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, 2018
or
☐
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from _________ to _____________
Commission file number: 001-38273 0
ACM Research, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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94-3290283
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(State
or Other Jurisdiction of Incorporation or
Organization)
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(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,
if any, every Interactive Data file required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files). Yes ☑
No ☐
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, 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
☐
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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
aggregate market value on June 39, 2018 (the last business day of
the registrant’s most recently completed second quarter), of
the voting common equity held by non-affiliates of the registrant,
computed by reference to the closing price of the stock on that
date, was $10.78. The registrant does not have non-voting common
equity outstanding.
Indicate
the number of shares outstanding of each of the registrant’s
classes of common stock, as of the latest practicable
date.
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Class
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Number
of Shares Outstanding
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Class A Common Stock, $0.0001 par value
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14,176,690 shares outstanding as of March 8, 2019
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Class B Common Stock, $0.0001 par value
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1,898,423 shares outstanding as of March 8, 2019
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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, 2018. Portions of such proxy statement are incorporated by
reference into Part III of this Annual Report on Form
10-K.
TABLE OF CONTENTS
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PART I
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Item 1
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Business
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3
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Item 1A
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Risk Factors
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14
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Item 2
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Properties
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37
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Item 3
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Legal Proceedings
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38
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PART II
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Item 5
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Market for Registrant’s Common Equity, Related Stockholder
Matters and
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Issuer Purchases of Equity Securities
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39
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Item 7
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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40
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Item 8
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Financial Statements and Supplementary Data
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63
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Item 9A
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Controls and Procedures
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98
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PART III
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Item 10
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Directors, Executive Officers and Corporate Governance
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99
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Item 11
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Executive Compensation
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99
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Item 12
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Security Ownership of Certain Beneficial Owners and Management
and
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Related Stockholder Matters
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99
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Item 13
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Certain Relationships and Related Transactions, and Director
Independence
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99
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Item 14
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Principal Accountant Fees and Services
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99
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PART IV
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Item 15
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Exhibits and Financial Statement Schedules
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100
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Signatures
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102
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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. For convenience, these
trademarks appear in this report without ™ symbols, but that
practice does not mean that we will not assert, to the fullest
extent under applicable law, our rights to the 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
This
report contains statements reflecting our views about our future
performance that constitute “forward-looking
statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are
generally identified through the inclusion of words such as
“anticipate,” “believe,”
“contemplate,” “estimate,”
“expect,” “forecast,” “intend,”
“may,” “objective,” “outlook,”
“plan,” “potential,” “project,”
“seek,” “should,” “strategy,”
“target” or “will” or variations of such
words or similar expressions. All statements addressing our future
operating performance, and statements addressing events and
developments that we expect or anticipate will occur in the future,
are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking
statements are based upon currently available information,
operating plans, and projections about future events and trends.
This report also contains statistical data and estimates based on
independent industry publications or other publicly available
information, as well as other information based on our internal
sources. Forward-looking statements and statistical estimates
inherently involve risks and uncertainties that could cause actual
results to differ materially from those predicted or expressed in
this report. These risks and uncertainties include those described
below in “Item 1A. Risk Factors.” Investors are
cautioned not to place undue reliance on any forward-looking
statements or statistical estimates, which speak only as of the
date they are made. We undertake no obligation to update any
forward-looking statement or statistical estimate, whether as a
result of new information, future events or otherwise.
2
PART I
Item
1.
Business
Overview
We
supply advanced, innovative capital equipment developed for the
global semiconductor industry. Fabricators of advanced integrated
circuits, or chips, can use our single-wafer wet-cleaning tools in
numerous steps to improve product yield, even at increasingly
advanced process nodes. We have designed these tools for use in
fabricating foundry, logic and memory chips, including dynamic
random-access memory (or DRAM) and 3D NAND-flash memory chips. We
also develop, manufacture and sell a range of advanced packaging
tools to wafer assembly and packaging customers.
Selling
prices for our single-wafer wet-cleaning tools range from $2
million to more than $5 million. Revenue from single-wafer
wet-cleaning tools totaled $68.5 million, or 92% of total revenue,
in 2018 and $27.1 million, or 74% of total revenue, in 2017. Our
customers for single-wafer wet-cleaning tools include Semiconductor
Manufacturing International Corporation, Shanghai Huali
Microelectronics Corporation, SK Hynix Inc. and Yangtze Memory
Technologies Co., Ltd.
We
focus our selling efforts on establishing a referenceable base of
leading foundry, logic and memory chip makers, whose use of our
products can influence decisions by other manufacturers. We believe
this customer base will help us penetrate the mature chip
manufacturing markets and build credibility with additional
industry leaders. Using a “demo-to-sales” process, we
have placed evaluation equipment, or “first tools,”
with a number of selected customers. Since 2009 we have delivered
more than 55 single-wafer wet cleaning tools, more than 50 of which
have been accepted by customers and thereby generated revenue to us
and the balance of which are awaiting customer acceptance should
contractual conditions be met.
Since
our formation in 1998, we have focused on building a strategic
portfolio of intellectual property to support and protect our key
innovations. Our wet-cleaning equipment has been developed using
our key proprietary technologies:
●
Space Alternated Phase Shift, or SAPS,
technology for flat and patterned wafer surfaces.
Introduced
in 2009, SAPS technology employs alternating phases of megasonic
waves to deliver megasonic energy 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 20nm and lower.
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Timely Energized Bubble Oscillation, or TEBO,
technology for patterned wafer surfaces at advanced process
nodes
. Introduced in March 2016, TEBO technology has been
developed to provide effective, damage-free cleaning for 2D and 3D
patterned wafers with fine feature sizes. 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 TEBO technology can be applied in manufacturing
processes for patterned chips with 3D architectures having aspect
ratios as high as 60-to-1.
●
Tahoe technology for cost and environmental
savings
. Introduced in August 2018, Tahoe technology
delivers high cleaning performance using significantly less
sulfuric acid and hydrogen peroxide than is typically consumed by
conventional high-temperature single-wafer cleaning
tools.
We have
been issued more than 220 patents in the United States, the
People’s Republic of China or PRC, Japan, Korea, Singapore
and Taiwan.
We
conduct substantially all of our product development,
manufacturing, support and services in the PRC. All of our tools
are built to order at our manufacturing facilities in Shanghai,
which encompass 86,000 square feet of floor space for production
capacity. Our experience has shown that chip manufacturers in the
PRC and throughout Asia demand equipment meeting their specific
technical requirements and prefer building relationships with local
suppliers. We will continue to seek to leverage our local presence
to address the growing market for semiconductor manufacturing
equipment in the region by working closely with regional chip
manufacturers to understand their specific requirements, encourage
them to adopt our SAPS, TEBO and Tahoe technologies, and enable us
to design innovative products and solutions to address their
needs.
3
Our Technology and Product Offerings
Single Wafer Wet Cleaning Equipment for Front End Production
Processes
Chip
fabricators can use our single-wafer wet-cleaning tools in numerous
steps to improve product yield during the front-end production
process, during which individual devices are patterned in the chip
prior to being interconnected on the wafer. Based on our review of
third-party reports and other information, we estimate that the
global market for single wafer wet cleaning tools will increase
from $3.1 billion in 2018 to $4.3 billion in 2023, representing a
compound annual growth rate of 6.8%. We estimate our Ultra-C SAPS,
TEBO and Tahoe product offerings address approximately 50% of this
market.
Our
wet-cleaning equipment has been developed using our proprietary
SAPS, TEBO and Tahoe technologies, which allow our tools to remove
random defects from a wafer surface effectively, without damaging a
wafer or its features, even at an increasingly advanced process
nodes (the minimum line widths on a chip) of 22 nanometers, or
nm, or less. We use 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 compound semiconductor, quartz, sapphire,
glass, and plastics.
SAPS
Technology, Applications and Equipment
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 20nm and below. These trials show
that SAPS technology has an even greater relative advantage over
conventional jet spray technology for cleaning defects between 50
and 65nm in size, and we expect the relative benefits of SAPS will
continue to apply in cleaning even smaller defect
sizes.
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.
4
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
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We
currently offer two principal 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
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. The sales prices of our SAPS tools generally range
between $2.5 million and $5.0 million, although the sales price of
a particular tool will vary depending upon the required
specifications.
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5
SAPS II (released in 2011).
Highlights of our SAPS II equipment
include:
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●
compact design,
with footprint of 2.65m x 4.10m x 2.85m (WxDxH), requiring limited
clean room floor space;
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up
to 8 chambers, providing throughput of up to 225 wafers per
hour;
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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.
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SAPS V (released in 2014)
.
SAPS V includes SAPS II features with
the following upgrades:
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●
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;
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chemical
supply system integrated into mainframe;
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inline
mixing method replaces tank auto-changing, reducing process time;
and
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improved
drying technology using hot isopropyl alcohol and de-ionized
water.
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TEBO
Technology,
Applications and Equipment
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TEBO Technology
We
developed TEBO technology for application in wet wafer cleaning
during the fabrication of 2D and 3D 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.
6
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 Fin
Field Effect Transistors or FinFET, DRAM, 3D NAND and 3D cross
point memory, and we expect it will be applicable to other 3D
architectures 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:
We estimate that TEBO
technology can be applied in as many as 50 steps in the fabrication
of a DRAM chip, consisting of up to 10 steps in cleaning ISO
structures, 20 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, we estimate that 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. The sales prices of our TEBO tools generally 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:
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●
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.
|
7
Ultra C TEBO II (released in 2016).
Highlights:
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● 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.
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Ultra C TEBO V (released in 2016).
Highlights
of our Ultra C TEBO V
equipment include:
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● 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.
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Tahoe
Overview
Our
Ultra-C Tahoe wafer cleaning tool can deliver high cleaning
performance using significantly less sulfuric acid and hydrogen
peroxide than is typically consumed by conventional
high-temperature single-wafer cleaning tools. During normal
single-wafer cleaning processes, only a fraction of the acid reacts
with the wafer surface, while the majority is wasted as acid spins
off the wafer and cannot be recycled. In addition to providing cost
savings resulting from vastly reduced acid consumption, Ultra-C
Tahoe meets the needs of customers who face increased environmental
regulations and demand new, more environmentally-friendly tools. We
announced our first purchase order for an Ultra C Tahoe tool in
August 2018, and we delivered the tool to a strategic customer in
January of 2019.
Single-Wafer Tools for Back-End Assembly and Packaging
We
leverage our technology and expertise to provide a range of
single-wafer tools for back-end wafer assembly and packaging
factories. We develop, manufacture and sell a wide range of
advanced packaging tools, such as coaters, developers, photoresist
strippers, scrubbers, wet etchers and copper-plating tools. We
focus on providing custom-made, differentiated equipment that
incorporates customer-requested features at a competitive price.
Selling prices for these tools range from approximately $500,000 to
more than $2 million.
|
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. 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.
|
8
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, 2018, chip
fabricators had purchased and deployed more than 55 of our
single-wafer wet cleaning tools. To date, all of our sales of
single-wafer wet cleaning equipment for front-end manufacturing
have been to customers located in Asia, and we anticipate that a
substantial majority of our revenue from these products 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 single-wafer wet
cleaning equipment with a small number of leading chip
manufacturers that are driving technology trends and key capability
implementation. In 2018, 85.7% of our revenue was derived from
three customers: Yangtze Memory Technologies Co., Ltd., a leading
PRC memory chip company, together with one of its subsidiaries,
accounted for 38.8% of our revenue; Shanghai Huali Microelectronics
Corporation, a leading PRC foundry, accounted for 23.6% of our
revenue; and SK Hynix Inc., a leading Korean memory chip company,
accounted for 23.3% of our revenue. In 2017, 55.2% of our revenue
was derived from four customers: SK Hynix Inc. accounted for 18.1%
of our revenue; Shanghai Integrated Circuit Research and
Development Center Ltd., a public research consortia for the
Chinese semiconductor industry, accounted for 14.1% of our revenue;
JiangYin ChangDian Advanced Packaging Co. Ltd., a leading PRC
foundry, accounted for 12.8% of our revenue; and Yangtze Memory
Technologies Co., Ltd., together with one of its subsidiaries,
accounted for 10.2% of our revenue.
Based
on our market experience, we believe that implementation of our
single-wafer wet cleaning equipment by one of our selected chip
manufacturers will attract and encourage other manufacturers to
evaluate our equipment, because the leading company’s
implementation will serve as validation of our equipment and could
enable the other manufacturers to shorten their evaluation
processes. We placed our first SAPS 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 tools
following the customer’s completion of its qualification
process. We believe that the period from new product introduction
to high volume manufacturing could range from one to several
years.
For our
back-end wafer assembly and packaging customers, we focus on
providing custom-made, differentiated single wafer wet cleaning
equipment that incorporates a customer’s requested features
at a competitive price. Our primary customers of these products in
2018 included: Deca Technologies, a wafer-level interconnect
foundry with headquarters in Arizona and manufacturing in the
Phillipines that is a majority-owned, independent subsidiary of
Cypress Semiconductor Corp.; JiangYin ChangDian Advanced Packaging
Co. Ltd., a leading PRC foundry that is also one of the largest
customers of our front end of line equipment; Nantong Tongfu
Microelectronics Co., Ltd., a PRC-based chip assembly and testing
company that is a subsidiary of Nantong Fujitsu Microelectronics
Co., Ltd.; and Wafer Works Corporation, a leading wafer supplier
based in the PRC.
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.
9
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 two 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 Shanghai facilities. Our
first 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
September 2018, we began production at our second factory, located
ten miles from our Shanghai headquarters. The new facility provides
an additional 50,000 square feet of floor space for production
capacity. We plan to shift an increasing portion of our future
production to this factory based on its modernized
capabilities.
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. To supplement our internal expertise, we also collaborated
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.
10
For the
foreseeable future we are focusing on enhancing our Ultra C
SAPS, TEBO and Tahoe 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 and additional 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. Our research and development
expense totaled $10.4 million, or 13.9% of revenue in 2018 and
$5.1 million, or 14.1% of revenue in 2017. 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, 2018, we had 20 issued patents, and 20 patents
pending, in the United States. These patents carry expiration dates
from 2022 through 2038. 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 have been issued more than 220 patents in the
United States, the People’s Republic of China or PRC, Japan,
Korea, Singapore and Taiwan.
We
currently manufacture advanced single-wafer cleaning systems
equipped with our SAPS, TEBO and Tahoe 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 31 patents granted internationally
protecting our SAPS technologies. We also have filed 9
international patent applications for key TEBO technologies, and 2
for Tahoe, 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 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 electro polishing process. Our technology was a breakthrough in
electro-chemical-copper-planarization technology when it was first
introduced, because it can polish, stress-free, copper layers used
in copper low-K interconnects. Our innovations in SFP and ECP are
reflected in US Patent Numbers 6638863 and 8518224, and their
corresponding international counterparts.
11
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 includes 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 Beijing Sevenstar
Science & Technology Co., Ltd., DNS Electronics LLC, Lam
Research Corp., Mujin Electronics Co., Ltd., SEMES Co. Ltd. and
Tokyo Electron 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;
12
●
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 began
fabricating chips for the 10nm node in 2017 and the 7nm node in
2018, and we have one customer that currently is evaluating
implementation of our equipment at these 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, TEBO and Tahoe
technologies, which we believe offer better performance, much less
chemical consumption, and lower cost of consumables, including at
advanced process nodes of 22nm or less.
Employees
As of
December 31, 2018, we had 273 full-time equivalent employees, of
whom 22 were in administration, 84 were in manufacturing, 96 were
in research and development, and 71
were in sales and marketing and
customer services. Of these employees, 253 were located in the
mainland China and Taiwan, 17 were located in Korea and 3 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.
Available Information
We are
required to file annual, quarterly and current reports, proxy
statements and other information with the SEC. The SEC maintains a
website at www.sec.gov that contains reports, proxy and information
statements, and other information regarding issuers that file
electronically with the SEC.
Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, proxy statements and amendments to
those documents filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, or the Exchange Act,
are also available free of charge on our website at
www.americanrenal.com as soon as reasonably practicable after such
reports are electronically filed with or furnished to the
SEC.
Investors
should note that we currently announce material information to our
investors and others using filings with the SEC, press releases,
public conference calls, webcasts or our website (www.acmrcsh.com),
including news and announcements regarding our financial
performance, key personnel, our brands and our business strategy.
Information that we post on our corporate website could be deemed
material to investors. We encourage investors to review the
information we post on these channels. We may from time to time
update the list of channels we will use to communicate information
that could be deemed material and will post information about any
such change on www.acmrcsh.com. The information on our website is
not, and shall not be deemed to be, a part hereof or incorporated
into this or any of our other filings with the SEC.
13
Item
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, 2018 we had an accumulated deficit of $3.4 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 $74.6 million in 2018 and $36.5 million in
2017. In 2018 we generated net income of $6.6 million, as compared
to an operating loss of $872,000 in 2017. Our ability to generate
significant revenue and operate profitably depends upon our ability
to commercialize our Ultra C single-wafer wet cleaning equipment.
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, TEBO and Tahoe
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.
14
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;
15
●
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.
16
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, TEBO and Tahoe 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, TEBO and Tahoe 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, TEBO and Tahoe 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, TEBO
and Tahoe 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.
17
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, TEBO and Tahoe 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.
18
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
most of our revenue from a limited number of customers. In 2018,
85.7% of our revenue was derived from three customers: Yangtze
Memory Technologies Co., Ltd., a leading PRC memory chip company,
together with one of its subsidiaries, accounted for 38.8% of our
revenue; Shanghai Huali Microelectronics Corporation, a leading PRC
foundry, accounted for 23.6% of our revenue; and SK Hynix Inc., a
leading Korean memory chip company, accounted for 23.3% of our
revenue. In 2017, 55.2% of our revenue was derived from four
customers: SK Hynix Inc. accounted for 18.1% of our revenue;
Shanghai Integrated Circuit Research and Development Center Ltd., a
public research consortia for the Chinese semiconductor industry,
accounted for 14.1% of our revenue; JiangYin ChangDian Advanced
Packaging Co. Ltd., a leading PRC foundry, accounted for 12.8% of
our revenue; and Yangtze Memory Technologies Co., Ltd., together
with one of its subsidiaries, accounted for 10.2% of our
revenue.
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.
19
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
some 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
$4.0 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 deliver evaluation equipment, or a “first
tool,” we may not recognize revenue or receive payment for
the tool for 24 months or longer. 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
20
●
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;
21
●
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.
As of December 31, 2018, we had accrued $1.7 million in 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.
22
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, 2014 and 2018. 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, TEBO and
Tahoe. 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.
23
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 28%
during 2017 and by an additional 35% during 2018. 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 Officer, 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.
24
Our ability to utilize certain U.S. and state net operating loss
carryforwards may be limited under applicable tax
laws.
As of
December 31, 2018, we had net operating loss carryforward amounts,
or NOLs, of $17 million for U.S. federal income tax purposes and
$714,000 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.
25
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 2017 and 2018 were made to customers outside the
United States. Our manufacturing center has been located in
Shanghai 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;
26
●
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 costs are denominated in other
currencies, principally the Chinese Renminbi and, to a lesser
extent, the Korean Won. 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 government trade policies could limit the
demand for our tools and increase the cost of our tools or
adversely impact our supply chain.
General
trade tensions between the U.S. and PRC escalated in 2018. In each
of July, August and September 2018, the U.S. government imposed a
round of new or higher tariffs on specified imported products
originating from the PRC in response to what the U.S. government
characterizes as unfair trade practices. The PRC government
responded to each of these three rounds of U.S. tariff
changes by imposing new or higher tariffs on specified
products imported from the United States. Higher duties on existing
tariffs and further rounds of tariffs have been announced or
threatened by U.S. and PRC leaders.
The
imposition of tariffs by the U.S. and PRC governments and the
surrounding economic uncertainty may negatively impact the
semiconductor industry, including reducing the demand of
fabricators for capital equipment such as our tools. Further
changes in trade policy, tariffs, additional taxes, restrictions on
exports or other trade barriers, or restrictions on supplies,
equipment, and raw materials including rare earth minerals, may
limit the ability of our customers to manufacture or sell
semiconductors or to make the manufacture or sale of semiconductors
more expensive and less profitable, which could lead those
customers to fabricate fewer semiconductors and to invest less in
capital equipment such as our tools. In addition, if the PRC were
to impose additional tariffs on raw materials, subsystems or other
supplies that we source from the United States, our cost for those
supplies would increase. As a result of any of the foregoing
events, the imposition or new or additional tariffs may limit our
ability to manufacture tools, increase our selling and/or
manufacturing costs, decrease margins, or inhibit our ability to
sell tools or to purchase necessary equipment and supplies, which
could have a material adverse effect on our business, results of
operations, or financial conditions.
27
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.
28
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.
In connection with the audit of our consolidated financial
statements for 2017, our management and auditors identified a
material weakness in our internal control over financial reporting
that, even after remediation, 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.
29
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. During the
nine months ended September 30, 2018, we took remedial measures to
improve the effectiveness of our controls, including by hiring
additional accounting and finance personnel and by engaging outside
consulting firms, which our management considered, as of September
30, 2018, to have fully remediated the identified material
weakness.
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 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 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, 2018 and 2017. 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.
30
Risks Relating to Our Intellectual Property
Our success depends on our ability to protect our intellectual
property, including our SAPS, TEBO and Tahoe
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, TEBO and Tahoe 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.
31
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.
32
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.
33
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
involve significant ongoing costs and can 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.
34
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 8, 2019, stockholders who hold
shares of Class B common stock, who consist principally of our
executive officers, employees, directors and their respective
affiliates, collectively held 72.8% 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.
Delaware law and provisions in our 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 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
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 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.
35
Our 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
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 charter
related to choice of forum. The choice of forum provision in our
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 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.
The
experience of the current members of our management team in
managing a publicly traded company, interacting with public company
investors and complying with the increasingly complex laws
pertaining to public companies is limited to their experience with
our company since our initial public offering in November 2017. 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.
36
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.
Item 2: Properties
We have
occupied our current corporate headquarters in Fremont, California,
since February 2008, under a lease that, as amended in February
2019, extends through March 2021.
We
conduct research and development, service support operations, and a
portion of manufacturing in our ACM Shanghai headquarters. This
facility consists of 60,000 square feet, of which 36,000 square
feet are allocated for manufacturing, and is located in the
Zhangjiang Hi Tech Park in Shanghai. 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.
We extended the lease for a 60-month term from January 1, 2018
until January 1, 2022.
37
In
January 2018, ACM Shanghai entered into an operating lease for a
second manufacturing space located in Shanghai, ten miles from its
headquarters. The lease covers a total of 103,318 square feet, of
which 50,000 square feet are allocated for production. The lease
term is five years and expires on January 15, 2022.
In
addition, we provide sales support and customer service operations
from leased office space in Jiangying and Wuxi in the PRC, and
Icheon in Korea.
Item 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.
38
PART II
Item 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 Class B common stock is not listed or traded on
any stock exchange.
Holders of Common Stock
As of
March 8, 2019, there were 14,176,690 holders of record of shares of
Class A common stock and 1,898,423 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.
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 2019
Annual Meeting of Stockholders and is incorporated by reference
herein.
Sales of Unregistered Securities
Set
forth below is information regarding shares of capital stock we
issued in 2018 that were not registered under the Securities Act of
1933:
(1)
We issued an
aggregate of 94,694 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 per share.
(2)
In March 2018 we
issued 397,502 shares of Class A common stock pursuant to an
exercise of a warrant issued in March 2017 in exchange for a senior
secured promissory note in the principal amount of approximately $3
million.
The
offer, sale and issuance of the securities described in paragraph
(1) were exempt from registration under the Securities Act of 1933
by virtue of Section 4(a)(2) thereof (or Regulation D promulgated
thereunder) because the issuance of securities to the recipients
did not involve a public offering, or in reliance on Rule 701
because the transaction was pursuant to a contract relating to
compensation as provided under such rule. The offer, sale and
issuance of the security described in paragraph (2) was 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 the transactions
under paragraphs (1) and (2) 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.
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.
39
Item 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 2 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
supply advanced, innovative capital equipment developed for the
global semiconductor industry. Fabricators of advanced integrated
circuits, or chips, can use our single-wafer wet-cleaning tools in
numerous steps to improve product yield, even at increasingly
advanced process nodes. We have designed these tools for use in
fabricating foundry, logic and memory chips, including dynamic
random-access memory (or DRAM) and 3D NAND-flash memory chips. We
also develop, manufacture and sell a range of advanced packaging
tools to wafer assembly and packaging customers.
Selling
prices for our single-wafer wet-cleaning tools range from $2
million to more than $5 million. Revenue from single-wafer
wet-cleaning tools totaled $68.5 million, or 92% of total revenue,
in 2018 and $27.1 million, or 74% of total revenue, in 2017. Our
customers for single-wafer wet-cleaning tools include Semiconductor
Manufacturing International Corporation, Shanghai Huali
Microelectronics Corporation, SK Hynix Inc. and Yangtze Memory
Technologies Co., Ltd.
We
focus our selling efforts on establishing a referenceable base of
leading foundry, logic and memory chip makers, whose use of our
products can influence decisions by other manufacturers. We believe
this customer base will help us penetrate the mature chip
manufacturing markets and build credibility with additional
industry leaders. Using a “demo-to-sales” process, we
have placed evaluation equipment, or “first tools,”
with a number of selected customers. Since 2009 we have delivered
more than 55 single-wafer wet cleaning tools, more than 50 of which
have been accepted by customers and thereby generated revenue to us
and the balance of which are awaiting customer acceptance should
contractual conditions be met.
Since
our formation in 1998, we have focused on building a strategic
portfolio of intellectual property to support and protect our key
innovations. Our wet-cleaning equipment has been developed using
our key proprietary technologies:
●
Space Alternated
Phase Shift, or SAPS, technology for flat and patterned wafer
surfaces, which employs alternating phases of megasonic waves to
deliver megasonic energy in a highly uniform manner on a
microscopic level;
●
Timely Energized
Bubble Oscillation, or TEBO, technology for patterned wafer
surfaces at advanced process nodes, which provides effective,
damage-free cleaning for 2D and 3D patterned wafers with fine
feature sizes; and
●
Tahoe technology
for cost and environmental savings, which delivers high cleaning
performance using significantly less sulfuric acid and hydrogen
peroxide than is typically consumed by conventional
high-temperature single-wafer cleaning tools.
We have
been issued more than 220 patents in the United States, the
People’s Republic of China or PRC, Japan, Korea, Singapore
and Taiwan.
We
conduct substantially all of our product development,
manufacturing, support and services in the PRC. All of our tools
are built to order at our manufacturing facilities in Shanghai,
which encompass 86,000 square feet of floor space for production
capacity. Our experience has shown that chip manufacturers in the
PRC and throughout Asia demand equipment meeting their specific
technical requirements and prefer building relationships with local
suppliers. We will continue to seek to leverage our local presence
to address the growing market for semiconductor manufacturing
equipment in the region by working closely with regional chip
manufacturers to understand their specific requirements, encourage
them to adopt our SAPS, TEBO and Tahoe technologies, and enable us
to design innovative products and solutions to address their
needs.
40
Corporate Background
ACM
Research was incorporated in California in 1998 and redomesticated
in Delaware in 2016. We perform strategic planning, marketing, and
financial activities at our global corporate headquarters in
Fremont, California.
Initially
we focused on developing tools for chip 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.
To help
us establish and build relationships with chip manufacturers in the
PRC, in 2006 we moved our operational center to Shanghai and began
to conduct our business through our subsidiary 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 2009
we introduced SAPS megasonic technology, which can be applied in
wet wafer cleaning at numerous steps during the chip fabrication
process. In 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 August 2018, we introduced the Ultra-C Tahoe wafer
cleaning tool, which delivers high cleaning performance with
significantly less sulfuric acid than typically consumed by
conventional high temperature single-wafer cleaning
tools.
In
December 2017 we formed a wholly owned subsidiary in the Republic
of Korea, ACM Research Korea CO., LTD., to serve our customers
based in the Republic of Korea and perform sales, marketing, and
research and development activities. We currently conduct the
majority of our product development, support and services, and
substantially all of our manufacturing at ACM Shanghai. Our
Shanghai operations position us to be near many of our current and
potential new customers in the PR (including Taiwan), Korea and
throughout Asia, providing convenient access and reduced shipping
and manufacturing costs.
In 2011
ACM Shanghai formed a wholly owned subsidiary in the PRC, ACM
Research (Wuxi), Inc., to manage sales and service operations. 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 2018, we announced the opening of a second factory in the
Pudong region of Shanghai. The new facility has a total of 50,000
square feet of available floor space for production capacity. This
is in addition to our first factory in the Pudong Region of
Shanghai, which has a total of 36,000 square feet of available
floor space.
Recent Equity Transactions
Issuance and Subsequent Exercise of Warrant
In
December 2016 Shengxin (Shanghai) Management Consulting Limited
Partnership, or SMC, paid 20,123,500 RMB ($3.0 million as of the
date of funding) to ACM Shanghai for investment pursuant to terms
to be subsequently negotiated. SMC is a PRC limited partnership
owned by Jian Wang and other employees of our subsidiary ACM
Shanghai. Jian Wang, who is the general partner of SMC, is our Vice
President, Research and Development and the brother of David H.
Wang, who is our Chief Executive Officer, President and Chair of
the Board. In connection with that investment, we issued to SMC in
March 2017 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. The warrant was exercisable 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. In March
2018 we entered into a warrant exercise agreement with ACM Shanghai
and SMC pursuant to which SMC exercised the SMC warrant in full by
issuance to us of a senior secured promissory note in the principal
amount of $3.0 million. We transferred the SMC note to ACM
Shanghai, in exchange for an intercompany promissory note issued by
ACM Shanghai to us in the principal amount of $3.0 million. Each of
the two notes bears interest at a rate of 3.01% per annum and
matures on August 17, 2023. As security for its performance of its
obligations under its note, SMC granted to ACM Shanghai a security
interest in the 397,502 shares of Class A common stock issued to
SMC upon its exercise of the warrant.
41
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.
IPO and Concurrent Private Placements
In
November 2017 we issued 2,233,000 shares of Class A common stock
and received net proceeds of $11.7 million from our initial public
offering, or the IPO, and concurrently we issued an additional
1,333,334 shares of Class A common stock through a private
placement for net proceeds of $7.1 million.
Acquisition of Outstanding Minority Interests in ACM
Shanghai
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. In 2017 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.
42
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 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 from $2 million to more
than $5 million for our single-wafer wet cleaning 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, TEBO and
Tahoe solutions use common 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 milestones of a
purchase order. Based on our limited experience with repeat sales
of our 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.
43
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 2018 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 Accounting Standards Update, or
ASU, No. 2014-09,
Revenue from
Contracts with Customers (Topic 606)
, of the Financial
Accounting Standards Board, or FASB, regarding the recognition,
presentation and disclosure of revenue in our financial statements
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 2018 and 2017, we received
payments for parts and labor for service activities provided from
time to time, but as of December 31, 2018 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.
44
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 46.2% in 2018 and 47.2% in 2017. 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 range 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.
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.
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 12.9% of our revenue in 2018
and 15.1% of our revenue in 2017. 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.
45
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 13.9% of our revenue in 2018
and 14.1% of our revenue in 2017. 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
18% and 22% 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 10.7% of our revenue in
2018 and 16.1% of our revenue in 2017. 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, but will continue to decrease as a percentage of
our total revenue.
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 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.
46
Cost of
revenue and operating expenses during the periods presented below
have included stock-based compensation as follows:
|
|
Year Ended
December 31,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Stock-Based
Compensation Expense:
|
|
|
|
Cost of
revenue
|
$
71
|
$
21
|
|
Sales and marketing
expense
|
120
|
53
|
|
Research and
development expense
|
255
|
50
|
|
General and
administrative expense
|
2,917
|
1,499
|
|
|
$
3,363
|
$
1,623
|
We
recognized stock-based compensation expense to employees of
$0.7 million in 2018
and $0.3
million in 2017. As of December 31, 2018 and 2017, we had $2.4
million and $0.7 million of total unrecognized employee share-based
compensation expense, net of estimated forfeitures, related to
unvested share-based awards. These are expected to be recognized
over a weighted-average period of 1.62 years and 1.77 years,
respectively.
We
recognized stock-based compensation expense to non-employees of
$2.7 million in 2018 and $1.4 million in 2017. 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 four 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 third grant was made in 2014 and relates to the
development of electro copper-plating technology. The fourth grant
was made in June 2018 and related to development of
polytetrafluoroethylene. 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 $1.5 million in 2018 and $3.4 million in
2017.
●
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 $0.1
million in 2018 and in 2017.
Net Income Attributable to Non-Controlling Interests
From
January 1, 2015 to August 31, 2017, ACM Research owned
62.87% of the equity interests of ACM Shanghai, with three
non-controlling, unrelated investors holding the remainder. ACM
Research acquired all of the non-controlling interests from
minority investors in several transactions during 2017. Following
these transactions, ACM Research owned 100% of the ACM Shanghai
subsidiary.
47
How We Evaluate Our Operations
We
present information below with respect to four measures of
financial performance:
●
We define
“shipments” of tools to include (a) a
“repeat” delivery to a customer of a type of tool that
the customer has previously accepted, for which we recognize
revenue upon delivery, and (b) a “first-time”
delivery of a “first tool” to a customer on an approval
basis, for which we may recognize revenue in the future if
contractual conditions are met and customer acceptance is
received.
●
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 shipments, 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.
Shipments,
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.
Shipments
Shipments
consist of two components:
●
a shipment to a
customer of a type of tool that the customer has
previously-accepted, for which we recognize revenue when the tool
is delivered; and
●
a shipment to a
customer of a type of tool that the customer is receiving and
evaluating for the first time, in each case a “first
tool,” for which we may recognize revenue at a later date,
subject to the customer’s acceptance of the tool upon the
tool’s satisfaction of applicable contractual
requirements.
“First
tool” shipments can be made to either an existing customer
that not previously accepted that specific type of tool in the past
─ for example, a delivery of SAPS V tool to a customer that
previously had received only SAPS II tools ─ or to a new
customer that has never purchased any tool from us.
Shipments
for the year ended December 31, 2018 totaled $95.1 million, as
compared to $40.1 million of shipments in the year ended December
31, 2017.
48
The
dollar amount attributed to a “first tool” shipment is
equal to the consideration we expect to receive if any and all
contractual requirements are satisfied and the customer accepts the
tool. There are a number of limitations related to the use of
shipments in evaluating our business, including that customers have
significant discretion in determining whether to accept our tools
and their decision not to accept delivered tools is likely to
result in our inability to recognize revenue from the delivered
tools.
Adjusted EBITDA
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,
|
|
|
|
2018
|
2017
|
|
|
（in
thousands）
|
|
|
Adjusted EBITDA Data:
|
|
|
|
Net
income (loss) attributable to ACM Research, Inc.
|
$
6,574
|
$
(318
)
|
|
Interest
expense, net
|
469
|
268
|
|
Income
tax expense
|
806
|
547
|
|
Depreciation
and amortization
|
417
|
271
|
|
Stock-based
compensation
|
3,363
|
1,622
|
|
Adjusted
EBITDA
|
$
11,629
|
$
2,390
|
Adjusted
EBITDA in 2018, as compared to $2.4 million in 2017 reflected
principally an increase of $6.9 million in net income and $1.7
million increase 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.”
49
Free Cash Flow
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,
|
|
|
|
2018
|
2017
|
|
|
（in
thousands）
|
|
|
Free Cash Flow Data:
|
|
|
|
Net
cash provided by (used in) operating activities
|
$
6,909
|
$
(8,101
)
|
|
Purchase
of property and equipment
|
(1,830
)
|
(651
)
|
|
Purchase
of intangible assets
|
(241
)
|
(115
)
|
|
Free
cash flow
|
$
4,839
|
$
(8,867
)
|
Free
cash flow in 2018, as compared to 2017, reflected the factors
driving net cash provided by (used in) operating activities,
principally increase in net income, accounts payable, advance from
customers, and offset by increase in inventories, prepaid expenses.
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
Adjusted
operating income 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 and our cash holdings would be less. The
following tables reflect the exclusion of stock-based compensation,
or SBC, from line items comprising income (loss) from
operations:
|
|
Year
Ended December 31,
|
|||||
|
|
2018
|
2017
|
||||
|
|
Actual
(GAAP)
|
SBC
|
Adjusted
(Non-GAAP)
|
Actual
(GAAP)
|
SBC
|
Adjusted
(Non-GAAP)
|
|
|
(in thousands)
|
|||||
|
Adjusted Operating Income:
|
|
|
|
|
|
|
|
Revenue
|
$
74,643
|
$
-
|
$
74,643
|
$
36,506
|
$
-
|
$
36,506
|
|
Cost
of revenue
|
(40,194
)
|
(71
)
|
(40,123
)
|
(19,281
)
|
(21
)
|
(19,260
)
|
|
Gross
profit
|
34,449
|
(71
)
|
34,520
|
17,225
|
(21
)
|
17,246
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Sales
and marketing
|
(9,611
)
|
(120
)
|
(9,491
)
|
(5,500
)
|
(53
)
|
(5,447
)
|
|
Research
and development
|
(10,380
)
|
(255
)
|
(10,125
)
|
(5,138
)
|
(50
)
|
(5,088
)
|
|
General
and administrative
|
(7,987
)
|
(2,917
)
|
(5,070
)
|
(5,887
)
|
(1,499
)
|
(4,388
)
|
|
Income
(loss) from operations
|
$
6,471
|
$
(3,363
)
|
$
9,834
|
$
700
|
$
(1,623
)
|
$
2,323
|
50
Adjusted
operating income in 2018, as compared to 2017 reflected increases
in operating income of $5.8 million and stock-based compensation of
$1.7 million.
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
In May
2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic
606)
, or ASU 2014-09, which amended the existing
accounting standards for revenue recognition. ASU 2014-09
establishes principles for recognizing revenue upon the transfer of
promised goods or services to customers, in an amount that reflects
the expected consideration received in exchange for those goods or
services. ASU 2014-09 and its related clarifying ASUs are effective
for annual reporting periods beginning after December 15, 2017 and
interim periods within those annual periods.
On
January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts
with Customers, and all the related amendments, or the New Revenue
Standard, to all contracts that were not completed as of January 1,
2018 using the modified retrospective method. We do not have open
contracts that may result in any changes to revenues applying the
New Revenue Standard.
We
derive revenue principally from the sale of single-wafer wet
cleaning equipment. Revenue from contracts with customers is
recognized using the following five steps pursuant to the New
Revenue Standard:
1.
identify the
contract(s) with a customer;
2.
identify the
performance obligations in the contract;
3.
determine the
transaction price;
4.
allocate the
transaction price to the performance obligations in the contract;
and
5.
recognize revenue
when (or as) the entity satisfies a performance
obligation.
A
contract contains a promise (or promises) to transfer goods or
services to a customer. A performance obligation is a promise (or a
group of promises) that is distinct. The transaction price is the
amount of consideration a company expects to be entitled from a
customer in exchange for providing the goods or
services.
The
unit of account for revenue recognition is a performance obligation
(a good or service). A contract may contain one or more performance
obligations. Performance obligations are accounted for separately
if they are distinct. A good or service is distinct if the customer
can benefit from the good or service either on its own or together
with other resources that are readily available to the customer,
and the good or service is distinct in the context of the contract.
Otherwise performance obligations are combined with other promised
goods or services until we identify a bundle of goods or services
that is distinct. Promises in contracts which do not result in the
transfer of a good or service are not performance obligations, as
well as those promises that are administrative in nature, or are
immaterial in the context of the contract. We have addressed
whether various goods and services promised to the customer
represent distinct performance obligations. We applied the guidance
of ASC Topic 606-10-25-16 through 18 in order to verify which
promises should be assessed for classification as distinct
performance obligations. Our contracts with customers include more
than one performance obligation. For example, the delivery of a
piece of equipment generally includes the promise to install the
equipment in the customer’s facility. Our performance
obligations in connection with a sale of equipment generally
include production, delivery and installation, together with the
provision of a warranty.
51
The
transaction price is allocated to all the separate performance
obligations in an arrangement. It reflects the amount of
consideration to which we expect to be entitled in exchange for
transferring goods or services, which may include an estimate of
variable consideration to the extent that it is probable of not
being subject to significant reversals in the future based on our
experience with similar arrangements. The transaction price
excludes amounts collected on behalf of third parties, such as
sales taxes. This is done on a relative selling price basis using
standalone selling prices, or SSP. The SSP represents the price at
which we would sell that good or service on a standalone basis at
the inception of the contract. Given the requirement for
establishing SSP for all performance obligations, if the SSP is
directly observable through standalone sales, then such sales
should be considered in the establishment of the SSP for the
performance obligation. All of our products were sold in
stand-alone arrangements, we do not have observable SSPs for most
performance obligations as they are not regularly sold on a
standalone basis. Production, delivery and installation of a
product, together with provision of a warranty, are a single unit
of accounting.
We
recognize revenue when we satisfy each performance obligation by
transferring control of the promised goods or services to the
customer. Goods or services can transfer at a point in time (upon
the acceptance of the products or upon the arrival at the
destination as stipulated in the shipment terms) in a sale
arrangement. 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 tool with the same specifications
and we 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
lapsing acceptance provision and 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.
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 its revenue in
the future. As such, we have concluded that its revenue recognition
under the adoption of the New Revenue Standard will remain the same
as previously reported and will not have material impacts to its
consolidated financial statements.
We
incur costs related to the acquisition of its contracts with
customers in the form of sales commissions. Sales commissions are
paid to third party representatives and distributors. Contractual
agreements with these parties outline commission structures and
rates to be paid. Generally speaking, the contracts are all
individual procurement decisions by the customers and are not for
significant periods of time, nor do they include renewal
provisions. As such, all contracts have an economic life of
significantly less than a year. Accordingly, we expense sales
commissions when incurred in accordance with the practical
expedient in the New Revenue Standard when the underlying contract
asset is less than one year. These costs are recorded within sales
and marketing expenses.
Generally,
all contracts have expected durations of one year or less.
Accordingly, we apply the practical expedient allowed in the New
Revenue Standard and does not disclose information about remaining
performance obligations that have original expected durations of
one year or less.
We do
not incur any costs to fulfill the contracts with customers that
are not already reported in compliance with another applicable
standard (for example, inventory or plant, property and
equipment).
52
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 our
initial public offering in November 2017, or the IPO, 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, 2018 and 2017, 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,
|
||
|
|
2018
|
|
2017
|
|
Risk-free interest rate
|
2.55%-2.96%
|
|
2.21%-2.22%
|
|
Expected volatility
|
39.14%-43.00%
|
|
28.62%-29.18%
|
|
Expected term (in years)
|
6.25
|
|
6.25
|
|
Expected dividend yield
|
0%
|
|
0%
|
53
For
non-employee stock option grants made during the years ended
December 31, 2018 and 2017, 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,
|
||
|
|
2018
|
|
2017
|
|
Risk-free interest
rate
|
2.39%-2.94%
|
|
1.62%-2.43%
|
|
Expected
volatility
|
40.24%-45.48%
|
|
28.71% - 29.41%
|
|
Expected
term ( in years)
|
2.58-5.36
|
|
3.58-6.25
|
|
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, 2017, 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
|
|
January
25, 2018
|
500,000
|
5.31
|
5.31
|
|
August
1, 2018
|
245,700
|
13.85
|
13.85
|
As of
December 31, 2018, the unrecognized compensation cost related
to outstanding options was $2.4 million and is expected to be
recognized as expense over a weighted-average of 1.62 years. 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, 2018, we had outstanding stock options to acquire an
aggregate of 3,715,779 shares of Class A common stock with an
intrinsic value of $27.1 million. Of those outstanding options,
(a) 2,273,880 shares had vested as of December 31, 2018,
representing an intrinsic value of $20.0 million and
(b) 1,441,899 shares were unvested, representing an intrinsic
value of $7.1 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 at December 31, 2018 and 2017. 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.
54
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 2018 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.
55
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,
2018 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, and the functional currency of
our subsidiary in Korea is the Korean Won. 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.
56
Recent Accounting Pronouncements
For a
discussion of recent accounting pronouncements impacting our
company, see Note 2 in the Notes to Consolidated Financial
Statements include herein under “Item 8. Financial Statements
and Supplementary Data.”
Results of Operations
The
following table sets forth our results of operations for the
periods presented, as percentages of revenue.
|
|
Year Ended December 31,
|
|
|
|
2018
|
2017
|
|
Revenue
|
100.0
%
|
100.0
%
|
|
Cost of revenue
|
53.8
|
52.8
|
|
Gross margin
|
46.2
|
47.2
|
|
Operating expenses:
|
|
|
|
Sales and marketing
|
12.9
|
15.1
|
|
Research and development
|
13.9
|
14.1
|
|
General and administrative
|
10.7
|
16.1
|
|
Total operating expenses, net
|
37.5
|
45.3
|
|
Income (loss) from operations
|
8.7
|
1.9
|
|
Interest expense, net
|
(0.6
)
|
(0.7
)
|
|
Other income (expense), net
|
1.7
|
(2.4
)
|
|
Equity
income in net income of affiliates
|
0.2
|
-
|
|
Income (loss) before income taxes
|
9.9
|
(1.1
)
|
|
Income tax expense
|
(1.1
)
|
(1.5
)
|
|
Net
income (loss)
|
8.8
|
(2.6
)
|
|
Less: Net income (loss) attributable to noncontrolling interests
|
-
|
(1.5
)
|
|
Net
income( loss) attributable to ACM Research, Inc.
|
8.8
%
|
(1.1
)%
|
Comparison of Year Ended December 31, 2018 and 2017
Revenue
|
|
Year
Ended
December
31,
|
% Change
|
|
|
|
2018
|
2017
|
2018 v 2017
|
|
|
(in
thousands)
|
|
|
|
Revenue
|
$
74,643
|
$
36,506
|
104
%
|
Revenue for the year ended December 31, 2018 compared to the year
ended December 31, 2017 increased by $38.1 million. The increase
was due to a $41.4 million increase in revenue from single-wafer
wet cleaning tools to our front-end customers, offset in part by a
$3.2 million decline in revenue of tools to our back-end customers.
Our revenue for 2018 compared to 2017 reflected significant growth
for three of our large front-end customers, partly offset by a
decline at one front-end and one back-end customer.
57
Cost
of Revenue and Gross Margin
|
|
Year
Ended
December
31,
|
% Change
|
|
|
|
2018
|
2017
|
2018 v 2017
|
|
|
(in
thousands)
|
|
|
|
Cost of
revenue
|
$
40,194
|
$
19,281
|
108
%
|
|
Gross
profit
|
$
34,449
|
$
17,225
|
100
|
|
Gross
margin
|
46.2
%
|
47.2
%
|
(1.0
)%
|
Cost of
revenue increased $20.9 million, and gross profit increased $17.2
million, for the year ended December 31, 2018 compared to
2017, reflecting the growth in sales. Gross margin decreased by 100
basis points primarily due to sales of relatively lower-margin
tools to new customers for the year ended December 31, 2018. The
higher margin in 2017 was primarily due to one system manufactured
under the government subsidies (see “—Key Components of
Results of Operations—PRC Government Research and Development
Funding”), which were sold for the amounts of $1.6 million
for the years ended December 31, 2017. Costs associated with these
systems were recorded as research and development expenses as the
relevant product development on these systems was applied to future
systems.
Operating
Expenses
|
|
Year Ended
December
31,
|
% Change
|
|
|
|
2018
|
2017
|
2018 v 2017
|
|
|
(in
thousands)
|
|
|
|
Sales and marketing
expense
|
$
9,611
|
$
5,500
|
75
%
|
|
Research and
development expense
|
10,380
|
5,138
|
102
|
|
General and
administrative expense
|
7,987
|
5,887
|
36
|
|
Total operating
expenses, net
|
$
27,978
|
$
16,525
|
69
%
|
Sales and marketing expense
increased $4.1 million for the
year ended December 31, 2018 as compared in 2017, primarily due to
an increase in employee count, salaries and sales
commissions.
Research and development expense
increased $5.2 million for
the year ended December 31, 2018 as compared to 2017, primarily due
to an increase in employee count, salaries and research and
development parts. Research and development expense represented
13.9% and 14.1% of our revenue in 2018 and 2017, respectively.
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
$11.9 million, or 15.9% of revenue, in 2018 and $8.6 million, or
23.4% of revenue, in 2017.
General and administrative expense
increased $2.1 million
for the year ended December 31, 2018 as compared to 2017,
principally resulting from increases of $1.4 million in stock-based
compensation expense and $523,000 in personnel-related
costs.
58
Other
Income and Expenses
|
|
Year
Ended
December
31,
|
% Change
|
|
|
|
2018
|
2017
|
2018 v 2017
|
|
|
(in
thousands)
|
|
|
|
Interest expense,
net
|
$
(469
)
|
$
(268
)
|
75
%
|
|
Other income
(expense), net
|
1,255
|
(794
)
|
(258
)%
|
Interest
expense consists of interest incurred from outstanding short-term
borrowings. Interest expense increased to $469,000 in 2018 from
$268,000 in 2017, principally as a result of increased borrowings
under short-term bank loans. We earn interest income from
depositary accounts. Interest income was nominal in 2018 and
2017.
Other
income (expense), net primarily reflects (a) gains or losses
recognized from the effect of exchange rates on our foreign
currency-denominated asset and liability balances and (b)
depreciation of assets acquired with government subsidies, as
described under “—Key Components of Results of
Operations—PRC Government Research and Development
Funding” above. Our other income was $1.3 million in 2018 due
primarily to a weaker RMB to U.S. dollar exchange rate, compared to
a $794,000 loss in 2017 due to a stronger RMB to U.S. dollar
exchange rate.
Income
Tax Expense Benefit
The
following presents components of income tax (expense) for the
indicated periods:
|
|
Year Ended
December 31,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Current:
|
|
|
|
U.S.
federal
|
$
-
|
$
-
|
|
U.S.
state
|
|
-
|
|
Foreign
|
(1,149
)
|
-
|
|
Total
current income tax expense
|
(1,149
)
|
-
|
|
Deferred:
|
|
|
|
U.S.
federal
|
-
|
-
|
|
U.S.
state
|
|
|
|
Foreign
|
343
|
(547
)
|
|
Total
deferred income (expense) benefit
|
343
|
(547
)
|
|
Total
current income tax expense
|
$
(806
)
|
$
(547
)
|
On
December 22, 2017, the Tax Cuts and Jobs Act, or the Tax 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. Due
to the timing of the enactment and the complexity involved in
applying the provisions of the Tax Act, we made reasonable
estimates of the effects and recorded provisional amounts in our
financial statements as of December 31, 2017.
As we
collect and prepare necessary data, and interpret the Tax Act and
any additional guidance issued by the U.S. Treasury Department, the
Internal Revenue Service, and other standard-setting bodies, we may
make adjustments to the provisional amounts. Those adjustments may
materially affect our provision for income taxes and effective tax
rate in the period in which the adjustments are made. There were no
adjustments made in 2018.
Our
effective tax rate differs from statutory rates of 21% for U.S.
federal income tax purposes and 15% to 25% for PRC income tax
purposes 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.
59
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.
Liquidity and Capital Resources
During
the year ended December 31, 2018, we funded our technology
development and operations principally through issuance of an
additional series of convertible preferred stock, short-term
borrowings by ACM Shanghai from local financial institutions, and
application of proceeds of the IPO and concurrent private
placements in November 2017. During the year ended December 31,
2018, we funded our technology development and operations
principally through application of proceeds of the IPO and
concurrent private placements, operating cash flow, and short-term
borrowings by ACM Shanghai from local financial
institutions.
We
believe our existing cash and cash equivalents, 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 from the issuance date of financial
statement. 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 in accordance with our strategic plan, we may
determine to raise additional funds through public or private debt
or equity financings or additional bank credit arrangements. 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 necessary or
desirable, 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
Cash Flow from Operating Activities.
Our operations provided
cash flow of $6.9 million in 2018. 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 (c) the amount and timing of payments by
customers.
|
Lender
|
|
Agreement Date
|
|
Maturity Date
|
|
Annual Interest Rate
|
|
Maximum Borrowing Amount(1)
|
|
Amount Outstanding at December 31, 2018
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
||
|
Bank of China Pudong Branch
|
|
August 2018
|
|
August 2019
|
|
5.22%
|
|
RMB30,000
|
|
RMB30,000
|
|
|
|
|
|
|
|
|
|
$4,372
|
|
$4,372
|
|
Bank of Shanghai Pudong Branch
|
|
February 2018
|
|
January 2019
|
|
5.15%
|
|
RMB50,000
|
|
RMB24,836
|
|
|
|
|
|
|
|
|
|
$7,800
|
|
$3,618
|
|
Shanghai
Rural Commercial Bank
|
|
January 2018
|
|
January
2019
|
|
5.44%
|
|
RMB10,000
|
|
RMB10,000
|
|
|
|
|
|
|
|
|
|
$1,457
|
|
$1,457
|
|
|
|
|
|
|
|
|
|
RMB90,000
|
|
RMB64,836
|
|
|
|
|
|
|
|
|
|
$13,629
|
|
$9,447
|
(1)
Converted from RMB
to dollars as of December 31, 2018
60
All of
the amounts owing under the line of credit with Bank of China
Pudong Branch are secured by ACM Shanghai’s intellectual
property and guaranteed by Dr. David Wang (“Dr. Wang”),
our Chair of the Board, Chief Executive Officer, President and
Chair of the Board. All of the amounts owing under the lines of
credit with Bank of Shanghai Pudong Branch are guaranteed by Dr.
Wang. All of the amounts owing under the line of credit with
Shanghai Rural Commercial Bank are secured by accounts receivable
and guaranteed by Dr. Wang.
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 $200,000 of
such grants in 2018 as compared to $2.5 million of such grants 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,
2018
|
|
|
(in
thousands)
|
|
Cash
and cash equivalents
|
$
27,124
|
|
Accounts
receivable, less allowance for doubtful amounts
|
24,608
|
|
Inventory
|
38,764
|
|
Total
|
$
90,496
|
Our
cash and cash equivalents at December 31, 2018 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.
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.
Uses of Funds
Capital Expenditures.
We incurred $2.1 million capital
expenditures in 2018.
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, 2018 and 2017, we did not have any significant
off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of Regulation S-K of the Securities and
Exchange Commission,
except the lease
commitment described in above “Contractual Obligations and
Requirements.”
61
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.
62
Item
8.
Financial
Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
Consolidated Financial Statements
|
63
|
|
|
|
|
Report of Independent Registered Public Accounting
Firm
|
64
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2018 and
2017
|
66
|
|
|
|
|
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the Years ended December 31, 2018 and 2017
|
67
|
|
|
|
|
Consolidated Statements of Changes in Redeemable Convertible
Preferred Stock and Stockholders’ Equity (Deficit) for the
Years ended December 31, 2018 and 2017
|
68
|
|
|
|
|
Consolidated Statements of Cash Flows for the Years ended December
31, 2018 and 2017
|
69
|
|
|
|
|
Notes to Consolidated Financial Statements
|
70
|
63
Report
of Independent Registered Public Accounting
Firm
Shareholders and Board of Directors
ACM Research, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of ACM
Research, Inc. (the “Company”) and subsidiaries as of
December 31, 2018 and 2017, 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, 2018, 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 and subsidiaries at December 31, 2018 and
2017, and the results of their operations and their cash flows for
each of the two years in the period ended December 31,
2018
,
in conformity with accounting
principles generally accepted in the United States of
America.
Basis for Opinion
These 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.
64
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.
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 14, 2019
65
ACM RESEARCH, INC.
Consolidated Balance Sheets
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
|
(in thousands, except share and per share data)
|
|
|
Assets
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
27,124
|
$
17,681
|
|
Accounts
receivable, less allowance for doubtful accounts of $0 and $0 as of
December 31, 2018 and 2017, respectively (note 3)
|
24,608
|
26,762
|
|
Other
receivables
|
3,547
|
2,491
|
|
Inventories
(note 4)
|
38,764
|
15,388
|
|
Prepaid
expenses
|
1,985
|
546
|
|
Other
current assets
|
-
|
46
|
|
Total
current assets
|
96,028
|
62,914
|
|
Property,
plant and equipment, net (note 5)
|
3,708
|
2,340
|
|
Intangible
assets, net
|
274
|
106
|
|
Deferred
tax assets (note 15)
|
1,637
|
1,294
|
|
Investment
in affiliates, equity method (note 10)
|
1,360
|
1,237
|
|
Other
long-term assets
|
40
|
-
|
|
Total
assets
|
103,047
|
67,891
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
Current
liabilities:
|
|
|
|
Short-term
borrowings (note 6)
|
9,447
|
5,095
|
|
Warrant
liability (note 8)
|
-
|
3,079
|
|
Accounts
payable
|
16,673
|
7,419
|
|
Advances
from customers
|
8,417
|
143
|
|
Income
taxes payable
|
1,193
|
44
|
|
Other
payables and accrued expenses (note 7)
|
10,410
|
6,037
|
|
Total
current liabilities
|
46,140
|
21,817
|
|
Other
long-term liabilities (note 9)
|
4,583
|
6,217
|
|
Total
liabilities
|
50,723
|
28,034
|
|
Commitments and contingencies (note 16)
|
|
|
|
Stockholders’
equity:
|
|
|
|
Common
stock – Class A, par value $0.0001: 100,000,000 shares
authorized as of December 31, 2018 and 2017. 14,110,315 shares
issued and outstanding as of December 31, 2018 and 12,935,546
shares issued and outstanding as of December 31, 2017 (note
13)
|
1
|
1
|
|
Common
stock–Class B, par value $0.0001: 7,303,533 shares authorized
as of December 31, 2018 and 2017. 1,898,423 shares issued and
outstanding as of December 31, 2018 and 2,409,738 shares issued and
outstanding as of December 31, 2017 (note 13)
|
-
|
-
|
|
Additional
paid in capital
|
56,567
|
49,695
|
|
Accumulated
deficit
|
(3,387
)
|
(9,961
)
|
|
Accumulated
other comprehensive income (loss)
|
(857
)
|
122
|
|
Total
stockholders’ equity
|
52,324
|
39,857
|
|
Total
liabilities and stockholders’ equity
|
$
103,047
|
$
67,891
|
The
accompanying notes are an integral part of these consolidated
financial statements.
66
ACM RESEARCH, INC.
Consolidated Statements of Operations and Comprehensive Income
(Loss)
|
|
Year Ended December 31,
|
|
|
|
2018
|
2017
|
|
|
( In thousands, except share and per share data)
|
|
|
Revenue
|
$
74,643
|
$
36,506
|
|
Cost of revenue
|
40,194
|
19,281
|
|
Gross profit
|
34,449
|
17,225
|
|
Operating expenses:
|
|
|
|
Sales and marketing
|
9,611
|
5,500
|
|
Research and development
|
10,380
|
5,138
|
|
General and administrative
|
7,987
|
5,887
|
|
Total operating expenses, net
|
27,978
|
16,525
|
|
Income from operations
|
6,471
|
700
|
|
Interest income
|
29
|
9
|
|
Interest expense
|
(498
)
|
(277
)
|
|
Other income
(expense), net
|
1,255
|
(794
)
|
|
Equity income in net income of affiliates
|
123
|
37
|
|
Income (Loss) before income taxes
|
7,380
|
(325
)
|
|
Income tax expense (note 15)
|
(806
)
|
(547
)
|
|
Net income (loss)
|
6,574
|
(872
)
|
|
Less: Net loss attributable to non-controlling interests
|
-
|
(554
)
|
|
Net income
(loss) attributable to ACM Research, Inc.
|
$
6,574
|
$
(318
)
|
|
Comprehensive income
(loss)
|
|
|
|
Net income
(loss)
|
6,574
|
(872
)
|
|
Foreign currency translation adjustment
|
(979
)
|
472
|
|
Comprehensive income (loss)
|
5,595
|
(400
)
|
|
Less: Comprehensive loss attributable to non-controlling interests
|
-
|
(369
)
|
|
Total comprehensive income
(loss) attributable to ACM Research, Inc. (note 2)
|
$
5,595
|
$
(31
)
|
|
|
|
|
|
Net income
(loss) attributable to ACM, Inc.
per common share (note 2):
|
|
|
|
Basic
|
$
0.42
|
(0.05
)
|
|
Diluted
|
$
0.37
|
$
(0.05
)
|
|
|
|
|
|
Weighted
average common shares outstanding used in computing
per share amounts (note 2):
|
|
|
|
Basic
|
15,788,460
|
6,865,390
|
|
Diluted
|
17,912,105
|
6,865,390
|
The
accompanying notes are an integral part of these consolidated
financial statements.
67
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 Class A
|
Common
Stock Class B
|
|
|
|
|
|
||||||||
|
|
shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Total Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional Paid-in
Capital
|
Accumulated Income (Deficit)
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Non-controlling
Interest
|
Total Stockholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Proceeds
from initial public, net of capitalized IPO cost and issuance costs
of $2,791
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
3,566,334
|
—
|
—
|
—
|
17,181
|
—
|
—
|
—
|
17,181
|
|
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
|
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
6,574
|
—
|
—
|
6,574
|
|
Foreign
currency translation adjustment
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(979
)
|
—
|
(979
)
|
|
Exercise
of stock option
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
265,952
|
—
|
—
|
—
|
528
|
—
|
—
|
—
|
528
|
|
Stock-based
compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
3,363
|
—
|
—
|
—
|
3,363
|
|
Conversion
of class B common shares to Class A common shares
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
511,315
|
—
|
(511,315
)
|
—
|
—
|
—
|
—
|
—
|
—
|
|
Exercise
of common stock warrant issued to SMC
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
397,502
|
—
|
—
|
—
|
2,981
|
—
|
—
|
—
|
2,981
|
|
Balance at December 31, 2018
|
-
|
$
-
|
-
|
$
-
|
-
|
$
-
|
-
|
$
-
|
-
|
$
-
|
-
|
$
-
|
$
-
|
14,110,315
|
$
1
|
1,898,423
|
$
-
|
$
56,567
|
$
(3,387
)
|
$
(857
)
|
$
-
|
$
52,324
|
The
accompanying notes are an integral part of these
consolidated financial statements.
68
ACM RESEARCH, INC.
Consolidated Statements of Cash Flows
|
|
Year Ended December 31,
|
|
|
|
2018
|
2017
|
|
|
(in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
Net
income (loss)
|
$
6,574
|
$
(872
)
|
|
Adjustments
to reconcile net loss from operations to net cash provided by
operating activities
|
|
|
|
Depreciation
and amortization
|
417
|
271
|
|
Equity
income in net income of affiliates
|
(123
)
|
(37
)
|
|
Deferred
income taxes
|
(405
)
|
659
|
|
Stock-based
compensation
|
3,363
|
1,622
|
|
Loss
on disposals of fixed assets, intangible assets and other long-term
assets
|
-
|
1
|
|
Net
changes in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
883
|
(9,757
)
|
|
Other
receivables
|
(1,171
)
|
332
|
|
Inventory
|
(24,083
)
|
(3,073
)
|
|
Prepaid
expenses
|
(1,494
)
|
256
|
|
Other
current assets
|
44
|
8
|
|
Accounts
payable
|
9,825
|
1,905
|
|
Advances
from customers
|
8,316
|
(127
)
|
|
Income
tax payable
|
1,149
|
-
|
|
Other
payables and accrued expenses
|
4,954
|
1,789
|
|
Other
long-term liabilities
|
(1,340
)
|
(1,078
)
|
|
Net cash provided by (used in) operating activities
|
6,909
|
(8,101
)
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(1,830
)
|
(651
)
|
|
Purchase
of intangible assets
|
(241
)
|
(115
)
|
|
Loan
to related party
|
-
|
(946
)
|
|
Purchase
of non-controlling interest
|
-
|
(20,808
)
|
|
Investments
in unconsolidated equity method affiliates
|
-
|
(1,200
)
|
|
Net cash used in investing activities
|
(2,071
)
|
(23,720
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Proceeds
from short-term borrowings
|
17,726
|
11,154
|
|
Repayments
of short-term borrowings
|
(13,131
)
|
(11,110
)
|
|
Proceeds
from stock option exercise to common stock
|
528
|
396
|
|
Proceeds
from issuance of Series E convertible preferred stock
|
-
|
5,800
|
|
Proceeds
from issuance of common stock in connection with initial public
offering and concurrent private placement
|
-
|
18,717
|
|
Payment
of initial public offering expenses
|
-
|
(1,537
)
|
|
Investment
in affiliates
|
-
|
1,000
|
|
Proceeds
from issuance of common stock for non-controlling interest
purchase
|
-
|
14,300
|
|
Net cash provided by financing activities
|
5,123
|
38,720
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalent
|
$
(518
)
|
$
663
|
|
Net
increase in cash and cash equivalent
|
$
9,443
|
$
7,562
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
17,681
|
10,119
|
|
Cash and cash equivalents at end of period
|
$
27,124
|
$
17,681
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
Interest
paid
|
$
498
|
$
277
|
|
Non-cash financing activities:
|
|
|
|
Preferred
stock conversion to common stock in connection with initial public
offering
|
$
-
|
$
23,834
|
|
Warrant
conversion to common stock
|
$
3,079
|
-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
69
ACM RESEARCH, INC.
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
NOTE 1 – DESCRIPTION OF BUSINESS
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 its single-wafer wet-cleaning
equipment, under the brand name “Ultra C,” 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 initially 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. In August 2018, the Company introduced its Ultra-C Tahoe
wafer cleaning tool, which can deliver high cleaning performance
with significantly less sulfuric acid than typically consumed by
conventional high-temperature single-wafer cleaning tools. 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. On November 8, 2017, ACM purchased the remaining 18.36%
of ACM Shanghai’s equity interest held by third parties,
Shanghai Pudong High-Tech Investment Co., Ltd.
(“PDHTI”) and Shanghai Zhangjiang Science &
Technology Venture Capital Co., Ltd. (“ZSTVC”). At
December 31, 2017, ACM owned all of the outstanding equity
interests of ACM Shanghai, and indirectly through ACM Shanghai,
owned all of the outstanding equity interests of ACM
Wuxi.
70
On
September 13, 2017, ACM effectuated a 1-for-3 reverse stock 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 these notes and the accompanying
condensed consolidated financial statements have been adjusted
retrospectively to reflect the reverse stock split.
On
November 2, 2017, the Registration Statement on Form S-1 (File No.
333- 220451) for ACM’s initial public offering of Class A
common stock (the “IPO”) was declared effective by the
U.S. Securities and Exchange Commission. Shares of Class A common
stock began trading on the Nasdaq Global Market on November 3,
2017, and the closing for the IPO was held on November 7,
2017.
In
December 2017 ACM formed a wholly owned subsidiary in the Republic
of Korea, ACM Research Korea CO., LTD. (“ACM Korea”),
to serve customers based in Republic of Korea and perform sales,
marketing, research and development activities for new products and
solutions.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
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,
accrued warranty, 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, 2018 and
2017, the Company, based on a review of its outstanding balances
and its customers, determined the allowance for doubtful accounts
in the amount of $0 and $0 respectively.
71
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, 2018 and 2017.
●
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.
●
Market value is
determined as the lower of replacement cost or net realizable
value.
●
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.
72
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 the 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
On
January 1, 2018, the Company adopted ASC Topic 606,
Revenue from Contracts with Customers
,
and all the related amendments (the “New Revenue
Standard”) to all contracts which were not completed as of
January 1, 2018 using the modified retrospective method. The
Company does not have open contracts that may result in any changes
to revenues applying the New Revenue Standard.
73
The
Company derives revenue principally from the sale of single-wafer
wet cleaning equipment. Revenue from contracts with customers is
recognized using the following five steps pursuant to the New
Revenue Standard:
1. Identify
the contract(s) with a customer;
2. Identify
the performance obligations in the contract;
3. Determine
the transaction price;
4. Allocate
the transaction price to the performance obligations in the
contract; and
5. Recognize
revenue when (or as) the entity satisfies a performance
obligation.
A
contract contains a promise (or promises) to transfer goods or
services to a customer. A performance obligation is a promise (or a
group of promises) that is distinct. The transaction price is the
amount of consideration a company expects to be entitled from a
customer in exchange for providing the goods or
services.
The
unit of account for revenue recognition is a performance obligation
(a good or service). A contract may contain one or more performance
obligations. Performance obligations are accounted for separately
if they are distinct. A good or service is distinct if the customer
can benefit from the good or service either on its own or together
with other resources that are readily available to the customer,
and the good or service is distinct in the context of the contract.
Otherwise performance obligations are combined with other promised
goods or services until the Company identifies a bundle of goods or
services that is distinct. Promises in contracts which do not
result in the transfer of a good or service are not performance
obligations, as well as those promises that are administrative in
nature, or are immaterial in the context of the contract. The
Company has addressed whether various goods and services promised
to the customer represent distinct performance obligations. The
Company applied the guidance of ASC Topic 606-10-25-16 through 18
in order to verify which promises should be assessed for
classification as distinct performance obligations. The
Company’s contracts with customers include more than one
performance obligation. For example, the delivery of a piece of
equipment generally includes the promise to install the equipment
in the customer’s facility. The Company’s performance
obligations in connection with a sale of equipment generally
include production, delivery and installation, together with the
provision of a warranty.
The
transaction price is allocated to all the separate performance
obligations in an arrangement. It reflects the amount of
consideration to which the Company expects to be entitled in
exchange for transferring goods or services, which may include an
estimate of variable consideration to the extent that it is
probable of not being subject to significant reversals in the
future based on the Company’s experience with similar
arrangements. The transaction price excludes amounts collected on
behalf of third parties, such as sales taxes. This is done on a
relative selling price basis using standalone selling prices
(“SSP”). The SSP represents the price at which the
Company would sell that good or service on a standalone basis at
the inception of the contract. Given the requirement for
establishing SSP for all performance obligations, if the SSP is
directly observable through standalone sales, then such sales
should be considered in the establishment of the SSP for the
performance obligation. All of the Company’s products were
sold in stand-alone arrangements. The Company does not have
observable SSPs for most performance obligations as the obligations
are not regularly sold on a standalone basis. Production, delivery
and installation of a product, together with provision of a
warranty, are a single unit of accounting.
Revenue
is recognized when the Company satisfies each performance
obligation by transferring control of the promised goods or
services to the customer. Goods or services can transfer at a point
in time (upon the acceptance of the products or upon the arrival at
the destination as stipulated in the shipment terms) in a sale
arrangement. In general, the Company recognizes 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, the Company
recognizes revenue as of 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 legal title to the tool is passed to a
customer as follows:
●
When the customer
has previously accepted the same tool with the same specifications
and the Company can objectively demonstrate that the tool meets all
of the required acceptance criteria;
74
●
When the sales
contract or purchase order contains no acceptance agreement or
lapsing acceptance provision and 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
●
When the
Company’s sales arrangements do not include a general right
of return.
The
Company offers 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. The Company does not expect revenue from extended
maintenance service contracts to represent a material portion of
its revenue in the future. As such, the Company has concluded that
its revenue recognition under the adoption of the New Revenue
Standard will remain the same as previously reported and will not
have material impacts to its consolidated financial
statements.
The
Company incurs costs related to the acquisition of its contracts
with customers in the form of sales commissions. Sales commissions
are paid to third party representatives and distributors.
Contractual agreements with these parties outline commission
structures and rates to be paid. Generally speaking, the contracts
are all individual procurement decisions by the customers and are
not for significant periods of time, nor do they include renewal
provisions. As such, all contracts have an economic life of
significantly less than a year. Accordingly, the Company expenses
sales commissions when incurred in accordance with the practical
expedient in the New Revenue Standard when the underlying contract
asset is less than one year. These costs are recorded within sales
and marketing expenses.
Generally,
all contracts have expected durations of one year or less.
Accordingly, the Company applies the practical expedient allowed in
the New Revenue Standard and does not disclose information about
remaining performance obligations that have original expected
durations of one year or less.
The
Company does not incur any costs to fulfill the contracts with
customers that are not already reported in compliance with another
applicable standard (for example, inventory or plant, property and
equipment).
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, 2018 and 2017, shipping and
handling costs included in sales and marketing expenses were $146
and $139 respectively.
75
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, 2018 or
2017.
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, 2018 and 2017, respectively.
|
|
Year Ended December 31,
|
|
|
|
2018
|
2017
|
|
Balance
at beginning of period
|
$
839
|
$
290
|
|
Additions
|
1,412
|
736
|
|
Utilized
|
(541
)
|
(187
)
|
|
Balance
at end of period
|
$
1,710
|
$
839
|
Government Subsidies
ACM
Shanghai has been awarded four 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 fourth subsidy was awarded in June
of 2018, and related to development of Polytetrafluoroethylene. 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, 2018 and 2017,
related government subsidies recognized as reductions of relevant
expenses in the consolidated statements of operations and
comprehensive income were $1,486 and $3,421
respectively.
●
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, 2018 and 2017,
related government subsidies recognized as other income in the
consolidated statements of operations and comprehensive income were
$144 and $135, respectively.
Unearned
government subsidies received are deferred for recognition and
recorded as other long-term liabilities (note 9) in the balance
sheet until the criteria for such recognition are
satisfied.
76
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 the Company 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. Three customers individually accounted for
greater than ten percent of the Company’s revenue for the
year ended 2018 and two of those customers individually accounted
for greater than ten percent of the Company’s revenue in
2017:
|
|
Year
Ended December 31
|
|
|
|
2018
|
2017
|
|
Customer
A
|
24.17
%
|
*
|
|
Customer
B
|
23.83
|
18.10
|
|
Customer
C
|
*
|
12.77
|
|
Customer
D
|
*
|
14.12
|
|
Customer
E
|
39.63
|
10.23
|
*
Customer accounted
for less than 10% of revenue in the period.
Interest Rate Risk
As of
December 31, 2018 and 2017, 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, 2018 and 2017 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.
77
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”), and the Korean Won. 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 ($979) and $1,052 for the years
ended December 31, 2018 and 2017.
In
accordance with FASB ASC Topic 830,
Foreign Currency Matters
, the Company
translates assets and liabilities into U.S. dollars from RMB or
Korean Won 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.
Translations
of amounts from RMB and Korean Won into U.S. dollars were made at
the following exchange rates for the respective dates and
periods:
|
Consolidated balance sheets:
|
|
|
At
December 31, 2018
|
RMB
6.8634 to $1.00
|
|
At
December 31, 2017
|
RMB
6.5359 to $1.00
|
|
At
December 31, 2018
|
KRW
1,114.83 to $1.00
|
|
At
December 31, 2017
|
No
transactions in Korean Won
|
|
|
|
|
Consolidated statements of operations and comprehensive
income:
|
|
|
Year
ended December 31, 2018
|
RMB
6.6181 to $1.00
|
|
Year
ended December 31, 2017
|
RMB
6.7522 to $1.00
|
|
Year
ended December 31, 2018
|
KRW 1,100.11 to $1.00
|
|
Year
ended December 31, 2017
|
No
transactions in Korean Won
|
78
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
|
|
|
|
2018
|
2017
|
|
Numerator:
|
|
|
|
Net
income (loss)
|
$
6,574
|
$
(872
)
|
|
Net
loss attributable to non-controlling interest
|
-
|
(554
)
|
|
Net income (loss)
attributable to ACM, basic and diluted
|
6,574
|
$
(318
)
|
|
Denominator:
|
|
|
|
Weighted
average shares outstanding, basic
|
15,788,460
|
6,865,390
|
|
Effect
of dilutive securities
|
2,123,645
|
-
|
|
Weighted
average shares outstanding, diluted
|
17,912,105
|
6,865,390
|
|
Net
income (loss) attributable to ACM per common share:
|
|
|
|
Basic
|
$
0.42
|
$
(0.05
)
|
|
Diluted
|
$
0.37
|
$
(0.05
)
|
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
during the years ended December 31, 2018 and 2017, 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.
79
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 years ended December 31, 2018 and 2017, 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
|
|
|
|
2018
|
2017
|
|
Stock
options
|
3,715,779
|
3,372,292
|
|
Warrant
|
80,000
|
477,502
|
|
|
3,795,779
|
3,849,794
|
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 $5,595 and $(31) for the years ended December
31, 2018 and 2017, 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, 2018
and 2017.
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:
80
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 8). 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, other current assets, accounts payable, advances
from customers, and other payables and accrued expenses,
approximate their carrying value due to their short-term
nature.
As of
December 31, 2018 and 2017, 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, 2018:
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Short-term
borrowings
|
$
-
|
$
9,447
|
$
-
|
$
9,447
|
|
|
$
-
|
$
9,447
|
$
-
|
$
9,447
|
|
|
|
|
|
|
|
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
|
81
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.
Reclassification of Accounts
Certain
prior year’s amounts have been reclassified to conform to
current year presentations. There was no change to previously
reported stockholders’ deficit or net income.
Recently Adopted Accounting Pronouncements
In May
2017, the
Financial Accounting
Standards Board
(“FASB”) issued Accounting
Standards Update (“ASU”) No. 2017-09,
Compensation—Stock Compensation (Topic
718): Scope of Modification Accounting
(“ASU 2017-09”)
, 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 adoption of ASU 2017-09
did not have a material impact on the Company’s 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
(“ASU 2017-05”)
, 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 adoption of ASU 2017-05
did not have a material impact on the Company’s consolidated
financial statements.
In
November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230):
Restricted Cash
(“ASU
2016-18”)
, 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 adoption of ASU
2016-18 did not have a material impact on the Company’s
consolidated financial statements.
82
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”)
,
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 adoption of ASU
2016-15 did not have material impact on the Company’s
consolidated financial statements.
In
January 2016, the FASB issued ASU No. 2016-01,
“Financial Instruments – Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities”
(“ASU
2016-01”). The amendments in this update require all equity
investments to be measured at fair value with changes in the fair
value recognized through net income (other than those accounted for
under the equity method of accounting or those that result in
consolidation of the investee). The amendments in this update also
require an entity to present separately in other comprehensive
income the portion of the total change in the fair value of a
liability resulting from a change in the instrument-specific credit
risk when the entity has elected to measure the liability at fair
value in accordance with the fair value option for financial
instruments. In addition, the amendments in this update eliminate
the requirement to disclose the method(s) and significant
assumptions used to estimate the fair value that is required to be
disclosed for financial instruments measured at amortized cost on
the balance sheet for public entities. For public business
entities, the amendments in ASU 2016-01 are effective for fiscal
years beginning after December 15, 2017, including interim periods
within those fiscal years. Except for the early application
guidance discussed in ASU 2016-01, early adoption of the amendments
in this update is not permitted. The adoption of the ASU 2016-01
did not have a material impact on the Company’s consolidated
financial statements.
In May
2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic
606)
(“ASU 2014-09”), which amended the
existing accounting standards for revenue recognition. ASU 2014-09
establishes principles for recognizing revenue upon the transfer of
promised goods or services to customers, in an amount that reflects
the expected consideration received in exchange for those goods or
services. ASU 2014-09 and its related clarifying ASUs are effective
for annual reporting periods beginning after December 15, 2017 and
interim periods within those annual periods.
On
January 1, 2018, the Company adopted ASC Topic 606,
Revenue from Contracts with Customers,
and all the related amendments (the “New Revenue
Standard”) to all contracts which were not completed as of
January 1, 2018 using the modified retrospective method. The
Company does not have open contracts that may result in any changes
to revenues applying the New Revenue Standard.
Recent
Accounting Pronouncements Not Yet Adopted
In June
2018, the FASB issued ASU 2018-07,
Compensation — Stock Compensation (Topic
718) — Improvements to Nonemployee Share-Based Payment
Accounting
(“ASU 2018-07”), which simplifies
several aspects of the accounting for nonemployee share-based
payment transactions resulting from expanding the scope of Topic
718, Compensation--Stock Compensation, to include share-based
payment transactions for acquiring goods and services from
nonemployees. Some of the areas for simplification apply only to
nonpublic entities. ASU 2018-07 specifies that Topic 718
applies to all share-based payment transactions in which a grantor
acquires goods or services to be used or consumed in a
grantor’s own operations by issuing share-based payment
awards. ASU 2018-07 also clarify that Topic 718 does not apply to
share-based payments used to effectively provide (1) financing
to the issuer or (2) awards granted in conjunction with selling
goods or services to customers as part of a contract accounted for
under the New Revenue Standard. ASU 2018-07 is effective for
public business entities for fiscal years beginning after December
15, 2018, including interim periods within that fiscal year. Early
adoption is permitted. The Company does not expect the adoption of
ASU 2018-07 to have a material impact on its consolidated
financial statements and related disclosures.
83
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
ASU 2018-02 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 ASU 2018-02 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 does not expect the adoption of ASU 2018-02
to have a material impact 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
(“ASU 2017-11”)
, 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
ASU 2017-11
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
ASU 2017-11
are effective for fiscal
years beginning after December 15, 2019, and interim periods within
fiscal years beginning after December 15, 2020. The Company is
evaluating the impact of the adoption of ASU 2017-11 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
(“ASU 2017-04”)
,
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.
ASU 2017-04
does not amend the optional
qualitative assessment of goodwill impairment. A business entity
that is an SEC filer must adopt the amendments in
ASU 2017-04
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 evaluating the impact of the adoption of
ASU 2017-04 on its consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”)
. The
amendments in
ASU 2016-02
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 lease 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 will
adopt Topic 842 effective January 1, 2019 using a modified
retrospective method and will not restate comparative periods. As
permitted under the transition guidance, we will carry forward the
assessment of whether our contracts contain or are leases,
classification of our leases and remaining lease terms. Based on
our portfolio of leases as of December 31, 2018, approximately $5
million of lease assets and liabilities will be recognized on our
balance sheet upon adoption, primarily relating to real estate. We
are substantially complete with our implementation
efforts.
84
NOTE 3 – ACCOUNTS RECEIVABLE
At
December 31, 2018 and 2017, accounts receivable consisted of the
following:
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
Accounts
receivable
|
$
24,608
|
$
26,762
|
|
Less:
Allowance for doubtful accounts
|
-
|
|
|
Total
|
$
24,608
|
$
26,762
|
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 was considered necessary at December 31, 2018 and 2017. At
December 31, 2018 and 2017, accounts receivable of $1,457 (RMB
10,000) and $1,805 (RMB 11,800), respectively, were pledged as
collateral for borrowings from financial institutions (note
6).
NOTE 4 – INVENTORY
At
December 31, 2018 and 2017, inventory consisted of the
following:
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
Raw
materials
|
$
12,646
|
$
6,181
|
|
Work
in process
|
9,631
|
4,328
|
|
Finished
goods
|
16,487
|
4,879
|
|
Total
inventory, gross
|
38,764
|
15,388
|
|
Inventory
reserve
|
-
|
-
|
|
Total
inventory, net
|
$
38,764
|
$
15,388
|
The
Company did not set up any inventory reserve as of
December 31, 2018 or 2017 and no inventory was pledged as
collateral for borrowings from financial institutions. System
shipments of first-tools to an existing or prospective customer,
for which ownership does not transfer until customer acceptance,
are classified as finished goods inventory and carried at cost
until ownership is transferred.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET
At
December 31, 2018 and 2017, property, plant and equipment
consisted of the following:
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
Manufacturing
equipment
|
$
9,703
|
$
9,660
|
|
Office
equipment
|
512
|
463
|
|
Transportation
equipment
|
184
|
203
|
|
Leasehold
improvement
|
1,379
|
277
|
|
Total
cost
|
11,778
|
10,603
|
|
Less:
Total accumulated depreciation
|
(8,102
)
|
(8,263
)
|
|
Construction
in progress
|
32
|
-
|
|
Total
property, plant and equipment, net
|
$
3,708
|
$
2,340
|
Depreciation
expense was $350 and $243 for the years ended December 31,
2018 and 2017, respectively.
85
NOTE 6 – SHORT-TERM BORROWINGS
At
December 31, 2018 and 2017, short-term borrowings consisted of the
following:
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
Line of credit up
to RMB 30,000 from Bank of China Pudong Branch, due on March 5,
2018 with annual interest rate of 5.69%, secured by certain of the
Company’s intellectual property and fully repaid on March 5,
2018 .
|
$
-
|
$
2,219
|
|
Line of credit up
to RMB 25,000 from Bank of Shanghai Pudong Branch, due on Various
dates of October 2018 with an annual interest rate of 5.66%,
guaranteed by the Company’s CEO and fully repaid on May 8,
2018.
|
-
|
2,111
|
|
Line of credit up
to RMB 50,000 from Bank of Shanghai Pudong Branch, due on April 17,
2019 with an annual interest rate of 4.99%, guaranteed by the
Company’s CEO.
|
3,133
|
-
|
|
Line of credit up
to RMB 50,000 from Bank of Shanghai Pudong Branch, due on February
14, 2019 with an annual interest rate of 5.15%, guaranteed by the
Company’s CEO.
|
485
|
-
|
|
Line of credit up
to RMB 5,000 from Shanghai Rural Commercial Bank, due on November
21, 2018 with an annual interest rate of 5.44%, guaranteed by the
Company’s CEO and pledged by accounts receivable (Note
3).
|
-
|
765
|
|
Line of credit up
to RMB 10,000 from Shanghai Rural Commercial Bank, due on January
23, 2019 with an annual interest rate of 5.44%, guaranteed by the
Company’s CEO and pledged by accounts receivable (Note
3).
|
1,457
|
-
|
|
Line of credit up
to RMB 30,000 from Bank of China Pudong Branch, due on June 6, 2019
with annual interest rate of 5.22%, secured by certain of the
Company’s intellectual property and the Company’s
CEO.
|
2,186
|
-
|
|
Line of credit up
to RMB 30,000 from Bank of China Pudong Branch, due on June 13,
2019 with annual interest rate of 5.22%, secured by certain of the
Company’s intellectual property and the Company’s
CEO.
|
2,186
|
|
|
Total
|
$
9,447
|
$
5,095
|
For the
years ended December 31, 2018 and 2017, interest expense
related to short-term borrowings amounted to $498 and $272
respectively.
NOTE 7 – OTHER PAYABLE AND ACCRUED
EXPENSES
At
December 31, 2018 and 2017, other payable and accrued expenses
consisted of the following:
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
Lease
expenses and payable for leasehold improvement due to a related
party (note 11)
|
$
53
|
$
2,024
|
|
Accrued
commissions
|
2,931
|
836
|
|
Accrued
warranty
|
1,710
|
839
|
|
Accrued
payroll
|
626
|
745
|
|
Accrued
professional fees
|
64
|
60
|
|
Accrued
machine testing fees
|
3,076
|
684
|
|
Others
|
1,950
|
849
|
|
Total
|
$
10,410
|
$
6,037
|
86
NOTE 8 – WARRANT LIABILITY
On
December 9, 2016, Shengxin (Shanghai) Management Consulting Limited
Partnership (“SMC”), a related party (note 11),
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 (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 Class A common stock at a price of $7.50 per
share.
The
warrant issued to SMC, while outstanding as of December 31, 2017,
was classified as a liability as it was conditionally puttable in
accordance with FASB ASC 480, Distinguishing Liabilities from
Equity. The fair value of the warrant was adjusted for changes in
fair value at each reporting period but could not be lower than the
proceeds of the SMC Investment. The corresponding non-cash gain or
loss of the changes in fair value was recorded in earnings. The
methodology used to value the warrant was the Black-Scholes
valuation model.
On
March 30, 2018, ACM entered into a warrant exercise agreement with
ACM Shanghai and SMC pursuant to which SMC exercised its warrant in
full by issuing to ACM a senior secured promissory note in the
principal amount of approximately $3,000. ACM then transferred the
SMC note to ACM Shanghai in exchange for an intercompany promissory
note of ACM Shanghai in the principal amount of approximately
$3,000. Each of the two notes bears interest at a rate of 3.01% per
annum and matures on August 17, 2023. As security for its
performance of its obligations under its note, SMC granted to ACM
Shanghai a security interest in the 397,502 shares of Class A
common stock issued to SMC upon its exercise of the warrant. Upon
the issuance of 397,502 shares of Class A common stock to SMC, the
senior secured promissory note issued to AMC by SMC was offset
against the SMC investment.
NOTE 9– OTHER LONG-TERM LIABILITIES
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, 2018 and 2017, other long-term liabilities consisted
of the following unearned government subsidies:
|
|
December 31
|
|
|
|
2018
|
2017
|
|
Subsidies
to Stress Free Polishing project, commenced in 2008 and
2017
|
$
1,483
|
$
1,952
|
|
Subsidies
to Electro Copper Plating project, commenced in 2014
|
2,860
|
4,265
|
|
Subsidies
to Polytetrafluoroethylene, commenced in 2018
|
178
|
-
|
|
Other
|
62
|
-
|
|
Total
|
$
4,583
|
$
6,217
|
NOTE 10 – EQUITY METHOD INVESTMENT
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 $123 and $37 of the consolidated retained earnings at
December 31, 2018 and 2017, respectively.
87
NOTE 11 – RELATED PARTY BALANCES AND
TRANSACTIONS
On
August 18, 2017, ACM and Ninebell, its equity method investment
affiliate (note 10), 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 was secured by a pledge of Ninebell’s
accounts receivable due from ACM and all money that Ninebell
received from ACM. Ninebell repaid the loan in March 2018. ACM
purchased materials from Ninebell amounting to $7,785 and $3,704
during the years ended December 31, 2018 and 2017, respectively. As
of December 31, 2018 and 2017, accounts payable due to Ninebell
were $1,477 and $2,118, respectively, and prepaid to Ninebell for
material purchases were $572 and $229, respectively.
In 2007
ACM Shanghai entered into an operating lease agreement with
Shanghai Zhangjiang Group Co., Ltd. (“Zhangjiang
Group”) to lease manufacturing and office space located in
Shanghai, China. An affiliate of Zhangjiang Group holds 787,098
shares of Class A common stock that it acquired in September 2017
for $5,903. 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. From January
1 to April 25, 2018, ACM Shanghai leased the property on a
month-to-month basis. On April 26, 2018, ACM Shanghai entered into
a renewed lease with Zhangjiang Group for the period from January
1, 2018 through December 31, 2022. Under the lease, ACM Shanghai
would pay a monthly rental fee of approximately RMB 366 (equivalent
to $55). The required security deposit is RMB 1,077 (equivalent to
$163). The Company incurred leasing expenses under the lease
agreement of $620 and $638 during the years ended December 31, 2018
and 2017, respectively. As of December 31, 2018 and 2017, payables
to Zhangjiang Group for lease expenses and leasehold improvements
recorded as other payables and accrued expenses amounted to $53 and
$2,024, 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 (note 8). SMC is a limited partnership incorporated in
the PRC, whose partners consist of employees of ACM Shanghai. 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 Class A common stock at a price of $7.50 per
share, for a total exercise price of $2,981. On March 30, 2018, SMC
exercised the warrant and purchased 397,502 shares of Class A
common stock (note 8).
NOTE 12 – LEASES
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
February 4, 2019, ACM amended the lease agreement to extend the
lease term through March 31, 2020 and increase the base rent to
$3.3 per month from April 1, 2019 to March 31, 2020 and $3.4 per
month from April 1, 2020 to March 31, 2021.
ACM
Shanghai entered into an operating lease agreement with Zhangjiang
Group (a related party, see Note 11) 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
from January 1, 2018 to April 25, 2018 we leased the property on a
month-to-month basis. On April 26, 2018, ACM Shanghai entered into
a renewed lease with Zhangjiang Group for the period from January
1, 2018 through December 31, 2022. Under the lease, ACM Shanghai
would pay a monthly rental fee of approximately RMB 366 (equivalent
to $55). The required security deposit is RMB 1,077 (equivalent to
$163).
ACM
Wuxi leases office space in Wuxi, China, at a rate of less than $1
per month.
88
In
January 2018, ACM Shanghai entered into an operating lease
agreement for the second factory in the Pudong region of Shanghai
from January 2018 to January 2023. The new facility has a total of
50,000 square feet of available floor space. The monthly rent
varies during the term of the lease.
ACM
leases its administrative, research and development and
manufacturing facilities under various operating leases. Future
minimum lease payments under non-cancelable lease agreements as of
December 31, 2018 were as follows:
|
|
December 31,
2018
|
|
2019
|
$
1,391
|
|
2020
|
1,371
|
|
2021
|
1,403
|
|
2022
|
1,441
|
|
Total
|
$
5,606
|
Rent
expense was $1867 and $670 for the years ended December 31,
2018 and 2017, respectively.
NOTE 13 – COMMON STOCK
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 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 interest 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 interest 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 10).
In
November 2017 ACM issued 2,233,000 shares of Class A common stock
and received net proceeds of $11,664 from the IPO and concurrently
ACM issued an additional 1,333,334 shares of Class A common stock
in a private placement for net proceeds of $7,053.
Upon
the completion of the IPO on November 2, 2017, the Company issued a
five-year warrant (the “Underwriter's Warrant”) to Roth
Capital Partners, LLC, the lead underwriter of the IPO, for the
purchase of up to 80,000 shares of Class A common stock at an
exercise price of $6.16 per share. The Underwriter’s Warrant
was immediately exercisable and expires on November 1, 2022. The
Underwriter's Warrant is equity classified and its fair value was
$137 at the IPO closing date, using the Black Scholes model with
the following assumptions: volatility of 28.26%, a dividend rate of
0%, and a risk-free discount rate of 2%.
89
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 10).
At
various dates during 2017, ACM issued 472,889 shares of Class A
common stock upon options exercises by certain employees and
non-employees. During the year ended December 31, 2018, the Company
issued 265,952 shares of Class A common stock upon options
exercises by certain employees and non-employees.
On
March 30, 2018, SMC exercised its warrant (note 8) and purchased
397,502 shares of Class A common stock.
At
December 31, 2018 and 2017, the number of shares of Class A common
stock issued and outstanding was 14,110,315 and 12,935,546,
respectively. At December 31, 2018 and 2017, the number of shares
of Class B common stock issued and outstanding was 1,898,423 and
2,409,738, respectively. During the year ended December 31, 2018,
511,315 shares of Class B common stock were converted into Class A
common stock.
NOTE 14 – STOCK-BASED COMPENSATION
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 the Company’s employee share
option activities during the year ended December 31,
2018:
|
|
Number
of Option Shares
|
Weighted
Average Grant Date Fair Value
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term
|
|
Outstanding
at December 31, 2016
|
2,100,377
|
$
0.54
|
$
2.03
|
7.83
years
|
|
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
years
|
|
Granted
|
745,700
|
1.52
|
8.12
|
|
|
Exercised
|
(151,650
)
|
0.53
|
2.06
|
|
|
Expired
|
(4,622
)
|
0.55
|
3.00
|
|
|
Forfeited
|
(131,639
)
|
0.97
|
3.87
|
|
|
Outstanding
at December 31, 2018
|
2,503,405
|
0.91
|
4.09
|
7.30
years
|
|
Vested
and exercisable at December 31, 2018
|
1,327,189
|
|
|
|
90
During
the years ended December 31, 2018 and 2017, ACM recognized employee
stock-based compensation expense of $712 and $271, respectively. As
of December 31, 2018 and 2017, $2,424 and $729, 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 1.62
years and 1.77 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,
|
||
|
|
2018
|
|
2017
|
|
Fair
value of common share(1)
|
$5.31-13.85
|
|
$5.60-7.59
|
|
Expected
term in years(2)
|
6.25
|
|
6.25
|
|
Volatility(3)
|
39.14% -43.00%
|
|
28.62% -29.18%
|
|
Risk-free
interest rate(4)
|
2.55%-2.96%
|
|
2.21%-2.22%
|
|
Expected
dividend(5)
|
0%
|
|
0%
|
(1)
Common stock value was the close market value on December 31,
2018.
(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 the Company’s non-employee share
option activities during the year ended December 31,
2018:
|
|
Number of Option Shares
|
Weighted Average Grant Date Fair Value
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Term
|
|
Outstanding
at December 31, 2016
|
1,578,565
|
$
0.51
|
$
1.58
|
6.81
years
|
|
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
years
|
|
Granted
|
-
|
-
|
-
|
-
|
|
Exercised
|
(114,302
)
|
0.43
|
1.92
|
-
|
|
Expired
|
-
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
Outstanding
at December 31, 2018
|
1,212,374
|
$
0.78
|
2.57
|
6.66 years
|
|
Vested
and exercisable at December 31, 2018
|
946,691
|
|
|
|
During
the years ended December 31, 2018 and 2017, the Company recognized
non-employee stock-based compensation expense of $2,651 and $1,351,
respectively.
91
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,
|
||
|
|
2018
|
|
2017
|
|
Fair value of common share(1)
|
$10.88
|
|
$5.25-7.59
|
|
Expected term in years(2)
|
2.58-5.36
|
|
3.58-6.25
|
|
Volatility(3)
|
40.24%-45.48%
|
|
28.71-29.41 %
|
|
Risk-free interest rate(4)
|
2.39%-2.94%
|
|
1.62%-2.43 %
|
|
Expected dividend(5)
|
0%
|
|
0%
|
(1)
Common stock value was the close market value on December 31,
2018.
(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.
NOTE 15 – INCOME TAXES
The
following represent components of the income tax expense (benefit)
for the years ended December 31, 2018 and 2017:
|
|
Year Ended December 31,
|
|
|
|
2018
|
2017
|
|
Current:
|
|
|
|
U.S.
federal
|
$
-
|
$
-
|
|
U.S.
state
|
-
|
-
|
|
Foreign
|
(1,149
)
|
-
|
|
Total
current tax expense
|
(1,149
)
|
-
|
|
Deferred:
|
|
|
|
U.S.
federal
|
-
|
-
|
|
U.S.
state
|
-
|
-
|
|
Foreign
|
343
|
(547
)
|
|
Total
deferred tax income (expense)
|
343
|
(547
)
|
|
Total
income tax expense
|
$
(806
)
|
$
(547
)
|
92
Tax
effects of temporary differences that give rise to significant
portions of the Company’s deferred tax assets at December 31,
2018 and 2017 are presented below:
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
Deferred
tax assets:
|
|
|
|
Net
operating loss carry forwards (offshore)
|
$
16
|
$
4,418
|
|
Net
operating loss carry forwards (U.S.) and credit
|
4,105
|
683
|
|
Deferred
revenue (offshore)
|
558
|
656
|
|
Accruals
(U.S.)
|
11
|
18
|
|
Reserves
and other (offshore)
|
1,080
|
495
|
|
Stock-based
compensation (U.S.)
|
1,021
|
453
|
|
Property
and equipment (U.S.)
|
1
|
2
|
|
Total
gross deferred tax assets
|
6,792
|
6,725
|
|
Less:
valuation allowance
|
(5,155
)
|
(5,431
)
|
|
Total
deferred tax assets
|
1,637
|
1,294
|
|
Total
deferred tax liabilities
|
-
|
-
|
|
Translation
difference
|
-
|
-
|
|
Deferred
tax assets, net
|
$
1,637
|
$
1,294
|
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, 2018 and 2017, 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 $278 for the year ended December
31, 2018 and increased $760 for the year ended December 31, 2017.
The valuation allowance in China decreased by $2 and decreased by
$58 during the years ended December 31, 2018 and 2017,
respectively.
The
Company did not have any significant temporary differences relating
to deferred tax liabilities as of December 31, 2018 or
2017.
As of
December 31, 2018 and 2017, the Company had net operating loss
carry-forwards of respectively, $15,867 and $20,116 for U.S federal
purposes, $714 and $536 for U.S. state purposes and $6,411 for
Chinese income tax purposes. Such losses are set to expire in 2019,
2032, and 2019 for U.S. federal, U.S. state and Chinese income tax
purposes, respectively.
As of
December 31, 2018 and 2017, 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, 2018 and
2017, the Company had not performed an analysis to determine if its
net operating loss and credit carry-forwards would be subject to
such limitations.
93
The
Company’s effective tax rate differs from statutory rates of
21% 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, 2018 and
2017.
Income
tax expense (benefit) for the years ended December 31, 2018
and 2017 differed from the amounts computed by applying the
statutory federal income tax rate of 21% and 34%, respectively, to
pretax income (loss) as a result of the following:
|
|
Year Ended
December 31,
|
|
|
|
2018
|
2017
|
|
Effective
tax rate reconciliation:
|
|
|
|
Income
tax provision at statutory rate
|
21.00
%
|
34.00
%
|
|
State
taxes, net of Federal benefit
|
-
|
-
|
|
Foreign
rate differential
|
(20.88
)
|
6.80
|
|
Other
permanent difference
|
15.59
|
197.7
|
|
Effect
of tax reform
|
-
|
(757
)
|
|
Change
in valuation allowance
|
(4.78
)
|
349.9
|
|
Total
income tax expense (benefit)
|
(10.93
%)
|
(168.65
%)
|
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, 2018 and
2017, are as follows:
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
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,
2018 and 2017.
94
The
Company recognizes interest and penalties related to uncertain tax
positions in income tax expense. As of December 31, 2018 and 2017,
the Company had $44 of accrued penalties and $44 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, 2018 and 2017. There were no ongoing examinations
by taxing authorities as of December 31, 2018 and
2017.
The
Company intends to indefinitely reinvest the PRC earnings outside
of the U.S. as of December 31, 2018 and 2017. 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 was enacted into
law and 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, 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.
NOTE 16 – COMMITMENTS AND CONTINGENCIES
The
Company leases offices under non-cancelable operating lease
agreements. The rental expenses were $1,867 and $670 for the years
ended December 31, 2018 and 2017, respectively. See note 12 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.
NOTE 17 – RESTRICTED NET ASSETS
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 a 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 $32,076
and $29,927 as of December 31, 2018 and 2017.
NOTE 18 – PARENT COMPANY ONLY CONDENSED FINANCIAL
INFORMATION
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, 2018 and
2017.
95
The
following represents condensed unconsolidated financial information
of ACM only as of and for the years ended December 31, 2018
and 2017:
CONDENSED BALANCE SHEET
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
Assets
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
13,161
|
$
10,874
|
|
Accounts
Receivable
|
983
|
118
|
|
Inventory
|
720
|
565
|
|
Due
from intercompany
|
14,494
|
12,669
|
|
Other
receivable
|
175
|
50
|
|
Total
current assets
|
29,533
|
24,276
|
|
Investment
in unconsolidated subsidiaries
|
26,861
|
15,476
|
|
Due
from related party
|
-
|
946
|
|
Total
assets
|
56,394
|
40,698
|
|
Liabilities
and Stockholders’
Equity
|
|
|
|
Notes
payable
|
-
|
11
|
|
Accounts
payable
|
2,818
|
739
|
|
Other
payable
|
58
|
47
|
|
Income
taxes payable
|
1,193
|
44
|
|
Total
liabilities
|
4,069
|
841
|
|
Total
redeemable convertible preferred stocks
|
-
|
-
|
|
Total
stockholders’ equity
|
52,325
|
39,857
|
|
Total
liabilities and stockholders’ equity
|
$
56,394
|
$
40,698
|
CONDENSED STATEMENT OF OPERATIONS
|
|
Year Ended December 31,
|
|
|
|
2018
|
2017
|
|
Revenue
|
$
25,506
|
$
6,985
|
|
Cost
of revenue
|
(23,927
)
|
(6,394
)
|
|
Gross
profit
|
1,579
|
591
|
|
Operating
expenses:
|
|
|
|
Sales
and marketing expenses
|
(301
)
|
(368
)
|
|
General
and administrative expenses
|
(5,083
)
|
(3,961
)
|
|
Research
and development expenses
|
(255
)
|
(50
)
|
|
Loss
from operations
|
(4,060
)
|
(3,788
)
|
|
Equity
in earnings of unconsolidated subsidiaries
|
10,360
|
3,475
|
|
Other
income (expense), net
|
108
|
-
|
|
Interest
expense, net
|
166
|
(5
)
|
|
Income
(loss) before income taxes
|
6,574
|
(318
)
|
|
Income
tax expense (benefit)
|
-
|
-
|
|
Net
income (loss)
|
$
6,574
|
$
(318
)
|
96
CONDENSED STATEMENT OF CASH FLOWS
|
|
Year Ended December 31,
|
|
|
|
2018
|
2017
|
|
Net
cash used in operating activities
|
$
(1,189
)
|
$
(13,848
)
|
|
Net
cash provided by (used in) investing activities
|
946
|
(21,754
)
|
|
Net
cash provided by financing activities
|
3,510
|
38,676
|
|
Net
increase in cash and cash equivalents
|
3,267
|
3,074
|
|
Cash
and cash equivalents, beginning of year
|
10,874
|
7,264
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
(980
)
|
536
|
|
Cash
and cash equivalents, end of year
|
$
13,161
|
$
10,874
|
97
Item 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 under
the Securities Exchange Act of 1934, or the Exchange Act, as of
December 31, 2018. 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 Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and
Exchange Commission 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
Management
is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. Our internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with general accepted accounting principles. 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.
Our
management, with the participation of our Chief Executive Officer
and Chief Accounting Officer, assessed the effectiveness of our
internal control over financial reporting as of December 31,
2018. In making this assessment, our management used the criteria
set forth in the Internal Control-Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on its assessment, management
concluded that our internal control over financial reporting was
effective as of December 31, 2018.
This
report does not include an attestation report of our independent
registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for
“emerging growth companies.”
Changes in Internal Control over Financial Reporting and
Remediation Efforts
During
year ended December 31, 2018, no changes, other than those in
conjunction with certain remediation efforts described below, were
identified to our internal control over financial reporting that
materially affected, or were reasonably likely to materially
affect, our internal control over financial reporting.
In
connection with its audits of our consolidated financial statements
as of, and for the year ended, December 31, 2017, BDO China Shu Lun
Pan Certified Public Accountants LLP 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 Securities
and Exchange Commission financial reporting
requirements.
98
In the
nine months ended September 30, 2018, we hired additional
accounting and finance personnel and engaged outside consulting
firms in order to improve our internal control over the financial
reporting process.
We will
continue to monitor the effectiveness of our internal control over
financial reporting and will seek to employ any additional tools
and resources deemed necessary to enhance our internal control over
financial reporting.
PART III
Item 10. Directors, Executive Officers and Corporate
Governance
Information
responsive to this item is incorporated herein by reference to our
definitive proxy statement with respect to our 2019 Annual Meeting
of Stockholders to be filed with the SEC within 120 days after the
end of the fiscal year covered by this report.
Item 11. Executive Compensation
Information
responsive to this item is incorporated herein by reference to our
definitive proxy statement with respect to our 2019 Annual Meeting
of Stockholders to be filed with the SEC within 120 days after the
end of the fiscal year covered by this report.
Item 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 2019 Annual Meeting
of Stockholders to be filed with the SEC within 120 days after the
end of the fiscal year covered by this report.
Item 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 2019 Annual Meeting
of Stockholders to be filed with the SEC within 120 days after the
end of the fiscal year covered by this report.
Item 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 2019 Annual Meeting
of Stockholders to be filed with the SEC within 120 days after the
end of the fiscal year covered by this report.
99
PART IV
Item 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)
Exhibits.
|
Exhibit No.
|
|
Description
|
|
|
Restated
Certificate of Incorporation of ACM Research, Inc.
|
|
|
|
Restated Bylaws of
ACM Research, Inc.
|
|
|
|
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
|
|
|
4.02
|
|
Senior
Secured Promissory Note dated March 30, 2018 issued by Shengxin
(Shanghai) Management Consulting Limited Partnership to ACM
Research (Shanghai), Inc.
|
|
4.03
|
|
Intercompany
Promissory Note dated March 30, 2018 issued by ACM Research
(Shanghai), Inc. to ACM Research, Inc.
|
|
|
Lease
dated March 22, 2017 between ACM Research, Inc. and D&J
Construction, Inc.
|
|
|
10.01(b)
|
|
Lease
Amendment dated February 28, 2018 between ACM Research, Inc. and
D&J Construction, Inc.
|
|
|
Lease
Amendment dated February 4, 2019 between ACM Research, Inc. and
D&J Construction, Inc.
|
|
|
10.02
|
|
Lease
Agreement dated April 26, 2018 between ACM Research (Shanghai),
Inc. and Shanghai Zhangjiang Group Co., Ltd.
|
|
10.03
|
|
Lease
Agreement dated January 18, 2018 between ACM Research (Shanghai),
Inc. and Shanghai Shengyu Culture Development Co.,
Ltd.
|
|
|
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.
|
100
|
Exhibit No.
|
|
Description
|
|
|
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
|
|
|
10.20+
|
|
Advisory Board
Agreement dated May 1, 2016 by and between ACM Research, Inc. and
Chenming Hu
|
|
10.21
|
|
Line of
Credit Agreement dated January 19, 2018 between ACM Research
(Shanghai), Inc. and Shanghai Rural Commercial Bank
|
|
10.22
|
|
Line of
Credit Agreement dated February 2, 2018 between ACM Research
(Shanghai), Inc. and Bank of Shanghai Pudong Branch
|
|
10.23
|
|
Line of
Credit Agreement dated August 24, 2018 between ACM Research
(Shanghai), Inc. and Bank of China Shanghai Pudong
Branch
|
|
10.24
|
|
Advisory Board
Agreement dated May 1, 2016 by and between ACM Research, Inc. and
Chenming Hu
|
|
10.25
|
|
Warrant
Exercise Agreement dated March 30, 2018 by and among ACM Research,
Inc., ACM Research (Shanghai), Inc., and Shengxin (Shanghai)
Management Consulting Limited Partnership
|
|
21.01
|
|
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
|
+
Indicates
management contract or compensatory plan.
101
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, as of March
14, 2019.
|
|
ACM
RESEARCH, INC.
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
David H.
Wang
|
|
|
|
|
David H.
Wang
|
|
|
|
|
Chief Executive
Officer and President
|
|
Pursuant to the
requirements of the Securities Act of 1934, this report has been
signed below by the following persons in the capacities indicated
on March 14, 2019:
|
Signature
|
|
Title
|
|
|
|
|
|
/s/ David H.
Wang
|
|
|
|
David H. Wang
|
|
Chief
Executive Officer, President and Director
(
Principal Executive
Officer
)
|
|
|
|
|
|
/s/ Lisa
Feng
|
|
|
|
Lisa Feng
|
|
Interim
Chief Financial Officer, Chief Accounting Officer and
Treasurer
(
Principal Accounting
Officer
)
|
|
|
|
|
|
/s/ Haiping
Dun
|
|
|
|
Haiping Dun
|
|
Director
|
|
|
|
|
|
/s/
Chenming Hu
|
|
|
|
Chenming Hu
|
|
Director
|
|
|
|
|
|
/s/
Tracy Liu
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Tracy Liu
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Director
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/s/ Yinan
Xiang
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Yinan Xiang
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Director
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/s/
Zhengfan Yang
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Zhengfan
Yang
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Director
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TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 2: PropertiesItem 3: Legal ProceedingsPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 8. Financial StatementsNote 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 Warrant LiabilityNote 9 Other Long-term LiabilitiesNote 10 Equity Method InvestmentNote 11 Related Party Balances and TransactionsNote 12 LeasesNote 13 Common StockNote 14 Stock-based CompensationNote 15 Income TaxesNote 16 Commitments and ContingenciesNote 17 Restricted Net AssetsNote 18 Parent Company Only Condensed Financial InformationItem 9A. Controls and ProceduresPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules