NOTE 15– STOCK-BASED COMPENSATION
ACM’s stock-based compensation awards consisting of employee and non-employee awards were issued under the 1998 Stock Option Plan and 2016 Omnibus Incentive Plan and as standalone options.
Employee Awards
The following table summarizes the Company’s employee share option activities during the nine months ended September 30, 2019:
| | | Number of Option Share | | | Weighted Average Grant Date Fair Value | | | Weighted Average Exercise Price | | Weighed Average Remaining Contractual Term | |
| Outstanding at December 31, 2018 | | | 2,503,405 | | | $ | 0.91 | | | $ | 4.09 | | 7.30 years | |
| Granted | | | 614,000 | | | | 6.30 | | | | 16.39 | | | |
| Exercised | | | (105,113 | ) | | | 0.60 | | | | 2.08 | | | |
| Expired | | | (628 | ) | | | 0.55 | | | | 3.00 | | | |
| Forfeited/cancelled | | | (41,203 | ) | | | 1.35 | | | | 3.82 | | | |
| Outstanding at September 30, 2019 | | | 2,970,461 | | | $ | 2.55 | | | $ | 6.71 | | 7.28 years | |
| Vested and exercisable at September 30, 2019 | | | 1,673,780 | | | | | | | | | | | |
In addition to the above share option activities, as mentioned in note 14, purchase price paid by the Employee Entities was at a discount of 20% from the purchase price paid by the other investors, and there was no vesting condition attached to the subscription. Accordingly, the Company determined the discount as stock based compensation expenses, which amounted to $949.
During the three months ended September 30, 2019 and 2018, the Company recognized employee stock-based compensation expense of $1,329 and $195, respectively. During the nine months ended September 30, 2019 and 2018, the Company recognized employee stock-based compensation expense of $1,841 and $458, respectively. As of September 30, 2019 and December 31, 2018, $5,009 and $2,424, 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 1.63 years and 1.62 years, respectively. Total recognized compensation cost may be adjusted for future changes in estimated forfeitures.
The change in recognized and unrecognized employee stock-based compensation expense during the three and nine months ended September 30, 2019 included the effect of the employee share option activities in the table above, together with an incremental $949 due to the discounted purchase price paid by the Employee Entities for their investments in ACM Shanghai (note 14).
Stock options to acquire 319,000 and 614,000 shares, respectively, of Class A common stock were granted to employees during the three and nine months ended September 30, 2019. Stock options to acquire 31,339 shares of Class A common stock held by employees were canceled pursuant to the Equity Purchase Agreement (note 11) during the three and nine months ended September 30, 2019.
ACM RESEARCH, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(in thousands, except share and per share data)
Non-employee Awards
The following table summarizes the Company’s non-employee share option activities during the nine months ended September 30, 2019:
| | | Number of
Option Shares | | | Weighted
Average Grant
Date Fair Value | | | Weighted
Average Exercise
Price | | | Weighted Average Remaining Contractual Term | |
| Outstanding at December 31, 2018 | | | 1,212,374 | | | $ | 0.78 | | | $ | 2.57 | | | 6.66 years | |
| Granted | | | - | | | | - | | | | - | | | | - | |
| Exercised | | | (88,529 | ) | | | 0.45 | | | | 1.06 | | | | - | |
| Expired | | | - | | | | - | | | | - | | | | - | |
| Forfeited/cancelled | | | (22,232 | ) | | | 0.55 | | | | 3.00 | | | | - | |
| Outstanding at September 30, 2019 | | | 1,101,613 | | | $ | 0.82 | | | $ | 2.69 | | |
| 6.10 years | |
| Vested and exercisable at September 30, 2019 | | | 959,845 | | | | | | | | | | | | | |
The Company adopted ASU 2018-07 on January 1, 2019, and the stock-based compensation expense for grants before the adoption of ASU 2018-07 is based on the grant date fair value as of December 31, 2018, which was the last business day before the Company adopted ASU 2018-07, for all nonemployee awards that have not vested as of December 31, 2018. The cumulative-effect adjustment to retained earnings as of January 1, 2019 was immaterial to the financial statements as a whole. Accordingly, the Company did not record this adjustment as of January 1, 2019. Furthermore, for future awards, compensation expense is based on the fair value of the shares at the grant date.
During the three months ended September 30, 2019 and 2018, the Company recognized stock-based compensation expense of $228 and $216, respectively, related to share option vesting. During the nine months ended September 30, 2019 and 2018, the Company recognized stock-based compensation expense of $1,078 and $2,313, respectively, related to share option vesting. As of September 30, 2019 and December 31, 2018, $634 and $1,713, respectively, of total unrecognized non-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 0.33 years and 1.31 years, respectively. Total recognized compensation cost may be adjusted for future changes in estimated forfeitures.
Stock options to acquire 22,232 shares of Class A common stock held by a director were canceled pursuant to the Equity Purchase Agreement (note 11) during the three and nine months ended September 30, 2019.
NOTE 16 – INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period during which such rates are enacted.
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.
As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. Prior to September 30, 2019, the Company had recorded a valuation allowance for the full amount of net deferred tax assets in the United States, as the realization of deferred tax assets was uncertain. The Company has now concluded that, as of September 30, 2019, it was more likely than not that the Company will generate sufficient U.S. taxable income within the applicable net operating loss carry-forward periods to realize a portion of its deferred tax assets. This conclusion, and the resulting partial reversal of the deferred tax asset valuation allowance, is based upon consideration of a number of factors, including the Company’s completion of a seventh consecutive quarter of profitability, recent operating results, forecast of future profitability, and a U.S. tax law change which affects reporting of foreign profits in the United States. Thus, the Company determined that there is sufficient positive objective evidence to conclude that it is more likely than not that a portion of deferred taxes are realizable. It, therefore, has reduced the valuation allowance accordingly, which resulted in a one-time tax benefit in the third quarter of $1,440. In order to recognize the remaining U.S. deferred tax assets that continue to be subject to a valuation allowance, the Company will need to generate sufficient U.S. taxable income in future periods before the expiration of the deferred tax assets governed by the tax code.
ACM RESEARCH, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(in thousands, except share and per share data)
ACM Shanghai has shown a three-year historical cumulative profit and has projections of future income. As a result, the Company maintained a partial consolidated valuation allowance for the three and nine months ended September 30, 2019 and December 31, 2018.
The Company accounts for uncertain tax positions in accordance with the authoritative guidance on income taxes under which the Company may only recognize or continue to recognize tax positions that meet a "more likely than not" threshold. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.
The Company’s effective tax rate differs from statutory rates of 21% for U.S. federal income tax purposes and 15% to 25% for Chinese income tax purposes due to the effects of the valuation allowance and certain permanent differences from book-tax differences. As a result, the Company recorded income tax benefit of $328 and income tax expense of $461 during the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, the Company recorded income tax expense of $667 and $647, respectively.
As of September 30, 2019, the Company's total unrecognized tax benefits were approximately $44, which would not affect the effective tax rate if recognized. The Company will recognize interest and penalties, when they occur, related to uncertain tax provisions as a component of tax expense. No interest or penalties were recognized for the three and nine months ended September 30, 2019.
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, 2018. 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 Tax Act enacted on December 22, 2017 introduced significant changes to U.S. income tax law. Effective January 1, 2018, the Tax Act reduced the U.S. statutory tax rate from 35% to 21% and created new taxes on certain foreign-sourced earnings and certain intercompany payments. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of December 31, 2017. There were no adjustments made in the nine months ended September 30, 2019. The accounting for the tax effects of the Tax Act was completed in 2018.
NOTE 17 – COMMITMENTS AND CONTINGENCIES
The Company leases offices under non-cancelable operating lease agreements. See note 8 for future minimum lease payments under non-cancelable operating lease agreements with initial terms of one year or more.
As of September 30, 2019, the Company had $303 of open capital commitments.
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. As of September 30, 2019, the Company did not have any legal proceedings.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, or our Annual Report. The following discussion contains forward‑looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward‑looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in the section titled “Item 1A. Risk Factors” in Part II below.
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. Our customers for single-wafer wet-cleaning tools have included Semiconductor Manufacturing International Corporation, Shanghai Huali Microelectronics Corporation, SK Hynix Inc. and Yangtze Memory Technologies Co., Ltd. We recognized revenue from sales of single-wafer wet cleaning equipment totaling $69.5 million, or 84% of total revenue, for the first nine months of 2019 compared to $51.4 million, or 96% of total revenue, for the first nine months of 2018.
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 75 single-wafer wet cleaning tools, more than 60 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.
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 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 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 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 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.
In March 2019, we introduced (a) the Ultra ECP AP, or Advanced Wafer Level Packaging tool, a back-end assembly tool used for bumping, or applying copper, tin and nickel to wafers at the die-level prior to packaging, and (b) the Ultra ECP MAP or Multi Anode Plating tool, a front-end process tool that utilizes our proprietary technology to deliver world-class electrochemical copper planting for copper interconnect applications.
Proposed Listing of ACM Shanghai Shares on STAR Market
For purposes of the following description, RMB amounts have been translated into U.S. dollars solely for the convenience of the reader. The translations have been made at the conversion rate of RMB 6.8937 to U.S. $1.00 effective as of June 12, 2019.
On June 17, 2019 we announced our plans to complete, over the next three years:
| • | a listing, which we refer to as the Listing, of shares of ACM Shanghai on the Shanghai Stock Exchange’s new Sci-Tech innovAtion boaRd, known as the STAR Market; and |
| • | a concurrent initial public offering, which we refer to as the STAR IPO, of ACM Shanghai shares in the PRC. |
To qualify for the Listing, ACM Shanghai must have multiple independent shareholders in the PRC. As an initial step in qualifying for the Listing, on June 12, 2019 ACM Shanghai entered into agreements with seven investors pursuant to which those investors agreed to pay a purchase price totaling RMB 187.9 million ($27.3 million) to ACM Shanghai for shares representing 4.2% of the then-outstanding ACM Shanghai shares. Pursuant to these agreements, in July 2019, ACM Shanghai made the required filings for the capital increase with the local agency of the PRC Ministry of Commerce, and the investors became obligated to fund their purchases. As of September 30, 2019, all of the investors had funded the purchase prices for their subscribed shares, all capital increase filings had been completed with the local branch of the PRC State Administration for Market Regulation, and all of the subscribed shares had been issued to the investors.
ACM Shanghai and the investors have agreed to use their respective best efforts to facilitate the completion, within three years from the date on which the ACM Shanghai shares are issued to the investors, of the Listing and the STAR IPO, with the STAR IPO to be completed at a pre-offering valuation of not less than RMB 5.15 billion ($747.1 million). If, by the end of such three-year period, the Listing and the STAR IPO have not been completed and the China Securities Regulatory Commission has not otherwise approved the registration of ACM Shanghai’s Listing application, each investor will have the right to require that ACM Shanghai repurchase, and ACM Shanghai will have the right to purchase, the investor’s ACM Shanghai shares for a price equal to the initial purchase price paid by the investor, without interest.
We have determined, voluntarily and not pursuant to any contractual or legal obligation, that ACM Shanghai will deposit, and hold in reserve, the proceeds from the share sales in segregated cash and cash-equivalent accounts pending either (a) completion of the Listing and the STAR IPO or (b) application to repurchase the shares from the investors.
We may determine to enter into additional agreements in the year ending December 31, 2019 pursuant to which certain existing ACM Research stockholders and other investors could purchase additional shares of ACM Shanghai for an aggregate purchase price of approximately $32 million. We expect that, if we were to enter any such agreements, the purchase price and other terms of those agreements would be substantially similar to those under the agreements entered into with the investors other than the employee entities.
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 $2.9 million in the first nine months of 2019, as compared to $0.8 million in the first nine months of 2018. |
| • | 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 $111,000 and $109,000 in the first nine months of 2019 and 2018, respectively. |
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 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” as our income 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 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 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 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 in the three months ended September 30, 2019 totaled $43 million, as compared to $32 million in the three months ended September 30, 2018, and $33 million in the three months ended June 30, 2019. Shipments in the nine months ended September 30, 2019 totaled $90 million, as compared to $63 million in the nine months ended September 30, 2018.
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, 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, 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, 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, the most directly comparable GAAP financial measure, to adjusted EBITDA:
| | | Nine Months Ended September 30, | |
| | | 2019 | | | 2018 | |
| | | (in thousands) | |
| Adjusted EBITDA Data: | | | | | | |
Net Income | | $ | 15,257 | | | $ | 4,288 | |
| Interest expense, net | | | 410 | | | | 344 | |
| Income tax expense | | | 667 | | | | 647 | |
| Depreciation and amortization | | | 586 | | | | 380 | |
| Stock based compensation | | | 2,919 | | | | 2,771 | |
| Adjusted EBITDA | | $ | 19,839 | | | $ | 8,430 | |
Adjusted EBITDA in the nine months ended September 30, 2019, increased by $11.4 million as compared to the same period in 2018, due to an increase of $11.0 million in net income, an increase of $66,000 in interest expense, an increase of $20,000 in income tax expense, an increase of $206,000 in depreciation and amortization, and an increase of $148,000 in stock-based compensation expense. 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 materially 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.”
Free Cash Flow
The following table reconciles net cash provided by operating activities, the most directly comparable GAAP financial measure, to free cash flow:
| | | Nine Months Ended September 30, | |
| | | 2019 | | | 2018 | |
| | | (in thousands) | |
| Free Cash Flow Data: | | | | | | |
| Net cash used in operating activities | | $ | (4,752 | ) | | $ | (2,733 | ) |
| Purchase of property and equipment | | | (832 | ) | | | (1,598 | ) |
| Purchase of intangible assets | | | (114 | ) | | | (350 | ) |
| Free cash flow | | $ | (5,698 | ) | | $ | (4,681 | ) |
Free cash flow in the nine months ended September 30, 2019, declined by $1 million as compared with the same period in 2018, due to an increase of $2 million of cash used in operating activities that was offset by a decrease of $1.0 million in purchase of property and equipment and intangible assets. 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 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 from operations:
| | | Three Months Ended September 30, | |
| | | 2019 | | | | 2018 | |
| | | Actual (GAAP) | | | SBC | | | Adjusted (Non-GAAP) | | | | Actual (GAAP) | | | SBC | | | Adjusted (Non-GAAP) | |
| | | | | | | | | (in thousands) | | | | | | | |
| Revenue | | $ | 33,427 | | | $ | - | | | $ | 33,427 | | | | $ | 23,179 | | | $ | - | | | $ | 23,179 | |
| Cost of revenue | | | (17,173 | ) | | | (154 | ) | | | (17,019 | ) | | | | (12,892 | ) | | | (25 | ) | | | (12,867 | ) |
| Gross profit | | | 16,254 | | | | (154 | ) | | | 16,408 | | | | | 10,287 | | | | (25 | ) | | | 10,312 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales and marketing | | | (3,886 | ) | | | (172 | ) | | | (3,714 | ) | | | | (3,229 | ) | | | (42 | ) | | | (3,187 | ) |
| Research and development | | | (3,492 | ) | | | (759 | ) | | | (2,733 | ) | | | | (2,264 | ) | | | (64 | ) | | | (2,200 | ) |
| General and administrative | | | (1,846 | ) | | | (472 | ) | | | (1,374 | ) | | | | (1,390 | ) | | | (280 | ) | | | (1,110 | ) |
| Income (loss) from operations | | $ | 7,030 | | | $ | (1,557 | ) | | $ | 8,587 | | | | $ | 3,404 | | | $ | (411 | ) | | $ | 3,815 | |
Adjusted operating income for the three months ended on September 30, 2019, as compared with the same period in 2018 increased by $4.8 million, due to increases of $3.6 million in income from operations and $1.1 million in stock-based compensation expense.
| | | Nine Months Ended September 30, | |
| | | 2019 | | | | 2018 | |
| | | Actual (GAAP) | | | SBC | | | Adjusted (Non-GAAP) | | | | Actual (GAAP) | | | SBC | | | Adjusted (Non-GAAP) | |
| | | | | | | | | (in thousands) | | | | | | | |
| Revenue | | $ | 82,916 | | | $ | - | | | $ | 82,916 | | | | $ | 53,795 | | | $ | - | | | $ | 53,795 | |
| Cost of revenue | | | (44,705 | ) | | | (213 | ) | | | (44,492 | ) | | | | (29,662 | ) | | | (44 | ) | | | (29,618 | ) |
| Gross profit | | | 38,211 | | | | (213 | ) | | | 38,424 | | | | | 24,133 | | | | (44 | ) | | | 24,177 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales and marketing | | | (8,679 | ) | | | (252 | ) | | | (8,427 | ) | | | | (7,766 | ) | | | (115 | ) | | | (7,651 | ) |
| Research and development | | | (9,598 | ) | | | (939 | ) | | | (8,659 | ) | | | | (6,224 | ) | | | (131 | ) | | | (6,093 | ) |
| General and administrative | | | (5,992 | ) | | | (1,515 | ) | | | (4,477 | ) | | | | (6,312 | ) | | | (2,481 | ) | | | (3,831 | ) |
| Income (loss) from operations | | $ | 13,942 | | | $ | (2,919 | ) | | $ | 16,861 | | | | $ | 3,831 | | | $ | (2,771 | ) | | $ | 6,602 | |
Adjusted operating income for the nine months ended on September 30, 2019 as compared with the same period in 2018, increased by $10.3 million, due to increases of $10.1 million in income from operations and $148,000 in stock-based compensation expense.
Critical Accounting Policies and Significant Judgments and Estimates
There were no significant changes in our critical accounting policies or significant judgments or estimates during the nine months ended September 30, 2019 to augment the critical accounting estimates disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report, other than those described in the notes to the condensed consolidated financial statements included in this report, including the adoption of the Financial Accounting Standards Board’s Accounting Standards Update 2016-02, Leases (Topic 842) effective January 1, 2019. As a result of our adoption of the new lease standard, we re-assessed the estimates, assumptions, and judgments that are most critical in our recognition of lease and have revised our lease critical accounting policy. For information regarding the impact of recently adopted accounting standards, refer to note 2 to the condensed financial statements included in this report.
Recent Accounting Pronouncements
A discussion of recent accounting pronouncements is included in our Annual Report and is updated in note 2 to the condensed consolidated financial statements included in this report.
Results of Operations
The following table sets forth our results of operations for the periods presented, as percentages of revenue.
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| Revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Cost of revenue | | | 51.4 | | | | 55.6 | | | | 53.9 | | | | 55.1 | |
| Gross margin | | | 48.6 | | | | 44.4 | | | | 46.1 | | | | 44.9 | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Sales and marketing | | | 11.6 | | | | 13.9 | | | | 10.5 | | | | 14.4 | |
| Research and development | | | 10.4 | | | | 9.8 | | | | 11.6 | | | | 11.6 | |
| General and administrative | | | 5.5 | | | | 6.0 | | | | 7.2 | | | | 11.7 | |
| Total operating expenses, net | | | 27.6 | | | | 29.7 | | | | 29.3 | | | | 37.7 | |
| Income from operations | | | 21.0 | | | | 14.7 | | | | 16.8 | | | | 7.2 | |
| Interest expense, net | | | (0.3 | ) | | | (0.5 | ) | | | (0.5 | ) | | | (0.6 | ) |
| Other expense, net | | | 5.5 | | | | 3.9 | | | | 2.6 | | | | 2.3 | |
| Equity income (loss) in net income (loss) of affiliates | | | 0.0 | | | | 0.5 | | | | 0.3 | | | | 0.4 | |
| Income before income taxes | | | 26.2 | | | | 18.6 | | | | 19.2 | | | | 9.3 | |
| Income tax (expense) benefit | | | 1.0 | | | | (2.0 | ) | | | (0.8 | ) | | | (1.2 | ) |
| Net income | | | 27.2 | | | | 16.6 | | | | 18.4 | | | | 8.1 | |
| Less: Net income attributable to redeemable non-controlling interests | | | 0.9 | | | | - | | | | 0.4 | | | | - | |
| Net income attributable to ACM Research, Inc. | | | 26.3 | % | | | 16.6 | % | | | 18.0 | % | | | 8.1 | % |
Comparison of Three Months Ended September 30, 2019 and 2018
Revenue
| | | Three Months Ended September 30, | �� | | | |
| | | 2019 | | | 2018 | | | % Change 2019 v 2018 | |
| | | (in thousands) | | | | |
| Revenue | | $ | 33,427 | | | $ | 23,179 | | | | 44.2 | % |
The increase in revenue of $10.3 million in the three months ended September 30, 2019 as compared to the same period in 2018 reflected increases in revenue of $5.7 million from single-wafer cleaning equipment, and increases in revenue of $4.6 million from back-end wafer assembly and packaging equipment. The increase in revenue was driven by a higher number of tools shipped for revenue, offset by a decrease in customer acceptances from prior period shipments received and recognized as revenue during the three months ended September 30, 2019.
Cost of Revenue and Gross Margin
| | | Three Months Ended September 30, | | | | |
| | | 2019 | | | 2018 | | | % Change 2019 v 2018 | |
| | | (in thousands) | | | | |
| Cost of revenue | | $ | 17,173 | | | $ | 12,892 | | | | 33.2 | % |
| Gross profit | | $ | 16,254 | | | $ | 10,287 | | | | 58.0 | |
| Gross margin | | | 48.63 | % | | | 44.38 | % | | | 4.2 | |
Cost of revenue increased $4.3 million and gross profit increased 6.0 million in the three months ended September 30, 2019, as compared to the corresponding period in 2018, due to increased sales volume and higher gross margin. Gross margin increased by 4.2 percentage points during the three months ended September 30, 2019, versus the comparable period in 2018 due to a favorable product mix.
Gross margin may vary from period to period, primarily related to the level of utilization and the timing and mix of purchase orders. We expect gross margin to be between 40.0% and 45.0% for the foreseeable future, with direct manufacturing costs approximating 50.0% to 55.0% of revenue and overhead costs totaling 5.0% of revenue.
Operating Expenses
| | | Three Months Ended September 30, | | | | |
| | | 2019 | | | 2018 | | | % Change 2019 v 2018 | |
| | | (in thousands) | | | | |
| Sales and marketing expense | | $ | 3,886 | | | $ | 3,229 | | | | 20.3 | % |
| Research and development expense | | | 3,492 | | | | 2,264 | | | | 54.2 | |
| General and administrative expense | | | 1,846 | | | | 1,390 | | | | 32.8 | |
| Total operating expenses | | $ | 9,224 | | | $ | 6,883 | | | | 34.0 | |
Sales and marketing expense increased by $657,000 in the three months ended September 30, 2019, as compared to the corresponding period in 2018. Sales and marketing expense consists primarily of:
| • | compensation of personnel associated with pre and aftersales 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; |
| • | travel and entertainment; and |
| • | allocated overhead for rent and utilities. |
Research and development expense increased by $1.2 million in the three months ended September 30, 2019 as compared to the corresponding period in 2018, principally as a result of increases in testing fees and personnel costs. Research and development expense represented 10.4% and 9.8% of our revenue in the three months ended September 30, 2019 and 2018, 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 $4.4 million, or 13.1% of revenue, in the three months ended September 30, 2019 and $2.7 million, or 11.5% of revenue, in the three months ended September 30, 2018. 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. |
General and administrative expense increased by $456,000 in the three months ended September 30, 2019 as compared to the corresponding period in 2018. 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 expenses will increase in absolute dollars, as we incur additional costs associated with growing our business and operating as a public company
Other Income and Expenses
| | | Three Months Ended September 30, | | | | |
| | | 2019 | | | 2018 | | | % Change 2019 v 2018 | |
| | | (in thousands) | | | | |
| Interest expense, net | | $ | (110 | ) | | $ | (109 | ) | | | 0.9 | % |
| Other income, net | | | 1,850 | | | | 902 | | | | 105.1 | |
Interest expense consists of interest incurred from outstanding short-term borrowings. Interest expense increased by $1,000 in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018, as a result of increased borrowings under short-term bank loans, partly offset by an increase in cash and equivalents. We earn interest income from depositary accounts. Interest income was $95,000 in the three months ended September 30, 2019 as compared to $3,000 in the same period of 2018.
Non-operating income (expense), net primarily reflects (a) gains or losses recognized from the impact of exchange rates on our foreign currency-denominated working-capital transactions 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 non-operating income was $1.85 million in the three months ended September 30, 2019 due to gains and losses of the RMB to U.S. dollar exchange rate during the quarter, compared to non-operating income of $902,000 in the three months ended September 30, 2018 due to gains and losses of RMB-to-U.S. dollar exchange rate during the quarter.
Income Tax Expense
The following presents components of income tax expense for the indicated periods:
| | | Three Months Ended September 30, | |
| | | 2019 | | | 2018 | |
| | | (in thousands) | |
| Current: | | | | | | |
| U.S. federal | | $ | - | | | $ | - | |
| U.S. state | | | | | | | - | |
| Foreign | | | 328 | | | | (461 | ) |
| Total current income tax expense | | | 328 | | | | (461 | ) |
| Deferred: | | | | | | | | |
| U.S. federal | | | - | | | | - | |
| U.S. state | | | - | | | | - | |
| Foreign | | | - | | | | - | |
| Total deferred income expense | | | - | | | | - | |
| Total current income tax expense | | $ | 328 | | | $ | (461 | ) |
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. There were no adjustments made in the three months ended September 30, 2019. The accounting for the tax effects of the Tax Act was completed in 2018.
Our effective tax rate differs from statutory rates of 21% for U.S. federal income tax purposes and 15% to 25% for Chinese 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 and 2018, with an effective period of three years.
We file income tax returns in the United States and state and foreign jurisdictions. Those federal, state and foreign income tax returns are under the statute of limitations subject to tax examinations for 2009 through 2016. To the extent we have tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state or foreign tax authorities to the extent utilized in a future period.
Net Income Attributable to Redeemable Non-Controlling Interests
As described above under “—Proposed Listing of ACM Shanghai Shares on STAR Market,” in the three months ended September 30, 2019, ACM Shanghai sold to seven investors a total number of shares representing 4.2% of its then-outstanding ACM Shanghai shares. ACM Research continues to hold the remaining 95.8% of ACM Shanghai’s outstanding shares. As a result, commencing with the three months ended September 30, 2019, we reflect, as net income attributable to non-controlling interests, the portion of our net income allocable to the minority holders of ACM Shanghai shares. In the three months ended September 30, 2019, this amount totaled $307,000.
Comparison of Nine Months Ended September 30, 2019 and 2018
Revenue
| | | Nine Months Ended September 30, | | | | |
| | | 2019 | | | 2018 | | | Y/Y %Change | |
| | | (in thousands) | | | | |
| Revenue | | $ | 82,916 | | | $ | 53,795 | | | | 54.1 | % |
The increase in revenue of $29.1 million in the nine months ended September 30, 2019 as compared to the same period in 2018, was driven by an $18.2 million increase in revenue from single-wafer cleaning tools, and an $11.0 million increase in revenue from back-end wafer assembly and packaging equipment. The revenue increase reflected an increased number of tools shipped, coupled with higher selling prices associated with the equipment sold and increased customer acceptances from prior period shipments received and recognized as revenue during the nine months ended September 30, 2019.
Cost of Revenue and Gross Margin
| | | Nine Months Ended September 30, | | | | |
| | | 2019 | | | 2018 | | | Y/Y %Change | |
| | | (in thousands) | | | | |
| Cost of revenue | | $ | 44,705 | | | $ | 29,662 | | | | 50.7 | % |
| Gross profit | | $ | 38,211 | | | $ | 24,133 | | | | 58.3 | |
| Gross margin | | | 46.1 | % | | | 44.9 | % | | | 1.2 | % |
Cost of revenue increased $15.0 million and gross profit increased $14.1 million in the nine months ended September 30, 2019, as compared to the corresponding period in 2018, primarily due to increased sales volume. Gross margin increased by 1.2 percentage points during the nine months ended September 30, 2019, from the comparable period in 2018.
Operating Expenses
| | Nine Months Ended September 30, | | | | |
| | | 2019 | | | 2018 | | | Y/Y %Change | |
| | | (in thousands) | | | | |
| Sales and marketing expense | | $ | 8,679 | | | $ | 7,766 | | | | 11.8 | % |
| Research and development expense | | | 9,598 | | | | 6,224 | | | | 54.2 | |
| General and administrative expense | | | 5,992 | | | | 6,312 | | | | (5.1 | ) |
| Total operating expenses | | $ | 24,269 | | | $ | 20,302 | | | | 19.5 | |
Sales and marketing expense increased by $913,000 in the nine months ended September 30, 2019, as compared to the corresponding period in 2018.
Research and development expense increased by $3.4 million in the nine months ended September 30, 2019 as compared to the corresponding period in 2018, principally as a result of increases in testing fees and personnel costs. Research and development expense represented 11.6% of our revenue in the nine months ended September 30, 2019 and 11.6% of our revenue in the nine months ended September 30 2018. 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 $12.5 million, or 15.1% of revenue, in the nine months ended September 30, 2019 and $6.2 million, or 13.0% of revenue, in the nine months ended September 30, 2018. Research and development expense relates to the development of new products and processes and encompasses our research, development and customer support activities.
General and administrative expense decreased by $320,000 in the nine months ended September 30, 2019 as compared to the corresponding period in 2018.
Other Income and Expenses
| | | Nine Months Ended September 30, | | | | |
| | | 2019 | | | 2018 | | | Y/Y % Change | |
| | | (in thousands) | | | | |
| Interest expense, net | | $ | (410 | ) | | $ | (344 | ) | | | 19.2 | % |
| Other income, net | | | 2,132 | | | | 1,213 | | | | 75.8 | |
Interest expense increased by $66,000 in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018, principally as a result of increased borrowings under short-term bank loans. We earn interest income from depositary accounts. Interest income was $128,000 in the nine months ended September 30, 2019 as compared to $20,000 in the nine months ended September 30, 2018.
Our non-operating income was $2.1 million in the nine months ended September 30, 2019 due to gains and losses of the RMB- to-U.S. dollar exchange rate during the quarter, compared to non-operating income of $1.2 million in the nine months ended September 30, 2018 due to gains and losses of RMB-to-U.S. dollar exchange rate during the quarter.
Income Tax Expense
The following presents components of income tax expense for the indicated periods:
| | | Nine Months Ended September 30, | |
| | | 2019 | | | | 2018 | |
| | | (in thousands) | |
| Current: | | | | | |
| |
| U.S. federal | | $ | - | | | | $ | - | |
| U.S. state | | | - | | | | | - | |
| Foreign | | | (667 | ) | | | | (647 | ) |
| Total current tax expense | | | (667 | ) | | | | (647 | ) |
| Deferred: | | | | | | | | | |
| U.S. federal | | | - | | | | | - | |
| U.S. state | | | - | | | | | - | |
| Foreign | | | | | | | | 0 | |
| Total deferred tax expense | | | | | | | | | |
| Total income tax expense | | | (667 | ) | | | | (647 | ) |
There were no adjustments with respect to the Tax Act made in the nine months ended September 30, 2019.
Net Income Attributable to Redeemable Non-Controlling Interests
As described above under “—Proposed Listing of ACM Shanghai Shares on STAR Market,” in the nine months ended September 30, 2019, ACM Shanghai sold to seven investors a total number of shares representing 4.2% of its then-outstanding ACM Shanghai shares. ACM Research continues to hold the remaining 95.8% of ACM Shanghai’s outstanding shares. As a result, commencing with the nine months ended September 30, 2019, we reflect, as net income attributable to non-controlling interests, the portion of our net income allocable to the minority holders of ACM Shanghai shares. In the nine months ended September 30, 2019, this amount totaled $307,000.
Liquidity and Capital Resources
During the first nine months of 2019 we funded our technology development and operations principally through application of proceeds from the initial public offering of Class A common stock and concurrent private placements in November 2017, proceeds from a follow-on public offering of Class A common stock in August 2019, and, to a lesser extent, from short-term borrowings by ACM Shanghai from local financial institutions. During the nine months ended September 30, 2019, our operations used cash flow of $4.8 million and we received $2.9 million in research and development grants from local and central PRC governmental authorities.
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. 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.
As described above under “—Proposed Listing of ACM Shanghai Shares on STAR Market,” proceeds received from investors to purchase shares of ACM Shanghai in the third quarter of 2019 have been deposited and are being held in reserve in segregated cash and cash-equivalent accounts pending either (a) completion of the STAR Market listing and PRC initial public offering or (b) application to repurchase the shares from the investors. As a result, during that period those proceeds will not be available to operate our business or for other corporate purposes.
Sources of Funds
Equity and Equity-Related Securities. During the three months ended September 30, 2019, we received:
| • | net proceeds of $26.5 million from our sale of 2,053,572 shares of Class A common stock to the public, of which we have applied, or will apply, $3.4 million of net proceeds to repurchase outstanding shares of Class A common stock (see “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds—Issuer Purchases of Equity Securities” in this Part II), and to cancel options to acquire shares of Class A common stock, from certain officers and directors, and an officer affiliate, pursuant to an equity purchase agreement entered into in connection with the public offering; and |
| • | proceeds of $140,000 from sales of common stock pursuant to option exercises. |
Indebtedness. ACM Shanghai is a party to lines of credit with four banks, as follows:
| Lender | | Agreement Date | | Maturity Date | | Annual Interest Rate | | | Maximum Borrowing Amount(1) | | | Amount Outstanding at September30, 2019 | |
| | | | | | | | | | (in thousands) | |
| Bank of Shanghai Pudong Branch | | January 2019 | | January 2020 | | | 5.22 | % | | RMB50,000 | | | RMB49,792 | |
| | | | | | | | | | | $ | 7,070 | | | $ | 7,041 | |
| Shanghai Rural Commercial Bank | | Feburary 2019 | | January 2020 | | | 5.66 | % | | RMB20,000 | | | RMB10,000 | |
| | | | | | | | | | | $ | 2,828 | | | $ | 1,414 | |
| Bank of Communications | | January 2019 | | January 2020 - February 2020 | | | 5.66 | % | | RMB20,000 | | | RMB20,000 | |
| | | | | | | | | | | $ | 2,828 | | | $ | 2,828 | |
| China Everbright Bank | | Feburary 2019 | | March 2020 - April 2020 | | | 4.94% - 5.66 | % | | RMB50,000 | | | RMB30,996 | |
| | | | | | | | | | | $ | 7,070 | | | $ | 4,382 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | RMB140,000 | | | RMB110,788 | |
| | | | | | | | | | | $ | 19,796 | | | | 15,665 | |
| (1) | Converted from RMB to U.S. dollars as of September 30, 2019. |
All of the amounts owing under the lines of credit with Bank of Shanghai Pudong Branch are guaranteed by our Chairman of the Board, Chief Executive Officer and President Dr. David H. Wang and by our subsidiary Cleanchip Technologies Ltd. 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. All of the amounts owing under the lines of credit with China Everbright Bank are guaranteed by Dr. Wang.
Working Capital. The following table sets forth selected working capital information:
| | | September 30, 2019 | |
| | | (in thousands) | |
| Cash and cash equivalents | | $ | 47,264 | |
| Accounts receivable, less allowance for doubtful amounts | | | 43,144 | |
| Inventory | | | 43,506 | |
| Working capital | | $ | 133,914 | |
Our cash and cash equivalents at September 30, 2019 were unrestricted and, except for proceeds received from investors to purchase shares of ACM Shanghai that we have elected to hold in reserve in segregated cash and cash-equivalent accounts as described in “—Proposed Listing of ACM Shanghai Shares on STAR Market,” are being held for working capital purposes. ACM Shanghai, our only direct PRC subsidiary, is, however, subject to PRC restrictions on distributions to equity holders. We currently intend for ACM Shanghai to retain all available funds any future earnings for use in the operation of its business and do not anticipate its paying any cash dividends. We have not entered into, and do not expect to enter into, investments for trading or speculative purposes. Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating activities. Fluctuations vary depending on cash collections, client mix, and the timing of shipment and acceptance of our tools.
Uses of Funds
Cash Flow from Operating Activities. Our operations used cash flow of $4.8 million in the first nine months of 2019. 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) the magnitude of our product sales and associated gross profits, and (c) the amount and timing of payments by customers.
Capital Expenditures. We estimate that our capital expenditures in 2019 will total approximately $2.4 million. We incurred $946,000 of capital expenditures during the nine months ended September 30, 2019 and had unpaid capital commitments of $303,000 as of September 30, 2019. ACM Shanghai is evaluating the desirability of entering into an agreement to purchase land in the Shanghai PRC region that could serve as a site for a future production facility and research and development center, and that would require additional capital expenditures for ACM Shanghai in 2019 or 2020.
Contractual Obligations and Requirements. Our contractual obligations and other commercial commitments are summarized in the section captioned “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations and Requirements” in our Annual Report. Other than changes that occurred in the ordinary course of business, we had no material changes to our contractual obligations reported in our Annual Report during the first nine months of 2019. For additional discussion, see note 16 to our condensed consolidated financial statements included elsewhere in this report.
Off-Balance Sheet Arrangements
As of September 30, 2019, we did not have any significant off-balance sheet arrangements, as defined in Item 303 (a)(4)(ii) of Regulation S-K under the Securities Act of 1933.
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
| Item 3. | Quantitative and Qualitative Disclosures about Market Risks |
We are a smaller reporting company as defined by Item 10(f)(1) of Regulation S-K under the Securities Act of 1933 and as such are not required to provide information under this Item.
| Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and interim chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission, or the SEC. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2019, our chief executive officer and interim chief financial officer concluded that, as of such date, our disclosure controls and procedures over financial reporting were effective.
Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2019, no changes 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.
PART II. OTHER INFORMATION
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.
There have been no material developments with regard to legal proceedings in the three months ended September 30, 2019.
There have been no material changes to the risk factors discussed in Item 1A, “Risk Factors” of Part I in our Annual Report. In addition to the other information set forth in this report, you should carefully consider those risk factors, which could materially affect our business, financial condition and future operating results. Those risk factors are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition and operating results.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Recent Sales of Unregistered Equity Securities
In the three months ended September 30, 2019, we issued and sold to employees and consultants an aggregate of 69,333 unregistered shares of Class A common stock upon the exercise of stock options at per share exercise prices between $0.75 and $1.50. These transactions did not involve any underwriters, any underwriting discounts or commissions, or any public offering. We believe the offers, sales and issuances of these shares 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 under said Act because the transactions were pursuant to a contract relating to compensation as provided under such rule. The recipients of the shares represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the shares issued in these transactions. The recipients had adequate access, through a relationship with us, to information about us. The sales of these shares were made without any general solicitation or advertising.
Use of Initial Public Offering Proceeds
The net proceeds of our initial public offering of Class A common stock in November 2017, after deducting underwriting discounts and commissions and offering expenses, were $17.3 million. There has been no material change in the planned use of proceeds from that described in the final prospectus filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933 on November 3, 2017. To date we have applied $10.8 million of the net proceeds to purchase inventory and an additional $2.1 million in the ordinary course of business operations.
Issuer Purchases of Equity Securities
Following is a summary of stock repurchases during the three months ending September 30, 2019:
| Period | | Total Number of Shares Purchased(1) | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Program) | |
| July 2019 | | | — | | | | — | | | | — | | | | — | |
| August 2019 | | | — | | | | — | | | | — | | | | — | |
| September 2019 | | | 59,465 | | | $ | 13.195 | | | | — | | | | — | |
| Total | | | | | | | | | | | | | | | | |
| (1) | On August 14, 2019, we entered into an equity purchase agreement under which we agreed to repurchase, at a price per share of $13.195 (the net proceeds per share we received in a public offering of Class A common stock), shares of Class A common stock from certain of our officers and directors and an officer affiliate. We have been fulfilling our repurchase obligations under the equity purchase agreement by either acquiring outstanding shares of Class A common stock or canceling outstanding vested options to acquire Class A common stock (at a purchase price net of the applicable option exercise price). This table reflects those outstanding shares that were repurchased under the equity purchase agreement during the three months ending September 30, 2019. In September 2019 we cancelled options to acquire a total of 53,571 shares of Class A common stock. We have a continuing obligation under the equity purchase agreement to complete the purchase of an additional 154,821 shares of Class A common stock, which we expect to complete in the fourth quarter of 2019. For further information, please see notes 11 and 15 to our condensed consolidated financial statements included elsewhere in this report. |
The following exhibits are being filed as part of this report:
Exhibit Number |
| Description |
| | Equity Purchase Agreement dated August 4, 2019 between ACM Research, Inc. and certain of its directors and executive officers and an officer affiliate |
| | Letter agreement dated June 12, 2019 between ACM Research, Inc. and Mark McKechnie |
| | Partnership Agreement of Hefei Shixi Chanheng Integrated Circuit Industry Venture Capital Fund Partnership (LP) dated September 5, 2019 by and among Infotech National Emerging Industry Venture Investment Guidance Fund (LP), Hefei Guozheng Asset Management Co, Ltd., Hefei Economic and Technological Development Zone Industrial Investment Guidance Fund Co., Ltd., ACM Research (Shanghai), Inc., Hefei Tongyi Equity Investment Partnership (LP), Shenzen Waitan Technology Development Co., Ltd., and Beijing Shixi Qingliu Investment Co., Ltd. |
| | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | Certification of Principal Executive Officer and Principal Financial Officer 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 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | ACM RESEARCH, INC. |
Date: November 13, 2019 | By: | /s/ Mark McKechnie
| |
| | | Mark McKechnie | |
| | | Chief Financial Officer and Treasurer (Principal Financial Officer) |
37
