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.
●
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.
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.
For
these purposes, SAPS technology uses environmentally-friendly
dilute chemicals, reducing chemical consumption. Chemical types
include dilute solutions of chemicals used in RCA cleaning, such as
dilute hydrofluoric acid and RCA SC-1 solutions, and, for higher
quality wafer cleaning, functional de-ionized water produced by
dissolving hydrogen, nitrogen or carbon dioxide in water containing
a small amount of chemicals, such as ammonia. Functional water
removes random defects by generating radicals, and megasonic
excitation can be used in conjunction with functional water to
further increase the generation of radicals. Functional water has a
lower cost and environmental impact than RCA solutions, and using
functional water is more efficient in eliminating random defects
than using dilute chemicals or de-ionized water alone. We have
shown that SAPS megasonic technology using functional water
exhibits high efficiency in removing random defects, especially
particles smaller than 65nm, with minimal damage to
structures.
Interconnects and Barrier Metals
. Each successive advanced
process node has led to finer feature sizes of interconnects such
as contacts, which form electrical pathways between a transistor
and the first metal layer, and vias, which form electrical pathways
between two metal layers. Advanced nodes have also resulted in
higher aspect ratios for interconnect structures, with thinner,
redesigned metal barriers being used to prevent diffusion. SAPS
technology can improve the removal of residues and other random
defects from interconnects during the chip fabrication
process:
●
Post Contact/Via Etch:
Wet etching
processes are commonly used to create patterns of high-density
contacts and vias. SAPS technology can be applied after each such
etching process to remove random defects that could otherwise lead
to electrical shorts.
●
Pre Barrier Metal Deposition
: Copper
wiring requires metal diffusion barriers at the top of via holes to
prevent electrical leakage. SAPS technology can be applied prior to
deposition of barrier metal to remove residual oxidized copper,
which otherwise would adhere poorly to the barrier and impair
performance.
For
these applications, SAPS technology uses environmentally friendly
dilute chemicals such as dilute hydrofluoric acid, RCA SC-1
solution, ozonated de-ionized water and functional de-ionized water
with dissolved hydrogen. These chemical solutions take the place of
piranha solution, a high-temperature mixture of sulfuric acid and
hydrogen peroxide used by conventional wet wafer cleaning
processes. We have shown that SAPS technology exhibits greater
efficiency in removing random defects, and lower levels of material
loss, than conventional processes, and our chemical solutions are
less expensive and more environmentally conscious than piranha
solution.
Recycled Test Wafers.
In addition to using silicon wafers
for chip production, chip manufacturers routinely process wafers
through a limited portion of the front-end fabrication steps in
order to evaluate the health, performance and reliability of those
steps. Manufacturers also use wafers for non-product purposes such
as inline monitoring. Wafers used for purposes other than
manufacturing revenue products are known as test wafers, and it is
typical for twenty to thirty percent of the wafers circulating in a
fab to be test wafers. In light of the significant cost of wafers,
manufacturers seek to re-use a test wafer for more than one test.
As test wafers are recycled, surface roughness and other defects
progressively impair the ability of a wafer to complete tests
accurately. SAPS technology can be applied to reduce random defect
levels of a recycled wafer, enabling the test wafer to be reclaimed
for use in additional testing processes. For these purposes, SAPS
technology includes improved fan filter units that balances intake
and exhaust flows, precise temperature and concentration controls
that ensure better handling of concentrated acid processes, and
two-chemical recycle capability that reduces chemical
consumption.
SAPS Equipment
|
We
currently offer two 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.
|
SAPS II (released in 2011).
Highlights of our SAPS II equipment
include:
|
●
compact design,
with footprint of 2.65m x 4.10m x 2.85m (WxDxH), requiring limited
clean room floor space;
●
up
to 8 chambers, providing throughput of up to 225 wafers per
hour;
●
double-sided
cleaning capability, with up to 5 cleaning chemicals for process
flexibility;
●
2-chemical
recycling capability for reduced chemical consumption;
●
image
wafer detection method for lowering wafer breakage rates;
and
●
chemical
delivery module for delivery of dilute hydrofluoric acid, RCA SC-1
solution, functional de-ionized water and carbon dioxide to each of
the chambers.
|
SAPS V (released in 2014)
.
SAPS V includes SAPS II features with
the following upgrades:
|
●
compact
design, with footprint of 2.55m x 5.1m x 2.85m
(WxDxH);
●
up
to 12 chambers, providing throughput of up to 375 wafers per
hour;
●
chemical
supply system integrated into mainframe;
●
inline
mixing method replaces tank auto-changing, reducing process time;
and
●
improved
drying technology using hot isopropyl alcohol and de-ionized
water.
|
|
|
|
TEBO
Technology,
Applications and Equipment
|
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.
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:
|
●
an
equipment front-end module, or EFEM, which moves wafers from
chamber to chamber;
●
one
or more chamber modules, each equipped with a TEBO megasonic
generator system;
●
an
electrical module to provide power for the tool; and
●
a
chemical delivery module.
|
Ultra C TEBO II (released in 2016).
Highlights:
|
● compact
design, with footprint of 2.25m x 2.25m x 2.85m
(WxDxH);
● up to
8 chambers with an upgraded transport system and optimized robotic
scheduler, providing throughput of up to 300 wafers per
hour;
● EFEM
module consisting of 4 load ports, transfer robot and 1 process
robot; and
● focus
on dilute chemicals contributes to environmental sustainability and
lower cost of ownership.
|
Ultra C TEBO V (released in 2016).
Highlights
of our Ultra C TEBO V
equipment include:
|
● footprint
of 2.45m x 5.30m x 2.85m (WxDxH);
● up to
12 chamber modules, providing throughput of up to 300 wafers per
hour;
● EFEM
module consisting of 4 load ports, 1 transfer robot and
1 process robot; and
● chemical
delivery module for delivery of isopropyl alcohol, dilute
hydrofluoric acid, RCA SC-1 solution, functional de-ionized water
and carbon dioxide to each of the chambers.
|
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.
|
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.
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.
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.
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;
●
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.
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.
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:
●
the costs of
applying our existing technologies to new or enhanced
products;
●
the costs of
developing new technologies and introducing new
products;
●
the costs
associated with protecting our intellectual property;
●
the costs
associated with our expansion, including capital expenditures,
increasing our sales and marketing and service and support efforts,
and expanding our geographic operations;
●
our ability to
continue to obtain governmental subsidies for developmental
projects in the future;
●
future debt
repayment obligations; and
●
the number and
timing of any future acquisitions.
To the
extent that our existing sources of cash, together with any cash
generated from operations, are insufficient to fund our activities,
we may need to raise additional funds through public or private
financings, strategic relationships, or other arrangements.
Additional funding may not be available to us on acceptable terms
or at all. If adequate funding is not available, we may be required
to reduce expenditures, including curtailing our growth strategies
and reducing our product development efforts, or to forego
acquisition opportunities.
If we
succeed in raising additional funds through the issuance of equity
or convertible securities, then the issuance could result in
substantial dilution to existing stockholders. Furthermore, the
holders of these new securities or debt may have rights,
preferences and privileges senior to those of the holders of Class
A common stock. In addition, any preferred equity issuance or debt
financing that we may obtain in the future could have restrictive
covenants relating to our capital raising activities and other
financial and operational matters, which may make it more difficult
for us to obtain additional capital and to pursue business
opportunities, including potential acquisitions.
Our quarterly operating results can be difficult to predict and can
fluctuate substantially, which could result in volatility in the
price of Class A common stock.
Our
quarterly revenue and other operating results have varied in the
past and are likely to continue to vary significantly from quarter
to quarter. Accordingly, you should not rely upon our past
quarterly financial results as indicators of future performance.
Any variations in our quarter-to-quarter performance may cause our
stock price to fluctuate. Our financial results in any given
quarter can be influenced by a variety of factors,
including:
●
the cyclicality of
the semiconductor industry and the related impact on the purchase
of equipment used in the manufacture of integrated circuits, or
chips;
●
the timing of
purchases of our tools by chip fabricators, which order types of
tools based on multi-year capital plans under which the number and
dollar amount of tool purchases can vary significantly from year to
year;
●
the relatively high
average selling price of our tools and our dependence on a limited
number of customers for a substantial portion of our revenue in any
period, whereby the timing and volume of purchase orders or
cancellations from our customers could significantly reduce our
revenue for that period;
●
the significant
expenditures required to customize our products often exceed the
deposits received from our customers;
●
the lead time
required to manufacture our tools;
●
the timing of
recognizing revenue due to the timing of shipment and acceptance of
our tools;
●
our ability to sell
additional tools to existing customers;
●
the changes in
customer specifications or requirements;
●
the length of our
product sales cycle;
●
changes in our
product mix, including the mix of systems, upgrades, spare parts
and service;
●
the timing of our
product releases or upgrades or announcements of product releases
or upgrades by us or our competitors, including changes in customer
orders in anticipation of new products or product
enhancements;
●
our ability to
enhance our tools with new and better functionality that meet
customer requirements and changing industry trends;
●
constraints on our
suppliers’ capacity;
●
the timing of
investments in research and development related to releasing new
applications of our technologies and new products;
●
delays in the
development and manufacture of our new products and upgraded
versions of our products and the market acceptance of these
products when introduced;
●
our ability to
control costs, including operating expenses and the costs of the
components and subassemblies used in our products;
●
the costs related
to the acquisition and integration of product lines, technologies
or businesses; and
●
the costs
associated with protecting our intellectual property, including
defending our intellectual property against third-party claims or
litigation.
Seasonality
has played an increasingly important role in the market for chip
manufacturing tools. The period of November through February has
been a particularly weak period historically for manufacturers of
chip tools, in part because capital equipment needed to support
manufacturing of chips for the December holidays usually needs to
be in the supply chain by no later than October and chip makers in
Asia often wait until after Chinese New Year, which occurs in
January or February, before implementing their capital acquisition
plans. The timing of new product releases also has an impact on
seasonality, with the acquisition of manufacturing equipment
occurring six to nine months before a new release.
Many of
these factors are beyond our control, and the occurrence of one or
more of them could cause our operating results to vary widely. As a
result, it is difficult for us to forecast our quarterly revenue
accurately. Our results of operations for any quarter may not be
indicative of results for future quarters and quarter-to-quarter
comparisons of our operating results are not necessarily
meaningful. Variability in our periodic operating results could
lead to volatility in our stock price. Because a substantial
proportion of our expenses are relatively fixed in the short term,
our results of operations will suffer if revenue falls below our
expectations in a particular quarter, which could cause the price
of Class A common stock to decline. Moreover, as a result of any of
the foregoing factors, our operating results might not meet our
announced guidance or expectations of public market analysts or
investors, in which case the price of Class A common stock could
decrease significantly.
Cyclicality in the semiconductor industry is likely to lead to
substantial variations in demand for our products, and as a result
our operating results could be adversely affected.
The
chip industry has historically been cyclic and is characterized by
wide fluctuations in product supply and demand. From time to time,
this industry has experienced significant downturns, often in
connection with, or in anticipation of, maturing product and
technology cycles, excess inventories and declines in general
economic conditions. This cyclicality could cause our operating
results to decline dramatically from one period to the
next.
Our
business depends upon the capital spending of chip manufacturers,
which, in turn, depends upon the current and anticipated market
demand for chips. During industry downturns, chip manufacturers
often have excess manufacturing capacity and may experience
reductions in profitability due to lower sales and increased
pricing pressure for their products. As a result, chip
manufacturers generally sharply curtail their spending during
industry downturns and historically have lowered their spending
more than the decline in their revenues. If we are unable to
control our expenses adequately in response to lower revenue from
our customers, our operating results will suffer and we could
experience operating losses.
Conversely,
during industry upturns we must successfully increase production
output to meet expected customer demand. This may require us or our
suppliers, including third-party contractors, to order additional
inventory, hire additional employees and expand manufacturing
capacity. If we are unable to respond to a rapid increase in demand
for our tools on a timely basis, or if we misjudge the timing,
duration or magnitude of such an increase in demand, we may lose
business to our competitors or incur increased costs
disproportionate to any gains in revenue, which could have a
material adverse effect on our business, results of operations,
financial condition or cash flows.
The PRC
government is implementing focused policies, including state-led
investment initiatives, that aim to create and support an
independent domestic semiconductor supply chain spanning from
design to final system production. If these policies, which include
loans and subsidies, result in lower demand for equipment than is
expected by equipment manufacturers, the resulting overcapacity in
the chip manufacturing equipment market could lead to excess
inventory and price discounting that could have a material adverse
effect on our business and operating results.
Our success will depend on industry chip manufacturers adopting our
SAPS, 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.
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.
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.
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
●
our
customers’ capital spending plans and processes, including
budgetary constraints, internal approvals, extended negotiations or
administrative delays.
It is
difficult to predict exactly when, or even if, we will make a sale
to a potential customer or if we can increase sales to our existing
customers. As a result, we may not recognize revenue from our sales
efforts for extended periods of time, or at all. The loss or delay
of one or more large transactions in a quarter could impact our
results of operations for that quarter and any future quarters for
which revenue from that transaction is lost or delayed. In
addition, we believe that the length of the sales cycle and
intensity of the evaluation process may increase for those current
and potential customers that centralize their purchasing
decisions.
Difficulties in forecasting demand for our tools may lead to
periodic inventory shortages or excess spending on inventory items
that may not be used.
We need
to manage our inventory of components and production of tools
effectively to meet changing customer requirements. Accurately
forecasting customers’ needs is difficult. Our tool demand
forecasts are based on multiple assumptions, including non-binding
forecasts received from our customers years in advance, each of
which may introduce error into our estimates. Inventory levels for
components necessary to build our tools in excess of customer
demand may result in inventory write-downs and could have an
adverse effect on our operating results and financial condition.
Conversely, if we underestimate demand for our tools or if our
manufacturing partners fail to supply components we require at the
time we need them, we may experience inventory shortages. Such
shortages might delay production or shipments to customers and may
cause us to lose sales. These shortages may also harm our
credibility, diminish the loyalty of our channel partners or
customers.
A
failure to prevent inventory shortages or accurately predict
customers’ needs could result in decreased revenue and gross
margins and harm our business.
Some of
our products and supplies may become obsolete or be deemed excess
while in inventory due to rapidly changing customer specifications,
changes in product structure, components or bills of material as a
result of engineering changes, or a decrease in customer demand. We
also have exposure to contractual liabilities to our contract
manufacturers for inventories purchased by them on our behalf,
based on our forecasted requirements, which may become excess or
obsolete. Our inventory balances also represent an investment of
cash. To the extent our inventory turns are slower than we
anticipate based on historical practice, our cash conversion cycle
extends and more of our cash remains invested in working capital.
If we are not able to manage our inventory effectively, we may need
to write down the value of some of our existing inventory or write
off non-saleable or obsolete inventory. Any such charges we incur
in future periods could materially and adversely affect our results
of operations.
The
difficulty in forecasting demand also makes it difficult to
estimate our future results of operations and financial condition
from period to period. A failure to accurately predict the level of
demand for our products could adversely affect our net revenue and
net income, and we are unlikely to forecast such effects with any
certainty in advance.
If our tools contain defects or do not meet customer
specifications, we could lose customers and revenue.
Highly
complex tools such as our may develop defects during the
manufacturing and assembly process. We may also experience
difficulties in customizing our tools to meet customer
specifications or detecting defects during the development and
manufacturing of our tools. Some of these failures may not be
discovered until we have expended significant resources in
customizing our tools, or until our tools have been installed in
our customers’ production facilities. These quality problems
could harm our reputation as well as our customer relationships in
the following ways:
●
our customers may
delay or reject acceptance of our tools that contain defects or
fail to meet their specifications;
●
we may suffer
customer dissatisfaction, negative publicity and reputational
damage, resulting in reduced orders or otherwise damaging our
ability to retain existing customers and attract new
customers;
●
we may incur
substantial costs as a result of warranty claims or service
obligations or in order to enhance the reliability of our
tools;
●
the attention of
our technical and management resources may be
diverted;
●
we may be required
to replace defective systems or invest significant capital to
resolve these problems; and
●
we may be required
to write off inventory and other assets related to our
tools.
In
addition, defects in our tools or our inability to meet the needs
of our customers could cause damage to our customers’
products or manufacturing facilities, which could result in claims
for product liability, tort or breach of warranty, including claims
from our customers. The cost of defending such a lawsuit,
regardless of its merit, could be substantial and could divert
management’s attention from our ongoing operations. In
addition, if our business liability insurance coverage proves
inadequate with respect to a claim or future coverage is
unavailable on acceptable terms or at all, we may be liable for
payment of substantial damages. Any or all of these potential
consequences could have an adverse impact on our operating results
and financial condition.
Warranty claims in excess of our estimates could adversely affect
our business.
We have
provided warranties against manufacturing defects of our tools that
range from 12 to 36 months in duration. Our product warranty
requires us to provide labor and parts necessary to repair defects.
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.
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.
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.
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.
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;
●
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;
●
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.
Changes in political and economic policies of the PRC government
may materially and adversely affect our business, financial
condition and results of operations and may result in our inability
to sustain our growth and expansion strategies.
Substantially
all of our operations are conducted in the PRC, and a substantial
majority of our revenue is sourced from the PRC. Accordingly, our
financial condition and results of operations are affected to a
significant extent by economics, political and legal developments
in the PRC.
The
Chinese economy differs from the economies of most developed
countries in many respects, including the extent of government
involvement, level of development, growth rate, and control of
foreign exchange and allocation of resources. Although the PRC
government has implemented measures emphasizing the utilization of
market forces for economic reform, the reduction of state ownership
of productive assets and the establishment of improved corporate
governance in business enterprises, a substantial portion of
productive assets in the PRC are still owned by the government. In
addition, the PRC government continues to play a significant role
in regulating industry development by imposing industrial policies.
The PRC government also exercises significant control over economic
growth in the PRC by allocating resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy,
regulating financial services and institutions, and providing
preferential treatment to particular industries or
companies.
While
the PRC economy has experienced significant growth in the past
three decades, growth has been uneven, both geographically and
among various sectors of the economy. The PRC government has
implemented various measures to encourage economic growth and guide
the allocation of resources. Some of these measures may benefit the
overall PRC economy, but may also have a negative effect on us. Our
financial condition and results of operation could be materially
and adversely affected by government control over capital
investments or changes in tax regulations that are applicable to
us. In the past the PRC government has implemented measures to
control the pace of economic growth, and similar measures in the
future may cause decreased economic activity, which in turn could
lead to a reduction in demand for our products and consequently
have a material adverse effect on our businesses, financial
condition and results of operations.
Although
the PRC government has been implementing policies to develop an
independent domestic semiconductor industry supply chain, there is
no guaranteed time frame in which these initiatives will be
implemented. We cannot guarantee that the implementation of these
policies will result in additional revenue to us or that our
presence in the PRC will result in support from the PRC government.
To the extent that any capital investment or other assistance from
the PRC government is not provided to us, it could be used to
promote the products and technologies of our competitors, which
could adversely affect our business, operating results and
financial condition.
We are subject to government regulation, including import, export,
economic sanctions, and anti-corruption laws and regulations, that
may limit our sales opportunities, expose us to liability and
increase our costs.
Our
products are subject to import and export controls in jurisdictions
in which we distribute or sell our products. Import and exports
control and economic sanctions laws and regulations include
restrictions and prohibitions on the sale or supply of certain
products and on our transfer of parts, components, and related
technical information and know-how to certain countries, regions,
governments, persons and entities.
Various
countries regulate the importation of certain products through
import permitting and licensing requirements and have enacted laws
that could limit our ability to distribute our products. The
exportation, re-exportation, transfers within foreign countries and
importation of our products, including by our partners, must comply
with these laws and regulations, and any violations may result in
reputational harm, government investigations and penalties, and a
denial or curtailment of exporting. Complying with export control
and sanctions laws for a particular sale may be time consuming, may
increase our costs, and may result in the delay or loss of sales
opportunities. If we are found to be in violation of U.S. sanctions
or export control laws, or similar laws in other jurisdictions, we
and the individuals working for us could incur substantial fines
and penalties. Changes in export, sanctions or import laws or
regulations may delay the introduction and sale of our products in
international markets, require us to spend resources to seek
necessary government authorizations or to develop different
versions of our products, or, in some cases, prevent the export or
import of our products to certain countries, regions, governments,
persons or entities, which could adversely affect our business,
financial condition and operating results.
We are
subject to various domestic and international anti-corruption laws,
such as the U.S. Foreign Corrupt Practices Act, as well as similar
anti-bribery and anti-kickback laws and regulations. These laws and
regulations generally prohibit companies and their intermediaries
from offering or making improper payments to non-U.S. officials for
the purpose of obtaining, retaining or directing business. Our
exposure for violating these laws and regulations increases as our
international presence expands and as we increase sales and
operations in foreign jurisdictions.
Breaches of our cybersecurity systems could degrade our ability to
conduct our business operations and deliver products to our
customers, result in data losses and the theft of our intellectual
property, damage our reputation, and require us to incur
significant additional costs to maintain the security of our
networks and data.
We
increasingly depend upon our information technology systems to
conduct our business operations, ranging from our internal
operations and product development and manufacturing activities to
our marketing and sales efforts and communications with our
customers and business partners. Computer programmers may attempt
to penetrate our network security, or that of our website, and
misappropriate our proprietary information or cause interruptions
of our service. Because the techniques used by such computer
programmers to access or sabotage networks change frequently and
may not be recognized until launched against a target, we may be
unable to anticipate these techniques. We have also outsourced a
number of our business functions to third-party contractors,
including our manufacturers, and our business operations also
depend, in part, on the success of our contractors’ own
cybersecurity measures. Accordingly, if our cybersecurity systems
and those of our contractors fail to protect against unauthorized
access, sophisticated cyberattacks and the mishandling of data by
our employees and contractors, our ability to conduct our business
effectively could be damaged in a number of ways, including
sensitive data regarding our employees or business, including
intellectual property and other proprietary data, could be stolen.
Should this occur, we could be subject to significant claims for
liability from our customers and regulatory actions from
governmental agencies. In addition, our ability to protect our
intellectual property rights could be compromised and our
reputation and competitive position could be significantly harmed.
Consequently, our financial performance and results of operations
could be adversely affected.
Our production facilities could be damaged or disrupted by a
natural disaster, war, terrorist attacks or other catastrophic
events.
Our
manufacturing facilities are subject to risks associated with
natural disasters, such as earthquakes, fires, floods tsunami,
typhoons and volcanic activity, environmental disasters, health
epidemics, and other events beyond our control such as power loss,
telecommunications failures, and uncertainties arising out of armed
conflicts or terrorist attacks. A substantial majority of our
facilities as well as our research and development personnel are
located in the PRC. Any catastrophic loss or significant damage to
any of our facilities would likely disrupt our operations, delay
production, and adversely affect our product development schedules,
shipments and revenue. In addition, any such catastrophic loss or
significant damage could result in significant expense to repair or
replace the facility and could significantly curtail our research
and development efforts in a particular product area or primary
market, which could have a material adverse effect on our
operations and operating results.
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.
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.
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.
We may not be able to protect our intellectual property rights
throughout the world, which could materially, negatively affect our
business.
Filing,
prosecuting and defending patents on our products or proprietary
technologies in all countries throughout the world would be
prohibitively expensive, and our intellectual property rights in
some countries outside the United States, including the PRC, can be
less extensive than those in the United States. In addition, the
laws of some foreign countries do not protect intellectual property
rights to the same extent as federal and state laws in the United
States. Consequently, competitors may use our technologies in
jurisdictions where we have not obtained patent protection to
develop their own products and may export otherwise infringing
products to territories where we have patent protection but
enforcement is not as strong as that in the United States. These
products may compete with our products, and our patents or other
intellectual property rights may not be effective or sufficient to
prevent them from competing.
Many
companies have encountered significant problems in protecting and
defending intellectual property rights in foreign jurisdictions.
The legal systems of certain countries, particularly certain
developing countries, do not favor the enforcement of patents and
other intellectual property protection, which could make it
difficult for us to stop the infringement of our patents or
marketing of competing products in violation of our proprietary
rights generally. Proceedings to enforce our patent rights in
foreign jurisdictions could result in substantial costs and divert
our efforts and attention from other aspects of our business, could
put our patents at risk of being invalidated or interpreted
narrowly and our patent applications at risk of not issuing, and
could provoke third parties to assert claims against us. We may not
prevail in any lawsuits that we initiate, and the damages or other
remedies awarded, if any, may not be commercially meaningful.
Accordingly, our efforts to enforce our intellectual property
rights around the world may be inadequate to obtain a significant
commercial advantage from the intellectual property that we develop
or license and may adversely affect our business.
If we are sued for infringing intellectual property rights of third
parties, it will be costly and time consuming, and an unfavorable
outcome in that litigation could have a material adverse effect on
our business.
Our
success depends on our ability to develop, manufacture, market and
sell our products without infringing upon the proprietary rights of
third parties. Numerous U.S. and foreign-issued patents and pending
patent applications owned by third parties exist in the fields in
which we are developing products, some of which may contain claims
that overlap with the subject matter of our intellectual property.
A third party has claimed in the past, and others may claim in the
future, that our technology or products infringe their intellectual
property. In some instances third parties may initiate litigation
against us in an effort to prevent us from using our technology in
alleged violation of their intellectual property rights. The risk
of such a lawsuit will likely increase as our size and the number
and scope of our products increase and as our geographic presence
and market share expand.
Any
potential intellectual property claims or litigation commenced
against us could:
●
be time consuming
and expensive to defend, whether or not meritorious;
●
force us to stop
selling products or using technology that allegedly infringes the
third party’s intellectual property rights;
●
delay shipments of
our products;
●
require us to pay
damages or settlement fees to the party claiming
infringement;
●
require us to
attempt to obtain a license to the relevant intellectual property,
which may not be available on reasonable terms or at
all;
●
force us to attempt
to redesign products that contain the allegedly infringing
technology, which could be expensive or which we may be unable to
do;
●
require us to
indemnify our customers, suppliers or other third parties for any
loss caused by their use of our technology that allegedly infringes
the third party’s intellectual property rights;
or
●
divert the
attention of our technical and managerial resources.
Because
patent applications can take many years to issue, there may be
currently pending applications, unknown to us, that may later
result in issued patents upon which our products or technologies
may infringe. Similarly, there may be issued patents relevant to
our products of which we are not aware.
Risks Related to Ownership of Class A Common Stock
The market price of Class A common stock
has been and may continue
to be volatile, which could result in substantial losses for
investors purchasing our shares
Class A
common stock only commenced trading on the Nasdaq Global Market, or
Nasdaq, on November 3, 2017, and the market price of Class A
common stock has been, and could continue to be, subject to
significant fluctuations. The market price of Class A common stock
may fluctuate significantly in response to numerous factors, many
of which are beyond our control, including:
●
actual or
anticipated fluctuations in our revenue and other operating
results;
●
the financial
projections we may provide to the public, any changes in these
projections or our failure to meet these projections;
●
actions of
securities analysts who initiate or maintain coverage of us,
changes in financial estimates by any securities analysts who
follow our company, or our failure to meet these estimates or the
expectations of investors;
●
changes in
projections for the chips or chip equipment industries or in the
operating performance or expectations and stock market valuations
of chip companies, chip equipment companies or technology companies
in general;
●
changes in
operating results;
●
any changes in the
financial projections we may provide to the public, our failure to
meet these projections, or changes in recommendations by any
securities analysts that elect to follow Class A common
stock;
●
additional shares
of Class A common stock being sold into the market by us or our
existing stockholders or the anticipation of such
sales;
●
price and volume
fluctuations in the overall stock market, including as a result of
trends in the economy as a whole;
●
lawsuits threatened
or filed against us;
●
litigation and
other developments relating to our patents or other proprietary
rights or those of our competitors;
●
developments in new
legislation and pending lawsuits or regulatory actions, including
interim or final rulings by judicial or regulatory bodies;
and
●
general economic
trends, including changes in the demand for electronics or
information technology or geopolitical events such as war or acts
of terrorism, or any responses to such events.
In
recent years, the stock market in general, and Nasdaq in
particular, has experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to changes in
the operating performance of the companies whose stock is
experiencing those price and volume fluctuations.
As a newly public company, our stock price may be volatile, and
securities class action litigation has often been instituted
against companies following periods of volatility of their stock
price. Any such litigation, if instituted against us, could result
in substantial costs and a diversion of our management’s
attention and resources.
In the
past, following periods of volatility in the overall market and the
market price of a particular company’s securities, securities
class action litigation has often been instituted against these
companies. This litigation, if instituted against us, could result
in substantial costs and a diversion of our management’s
attention and resources.
An active trading market for Class A common stock may not be
sustained.
Class A
common stock has been listed on Nasdaq only since November 3,
2017, and we cannot assure you that an active trading market for
Class A common stock will be sustained or maintained. The lack of
an active market may impair your ability to sell your shares at the
time you wish to sell them or at a price that you consider
reasonable. The lack of an active market may also reduce the fair
market value of your shares. There can be no assurance that we will
be able to successfully develop or maintain a liquid market for
Class A common stock.
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.
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.
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.
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.