shares issued and
outstanding as of December 31, 2016 (note 14)
|
1
|
1
|
|
Common stock –
Class B, with par value $0.0001: 7,303,533 shares authorized and
2,409,738 shares issued and outstanding as of December 31, 2017 and
2016 (note 14)
|
-
|
1
|
|
Additional paid in
capital
|
49,695
|
7,620
|
|
Accumulated
deficit
|
(9,961
)
|
(9,643
)
|
|
Accumulated other
comprehensive income (loss)
|
122
|
(413
)
|
|
Total
ACM Research, Inc. stockholders’ (deficit)
equity
|
39,857
|
(2,434
)
|
|
Non-controlling
interests
|
-
|
4,919
|
|
Total
stockholders’ equity
|
39,857
|
2,485
|
|
|
|
|
|
Total
liabilities, redeemable convertible preferred stock and
stockholders’ equity
|
$
67,891
|
$
44,467
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ACM RESEARCH, INC.
|
|
Year Ended December 31,
|
|
|
|
2017
|
2016
|
|
|
(in
thousands, except share and per share data)
|
|
|
Revenue
|
$
36,506
|
$
27,371
|
|
Cost
of revenue
|
19,281
|
14,042
|
|
Gross profit
|
17,225
|
13,329
|
|
Operating
expenses:
|
|
|
|
Sales
and marketing
|
5,500
|
3,907
|
|
Research
and development
|
5,138
|
3,259
|
|
General
and administrative
|
5,887
|
2,673
|
|
Total operating expenses, net
|
16,525
|
9,839
|
|
Income from operations
|
700
|
3,490
|
|
Interest
income
|
9
|
16
|
|
Interest
expense
|
(277
)
|
(181
)
|
|
Other
expense, net
|
(794
)
|
(343
)
|
|
Equity
in net income of affiliates
|
37
|
-
|
|
Income (loss) before income taxes
|
(325
)
|
2,982
|
|
Income
tax expense (note 17)
|
(547
)
|
(595
)
|
|
Net income (loss)
|
(872
)
|
2,387
|
|
Less:
Net income (loss) attributable to non-controlling
interests
|
(554
)
|
1,356
|
|
Net income (loss) attributable to ACM Research, Inc.
|
(318
)
|
1,031
|
|
Comprehensive
income (loss):
|
|
|
|
Net
income (loss)
|
(872
)
|
2,387
|
|
Foreign
currency translation adjustment
|
472
|
(522
)
|
|
Comprehensive income (loss)
|
(400
)
|
1,865
|
|
Less:
Comprehensive income (loss) attributable to non-controlling
interests
|
(369
)
|
1,161
|
|
Total comprehensive income (loss) attributable to ACM Research,
Inc. (note 2)
|
$
(31
)
|
$
704
|
|
Net
income (loss) per common share (note 2):
|
|
|
|
Basic
|
$
(0.05
)
|
$
0.30
|
|
Diluted
|
(0.05
)
|
$
0.18
|
|
Weighted-average
common shares outstanding used in computing per share amounts (note
2):
|
|
|
|
Basic
|
6,865,390
|
2,176,315
|
|
Diluted
|
6,865,390
|
3,792,137
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ACM RESEARCH, INC.
Consolidated Statement of Changes in Redeemable Convertible
Preferred Stock and Stockholders’ Equity
(Deficit)
|
|
Redeemable Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
Series A
|
Series B
|
Series C
|
Series D
|
Series E
|
Series F
|
|
Common Stock
|
Common
Stock Class A
|
Common
Stock Class B
|
|
|
|
|
|
|||||||||
|
|
shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Total Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional Paid-in
Capital
|
Accumulated Deficit
|
Accumulated
Other
Comprehensive
Income
|
Non-controlling
Interest
|
Total Stockholders’ Equity (Deficit)
|
|
|
(in thousands, except share data)
|
|||||||||||||||||||||||
|
Balance at January 1, 2016
|
385,000
|
$
288
|
1,572,000
|
$
1,572
|
1,360,962
|
$
2,041
|
1,326,642
|
$
4,975
|
—
|
$
—
|
—
|
$
—
|
$
8,876
|
2,047,403
|
$
280
|
—
|
$
—
|
—
|
$
—
|
$
2,243
|
$
(10,675
)
|
$
(84
)
|
$
3,757
|
$
(4,479
)
|
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
1,031
|
—
|
1,356
|
2,387
|
|
Foreign
currency translation adjustment
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(329
)
|
(193
)
|
(522
)
|
|
Redomestication
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(2,047,403
)
|
(280
)
|
—
|
—
|
2,047,403
|
1
|
279
|
—
|
—
|
—
|
—
|
|
Issuance
of stock
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
3,615,800
|
9,039
|
9,039
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|
Debt
conversion
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
47,454
|
119
|
119
|
—
|
—
|
1,812,069
|
1
|
—
|
—
|
4,131
|
—
|
—
|
—
|
4,132
|
|
Exercise
of stock option
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
416,671
|
—
|
362,335
|
—
|
584
|
—
|
—
|
—
|
584
|
|
compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
383
|
—
|
—
|
—
|
383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
385,000
|
$
288
|
1,572,000
|
$
1,572
|
1,360,962
|
$
2,041
|
1,326,642
|
$
4,975
|
—
|
$
—
|
3,663,254
|
$
9,158
|
$
18,034
|
—
|
$
—
|
2,228,740
|
$
1
|
2,409,738
|
$
1
|
$
7,620
|
$
(9,643
)
|
$
(413
)
|
$
4,919
|
$
2,485
|
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(318
)
|
—
|
(554
)
|
(872
)
|
|
Foreign
currency translation adjustment
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
535
|
185
|
720
|
|
Exercise
of stock option
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
472,887
|
—
|
—
|
—
|
396
|
—
|
—
|
—
|
396
|
|
Stock-based
compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
1,622
|
—
|
—
|
—
|
1,622
|
|
Purchase
of non-controlling interest
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(16,258
)
|
—
|
—
|
(4,550
)
|
(20,808
)
|
|
Issuance
of Series E Preferred Stock
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
4,998,508
|
$
5,800
|
—
|
—
|
5,800
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|
Issuance
of Common Stock to Ninebell
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
133,334
|
—
|
—
|
—
|
1,000
|
—
|
—
|
—
|
1,000
|
|
Issuance
of Common Stock to Shanghai and Pudong VC
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
1,906,674
|
—
|
—
|
—
|
14,299
|
—
|
—
|
—
|
14,299
|
|
Convertible
preferred shares converted to common shares in connection with
initial public offering
|
(385,000
)
|
(288
)
|
(1,572,000
)
|
(1,572
)
|
(1,360,962
)
|
(2,041
)
|
(1,326,642
)
|
(4,975
)
|
(4,998,508
)
|
(5,800
)
|
(3,663,254
)
|
(9,158
)
|
(23,834
)
|
—
|
—
|
4,627,577
|
—
|
—
|
—
|
23,834
|
—
|
—
|
—
|
23,834
|
|
Issuance
of Class A common stock in connection with initial public offering
and concurrent private placement, net of issuance costs of $2,791
and underwriter's warrant of $137
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
3,566,334
|
—
|
—
|
—
|
17,044
|
—
|
—
|
—
|
17,044
|
|
Issuance
of underwriter's warrant
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
137
|
—
|
—
|
—
|
137
|
|
Reclassification
of reverse split par value
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(1
)
|
1
|
—
|
—
|
—
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
-
|
$
-
|
-
|
$
-
|
-
|
$
-
|
-
|
$
-
|
-
|
$
-
|
-
|
$
-
|
$
-
|
—
|
$
—
|
12,935,546
|
$
1
|
2,409,738
|
$
-
|
$
49,695
|
$
(9,961
)
|
$
122
|
$
-
|
$
39,857
|
The
accompanying notes are an integral part of these
consolidated financial statements.
ACM RESEARCH, INC.
|
|
Year
Ended December 31,
|
|
|
|
2017
|
2016
|
|
|
(in
thousands)
|
|
|
Cash
flows from operating activities:
|
|
|
|
Net income
(loss)
|
$
(872
)
|
$
2,387
|
|
Adjustments to
reconcile net income (loss) from operations to net cash provided by
operating activities:
|
|
|
|
Depreciation and
amortization
|
271
|
187
|
|
Undistributed
earnings from investments in equity method
affiliates
|
(37
)
|
-
|
|
Loss on disposals of
fixed assets, intangible assets and other long-term
assets
|
1
|
3
|
|
Net loss from debt
conversion and interest waiver
|
-
|
1,608
|
|
Deferred income
taxes
|
659
|
436
|
|
Stock-based
compensation
|
1,622
|
383
|
|
Net changes in
operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(9,757
)
|
(4,724
)
|
|
Other
receivables
|
332
|
(621
)
|
|
Inventory
|
(3,073
)
|
(3,055
)
|
|
Prepaid
expenses
|
256
|
219
|
|
Other current
assets
|
8
|
(47
)
|
|
Accounts
payable
|
1,905
|
3,177
|
|
Advances from
customers
|
(127
)
|
(4,078
)
|
|
Other payables and
accrued expenses
|
1,789
|
276
|
|
Other long-term
liabilities
|
(1,078
)
|
147
|
|
Net
cash used in operating activities
|
(8,101
)
|
(3,702
)
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Purchase of property
and equipment
|
(651
)
|
(795
)
|
|
Purchase of
intangible assets
|
(115
)
|
(22
)
|
|
Proceed from disposal
of property and equipment
|
-
|
7
|
|
Loan to related
party
|
(946
)
|
-
|
|
Purchase of
non-controlling interest
|
(20,808
)
|
-
|
|
Investment in
affiliates, equity method
|
(1,200
)
|
-
|
|
Net
cash used in investing activities
|
(23,720
)
|
(810
)
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
Proceeds from
short-term borrowings
|
11,154
|
5,918
|
|
Repayments of
short-term borrowings
|
(11,110
)
|
(7,575
)
|
|
Investors’
deposit
|
-
|
2,902
|
|
Proceeds
from stock option exercise to common stock
|
396
|
410
|
|
Proceeds
from issuance of Series E convertible preferred
stock
|
5,800
|
-
|
|
Proceeds
from issuance of Series F convertible preferred
stock
|
-
|
9,040
|
|
Proceeds
from issuance of common stock in connection with initial public
offering and concurrent private placement
, net of direct issuance expenses
of $1,254
|
18,717
|
-
|
|
Payment of initial public
offering expenses
|
(1,537
)
|
-
|
|
Investment in
affiliates, equity method
|
1,000
|
-
|
|
Repayments of notes
payable
|
-
|
(141
)
|
|
Proceeds from
issuance of common stock for non-controlling interest
purchase
|
14,300
|
-
|
|
Net
cash provided by financing activities
|
38,720
|
10,554
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash
equivalents
|
663
|
(324
)
|
|
|
|
|
|
Net increase in cash
and cash equivalents
|
7,562
|
5,718
|
|
Cash and cash
equivalents at beginning of period
|
10,119
|
4,401
|
|
Cash
and cash equivalents at end of period
|
$
17,681
|
$
10,119
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
Interest
paid
|
$
277
|
$
181
|
|
|
|
|
|
Non-cash
financing activities:
|
|
|
|
Debt conversion to
Class A common stock
|
-
|
$
1,486
|
|
Debt conversion to
Series F convertible preferred stock
|
-
|
$
119
|
|
Exercise of stock
option in lieu of the cash repayment of notes
payable
|
-
|
$
174
|
|
Preferred stock
conversion to common stock in connection with initial public
offering
|
$
23,834
|
-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ACM RESEARCH, INC.
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
ACM
Research, Inc. (“ACM”) and its subsidiaries
(collectively with ACM, the “Company”) develop,
manufacture and sell single-wafer wet cleaning equipment used to
improve the manufacturing process and yield for advanced integrated
chips. The Company markets and sells, under the brand name
“Ultra C,” lines of equipment based on the
Company’s proprietary Space Alternated Phase Shift
(“SAPS”) and Timely Energized Bubble Oscillation
(“TEBO”) technologies. These tools are designed to
remove random defects from a wafer surface efficiently, without
damaging the wafer or its features, even at increasingly advanced
process nodes.
ACM was
incorporated in California in 1998, and it initially focused on
developing tools for manufacturing process steps involving the
integration of ultra low-K materials and copper. The
Company’s early efforts focused on stress-free
copper-polishing technology, and it sold tools based on that
technology in the early 2000s.
In 2006
the Company established its operational center in Shanghai in the
People’s Republic of China (the “PRC”), where it
operates through ACM’s subsidiary ACM Research (Shanghai),
Inc. (“ACM Shanghai”). ACM Shanghai was formed to help
establish and build relationships with integrated circuit
manufacturers in the PRC, and the Company financed its Shanghai
operations in part through sales of non-controlling equity
interests in ACM Shanghai.
In 2007
the Company began to focus its development efforts on single-wafer
wet-cleaning solutions for the front-end chip fabrication process.
The Company introduced its SAPS megasonic technology, which can be
applied in wet wafer cleaning at numerous steps during the chip
fabrication process, in 2009. It introduced its TEBO technology,
which can be applied at numerous steps during the fabrication of
small node two-dimensional conventional and three-dimensional
patterned wafers, in March 2016. The Company has designed its
equipment models for SAPS and TEBO solutions using a modular
configuration that enables it to create a wet-cleaning tool meeting
the specific requirements of a customer, while using pre-existing
designs for chamber, electrical, chemical delivery and other
modules. The Company also offers a range of custom-made equipment,
including cleaners, coaters and developers, to back-end wafer
assembly and packaging factories, principally in the
PRC.
In 2011
ACM Shanghai formed a wholly owned subsidiary in the PRC, ACM
Research (Wuxi), Inc. (“ACM Wuxi”), to manage sales and
service operations.
In
November 2016 ACM redomesticated from California to Delaware
pursuant to a merger in which ACM Research, Inc., a California
corporation, was merged into a newly formed, wholly owned Delaware
subsidiary, also named ACM Research, Inc.
In June
2017 ACM formed a wholly owned subsidiary in Hong Kong, CleanChip
Technologies Limited (“CleanChip”), to act on the
Company’s behalf in Asian markets outside the PRC by, for
example, serving as a trading partner between ACM Shanghai and its
customers, procuring raw materials and components, performing sales
and marketing activities, and making strategic
investments.
In
August 2017 ACM purchased 18.77% of ACM Shanghai’s equity
interests held by Shanghai Science and Technology Venture Capital
Co., Ltd.("SSTVC"). On November 8, 2017, ACM purchased the
remaining
18.36% of
ACM Shanghai’s equity interest held
by Shanghai Pudong High-Tech Investment Co., Ltd.
(“PDHTI”) and Shanghai Zhangjiang Science &
Technology Venture Capital Co., Ltd. (“ZSTVC”). At
December 31, 2017 and 2016, respectively, ACM owned 100% and 62.87%
of the outstanding equity interests of ACM Shanghai, and indirectly
through ACM Shanghai, owned 100% and 62.87% of the outstanding
equity interests of ACM Wuxi, respectively.
On
September 13, 2017, ACM effectuated a 1-for-3 reverse stock split
(the “Reverse Split”) of Class A and Class B
common stock. Unless otherwise indicated, all share numbers, per
share amount, share prices, exercise prices and conversion rates
set forth in those notes and the accompanying condensed
consolidated financial statements have been adjusted
retrospectively to reflect the Reverse Split.
On
November 2, 2017, the Registration Statement on Form S-1 (File No.
333- 220451) for our initial public offering of Class A common
stock, or IPO, was declared effective by the SEC. Shares of Class A
common stock began trading on the Nasdaq Global Market on November
3, 2017.
In
December 2017 ACM formed a wholly owned subsidiary in Republic of
Korea, ACM Research Korea CO., LTD. (“ACM Korea”), to
serve our customers based in Republic of Korea and perform sales,
marketing, research and delveopment activities. ACM Korea has not
yet commenced its operation during the year ended December 31,
2017.
Basis of Presentation and Principles of Consolidation
The accompanying
consolidated financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in the
United States of America (“GAAP”).
The
consolidated accounts include ACM and its subsidiaries,
ACM Shanghai, ACM Wuxi,
CleanChip and ACM Korea
. Subsidiaries are those
entities in which ACM, directly and indirectly, controls more than
one half of the voting power. All significant intercompany
transactions and balances have been eliminated upon
consolidation.
Use of Estimates
The
preparation of consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the balance
sheet date and the reported revenues and expenses during the
reported period in the consolidated financial statements and
accompanying notes. The Company’s significant accounting
estimates and assumptions include, but are not limited to, those
used for the valuation and recognition of stock-based compensation
arrangements and warrant liability, realization of deferred tax
assets, assessment for impairment of long-lived assets, allowance
for doubtful accounts, inventory valuation for excess and obsolete
inventories, lower of cost and market value or net realizable value
of inventories, depreciable lives of property and equipment, and
useful life of intangible assets.
Management
evaluates these estimates and assumptions on a regular basis.
Actual results could differ from those estimates and
assumptions.
Cash and Cash Equivalents
Cash
and cash equivalents consist of cash on hand, bank deposits that
are unrestricted as to withdrawal and use, and highly liquid
investments with an original maturity date of three months or less
at the date of purchase. At times, cash deposits may exceed
government-insured limits.
Accounts Receivable
Accounts receivable
are presented net of an allowance for doubtful accounts. The
Company reviews its accounts receivable on a periodic basis and
makes general and specific allowances when there is doubt as to the
collectability of individual balances. In evaluating the
collectability of individual receivable balances, the Company
considers many factors, including the age of the balance, a
customer’s historical payment history and credit worthiness,
and current economic trends. Accounts are written off after all
collection efforts have been exhausted. At December 31, 2017 and
2016, the Company, based on a review of its outstanding balances
and its customers, determined no allowance for doubtful accounts
was necessary.
Inventory
Inventory consists
of raw materials and related goods, work-in-progress, finished
goods, and other consumable materials such as spare parts. Finished
goods typically are shipped from the Company’s warehouse
within one month of completion.
Inventory was
recorded at the lower of cost or net realizable value at December
31, 2017 and 2016.
●
The cost of a
general inventory item is determined using the weighted moving
average method. Under the weighted moving average method, the
Company calculates the new average price of all items of a
particular inventory stock each time one or more items of that
stock are purchased. The then-current average price of the stock is
used for purposes of determining cost of inventory or cost of
revenue. The cost of an inventory item purchased specifically for a
customized product is determined using the specific identification
method. Low-cost consumable materials and packaging materials are
expensed as incurred.
●
Net realizable
value is the estimated selling price, in the ordinary course of
business, less estimated costs to complete or dispose.
The
Company assesses the recoverability of all inventories quarterly to
determine if any adjustments are required. Potential excess or
obsolete inventory is written off based on management’s
analysis of inventory levels and estimates of future 12-month
demand and market conditions.
Property, Plant and Equipment, Net
Property, plant and
equipment are recorded at cost less accumulated depreciation and
any provision for impairment in value. Depreciation begins when the
asset is placed in service and is calculated by using the
straight-line method over the estimated useful life of an asset
(or, if shorter, over the lease term). Betterments or renewals are
capitalized when incurred. Plant, property and equipment is
reviewed each year to determine whether any events or circumstances
indicate that the carrying amount of the assets may not be
recoverable.
Estimated useful
lives of assets in the United States are as follows:
|
|
|
|
Computer and office
equipment
|
3 to 5
years
|
|
Furniture and
fixtures
|
5
years
|
|
Leasehold
improvements
|
shorter of lease term or estimated
useful life
|
ACM’s
subsidiaries follow regulations for depreciation of fixed assets
implemented under the PRC’s Enterprise Income Tax Law, which
state that the minimum useful lives used for calculating
depreciation for fixed assets are as follows:
|
|
|
|
Manufacturing
equipment
|
for
small to medium-sized equipment, 5 years; for large equipment,
estimated by purchasing department at time of
acceptance
|
|
Furniture and
fixtures
|
5
years
|
|
Transportation
equipment
|
4 to 5
years
|
|
Electronic
equipment
|
3
years
|
|
Leasehold
improvements
|
remaining lease
term for improvements on leased fixed assets or, for large
improvements, estimated useful life; not less than 3 years for
non-fixed asset repairs
|
Expenditures for
maintenance and repairs that neither materially add to the value of
the property nor appreciably prolong the life of the property are
charged to expense as incurred. Upon retirement or sale of an
asset, the cost of the asset and the related accumulated
depreciation are eliminated from the accounts and any resulting
gain or loss is credited or charged to income.
Intangible Assets, Net
Intangible assets
consist of software used for finance, manufacturing, and research
and development purposes. Assets are valued at cost at the time of
acquisition and are amortized over their beneficial periods. If a
contract specifies a beneficial period, then the intangible asset
is amortized over a term not exceeding the beneficial period. If
the contract does not specify a beneficial period, then the
intangible asset is amortized over a term not exceeding the valid
period specified by local law. If neither the contract nor local
law specifies a beneficial period, then the intangible asset is
amortized over a period of up to 10 years. Currently, the software
that the Company uses is amortized over a two-year period in
accordance with the policy described above.
Valuation of Long-Lived Assets
Long-lived assets
are evaluated for impairment whenever events or changes in
circumstance indicate that the carrying value of the assets may not
be fully recoverable or that the useful life of the assets is
shorter than the Company had originally estimated. When these
events or changes occur, the Company evaluates the impairment of
the long-lived assets by comparing the carrying value of the assets
to an estimate of future undiscounted cash flows expected to be
generated from the use of the assets and their eventual
disposition. If the sum of the expected future undiscounted cash
flow is less than the carrying value of the assets, the Company
recognizes an impairment loss based on the excess of the carrying
value over the fair value. No impairment charge was recognized for
either of the periods presented.
Leases
Each
lease is classified at the inception date as either a capital lease
or an operating lease. For the lessee, a lease is a capital lease
if any of the following conditions exist: (a) ownership is
transferred to the lessee by the end of the lease term;
(b) there is a bargain purchase option; (c) the lease
term is at least 75% of the property’s estimated remaining
economic life; or (d) the present value of the minimum lease
payments at the beginning of the lease term is 90% or more of the
fair value of the leased property to the leasor at the inception
date. A capital lease is accounted for as if there was an
acquisition of an asset and an incurrence of an obligation at the
inception of the lease. All other leases are accounted for as
operating leases. Payments made under operating leases are charged
to the consolidated statements of operations and comprehensive
income on a straight-line basis over the terms of underlying lease.
The Company had no capital lease for either of the periods
presented.
Redeemable Convertible Preferred Stock
The
Company recorded each series of convertible preferred stock at fair
value on the date of issuance, net of issuance costs. The
convertible preferred stock is recorded outside of
stockholders’ equity (deficit) because, in the event of
certain deemed liquidation events considered not solely within the
Company’s control (such as a merger, acquisition, or sale of
all or substantially all of the Company’s assets), the
convertible preferred stock will become redeemable at the option of
the holders. The Company has not adjusted the carrying value of any
series of convertible preferred stock to the liquidation preference
of such series because it is uncertain whether or when an event
would occur that would obligate the Company to pay the liquidation
preferences to holders of convertible preferred stock. Subsequent
adjustments to the carrying values to the liquidation preferences
will be made only when it becomes probable that such a liquidation
event will occur.
Revenue Recognition
The
Company recognizes revenue when all the following conditions are
met:
●
there is persuasive
evidence of an arrangement;
●
the product
delivery has occurred and the Company has transferred major risks
and remunerations over the ownership of the product to the buyer or
a service has been fully rendered and completed;
●
the collection of
the receivable is probable; and
●
the amount of the
payment is fixed or determinable.
The
Company derives revenue principally from sales of semiconductor
capital equipment. In general, the Company recognizes revenue when
the product has been demonstrated to meet the predetermined
specifications and is accepted by the customer. If terms of the
sale provide for a lapsing customer acceptance period, the Company
recognizes revenue upon the earlier of the expiration of the
lapsing acceptance period and customer acceptance. In the following
circumstances, however, the Company recognizes revenue upon
shipment or delivery, when the legal title of the product is passed
to a customer:
●
when the customer
has previously accepted the same tool with the same specifications
and when the Company can objectively demonstrate that the tool
meets all of the required acceptance criteria;
●
when the sales
contract or purchase order contains no acceptance agreement or no
lapsing acceptance provision and when the Company can objectively
demonstrate that the tool meets all of the required acceptance
criteria;
●
when the customer
withholds acceptance due to issues unrelated to product
performance, in which case revenue is recognized when the system is
performing as intended and meets predetermined specifications;
or
●
the Company’s
sales arrangements do not include a general right of
return.
Customization,
production, installation and delivery are essential elements of the
functionality of a delivered machine; the services offered,
principally the warranty, are not essential to the functionality of
the machine. The Company treats the customization, production,
installation and delivery of machines, together with the provision
of related warranty and other services, as a single unit of
accounting in accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“ASC”) Subtopic 605-25,
Revenue Recognition – Multiple-Element
Arrangements
. All of the Company’s products were sold
in stand-alone arrangements during the year ended December 31, 2017
and 2016.
After
the warranty period has expired, the Company will also provide
customers with post-warranty services, which mainly include the
installation and replacement of parts and small-scale modifications
to the existing products. The related revenue and costs are
recognized as revenue and cost of revenue, respectively, when the
parts have been delivered and installed, risk of loss has passed to
the customer, and collection of the resulting receivable is
probable.
Cost of Revenue
Cost of
revenue primarily consists of: direct materials, comprised
principally of parts used in assembling equipment, together with
crating and shipping costs; direct labor, including salaries and
other labor related expenses attributable to the Company’s
manufacturing department; and allocated overhead cost, such as
personnel cost, depreciation expense, and allocated administrative
costs associated with supply chain management and quality assurance
activities, as well as shipping insurance premiums.
Research and Development Costs
Research and
development costs relating to the development of new products and
processes, including significant improvements and refinements to
existing products or to the process of supporting customer
evaluations of tools, including the development of new tools for
evaluation by customers during the product demonstration process,
are expensed as incurred.
Shipping and Handling Costs
Shipping and
handling costs, which relate to transportation of products to
customer locations, are charged to selling and marketing expense.
For the year ended December 31, 2017 and 2016, shipping and
handling costs included in sales and marketing expenses were $139
and $75, respectively.
Borrowing Costs
Borrowing costs
attributable directly to the acquisition, construction or
production of qualifying assets that require a substantial period
of time to be ready for their intended use or sale are capitalized
as part of the cost of those assets. Income earned on temporary
investments of specific borrowings pending their expenditure on
those assets is deducted from borrowing costs capitalized. All
other borrowing costs are recognized in interest expenses in the
consolidated statements of operations and comprehensive income in
the period in which they are incurred. No borrowing costs were
capitalized for the year ended December 31, 2017 or
2016.
Warranty
For
each of its products, the Company generally provides a warranty
ranging from 12 to 36 months and covering replacement of the
product during the warranty period. The Company accounts for the
estimated warranty costs as sales and marketing expenses at the
time revenue is recognized. Warranty obligations are affected by
historical failure rates and associated replacement costs.
Utilizing historical warranty cost records, the Company calculates
a rate of warranty expenses to revenue to determine the estimated
warranty charge. The Company updates these estimated charges on a
regular basis. The following table shows changes in the
Company’s warranty obligations for the year ended December
31, 2017 and 2016, respectively.
|
|
Year Ended December 31,
|
|
|
|
2017
|
2016
|
|
Balance
at beginning of period
|
$
290
|
$
459
|
|
Additions
|
736
|
544
|
|
Utilized
|
(187
)
|
(713
)
|
|
Balance
at end of period
|
$
839
|
$
290
|
Government Subsidies
ACM
Shanghai has been awarded three subsidies from local and central
governmental authorities in the PRC. The first subsidy, which was
awarded in October 2008, relates to the development and
commercialization of 65-45 nanometer Stress Free Polishing
technology. The second subsidy was awarded in April 2009 to fund
interest expenses for short-term borrowings. The third subsidy was
awarded in January 2014 and relates to the development of Electro
Copper Plating technology. The PRC governmental authorities will
provide the majority of the funding, although ACM Shanghai is also
required to invest certain amounts in the projects.
The
government subsidies contain certain operating conditions and
therefore are recorded as long-term liabilities upon receipt. The
grant amounts are recognized in the statements of operations and
comprehensive income:
●
Government
subsidies relating to current expenses are recorded as reductions
of those expenses in the periods in which the current expenses are
recorded. For the years ended December 31, 2017 and 2016,
related government subsidies recognized as reductions of relevant
expenses in the consolidated statements of operations and
comprehensive income were $3,421 and $6,244
respectively.
●
Government
subsidies for short-term borrowings’ interest expenses are
reported as reductions of interest expenses in the period the
interest is accrued, which were $0 and $99 for the years ended
December 31, 2017 and 2016.
●
Government
subsidies related to depreciable assets are credited to income over
the useful lives of the related assets for which the grant was
received. For the years ended December 31, 2017 and 2016,
related government subsidies recognized as other income in the
consolidated statements of operations and comprehensive income were
$135 and $127, respectively.
Unearned government
subsidies received are deferred for recognition and recorded as
other long-term liabilities (note 10) in the balance sheet until
the criteria for such recognition are satisfied.
Stock-based Compensation
ACM
grants stock options to employees and non-employee consultants and
directors and accounts for those stock-based awards in accordance
with FASB ASC Topic 718,
Compensation – Stock
Compensation
, and FASB ASC Subtopic 505-50,
Equity-Based Payments to
Non-Employees
.
Stock-based awards
granted to employees are measured at the fair value of the awards
on the grant date and are recognized as expenses either
(a) immediately on grant, if no vesting conditions are
required or (b) using the graded vesting method, net of
estimated forfeitures, over the requisite service period. The fair
value of stock options is determined using the Black-Scholes
valuation model. Stock-based compensation expense, when recognized,
is charged to the category of operating expense corresponding to
the employee’s service function.
Stock-based awards
granted to non-employees are accounted for at the fair value of the
awards at the earlier of (a) the date at which a commitment
for performance by the non-employee to earn the awards is reached
and (b) the date at which the non-employee’s performance
is complete. The fair value of such non-employee awards is
re-measured at each reporting date using the fair value at each
period end until the vesting date. Changes in fair value between
the reporting dates are recognized by the graded vesting
method.
Operating and Financial Risks
Concentration of Credit Risk
Financial
instruments that potentially subject to credit risk consist
principally of cash and cash equivalents and accounts receivable.
The Company deposits and invests its cash with financial
institutions that management believes are
creditworthy.
The
Company is potentially subject to concentrations of credit risks in
its accounts receivable. Four customers individually accounted for
greater than ten percent of the Company’s revenue for the
year ended 2017 and two of those customers individually accounted
for greater than ten percent of the Company’s revenue in
2016:
|
|
Year ended December 31,
|
|
|
|
2017
|
2016
|
|
Customer
A
|
*
|
33.7
%
|
|
Customer
B
|
18.10
%
|
25.00
|
|
Customer
C
|
*
|
24.00
|
|
Customer
D
|
12.77
|
16.60
|
|
Customer
E
|
14.12
|
*
|
|
Customer
F
|
10.23
|
*
|
*
Customer accounted for less than 10% of revenue in
the period.
Interest Rate Risk
As of
December 31, 2017 and 2016, the balance of bank borrowings (note 6)
was short-term in nature, matured at various dates within the
following year and did not expose the Company to interest rate
risk.
Liquidity Risk
The
Company’s working capital at December 31, 2017 and 2016 was
sufficient to meet its then-current requirements. The Company may,
however, require additional cash due to changing business
conditions or other future developments, including any investments
or acquisitions the Company decides to pursue. In the long run, the
Company intends to rely primarily on cash flows from operations and
additional borrowings from financial institutions in order to meet
its cash needs. If those sources are insufficient to meet cash
requirements, the Company may seek to issue additional debt or
equity.
Country Risk
The
Company has significant investments in the PRC. The operating
results of the Company may be adversely affected by changes in the
political and social conditions in the PRC and by changes in
Chinese government policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other
things.
Foreign Currency Risk and Translation
The
Company’s consolidated financial statements are presented in
U.S. dollars, which is the Company’s reporting currency,
while the functional currency of ACM’s subsidiaries is the
Chinese Renminbi (“RMB”). Changes in the relative
values of U.S. dollars and Chinese RMB affect the Company’s
reported levels of revenues and profitability as the results of its
operations are translated from RMB into U.S. dollars for reporting
purposes. Because the Company has not engaged in any hedging
activities, it cannot predict the impact of future exchange rate
fluctuations on the results of its operations and it may experience
economic losses as a result of foreign currency exchange rate
fluctuations.
Transactions of
ACM’s subsidiaries involving foreign currencies are recorded
in functional currency according to the rate of exchange prevailing
on the date when the transaction occurs. The ending balances of the
Company’s foreign currency accounts are converted into
functional currency using the rate of exchange prevailing at the
end of each reporting period. Net gains and losses resulting from
foreign exchange transactions are included in the consolidated
statements of operations and comprehensive income. Total exchange
gain (loss) was, respectively, $1,052 and $ (746) for the years
ended December 31, 2017 and 2016.
In
accordance with FASB ASC Topic 830,
Foreign Currency Matters
, the Company
translates assets and liabilities into U.S. dollars from RMB using
the rate of exchange prevailing at the applicable balance sheet
date and the consolidated statements of operations and
comprehensive income and consolidated statements of cash flows are
translated at an average rate during the reporting period.
Adjustments resulting from the translation are recorded in
stockholders’ (deficit) equity as part of accumulated other
comprehensive income (loss). Any differences between the initially
recorded amount and the settlement amount are recorded as a gain or
loss on foreign currency transaction in the consolidated statements
of operations and comprehensive income.
|
Consolidated balance
sheets:
|
|
|
At
December 31, 2017
|
RMB
6.5359 to $1.00
|
|
At
December 31, 2016
|
RMB 6.9348 to $1.00
|
|
|
|
|
Consolidated statements of operations
and comprehensive income:
|
|
|
Year
ended December 31, 2017
|
RMB
6.7522 to $1.00
|
|
Year
ended December 31, 2016
|
RMB
6.6401 to $1.00
|
Translations of
amounts from RMB into U.S. dollars were made at the following
exchange rates for the respective dates and periods:
Income Taxes
The
Company accounts for income taxes using the liability method
whereby deferred tax asset and liability account balances are
determined based on differences between the financial reporting and
tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company provides a
valuation allowance, if necessary, to reduce deferred tax assets to
their estimated realizable values.
In
evaluating the ability to recover its deferred income tax assets,
the Company considers all available positive and negative evidence,
including its operating results, ongoing tax planning and forecasts
of future taxable income on a jurisdiction-by-jurisdiction basis.
In the event the Company determines that it would be able to
realize its deferred income tax assets in the future in excess of
their net recorded amount, it would make an adjustment to the
valuation allowance that would reduce the provision for income
taxes. Conversely, in the event that all or part of the net
deferred tax assets are determined not to be realizable in the
future, an adjustment to the valuation allowance would be charged
to earnings in the period such determination is made.
Tax
benefits related to uncertain tax positions are recognized when it
is more likely than not that a tax position will be sustained
during an audit. Interest and penalties related to unrecognized tax
benefits are included within the provision for income
tax.
Basic and Diluted Net Income (Loss) per Common Share
Basic
and diluted net income (loss) per common share is calculated as
follows:
|
|
For the Year Ended
December 31,
|
|
|
|
2017
|
2016
|
|
Numerator:
|
|
|
|
Net
income (loss)
|
$
(872
)
|
$
2,387
|
|
Net
income (loss) attributable to non-controlling interest
|
(554
)
|
1,356
|
|
Net
income allocated to participating securities
|
-
|
386
|
|
Net
income (loss) available to common stockholders, basic and
diluted
|
$
(318
)
|
$
645
|
|
Denominator:
|
|
|
|
Weighted
average shares outstanding, basic
|
6,865,390
|
2,176,315
|
|
Effect
of dilutive securities
|
-
|
1,615,822
|
|
Weighted
average shares outstanding, diluted
|
6,865,390
|
3,792,137
|
|
Net
income (loss) per common share:
|
|
|
|
Basic
|
$
(0.05
)
|
$
0.30
|
|
Diluted
|
$
(0.05
)
|
$
0.18
|
Basic
and diluted net income (loss) per common share is presented using
the two-class method, which allocates undistributed earnings to
common stock and any participating securities according to dividend
rights and participation rights on a proportionate basis. Under the
two-class method, basic net income (loss) per common share is
computed by dividing the sum of distributed and undistributed
earnings attributable to common stockholders by the weighted
average number of shares of common stock outstanding during the
period. Shares of ACM’s Series A, B, C, D, E and F
convertible preferred stock are participating securities, as the
holders are entitled to participate in and receive the same
dividends as may be declared for common stockholders on a pro-rata,
if-converted basis.
ACM has
been authorized to issue Class A and Class B common stock since
redomesticating in Delaware in November 2016. The two classes of
common stock are substantially identical in all material respects,
except for voting rights. Since ACM did not declare any dividends
for year ended December 31, 2017 and 2016, the net income (loss)
per common share attributable to each class is the same under the
“two-class” method. As such, the two classes of common
stock have been presented on a combined basis in the consolidated
statements of operations and comprehensive income (loss) and in the
above computation of net income (loss) per common
share.
Diluted
net income (loss) per common share reflects the potential dilution
from securities that could share in ACM’s earnings. All
potential dilutive securities, including potentially dilutive
convertible preferred stocks and stock options, if any, were
excluded from the computation of dilutive net loss per common share
for the year ended December 31, 2017 and 2016, as their effects are
antidilutive due to our net loss for those periods. The potentially
dilutive securities that were not included in the calculation of
diluted net income per share in the periods presented where their
inclusion would be anti-dilutive are as follows:
|
|
Year ended
December 31,
|
|
|
|
2017
|
2016
|
|
Series
A convertible preferred stock
|
-
|
128,334
|
|
Series
B convertible preferred stock
|
-
|
524,003
|
|
Series
C convertible preferred stock
|
-
|
482,288
|
|
Series
D convertible preferred stock
|
-
|
605,244
|
|
Series
F convertible preferred stock
|
-
|
1,221,099
|
|
Stock
options
|
3,372,292
|
1,424,596
|
|
Warrants
|
477,502
|
-
|
|
|
3,849,794
|
4,385,564
|
Comprehensive Income (Loss) Attributable to the
Company
The
Company applies FASB ASC Topic 220,
Comprehensive Income
, which establishes
standards for the reporting and display of comprehensive income or
loss, requiring its components to be reported in a financial
statement with the same prominence as other financial statements.
The comprehensive income (loss) attributable to the Company was
$(31) and $704 for the years ended December 31, 2017 and 2016,
respectively.
Appropriated Retained Earnings
The
income of ACM’s PRC subsidiaries is distributable to their
shareholders after transfers to reserves as required under relevant
PRC laws and regulations and the subsidiaries’ Articles of
Association. As stipulated by the relevant laws and regulations in
the PRC, the PRC subsidiaries are required to maintain reserves,
including reserves for statutory surpluses and public welfare funds
that are not distributable to shareholders. A PRC
subsidiary’s appropriations to the reserves are approved by
its board of directors. At least 10% of annual statutory after-tax
profits, as determined in accordance with PRC accounting standards
and regulations, is required to be allocated to the statutory
surplus reserves. If the cumulative total of the statutory surplus
reserves reaches 50% of a PRC subsidiary’s registered
capital, any further appropriation is optional.
Statutory surplus
reserves may be used to offset accumulated losses or to increase
the registered capital of a PRC subsidiary, subject to approval
from the relevant PRC authorities, and are not available for
dividend distribution to the subsidiary’s shareholders. The
PRC subsidiaries are prohibited from distributing dividends unless
any losses from prior years have been offset. Except for offsetting
prior years’ losses, however, statutory surplus reserves must
be maintained at a minimum of 25% of share capital after such
usage. No retained earnings of either PRC subsidiary had been
appropriated to statutory surplus reserves as the PRC subsidiaries
recorded accumulated losses as of December 31, 2017 and
2016.
Fair Value of Financial Instruments
Under
the FASB’s authoritative guidance on fair value measurements,
fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. In determining the
fair value, the Company uses various methods including market,
income and cost approaches. Based on these approaches, the Company
often utilizes certain assumptions that market participants would
use in pricing the asset or liability, including assumptions about
risk and the risks inherent in the inputs to the valuation
technique. These inputs can be readily observable, market
corroborated or generally unobservable inputs. The Company uses
valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. Based on observability of
the inputs used in the valuation techniques, the Company is
required to provide the following information according to the fair
value hierarchy. The fair value hierarchy ranks the quality and
reliability of the information used to determine fair values.
Financial assets and liabilities carried at fair value are
classified and disclosed in one of the following three
categories:
Level
1: Valuations for assets and liabilities traded in active exchange
markets. Valuations are obtained from readily available pricing
sources for market transactions involving identical assets or
liabilities.
Level
2: Valuations for assets and liabilities traded in less active
dealer or broker markets. Valuations are obtained from third party
pricing services for identical or similar assets or
liabilities.
Level
3: Valuations for assets and liabilities that are derived from
other valuation methodologies, including option pricing models,
discounted cash flow models and similar techniques, and not based
on market exchange, dealer or broker traded transactions. Level 3
valuations incorporate certain unobservable assumptions and
projections in determining the fair value assigned to such
assets.
All
transfers between fair value hierarchy levels are recognized by the
Company at the end of each reporting period. In certain cases, the
inputs used to measure fair value may fall into different levels of
the fair value hierarchy. In such cases, an investment’s
level within the fair value hierarchy is based on the lowest level
of input that is significant to the fair value measurement in its
entirety requires judgment, and considers factors specific to the
investment. The inputs or methodology used for valuing financial
instruments are not necessarily an indication of the risks
associated with investment in those instruments.
Fair Value Measured or Disclosed on a Recurring Basis
Short-term borrowings
—Interest
rates under the borrowing agreements with the lending parties were
determined based on the prevailing interest rates in the market.
The Company classifies the valuation techniques that use these
inputs as Level 2 fair value measurement.
Warrant liability
—The fair value
of the warrant liability derives from the Black-Scholes valuation
model which incorporates certain unobservable assumptions (note 9).
The Company classifies the valuation techniques that use these
inputs as Level 3 fair value measurement.
Other financial items for disclosure
purpose
—The fair value of other financial items of the
Company for disclosure purpose, including cash and cash
equivalents, accounts receivable, other receivables, prepaid
expenses, other current assets, notes payable, investors’
deposits, accounts payable, advances from customers, income taxes
payable, and other payables and accrued expenses, approximate their
carrying value due to their short-term nature.
As of
December 31, 2017 and 2016, information about inputs into the fair
value measurement of the Company’s liabilities that are
measured and recorded at fair value on a recurring basis in periods
subsequent to their initial recognition is as follows:
|
|
Fair Value
Measurement at Reporting Date Using
|
|||
|
|
Quoted Prices in
Active Markets for Identical Liabilities
(Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
Total
|
|
|
(in
thousands)
|
|||
|
As of December 31, 2017
:
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Short-term
borrowings
|
$
—
|
$
5,095
|
$
—
|
$
5,095
|
|
Warrant
liability
|
—
|
—
|
3,079
|
3,079
|
|
|
|
|
|
|
|
|
—
|
5,095
|
3,079
|
8,174
|
|
As of December 31, 2016
:
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Short-term
borrowings
|
$
—
|
$
4,761
|
$
—
|
$
4,761
|
Fair Value Measured on a Non-Recurring Basis
The
Company reviews long-lived assets for impairment annually or more
frequently if events or changes in circumstances indicate the
possibility of impairment. Long-lived assets are measured at fair
value on a nonrecurring basis when there is an indicator of
impairment, and they are recorded at fair value only when
impairment is recognized. In determining the fair value, the
Company used projections of cash flows directly associated with,
and which are expected to arise as a direct result of, the use and
eventual disposition of the assets. This approach required
significant judgments including the Company’s projected net
cash flows, which were derived using the most recent available
estimate for the reporting unit containing the assets tested.
Several key assumptions included periods of operation, projections
of product pricing, production levels, product costs, market supply
and demand, and inflation.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted in the Consolidated
Financial Statements for the Year ended December 31,
2017
In
April 2016, the FASB issued Accounting Standards Update
(“ASU”) No. 2016-09,
Compensation—Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment
Accounting
, which simplifies several aspects of the
accounting for employee stock-based payment transactions. The areas
for simplification in ASU No. 2016-09 include the income tax
consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. The
amendments in this ASU were effective for annual periods beginning
after December 15, 2016 and interim periods within those
annual periods. The adoption of ASU No. 2016-09 did not have a
material impact on the Company’s consolidated financial
statements.
In
November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes
. Topic 740,
Income Taxes
, requires an entity to
separate deferred income tax liabilities and assets into current
and noncurrent amounts in a classified statement of financial
position. Deferred tax liabilities and assets are classified as
current or noncurrent based on the classification of the related
asset or liability for financial reporting. Deferred tax
liabilities and assets that are not related to an asset or
liability for financial reporting are classified according to the
expected reversal date of the temporary difference. To simplify the
presentation of deferred income taxes, the amendments in ASU No.
2015-17 require that deferred income tax liabilities and assets be
classified as noncurrent in a classified statement of financial
position. For public business entities, the amendments in this
update are effective for financial statements issued for annual
periods beginning after December 15, 2016, and interim periods
within those annual periods. The adoption of ASU No. 2015-17 did
not have a material impact on the Company’s consolidated
financial statements.
In July
2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330): Simplifying the
Measurement of Inventory
. The amendments in this update
require an entity to measure inventory within the scope of ASU No.
2015-11 (the amendments in ASU No. 2015-11 do not apply to
inventory that is measured using last-in, first-out or the retail
inventory method. The amendments apply to all other inventory,
which includes inventory that is measured using first-in, first-out
or average cost) at the lower of cost and net realizable value. Net
realizable value is the estimated selling prices in the ordinary
course of business, less reasonably predictable costs of
completion, disposal, and transportation. Subsequent measurement is
uncharged for inventory measured using last-in, first-out or the
retail inventory method. The amendments in ASU No. 2015-11 more
closely align the measurement of inventory in GAAP with the
measurement of inventory in International Financial Reporting
Standards. ASU No. 2015-11 is effective for public business
entities for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. The amendments
in ASU No. 2015-11 should be applied prospectively with earlier
application permitted as of the beginning of an interim or annual
reporting period. The adoption of ASU No. 2015-11 did not have a
material impact on the Company’s consolidated financial
statements. The relevant descriptions have been included in the
inventory accounting policy.
In
August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial
Statements—Going Concern
. The amendments in this
update require management to evaluate whether there are conditions
and events that raise substantial doubt about an entity’s
ability to continue as a going concern for both annual and interim
reporting. The guidance is effective for the Company for the annual
period ended after December 15, 2016 and interim periods
thereafter. Management performed an evaluation of the
Company’s ability to fund operations and to continue as a
going concern according to ASC Topic 205-40,
Presentation of Financial
Statements—Going Concern
. The adoption of ASU No.
2014-15 did not have a material impact on the Company’s
consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In
February 2018, the FASB issued ASU No. 2018-02,
Income Statement—Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income (“ASU
2018-02”)
, which provides financial statement
preparers with an option to reclassify stranded tax effects within
accumulated other comprehensive income to retained earnings in each
period in which the effect of the change in the U.S. federal
corporate income tax rate in the Tax Cuts and Jobs Act (or portion
thereof) is recorded. The amendments in this ASU are effective for
all entities for fiscal years beginning after December 15, 2018,
and interim periods within those fiscal years. Early adoption of
ASU 2018-02 is permitted, including adoption in any interim period
for the public business entities for reporting periods for which
financial statements have not yet been issued. The amendments in
this ASU should be applied either in the period of adoption or
retrospectively to each period (or periods) in which the effect of
the change in the U.S. federal corporate income tax rate in the Tax
Cuts and Jobs Act is recognized. The Company is currently
evaluating the impact of the adoption of ASU No. 2018-02 on its
consolidated financial statements.
In July
2017, the FASB issued ASU No. 2017-11,
Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments
with Down Round Features, (Part II) Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests with a Scope Exception
, which
addresses the complexity of accounting for certain financial
instruments with down round features. Down round features are
features of certain equity-linked instruments (or embedded
features) that result in the strike price being reduced on the
basis of the pricing of future equity offerings. Current accounting
guidance creates cost and complexity for entities that issue
financial instruments (such as warrants and convertible
instruments) with down round features that require fair value
measurement of the entire instrument or conversion option. For
public business entities, the amendments in Part I of this Update
are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. For all other
entities, the amendments in Part I of this Update are effective for
fiscal years beginning after December 15, 2019, and interim periods
within fiscal years beginning after December 15, 2020. The Company
is currently evaluating the impact of the adoption of ASU No.
2017-11 on its consolidated financial statements.
In May
2017, the FASB issued ASU No. 2017-09,
Compensation—Stock Compensation (Topic
718): Scope of Modification Accounting
, which provides
guidance on determining which changes to the terms and conditions
of share-based payment awards require an entity to apply
modification accounting under Topic 718. The amendments in this ASU
are effective for all entities for annual periods, and interim
periods within those annual periods, beginning after December 15,
2017. Early adoption is permitted, including adoption in any
interim period, for (1) public business entities for reporting
periods for which financial statements have not yet been issued and
(2) all other entities for reporting periods for which financial
statements have not yet been made available for issuance. The
amendments in this ASU should be applied prospectively to an award
modified on or after the adoption date. The Company does not expect
the adoption of ASU No. 2017-09 to have a material impact on its
consolidated financial statements.
In
February 2017, the FASB issued ASU No. 2017-05,
Other Income—Gains and Losses from the
Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying
the Scope of Asset Derecognition Guidance and Accounting for
Partial Sales of Nonfinancial Assets
, which clarifies the
scope of nonfinancial asset guidance in Subtopic 610-20. This ASU
also clarifies that derecognition of all businesses and nonprofit
activities (except those related to conveyances of oil and gas
mineral rights or contracts with customers) should be accounted for
in accordance with the derecognition and deconsolidation guidance
in Subtopic 810-10. The amendments in this ASU also provide
guidance on the accounting for so-called “partial
sales” of nonfinancial assets within the scope of Subtopic
610-20 and contributions of nonfinancial assets to a joint venture
or other noncontrolled investee. The amendments in this ASU are
effective for annual reporting reports beginning after December 15,
2017, including interim reporting periods within that reporting
period. The Company does not expect the adoption of ASU No. 2017-05
to have a material impact on its consolidated financial
statements.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles—Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment
, which
removes Step 2 from the goodwill impairment test. An entity will
apply a one-step quantitative test and record the amount of
goodwill impairment as the excess of a reporting unit’s
carrying amount over its fair value, not to exceed the total amount
of goodwill allocated to the reporting unit. The new guidance does
not amend the optional qualitative assessment of goodwill
impairment. A business entity that is a U.S. Securities and
Exchange Commission filer must adopt the amendments in this ASU for
its annual or any interim goodwill impairment test in fiscal years
beginning after December 15, 2019. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing
dates after January 1, 2017. The Company is currently evaluating
the impact of the adoption of ASU 2017-04 on its consolidated
financial statements.
In
November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230):
Restricted Cash
, which requires that a statement of cash
flows explain the change during the period in the total of cash,
cash equivalents, and amounts generally described as restricted
cash or restricted cash equivalents. Therefore, amounts generally
described as restricted cash and restricted cash equivalents should
be included with cash and cash equivalents when reconciling the
beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. The amendments in this ASU do not provide
a definition of restricted cash or restricted cash equivalents. The
amendments in this ASU are effective for public business entities
for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. The Company does not
expect the adoption of ASU No. 2016-18 to have a material impact on
its consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments
,
which addresses the following cash flow issues: (1) debt
prepayment or debt extinguishment costs; (2) settlement of
zero-coupon debt instruments or other debt instruments with coupon
interest rates that are insignificant in relation to the effective
interest rate of the borrowing; (3) contingent consideration
payments made after a business combination; (4) proceeds from
the settlement of insurance claims; (5) proceeds from the
settlement of corporate-owned life insurance policies, including
bank-owned life insurance policies; (6) distributions received
from equity method investees; (7) beneficial interests in
securitization transactions; and (8) separately identifiable
cash flows and application of the predominance principle. The
amendments in this ASU are effective for public business entities
for fiscal years beginning after December 15, 2017 and interim
periods within those fiscal years and are effective for all other
entities for fiscal years beginning after December 15, 2018 and
interim periods within fiscal years beginning after December 15,
2019. Early adoption is permitted, including adoption in an interim
period. The Company is currently evaluating the impact of the
adoption of ASU No. 2016-15 on its consolidated financial
statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. The amendments in
this update create Topic 842,
Leases
, and supersede the leases
requirements in Topic 840,
Leases
. Topic 842 specifies the
accounting for leases. The objective of Topic 842 is to establish
the principles that lessees and lessors shall apply to report
useful information to users of financial statements about the
amount, timing, and uncertainty of cash flows arising from a lease.
The main difference between Topic 842 and Topic 840 is the
recognition of lease assets and lease liabilities for those leases
classified as operating leases under Topic 840. Topic 842 retains a
distinction between finance leases and operating leases. The
classification criteria for distinguishing between finance leases
and operating leases are substantially similar to the
classification criteria for distinguishing between capital leases
and operating leases in the previous leases guidance. The result of
retaining a distinction between finance leases and operating leases
is that under the lessee accounting model in Topic 842, the effect
of leases in the statement of comprehensive income and the
statement of cash flows is largely unchanged from previous GAAP.
The amendments in ASU No. 2016-02 are effective for fiscal years
beginning after December 15, 2018, including interim periods
within those fiscal years for public business entities. Early
application of the amendments in ASU No. 2016-02 is permitted. The
Company is currently in the process of evaluating the impact of the
adoption of ASU No. 2016-02 on its consolidated financial
statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with
Customers (Topic 606)
. ASU No. 2014-09 supersedes the
revenue recognition requirements in “Revenue Recognition
(Topic 605)”, and requires entities to recognize revenue when
it transfers promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be
entitled to in exchange for those goods or services. The FASB
issued ASU No. 2015-14,
Revenue
from Contracts with Customers (Topic 606): Deferral of the
Effective Date
in August 2015. The amendments in ASU No.
2015-14 defer the effective date of ASU No. 2014-09. Public
business entities, certain not-for-profit entities, and certain
employee benefit plans should apply the guidance in ASU No. 2014-09
to annual reporting periods beginning after December 15, 2017,
including interim reporting periods within that reporting period.
Earlier adoption is permitted only as of annual reporting periods
beginning after December 15, 2016, including interim reporting
periods within that reporting period. Further to ASU No. 2014-09
and ASU No. 2015-14, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)
in March 2016, ASU No. 2016-10,
Revenue from Contracts with
Customers (Topic 606): Identifying Performance Obligations and
Licensing
in April 2016, ASU No. 2016-12,
Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical Expedients
,
and ASU No. 2016-20,
Technical
Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers
, respectively. The amendments in ASU No.
2016-08 clarify the implementation guidance on principal versus
agent considerations, including indicators to assist an entity in
determining whether it controls a specified good or service before
it is transferred to the customers. ASU No. 2016-10 clarifies
guideline related to identifying performance obligations and
licensing implementation guidance contained in the new revenue
recognition standard. The updates in ASU No. 2016-10 include
targeted improvements based on input the FASB received from the
Transition Resource Group for Revenue Recognition and other
stakeholders. It seeks to proactively address areas in which
diversity in practice potentially could arise, as well as to reduce
the cost and complexity of applying certain aspects of the guidance
both at implementation and on an ongoing basis. ASU No. 2016-12
addresses narrow-scope improvements to the guidance on
collectability, non-cash consideration, and completed contracts at
transition. Additionally, the amendments in this ASU provide a
practical expedient for contract modifications at transition and an
accounting policy election related to the presentation of sales
taxes and other similar taxes collected from customers. The
amendments in ASU No. 2016-20 represents changes to make minor
corrections or minor improvements to the Codification that are not
expected to have a significant effect on current accounting
practice or create a significant administrative cost to most
entities. The effective date and transition requirements for ASU
No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20
are the same as ASU No. 2014-09. The Company will adopt ASU No.
2014-09, ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU
No. 2016-20 at January 1, 2018.
The Company has substantially completed the implementation of these
ASUs and has identified the necessary changes to its policies,
business processes, systems and controls. Whilst the Company has
finalized the analysis of its revenue contracts applying the above
guidance, and will adopt FASB ASC Topic 606,
Revenue from Contracts with Customers
,
effective January 1, 2018, using the modified retrospective
transition approach. Under this approach, FASB ASC Topic 606 would
apply to all new contracts initiated on or after January 1, 2018.
For existing contracts that have remaining obligations as of
January 1, 2018, any difference between the recognition criteria in
these ASUs and the Company's current revenue recognition practices
would be recognized using a cumulative effect adjustment to the
opening balance of accumulated deficit. The Company has concluded
that its revenue recognition will remain the same as previously
reported and will not have material impacts to its consolidated
financial statements.
At
December 31, 2017 and 2016, accounts receivable consisted of the
following:
|
|
December
31,
|
|
|
|
2017
|
2016
|
|
Accounts
receivable
|
$
26,762
|
$
16,026
|
|
Less: Allowance for
doubtful accounts
|
—
|
—
|
|
Total
|
$
26,762
|
$
16,026
|
The
Company reviews accounts receivable on a periodic basis and makes
general and specific allowances when there is doubt as to the
collectability of individual balances. No allowance for doubtful
accounts is considered necessary at December 31, 2017 and 2016. At
December 31, 2017, accounts receivable of $1,805 (RMB 11,800) was
pledged as collateral for borrowings from financial institutions
(note 6).
At
December 31, 2017 and 2016, inventory consisted of the
following:
|
|
December
31,
|
|
|
|
2017
|
2016
|
|
Raw
materials
|
$
6,181
|
$
7,698
|
|
Work in
process
|
4,328
|
1,260
|
|
Finished
goods
|
4,879
|
2,708
|
|
|
|
|
|
Total inventory,
gross
|
15,388
|
11,666
|
|
Inventory
reserve
|
—
|
—
|
|
Total inventory,
net
|
$
15,388
|
$
11,666
|
The
Company did not set up any inventory reserve as of
December 31, 2017 or 2016 and no inventory was pledged as
collateral for borrowings from financial institutions.
At
December 31, 2017 and 2016, property, plant and equipment
consisted of the following:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Manufacturing
equipment
|
$
9,660
|
$
8,566
|
|
Office
equipment
|
463
|
410
|
|
Transportation
equipment
|
203
|
191
|
|
Leasehold
improvement
|
277
|
224
|
|
Total
cost
|
10,603
|
9,391
|
|
Less:
Total accumulated depreciation
|
(8,263
)
|
(7,562
)
|
|
Construction
in progress
|
-
|
433
|
|
Total
property, plant and equipment, net
|
$
2,340
|
$
2,262
|
Depreciation
expense was $243 and $180 for the years ended December 31,
2017 and 2016, respectively.
At
December 31, 2017 and 2016, short-term borrowings consisted of the
following:
|
|
December 31,
2017
|
December 31,
2016
|
|
Borrowings
from Bank of China, due on February 10, 2017 with annual interest
rate of 4.8%, secured by certain of the Company’s
intellectual property and fully repaid on February 13,
2017
|
$
-
|
$
1,222
|
|
Borrowings
from Bank of Shanghai Pudong Branch, due on June 24, 2017 with an
annual interest rate of 5.66%, guaranteed by the Company’s
CEO and fully repaid on June 25, 2017
|
-
|
281
|
|
Line
of credit up to $3,605 (RMB 25,000) from Bank of Shanghai Pudong
Branch, due on July 3, 2017 with floating interest (interest rate
of 5.66% at December 31, 2016), guaranteed by the Company’s
CEO and fully repaid on May 18, 2017
|
-
|
1,455
|
|
Line
of credit up to $3,670 from Bank of Shanghai Pudong Branch, due on
July 3, 2017 with an annual interest rate of 3.2%, guaranteed by
the Company’s CEO and fully repaid on June 7,
2017
|
-
|
1,803
|
|
Line
of credit up to $4,590 (RMB 30,000) from Bank of China Pudong
Branch, due on March 5, 2018 with floating interest rate (annual
interest rate of 4.80% at December 31, 2017), secured by certain of
the Company’s intellectual property
|
2,219
|
-
|
|
Line
of credit up to $3,825 (RMB 25,000) from Bank of Shanghai Pudong
Branch, various withdraws due in October 2018 with floating
interest rate (annual interest rate of 5.66% at December 31, 2017),
guaranteed by the Company’s CEO
|
2,111
|
-
|
|
Borrowings
from Shanghai Rural Commercial Bank, due on November 21, 2018 with
annual interest rate of 5.44%, pledged by ACM Shanghai’s
accounts receivable (note 3) and guaranteed by the Company’s
CEO.
|
765
|
-
|
|
Total
|
$
5,095
|
$
4,761
|
For the
years ended December 31, 2017 and 2016, interest expense
related to short-term borrowings amounted to $272 and $179
respectively.
At
December 31, 2017 and 2016, other payable and accrued expenses
consisted of the following:
|
|
December
31,
|
|
|
|
2017
|
2016
|
|
Lease
expenses and payable for leasehold improvement due to a related
party (note 12)
|
$
2,024
|
$
1,883
|
|
Commissions
|
836
|
757
|
|
Accrued
warranty
|
839
|
290
|
|
Accrued
payroll
|
745
|
398
|
|
Accrued
professional fees
|
60
|
46
|
|
Accrued
machine testing fees
|
684
|
-
|
|
Others
|
838
|
589
|
|
Total
|
$
6,026
|
$
3,963
|
On
December 9, 2016, Shengxin (Shanghai) Management Consulting
Limited Partnership (“SMC”), a related party (note 12),
delivered RMB 20,124 (approximately $2,981 as of the close of
business on such date) in cash (the “SMC Investment”)
to ACM Shanghai for potential investment pursuant to terms to be
subsequently negotiated. On March 14, 2017, ACM, ACM Shanghai and
SMC entered into a securities purchase agreement pursuant to which,
in exchange for the SMC Investment, ACM issued to SMC a warrant
exercisable to purchase 397,502 shares of ACM’s Class A
common stock at a price of $7.50 per share (note 9).
On
December 9, 2016, SMC delivered the SMC Investment to ACM Shanghai
for potential investment pursuant to terms to be subsequently
negotiated. As of December 31, 2016, the terms of the SMC
Investment had not yet been negotiated and the SMC Investment was
recorded as investors’ deposit.
On
March 14, 2017, ACM, ACM Shanghai and SMC entered into a securities
purchase agreement (the “SMC Agreement”) pursuant to
which, in exchange for the SMC Investment, ACM issued to SMC a
warrant exercisable, for cash or on a cashless basis, to purchase,
at any time on or before May 17, 2023, all, but not less than all,
of 397,502 shares of ACM’s Class A common stock at a price of
$7.50 per share. Under the SMC Agreement, if SMC does not exercise
the warrant by May 17, 2023, ACM Shanghai will be obligated,
subject to approval of governmental authorities and ACM
Shanghai’s equity holders, to deliver an equity interest of
3.6394% (subject to dilution) in satisfaction of the SMC
Investment. If SMC exercises the warrant or if SMC does not
exercise the warrant and the issuance of the equity interest in ACM
Shanghai is not completed by August 17, 2023 due to the inability
of the parties to obtain required governmental or equity holder
approvals, then ACM Shanghai will be obligated to pay to SMC, in
satisfaction of the SMC Investment, an amount equal to $2,981,
converted into RMB at the lesser of 6.75 and the then-current
RMB-to- US dollar exchange rate.
In
accordance with FASB ASC 480,
Distinguishing Liabilities from Equity
,
the warrant is classified as a liability as the warrant is
conditional puttable. The fair value of the warrant is adjusted for
changes in fair value at each reporting period but cannot be lower
than the proceeds of the SMC Investment. The corresponding non-cash
gain or loss of the changes in fair value is recorded in earnings.
The methodology used to value the warrant was the Black-Scholes
valuation model with the following assumptions:
|
|
December
31,
|
|
|
2017
|
|
Fair value of
common share (1)
|
$
5.25
|
|
Expected term in
years (2)
|
5.38
|
|
Volatility
(3)
|
28.71
%
|
|
Risk-free interest
rate (4)
|
2.20
%
|
|
Expected dividend
(5)
|
0
%
|
(1) Common
stock price was the close price at December 31, 2017.
(2) Expected
term of the warrant represents the period from the current balance
sheet date to the warrant expiration date.
(3) Volatility
is calculated based on the historical volatility of ACM’s
comparable companies in the period equal to the expected term of
the warrant.
(4) Risk-free
interest rate is based on the yields of U.S. treasury securities
with maturities similar to the expected term of the
warrant.
(5) Expected
dividend is assumed to be 0% as ACM has no history or expectation
of paying a dividend on its common stock.
Other long-term
liabilities represent government subsidies received from PRC
governmental authorities for development and commercialization of
certain technology but not yet recognized (note 2). As of December
31, 2017 and 2016, other long-term liabilities consisted of the
following unearned government subsidies:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Subsidies to Stress
Free Polishing project, commenced in 2008 and
2017
|
$
1,952
|
$
1,958
|
|
Subsidies to
Electro Copper Plating project, commenced in 2014
|
4,265
|
4,921
|
|
Total
|
$
6,217
|
$
6,879
|
On September
6, 2017, ACM and Ninebell Co., Ltd. (“Ninebell”), a
Korean company that is one of the Company’s principal
materials suppliers, entered into an ordinary share purchase
agreement, effective as of September 11, 2017, pursuant to
which Ninebell issued to ACM ordinary shares representing 20% of
Ninebell’s post-closing equity for a purchase price of
$1,200, and a common stock purchase agreement, effective as of
September 11, 2017, pursuant to which ACM issued 133,334
shares of Class A common stock to Ninebell for a purchase price of
$1,000 at $7.50 per share. The investment in Ninebell is accounted
for under the equity method. Undistributed earnings attributable to
ACM’s equity method investment represented $37 of the
consolidated retained earnings at December 31, 2017.
On
August 18, 2017, ACM and Ninebell, its equity method investment
affiliate (note 11), entered into a loan agreement, pursuant to
which ACM made an interest-free loan of $946 to Ninebell, payable
in 180 days or automatically extended another 180 days if in
default. The loan is secured by a pledge of Ninebell’s
accounts receivable due from ACM and all money that Ninebell
receives from ACM. As of December 31, 2017 and 2016, accounts
payable due to Ninebell was $2,118 and $508,
respectively.
In
2007, ACM Shanghai entered into an operating lease agreement with
Shanghai Zhangjiang Group Co., Ltd. (“Zhangjiang
Group”),
group company of ZSTVC, which is our current investor and previous
holder of non-controlling interests in ACM Shanghai (note
14),
to lease manufacturing and office space located
in Shanghai, China. Pursuant to the lease agreement, Zhangjiang
Group provided $771 to ACM Shanghai for leasehold improvements. In
September 2016, the lease agreement was amended to modify payment
terms and extend the lease through December 31, 2017. During the
year ended December 31, 2017 and 2016, the Company incurred leasing
expenses under the lease agreement of $638 and $640, respectively.
As of December 31, 2017, and December 31, 2016, payables to
Zhangjiang Group for lease expenses and leasehold improvements
recorded as other payables and accrued expenses, amounted to $2,024
and $1,883, respectively (note 7).
On
December 9, 2016, ACM Shanghai received the SMC Investment from SMC
for potential investment pursuant to terms to be subsequently
negotiated (notes 8 and 9). SMC is a limited partnership
incorporated in the PRC, whose partners consist of employees of ACM
Shanghai. As of December 31, 2017 and 2016, investors’
deposits from SMC amounted to $0, and $2,902, respectively. On
March 14, 2017, ACM, ACM Shanghai and SMC entered into a securities
purchase agreement (the “SMC Agreement”) pursuant to
which, in exchange for the SMC Investment, ACM issued to SMC a
warrant exercisable, for cash or on a cashless basis, to purchase,
at any time on or before May 17, 2023, all, but not less than all,
of 397,502 shares of ACM’s Class A common stock at a price of
$7.50 per share, for a total exercise price of $2,981. Under the
SMC Agreement, if SMC does not exercise the warrant by May 17,
2023, ACM Shanghai will be obligated, subject to approval of
governmental authorities and ACM Shanghai’s equity holders,
to deliver an equity interest of 3.6394% (subject to dilution) in
satisfaction of the SMC Investment. If SMC exercises the warrant or
if SMC does not exercise the warrant and the issuance of the equity
interest in ACM Shanghai is not completed by August 17, 2023 due to
the inability of the parties to obtain required governmental or
equity holder approvals, then ACM Shanghai will be obligated to pay
to SMC, in satisfaction of the SMC Investment, an amount equal to
$2,981, converted into RMB at the lesser of 6.75 and the
then-current RMB-to-US dollar exchange rate.
ACM
entered into a two-year lease agreement in March 2015 for office
and warehouse space of approximately 3,000 square feet for its
headquarters in Fremont, California, at a rate of $2 per month. On
March 22, 2017, ACM amended the lease agreement to extend the lease
term through March 31, 2019 and increase the base rent to $3 per
month.
ACM
Shanghai entered into an operating lease agreement with Zhangjiang
Group (a related party, see note 12) in 2007 for manufacturing and
office space of approximately 63,510 square feet in Shanghai,
China. The lease terms and its payment terms are subject to
modification and extension with Zhangjiang Group from time to time.
The
lease with Zhangjiang Group expired on December 31, 2017 and we are
now leasing the property on a month-to-month basis as we negotiate
the terms of the lease.
ACM
Wuxi leases office space in Wuxi, China, at a rate of less than $1
per month.
Future
minimum lease payments under non-cancelable lease agreements as of
December 31, 2017 were as follows:
|
|
December
31,
2017
|
|
2018
|
$
50
|
|
2019
|
22
|
|
Total
|
$
72
|
Rent
expense was $670 an $675 for the years ended December 31, 2017
and 2016, respectively.
ACM is
authorized to issue 100,000,000 shares of Class A common stock
and 7,303,533 shares of Class B common stock, each with a par value
of $0.0001. Each share of Class A common stock is entitled to
one vote, and each share of Class B common stock is entitled to
twenty votes and is convertible at any time into one share of
Class A common stock. Shares of Class A common stock and
Class B common stock are treated equally, identically and
ratably with respect to any dividends if declared by the Board of
Directors unless the Board of Directors declares different
dividends to the Class A common stock and Class B common
stock by getting approval from a majority of common stock
holders.
In
August 2017 ACM entered into a securities purchase agreement with
PDHTI and its subsidiary Pudong Science and Technology (Cayman)
Co., Ltd. (“PST”), in which ACM agreed to bid, in an
auction process mandated by PRC regulations, to purchase
PDHTI’s 10.78% equity interests in ACM Shanghai and to sell
shares of Class A common stock to PST. On September 8, 2017, ACM
issued 1,119,576 shares of Class A common stock to PST for a
purchase price of $7.50 per share, representing an aggregate
purchase price of $8,397.
In
August 2017 ACM entered into a securities purchase agreement
with ZSTVC and its subsidiary Zhangjiang AJ Company Limited
(“ZJAJ”), in which ACM agreed to bid, in an auction
process mandated by PRC regulations, to purchase ZSTVC’s
7.58% equity interests in ACM Shanghai and to sell shares of Class
A common stock to ZJAJ. On September 8, 2017, ACM issued 787,098
shares of Class A common stock to ZJAJ for a purchase price of
$7.50 per share, or an aggregate purchase price of
$5,903.
In
September 2017 ACM issued 133,334 shares of Class A common stock to
Ninebell for a purchase price of $7.50 per share, or an aggregate
purchase price of $1,000 (note 11).
In
November 2017 ACM issued 2,233,000 shares of Class A common stock
and received net proceeds of $11,664 from IPO and concurrently ACM
issued additional 1,333,334 shares of Class A common stock through
a private placement for net proceeds of $7,053.
In
connection with the completion of IPO on November 2, 2017, the
Company issued a five-year warrant to Roth Capital Partners, LLC,
the Company's IPO underwriter, up to 80,000 shares ("Underwriter's
Warrant") of the Company's Class A common stock at the exercise
price of $6.16. The Underwriter's Warrant is immediately
exercisable and expires on November 1, 2022. The Underwriter's
Warrant is equity classified and the fair value was $137 at the IPO
offering date, using the Black Scholes model with the following
assumptions: volatility - 28.26%, dividend rate - 0%, and risk free
discount rate- 2%.
At
various dates during 2017, ACM issued 472,889 shares of Class A
common stock for options exercised by certain employee and
non-employees.
At
December 31, 2017 and 2016, the number of shares of Class A common
stock issued and outstanding was 12,935,546 and 2,228,740,
respectively. At December 31, 2017 and 2016, the number of shares
of Class B common stock issued and outstanding was
2,409,738.
Upon
ACM’s redomestication in Delaware in November 2016, ACM had
22,696,467 authorized shares of preferred stock, of which 385,000,
1,572,000, 1,360,962, 2,659,975, 10,718,530, and 6,000,000 shares
were designated as Series A, Series B, Series C, Series D, Series E
and Series F preferred stock, respectively.
In
March 2017 ACM entered into a securities purchase agreement,
amended in July 2017, with SSTVC pursuant to which, effective as of
August 31, 2017, ACM acquired SSTVC’s equity interests in ACM
Shanghai for a purchase price of $6,154 (RMB 40,000) and issued to
SSTVC 4,998,508 shares of Series E convertible preferred stock for
a purchase price of $5,800.
The
number of issued and outstanding shares of redeemable convertible
preferred stock as of December 31, 2017 and 2016 were as
follows:
|
|
2017
|
2016
|
|
Series
A convertible preferred stock
|
-
|
385,000
|
|
Series
B convertible preferred stock
|
-
|
1,572,000
|
|
Series
C convertible preferred stock
|
-
|
1,360,962
|
|
Series
D convertible preferred stock
|
-
|
2,659,975
|
|
Series
E convertible preferred stock
|
-
|
-
|
|
Series
F convertible preferred stock
|
-
|
6,000,000
|
|
|
-
|
11,977,937
|
Shares
of ACM’s convertible preferred stock have rights, preferences
and privileges as follows:
Voting Rights
Each
share of Series A through Series F convertible preferred stock is
entitled to a number of votes equal to the number of whole shares
of common stock into which such share can be
converted.
Dividends
Holders
of Series A through Series F convertible preferred stock have a
non-cumulative right to participate in and receive the same
dividends as may be declared for common stockholders, as and if
declared by the Board of Directors, payable out of funds legally
available.
Conversion
Each
share of Series A through Series F convertible preferred stock is
convertible at any time, at the option of the holder. At November
3, 2017, the IPO date, each share of Series A, B, E and F
convertible preferred stock was convertible into one-third share of
Class A common stock, each share of Series C convertible preferred
stock was convertible into 0.3544 shares of Class A common stock,
and each share of Series D convertible preferred stock was
convertible into 0.4562 shares of Class A common stock. All Series
A through Series F convertible preferred stock converted
automatically into a total of 4,625,577 shares of Class A
common stock upon the closing of the IPO. At December 31,
2016, 2,960,968 shares of Class A common stock were reserved
for issuance upon conversion of outstanding Series A through Series
F convertible preferred stock.
Liquidation Preferences
Holders
of Series A through Series F convertible preferred stock are
entitled to receive specified liquidation amounts in the event of a
liquidation, dissolution or winding-up of ACM or of certain deemed
liquidation events. The deemed liquidation events generally include
(a) a merger or stock sale after which new stockholders would
own a majority of the voting stock of ACM and (b) a sale of
all or substantially all of the assets of the Company.
In the
event of a liquidation, dissolution or winding-up of ACM or a
deemed liquidation, the holders of Series A through Series F
convertible preferred stock shall be entitled to be paid, prior to
and in preference to the holders of common stock, an amount equal
to $0.80, $1.00, $1.50, $3.75, $1.00 and $2.50 per share of Series
A through Series F convertible preferred stock, respectively, plus
any accumulated and unpaid dividends as of the redemption
date.
On
April 29, 1998, ACM adopted the 1998 Stock Option Plan (the
“1998 Plan”). The options issued under the Plan
consisted of incentive stock options (“ISOs”) and
nonstatutory stock options (“NSOs”) that should be
determined at the time of grant. ISOs could be granted only to
employees. NSOs could be granted to employees, directors and
consultants. The option price of each ISO and each NSO could not be
less than 100% or less than 85% of the fair market value of stock
price at the time of grant, respectively. The vesting period was to
be determined by the Board of Directors for each grant. The total
number of shares of common stock reserved under the 1998 Plan, as
amended, was 766,667. If any option granted under the 1998 Plan
expires or otherwise terminates without having been exercised in
full, the shares of common stock subject to that option would
become available for re-grant. At March 3, 2014, the 1998 Plan
terminated and no further grants under the 1998 Plan could be made
thereunder, although certain previously granted options remained
outstanding in accordance with their terms.
On
December 28, 2016, ACM adopted the 2016 Omnibus Incentive
Plan (the “2016 Plan”). Under the 2016 Plan, the
aggregate number of shares of Class A common stock that may be
issued shall equal the sum of (a) 2,333,334 and (b) an
annual increase on the first day of each year beginning in 2018 and
ending in 2026 equal to the lesser of (i) 4% of the shares of
Class A and Class B common stock outstanding (on an as-converted
basis) on the last day of the immediately preceding year and
(ii) such smaller number of shares as may be determined by the
Board. A maximum of 2,333,334 shares is available for issuance as
ISOs under the 2016 Plan. Besides the stock options, the 2016 Plan
also authorizes issuance of stock appreciation rights, restricted
stock, restricted stock units, and other share-based and cash
awards. The 2016 Plan will terminate on December 27,
2026.
Employee Awards
The
following table summarizes ACM’s employee share option
activities:
|
|
Number of Option Shares
|
Weighted Average Grant Date Fair
Value
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual
Term
|
|
Outstanding
at December 31, 2015
|
1,500,010
|
$
0.48
|
$
1.02
|
5.60
|
|
Granted
|
1,009,371
|
0.54
|
3.00
|
|
|
Exercised
|
(409,004
)
|
0.42
|
0.75
|
|
|
Expired
|
-
|
-
|
-
|
|
|
Forfeited
|
-
|
-
|
-
|
|
|
Outstanding
at December 31, 2016
|
2,100,377
|
0.54
|
2.03
|
7.83
|
|
Granted
|
140,002
|
2.28
|
6.75
|
|
|
Exercised
|
(174,334
)
|
0.45
|
0.75
|
|
|
Expired
|
(3,752
)
|
0.54
|
3.00
|
|
|
Forfeited
|
(16,677
)
|
0.54
|
3.00
|
|
|
Outstanding
at December 31, 2017
|
2,045,616
|
$
0.66
|
$
2.46
|
7.57
|
|
Vested
and exercisable at December 31, 2017
|
1,010,313
|
|
|
|
During
the years ended December 31, 2017 and 2016, ACM recognized employee
stock-based compensation expense of $271 and $92, respectively. As
of December 31, 2017 and 2016, $729 and $726, respectively, of
total unrecognized employee stock-based compensation expense, net
of estimated forfeitures, related to stock-based awards were
expected to be recognized over a weighted-average period of 1.77
years and 2.25 years, respectively. Total unrecognized compensation
cost may be adjusted for future changes in estimated
forfeitures.
The
fair value of each option granted to employee is estimated on the
grant date using the Black-Scholes valuation model with the
following assumptions.
|
|
December 31,
|
||
|
|
2017
|
|
2016
|
|
Fair
value of common share(1)
|
$5.60-7.59
|
|
$2.28
|
|
Expected
term in years(2)
|
6.25
|
|
5.75-6.25
|
|
Volatility(3)
|
28.62% -29.18%
|
|
29.93%
|
|
Risk-free
interest rate(4)
|
2.21%-2.22%
|
|
2.02%-2.32%
|
|
Expected
dividend(5)
|
0%
|
|
0%
|
(1)
Common stock value was
the close market value on December 31, 2017.
(2)
Expected term of
share options is based on the average of the vesting period and the
contractual term for each grant according to Staff Accounting
Bulletin 110.
(3)
Volatility is
calculated based on the historical volatility of ACM’s
comparable companies in the period equal to the expected term of
each grant.
(4)
Risk-free interest
rate is based on the yields of U.S. Treasury securities with
maturities similar to the expected term of the share options in
effect at the time of grant.
(5)
Expected dividend
is assumed to be 0% as ACM has no history or expectation of paying
a dividend on its common stock.
Non-employee Awards
The
following table summarizes ACM’s non-employee share option
activities:
|
|
|
Weighted
|
Weighted
|
Weighted
Average
|
|
|
Number
of
|
Average Grant
|
Average Exercise
|
Remaining
|
|
|
Option Shares
|
Date Fair Value
|
Price
|
Contractual
Term
|
|
Outstanding
at December 31, 2015
|
1,533,343
|
$
0.48
|
$
0.99
|
5.53
|
|
Granted
|
415,225
|
0.54
|
3.00
|
|
|
Exercised
|
(370,003
)
|
0.45
|
0.75
|
|
|
Expired
|
-
|
-
|
-
|
|
|
Forfeited
|
-
|
-
|
-
|
|
|
Outstanding
at December 31, 2016
|
1,578,565
|
0.51
|
1.58
|
6.81
|
|
Granted
|
196,669
|
2.25
|
6.90
|
|
|
Exercised
|
(298,555
)
|
0.39
|
0.93
|
|
|
Expired
|
(133,336
)
|
0.45
|
0.75
|
|
|
Forfeited
|
(16,667
)
|
2.58
|
7.50
|
|
|
Outstanding
at December 31, 2017
|
1,326,676
|
0.78
|
2.52
|
7.54
|
|
Vested
and exercisable at December 31, 2017
|
754,799
|
|
|
|
During
the years ended December 31, 2017 and 2016, the Company recognized
non-employee stock-based compensation expense of $1,351 and $291,
respectively.
The fair value of
each option granted to non-employees is re-measured at each period
end until the vesting date using the Black-Scholes valuation model
with the following assumptions:
|
|
December
31,
|
||
|
|
2017
|
|
2016
|
|
Fair value of common share(1)
|
$5.25-7.59
|
|
$2.28
|
|
Expected term in years(2)
|
3.58-6.25
|
|
2.11-6.24
|
|
Volatility(3)
|
28.71%-29.41%
|
|
29.93%
|
|
Risk-free interest rate(4)
|
1.62%-2.43%
|
|
1.00%-2.25%
|
|
Expected dividend(5)
|
0%
|
|
0%
|
1.
Common stock value was
the close market value on December 31, 2017.
2.
Expected term of
share options is based on the average of the vesting period and the
contractual term for each grant according to Staff Accounting
Bulletin 110.
3.
Volatility is
calculated based on the historical volatility of ACM’s
comparable companies in the period equal to the expected term of
each grant.
4.
Risk-free interest
rate is based on the yields of U.S. Treasury securities with
maturities similar to the expected term of the share options in
effect at the time of grant.
5.
Expected
dividend is assumed to be 0% as ACM has no history or expectation
of paying a dividend on its common stock.
The
following represent components of the income tax benefit (expense)
for the years ended December 31, 2017 and 2016:
|
|
Year
Ended
December
31,
|
|
|
|
2017
|
2016
|
|
Current:
|
|
|
|
U.S.
federal
|
$
-
|
$
-
|
|
U.S.
state
|
-
|
(1
)
|
|
Foreign
|
-
|
-
|
|
Total
current tax expense
|
-
|
(1
)
|
|
Deferred:
|
|
|
|
U.S.
federal
|
-
|
-
|
|
U.S.
state
|
-
|
-
|
|
Foreign
|
(547
)
|
(594
)
|
|
Total
deferred tax expense
|
(547
)
|
(594
)
|
|
Total
income tax expense
|
$
(547
)
|
$
(595
)
|
Tax
effects of temporary differences that give rise to significant
portions of the Company’s deferred tax assets at December 31,
2017 and 2016 are presented below:
|
|
December
31,
|
|
|
|
2017
|
2016
|
|
Deferred
tax assets:
|
|
|
|
Net
operating loss carry forwards (offshore)
|
$
4,418
|
$
1,029
|
|
Net
operating loss carry forwards (U.S.) and credit
|
683
|
5,815
|
|
Deferred
revenue (offshore)
|
656
|
840
|
|
Accruals
(U.S.)
|
18
|
18
|
|
Reserves
and other (offshore)
|
495
|
43
|
|
Stock-based
compensation (U.S.)
|
453
|
342
|
|
Property
and equipment (U.S.)
|
2
|
3
|
|
Total
gross deferred tax assets
|
6,725
|
8,090
|
|
Less:
valuation allowance
|
(5,431
)
|
(6,249
)
|
|
Total
deferred tax assets
|
1,294
|
1,841
|
|
Total
deferred tax liabilities
|
-
|
-
|
|
Translation
difference
|
-
|
-
|
|
Deferred
tax assets, net
|
$
1,294
|
$
1,841
|
The
Company considers all available evidence to determine whether it is
more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become
realizable. Management considers the scheduled reversal of deferred
tax liabilities (including the impact of available carryback and
carry-forward periods), and projected taxable income in assessing
the realizability of deferred tax assets. In making such judgments,
significant weight is given to evidence that can be objectively
verified. Based on all available evidence, a partial valuation
allowance has been established against some net deferred tax assets
as of December 31, 2017 and 2016, based on estimates of
recoverability. While the Company has optimistic plans for its
business strategy, it determined that such a valuation allowance
was necessary given its historical losses and the uncertainty with
respect to its ability to generate sufficient profits from its
business model from all tax jurisdictions. In order to fully
realize the U.S. deferred tax assets, the Company must generate
sufficient taxable income in future periods before the expiration
of the deferred tax assets governed by the tax code. The valuation
allowance in the U.S. decreased by $760 for the year ended December
31, 2017 and increased $264 for the year ended December 31, 2016.
The valuation allowance in China decreased by $58 and $163 during
the years ended December 31, 2017 and 2016,
respectively.
The
Company did not have any significant temporary differences relating
to deferred tax liabilities as of December 31, 2017 or
2016.
As of
December 31, 2017 and 2016, the Company had net operating loss
carry-forwards of respectively, $20,116 and $15,037 for U.S federal
purposes, $536 and $204 for U.S. state purposes and $6,411 and
$6,822 for Chinese income tax purposes. Such losses are set to
expire in 2019, 2032, and 2017 for U.S. federal, U.S. state and
Chinese income tax purposes, respectively.
As of
December 31, 2017 and 2016, the Company had research credit
carry-forwards of $606 for U.S. federal purposes, and $377 for U.S.
state purposes. Such credits are set to expire in 2025 for U.S.
federal carry-forwards. There is no expiration date for U.S. state
carry-forwards.
A
limitation may apply to the use of the U.S. net operating loss and
credit carry-forwards, under provisions of the U.S. Internal
Revenue Code that would be applicable if ACM experiences an
“ownership change.” Should these limitations apply, the
carry-forwards would be subject to an annual limitation, resulting
in a substantial reduction in the gross deferred tax assets before
considering the valuation allowance. As of December 31, 2017 and
2016, the Company had not performed an analysis to determine if its
net operating loss and credit carry-forwards would be subject to
such limitations.
The
Company’s effective tax rate differs from statutory rates of
34% for U.S. federal income tax purposes and 15%-25% for Chinese
income tax purpose due to the effects of the valuation allowance
and certain permanent differences as it pertains to book-tax
differences in the value of client shares received for services.
Pursuant to the Corporate Income Tax Law of the PRC, all of the
Company’s PRC subsidiaries are liable to PRC Corporate Income
Taxes at a rate of 25% except for ACM Shanghai. According to
Guoshuihan 2009 No. 203, if an entity is certified as an
“advanced and new technology enterprise,” it is
entitled to a preferential income tax rate of 15%. ACM Shanghai
obtained the certificate of “advanced and new technology
enterprise” in 2012 and again in 2016 with an effective
period of three years, and the provision for PRC corporate income
tax for ACM Shanghai is calculated by applying the income tax rate
of 15% for the years ended December 31, 2017 and
2016.
Income
tax (expense) benefit for the years ended December 31, 2017
and 2016 differed from the amounts computed by applying the
statutory federal income tax rate of 34% to pretax income (loss) as
a result of the following:
|
|
Year
ended
December
31,
|
|
|
|
2017
|
2016
|
|
Effective
tax rate reconciliation:
|
|
|
|
Income
tax provision at statutory rate
|
34.00
%
|
(34.00
%)
|
|
State
taxes, net of Federal benefit
|
-
|
-
|
|
Foreign
rate differential
|
6.8
|
38.7
|
|
Other
permanent difference
|
197.7
|
(20.9
)
|
|
Effect
of tax reform
|
(757
)
|
-
|
|
Change
in valuation allowance
|
349.9
|
(3.8
)
|
|
Total
income tax (expense) benefit
|
(168.60
%)
|
(20.00
%)
|
Tax
positions are evaluated in a two-step process. The Company first
determines whether it is more likely than not that a tax position
will be sustained upon examination. If a tax position meets the
more-likely-than-not recognition threshold it is then measured to
determine the amount of benefit to recognize in the financial
statements. The tax position is measured as the largest amount of
benefit that is greater than 50% likely of being realized
upon ultimate settlement. The aggregate changes in the balance
of gross unrecognized tax benefits, which excludes interest and
penalties, for the years ended December 31, 2017 and
2016, are as follows:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Beginning
balance
|
$
44
|
$
44
|
|
Increase/(Decrease)
of unrecognized tax benefits taken in prior years
|
-
|
-
|
|
Increase/(Decrease)
of unrecognized tax benefits related to current year
|
-
|
-
|
|
Increase/(Decreases)
of unrecognized tax benefits related to settlements
|
-
|
-
|
|
Reductions
to unrecognized tax benefits related to lapsing statute of
limitations
|
-
|
-
|
|
Ending
balance
|
$
44
|
$
44
|
The
Company files income tax returns in the United States, and state
and foreign jurisdictions. The federal, state and foreign income
tax returns are under the statute of limitations subject to tax
examinations for the tax years ended December 31, 2009 through
December 31, 2017. To the extent the Company has tax attribute
carry-forwards, the tax years in which the attribute was generated
may still be adjusted upon examination by the U.S. Internal Revenue
Service, state or foreign tax authorities to the extent utilized in
a future period.
The
Company had $44 of unrecognized tax benefits as of December 31,
2017 and 2016.
The
Company recognizes interest and penalties related to uncertain tax
positions in income tax expense. As of December 31, 2017 and 2016,
the Company had $44 of accrued penalties and $0 of accrued
penalties related to uncertain tax positions, none of which has
been recognized in the Company’s consolidated statements of
operations and comprehensive income for the years ended
December 31, 2017 and 2016. There were no ongoing examinations
by taxing authorities as of December 31, 2017 and
2016.
The
Company intends to indefinitely reinvest the PRC earnings outside
of the U.S. as of December 31, 2017 and December 31, 2016.
Thus, deferred taxes are not provided in the U.S. for unremitted
earnings in the PRC.
On
December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was
enacted into law and the new legislation contains several key tax
provisions that affected us, including a one-time mandatory
transition tax on accumulated foreign earnings and a reduction of
the corporate income tax rate to 21% effective January 1, 2018,
among others. We are required to recognize the effect of the tax
law changes in the period of enactment, such as determining the
transition tax, remeasuring our U.S. deferred tax assets and
liabilities as well as reassessing the net realizability of our
deferred tax assets and liabilities.
The
Company leases offices under non-cancelable operating lease
agreements. The rental expenses were $670 and $675 for the years
ended December 31, 2017 and 2016, respectively. See note 13 for
future minimum lease payments under non-cancelable operating lease
agreements with initial terms of one year or more.
The
Company did not have any capital commitments during the reported
periods.
From
time to time the Company is subject to legal proceedings, including
claims in the ordinary course of business and claims with respect
to patent infringements.
In
accordance with the PRC’s Foreign Enterprise Law, ACM
Shanghai and ACM Wuxi are required to make contributions to a
statutory surplus reserve (note 2).
As a
result of PRC laws and regulations that require annual
appropriations of 10% of net after-tax profits to be set aside
prior to payment of dividends as general reserve fund or statutory
surplus fund, ACM Shanghai is restricted in its ability to transfer
a portion of its net assets to ACM (including any assets received
as distributions from ACM Wuxi). Amounts restricted included
paid-in capital and statutory reserve funds, as determined pursuant
to PRC accounting standards and regulations, were $29,927 as of
December 31, 2017 and 2016.
On
January 12, 2018, ACM Shanghai entered into an operating lease for
manufacturing space of approximately 103,318 square feet in
Shanghai, China effective as of January 16, 2018. The lease
term is five years and expires on January 15, 2022. During the
first year, the lease space is 51,659 square feet with monthly
payments of RMB 270 starting from the second month of the lease.
From January 16, 2019, the lease space will be increased to 103,318
square feet with monthly payments of RMB 390. The monthly payments
for the third and four year is RMB 409 and RMB 430 for the fifth
year.
On
January 25, 2018, the Company’s board approved a total of
500,000 shares of stock options to its employees and consultants at
the exercise price of $5.31 per share
The
Company performed a test on the restricted net assets of
consolidated subsidiaries in accordance with Rule 4-08(e)(3)
of Regulation S-X of the SEC and concluded that it was applicable
for the Company to disclose the financial information for ACM only.
Certain information and footnote disclosures generally included in
financial statements prepared in accordance with GAAP have been
condensed or omitted. The footnote disclosure contains supplemental
information relating to the operations of ACM
separately.
ACM’s
subsidiaries did not pay any dividends to ACM during the periods
presented.
ACM did
not have significant capital or other commitments, long-term
obligations, or guarantees as of December 31, 2017 and
2016.
The
following represents condensed unconsolidated financial information
of ACM only as of and for the years ended December 31, 2017
and 2016:
CONDENSED BALANCE SHEET
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Assets
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
10,874
|
$
7,264
|
|
Accounts
Receivable
|
118
|
-
|
|
Inventory
|
565
|
1,042
|
|
Due
from intercompany
|
12,669
|
1,986
|
|
Other
receivable
|
50
|
3
|
|
Total
current assets
|
24,276
|
10,295
|
|
Investment
in unconsolidated subsidiaries
|
15,476
|
6,583
|
|
Due
from related party
|
946
|
-
|
|
Total
assets
|
40,698
|
16,878
|
|
Liabilities, Redeemable Convertible Preferred Stock and
Stockholders’ Equity
|
|
|
|
Notes
payable
|
11
|
11
|
|
Accounts
payable
|
739
|
1,176
|
|
Other
payable
|
47
|
47
|
|
Income
taxes payable
|
44
|
44
|
|
Total
liabilities
|
841
|
1,278
|
|
Total
redeemable convertible preferred stocks
|
-
|
18,034
|
|
Total
stockholders’ equity (deficit)
|
39,857
|
(2,434
)
|
|
Total
liabilities, redeemable convertible preferred stock and
stockholders’ equity
|
$
40,698
|
$
16,878
|
CONDENSED STATEMENT OF OPERATIONS
|
|
Year Ended
December 31,
|
|
|
|
2017
|
2016
|
|
Revenue
|
$
6,985
|
$
5,803
|
|
Cost
of revenue
|
(6,394
)
|
(5,346
)
|
|
Gross
profit
|
591
|
457
|
|
Operating
expenses:
|
|
|
|
Sales
and marketing expenses
|
(368
)
|
(64
)
|
|
General
and administrative expenses
|
(3,961
)
|
(1,202
)
|
|
Research
and development expenses
|
(50
)
|
(6
)
|
|
Loss
from operations
|
(3,788
)
|
(815
)
|
|
Equity
in earnings of unconsolidated subsidiaries
|
3,475
|
3,561
|
|
Other
income (expense), net
|
-
|
(1,608
)
|
|
Interest
expense, net
|
(5
)
|
(106
)
|
|
Income
(loss) before income taxes
|
(318
)
|
1,032
|
|
Income
tax expense (benefit)
|
-
|
(1
)
|
|
Net
income (loss)
|
$
(318
)
|
$
1,031
|
Condensed Statement of Cash Flows
|
|
Year
Ended
December 31,
|
|
|
|
2017
|
2016
|
|
Net
cash used in operating activities
|
$
(13,848
)
|
$
(2,220
)
|
|
Net
cash used in investing activities
|
(21,754
)
|
-
|
|
Net
cash provided by financing activities
|
38,676
|
9,309
|
|
Net
increase in cash and cash equivalents
|
3,074
|
7,089
|
|
Cash
and cash equivalents, beginning of year
|
7,264
|
504
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
536
|
(329
)
|
|
Cash
and cash equivalents, end of year
|
$
10,874
|
$
7,264
|
I
TEM 9. Changes in and Disagreements
with Accountants on Accounting and Financial
Disclosure
None.
I
TEM 9A. Controls and
Procedures
Evaluation of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer
and Chief Accounting Officer, evaluated the effectiveness of our
disclosure controls and procedures pursuant to Rule 13a-15 (e) and
15d-14 (e) under the Securities Exchange Act of 1934 as of December
31, 2017. The evaluation included certain internal control areas in
which we have made and are continuing to make changes to improve
and enhance controls. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls
and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives. In addition, the design of disclosure controls and
procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment
in evaluating the benefits of possible controls and procedures
relative to their costs.
Based
on that evaluation, our Chief Executive Officer and Chief
Accounting Officer concluded that our disclosure controls and
procedures are effective to provide reasonable assurance that
information we are required to disclose in reports that we file or
submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods
specified in SEC rules and forms, and that such information is
accumulated and communicated to our management, including our Chief
Executive Officer and Chief Accounting Officer, as appropriate, to
allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial
Reporting
This
report does not include a report of management’s assessment
regarding internal control over financial reporting or an
attestation report of our registered public accounting firm due to
a transition period established by rules of the SEC for newly
public companies.
Previously Identified Material Weaknesses in Internal Control Over
Financial Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting for our company. Internal
control over financial reporting is defined in Rule 13a-15(f) and
15d-15(f) promulgated under the Securities Exchange Act of 1934 as
a process designed by, or under the supervision of, a company's
principal executive and principal financial officers and effected
by the company's board of directors, management and other
personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP, and
includes those policies and procedures that:
●
pertain to the
maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of
the company;
●
provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures
of the company are being made in accordance with authorizations of
management and directors of the company; and
●
provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could
have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In
connection with its audits of our consolidated financial statements
as of, and for the year ended, December 31, 2016, BDO China Shu Lun
Pan Certified Public Accountants LLP, or BDO China, informed us
that it had identified a material weakness in our internal control
over financial reporting relating to our lack of sufficient
qualified financial reporting and accounting personnel with an
appropriate level of expertise to properly address complex
accounting issues under GAAP and to prepare and review our
consolidated financial statements and related disclosures to
fulfill GAAP and SEC financial reporting requirements. A material
weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the annual
or interim financial statements will not be prevented or detected
on a timely basis.
Our
management, including our Chief Executive Officer, who is our
principal executive officer, and our Chief Accounting Officer and
interim Chief Financial Officer, who is our principal financial
officer, assessed the effectiveness of our internal control over
financial reporting as of December 31, 2017. In making this
assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control—An
Integrated Framework
(2013). As of, and during the year
ended, December 31, 2017, we considered we were still in a
transitional period to improve and enhance the quality of our
accounting and financial reporting function, we determined that the
above mentioned material weakness had not been fully remediated.
Management concluded that, as of December 31, 2017, our internal
control over financial reporting was not effective.
Remediation Efforts
We have
taken, and are continuing to take, remedial measures to improve the
effectiveness of our controls, including by hiring additional
accounting and finance personnel and by engaging outside consulting
firms. In particular, in January 2018 we hired a new Chief
Accounting Officer. Because the employment of our former Chief
Financial Officer terminated in January 2018, our new Chief
Accounting Officer is also serving as interim Chief Financial
Officer while we conduct a search for a permanent Chief Financial
Officer. We are continuing to add personnel and take other remedial
steps, and management expects to remedy the identified material
weakness by no later than the second quarter of 2018.
I
tem 9B. Other
Information
None.
P
ART III
I
TEM 10. Directors, Executive
Officers and Corporate Governance
Information
responsive to this item is incorporated herein by reference to
ACM’s definitive proxy statement with respect to our 2018
Annual Meeting of Stockholders to be filed with the SEC within 120
days after the end of the fiscal year covered by this
report.
I
TEM 11. Executive
Compensation
Information
responsive to this item is incorporated herein by reference to our
definitive proxy statement with respect to our 2018 Annual Meeting
of Stockholders to be filed with the SEC within 120 days after the
end of the fiscal year covered
by this
report.
I
TEM 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters
Information
responsive to this item is incorporated herein by reference
to
our
definitive proxy statement with respect to our 2018 Annual Meeting
of Stockholders to be filed with the SEC within 120 days after the
end of the fiscal year covered
by this
report.
I
TEM 13. Certain Relationships and
Related Transactions, and Director Independence
Information
responsive to this item is incorporated herein by reference
to
our
definitive proxy statement with respect to our 2018 Annual Meeting
of Stockholders to be filed with the SEC within 120 days after the
end of the fiscal year covered
by this
report.
I
TEM 14. Principal Accounting Fees
and Services
Information
responsive to this item is incorporated herein by reference
to
our
definitive proxy statement with respect to our 2018 Annual Meeting
of Stockholders to be filed with the SEC within 120 days after the
end of the fiscal year covered
by this
report.
P
ART IV
I
TEM 15. Exhibits and Financial
Statement Schedules
(a)
See “Item 8.
Financial Statements and Supplementary Data─Index to
Consolidated Financial Statements” above and “Exhibit
Index” below.
(b)
See “Exhibit
Index” below.
(c)
None.
None.
EXHIBIT
INDEX
|
Exhibit
No.
|
|
Description
|
|
|
Restated
Certificate of Incorporation of ACM Research,
Inc.
|
|
|
|
|
|
|
|
Restated Bylaws of
ACM Research, Inc.
|
|
|
|
|
|
| 4.01# |
|
Warrant dated March 14, 2017 issued by ACM Research, Inc. to Shengxin (Shanghai) Management Consulting Limited Partnership |
|
|
|
|
| 4.02# |
|
Form of Warrant dated November 2, 2017 issued to
the underwriters of ACM Research, Inc.'s initial public offering
exercisable for an aggregate of 80,000 shares of Class A common
stock
|
|
|
|
|
|
|
Lease
dated March 22, 2017 between ACM Research, Inc. and D&J
Construction, Inc.
|
|
|
|
|
|
|
|
Lease
dated September 6, 2016 between ACM Research (Shanghai), Inc.
and Shanghai Zhangjiang Group Co., Ltd.
|
|
|
|
|
|
| 10.03# |
|
Underwriting Agreement dated November 2, 2017
between ACM Research, Inc. and Roth Capital Partners, LLC, as
representative of the several underwriters named on Schedule I
thereto
|
|
|
|
|
|
|
Securities Purchase
Agreement dated March 14, 2017 by and among ACM Research,
Inc., Shengxin (Shanghai) Management Consulting Limited Partnership
and ACM Research (Shanghai), Inc.
|
|
|
|
|
|
|
|
Securities Purchase
Agreement dated March 23, 2017 between ACM Research, Inc. and
Shanghai Science and Technology Venture Capital Co., Ltd., as
amended
|
|
|
|
|
|
|
|
Securities Purchase
Agreement dated August 31, 2017 by and among ACM Research, Inc.,
Shanghai Pudong High-Tech Investment Co., Ltd. and Pudong Science
and Technology (Cayman) Co., Ltd.
|
|
|
|
|
|
|
|
Securities Purchase
Agreement dated August 31, 2017 by and among ACM Research, Inc.,
Shanghai Zhangjiang Science & Technology Venture Capital Co.,
Ltd. and Zhangjiang AJ Company Limited
|
|
|
|
|
|
|
|
Ordinary Share
Purchase Agreement dated September 6, 2017 by and among
ACM Research, Inc., Ninebell Co., Ltd. and Moon-Soo
Choi
|
|
|
|
|
|
|
|
Class A Common
Stock Purchase Agreement dated September 6, 2017 by and among
ACM Research, Inc., Ninebell Co., Ltd. and Moon-Soo
Choi
|
|
|
|
|
|
|
|
Form of
Second Amended and Restated Registration Rights Agreement to be
entered into between ACM Research, Inc. and certain of its
stockholders
|
|
|
Stock
Purchase Agreement, dated October 11, 2017, by and among ACM
Research, Inc., Xunxin (Shanghai) Capital Co., Limited, Xinxin
(Hongkong) Capital Co., Limited and David H. Wang
|
|
|
|
|
|
|
|
Stock
Purchase Agreement, dated October 16, 2017, by and between ACM
Research, Inc. and Victorious Way Limited
|
|
|
|
|
|
|
|
Nomination and
Voting Agreement, dated October 11, 2017, by and among Xinxin
(Hongkong) Capital Co., Limited, ACM Research, Inc., David H. Wang,
and the individuals named therein
|
|
|
|
|
|
|
|
Voting
Agreement, dated March 23, 2017, by and among Shanghai Technology
Venture Capital Co., Ltd. (also known as Shanghai Science and
Technology Venture Capital Co., Ltd.) and ACM Research,
Inc.
|
|
|
|
|
|
|
|
2016
Omnibus Incentive Plan of ACM Research, Inc.
|
|
|
|
|
|
|
|
Form of
Incentive Stock Option Grant Notice and Agreement under 2016
Omnibus Incentive Plan
|
|
|
|
|
|
|
|
Form of
Non-qualified Stock Option Grant Notice and Agreement under 2016
Omnibus Incentive Plan
|
|
|
|
|
|
|
|
Form of
Restricted Stock Unit Grant Notice and Agreement under 2016 Omnibus
Incentive Plan
|
|
|
|
|
|
|
|
Form of
Nonstatutory Stock Option Agreement of ACM Research,
Inc.
|
|
|
|
|
|
|
|
1998
Stock Option Plan of ACM Research, Inc.
|
|
|
|
|
|
|
|
Form of
Incentive Stock Option Agreement under 1998 Stock Option
Plan
|
|
|
|
|
|
|
|
Form of
Non-statutory Stock Option Agreement under 1998 Stock Option
Plan
|
|
|
|
|
|
|
|
Form of
Indemnification Agreement entered into between ACM Research, Inc.
and certain of its directors and officers
|
|
|
|
|
|
|
|
Executive Retention
Agreement dated November 14, 2016 between ACM Research, Inc.
and Min Xu
|
|
|
|
|
|
|
|
Line of
Credit Agreement dated August 21, 2017 between ACM Research
(Shanghai), Inc. and Shanghai Pudong Development Zone Branch of
Bank of China Limited
|
|
|
|
|
|
|
|
Line of
Credit Agreement dated August 21, 2017 between ACM Research
(Shanghai), Inc. and Bank of Shanghai Co., Ltd. Pudong
Branch
|
|
|
|
|
|
|
|
List of
Subsidiaries of ACM Research, Inc.
|
|
|
|
|
|
|
|
Consent
of BDO China Shu Lan Pan Certified Public Accountants
LLP
|
|
|
|
|
|
| 31.01 |
|
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
| 31.02 |
|
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
| 32.01 |
|
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
| 101.INS |
|
XBRL Instance Document |
|
|
|
|
| 101.SCH |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
|
| 101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
| 101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
| 101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
# Previously
filed.
+ Indicates
management contract or compensatory plan.
S
IGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of
March 22, 2018.
|
|
ACM
RESEARCH, INC.
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ David H.
Wang
|
|
|
|
|
David H.
Wang
|
|
|
|
|
Chief Executive
Officer and President
|
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities
indicated on March 22, 2018:
|
Signature
|
|
Title
|
|
|
|
|
|
/s/ David H.
Wang
|
|
Chief Executive Officer, President and Director |
|
David H.
Wang
|
|
(
Principal Executive
Officer
)
|
|
|
|
|
|
/s/ Lisa
Feng
|
|
Interim Chief Financial Officer, Chief Accounting Officer and Treasurer |
|
Lisa
Feng
|
|
(Principal Accounting
Officer
)
|
|
|
|
|
|
/s/ Haiping
Dun
|
|
Director |
|
Haiping
Dun
|
|
|
|
|
|
|
|
/s/ Tracy
Liu
|
|
Director |
|
Tracy
Liu
|
|
|
|
|
|
|
|
/s/ Yinan
Xiang
|
|
Director |
|
Yinan
Xiang
|
|
|
112
TABLE OF CONTENTS
Note 1 Description Of BusinessNote 2 Summary Of Significant Accounting PoliciesNote 3 Accounts ReceivableNote 4 InventoryNote 5 Property, Plant and Equipment, NetNote 6 Short-term BorrowingsNote 7 Other Payable and Accrued ExpensesNote 8 Investors DepositsNote 9 Warrant LiabilityNote 10 Other Long-term LiabilitiesNote 11 Equity Method InvestmentNote 12 Related Party Balances and TransactionsNote 13 LeasesNote 14 Common StockNote 15 Redeemable Convertible Preferred StockNote 16 Stock-based CompensationNote 17 Income TaxesNote 18 Commitments and ContingenciesNote 19 Restricted Net AssetsNote 20 Subsequent EventsNote 21 Parent Company Only Condensed Financial InformationItem 16. Form 10-k Summary