Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
NOTE 1 – DESCRIPTION OF BUSINESS
ACM
Research, Inc. (“ACM”) and its subsidiaries
(collectively with ACM, the “Company”) develop,
manufacture and sell single-wafer wet cleaning equipment used to
improve the manufacturing process and yield for advanced integrated
chips. The Company markets and sells its single-wafer wet-cleaning
equipment, under the brand name “Ultra C,” based on the
Company’s proprietary Space Alternated Phase Shift
(“SAPS”) and Timely Energized Bubble Oscillation
(“TEBO”) technologies. These tools are designed to
remove random defects from a wafer surface efficiently, without
damaging the wafer or its features, even at increasingly advanced
process nodes.
ACM was
incorporated in California in 1998, and it initially focused on
developing tools for manufacturing process steps involving the
integration of ultra low-K materials and copper. The
Company’s early efforts focused on stress-free
copper-polishing technology, and it sold tools based on that
technology in the early 2000s.
In 2006
the Company established its operational center in Shanghai in the
People’s Republic of China (the “PRC”), where it
operates through ACM’s subsidiary ACM Research (Shanghai),
Inc. (“ACM Shanghai”). ACM Shanghai was formed to help
establish and build relationships with integrated circuit
manufacturers in the PRC, and the Company initially financed its
Shanghai operations in part through sales of non-controlling equity
interests in ACM Shanghai.
In 2007
the Company began to focus its development efforts on single-wafer
wet-cleaning solutions for the front-end chip fabrication process.
The Company introduced its SAPS megasonic technology, which can be
applied in wet wafer cleaning at numerous steps during the chip
fabrication process, in 2009. It introduced its TEBO technology,
which can be applied at numerous steps during the fabrication of
small node two-dimensional conventional and three-dimensional
patterned wafers, in March 2016. The Company has designed its
equipment models for SAPS and TEBO solutions using a modular
configuration that enables it to create a wet-cleaning tool meeting
the specific requirements of a customer, while using pre-existing
designs for chamber, electrical, chemical delivery and other
modules. In August 2018, the Company introduced its Ultra-C Tahoe
wafer cleaning tool, which can deliver high cleaning performance
with significantly less sulfuric acid than typically consumed by
conventional high-temperature single-wafer cleaning tools. The
Company also offers a range of custom-made equipment, including
cleaners, coaters and developers, to back-end wafer assembly and
packaging factories, principally in the PRC.
In 2011
ACM Shanghai formed a wholly owned subsidiary in the PRC, ACM
Research (Wuxi), Inc. (“ACM Wuxi”), to manage sales and
service operations.
In
November 2016 ACM redomesticated from California to Delaware
pursuant to a merger in which ACM Research, Inc., a California
corporation, was merged into a newly formed, wholly owned Delaware
subsidiary, also named ACM Research, Inc.
In June
2017 ACM formed a wholly owned subsidiary in Hong Kong, CleanChip
Technologies Limited (“CleanChip”), to act on the
Company’s behalf in Asian markets outside the PRC by, for
example, serving as a trading partner between ACM Shanghai and its
customers, procuring raw materials and components, performing sales
and marketing activities, and making strategic
investments.
In
August 2017 ACM purchased 18.77% of ACM Shanghai’s equity
interests held by Shanghai Science and Technology Venture Capital
Co., Ltd. On November 8, 2017, ACM purchased the remaining 18.36%
of ACM Shanghai’s equity interest held by third parties,
Shanghai Pudong High-Tech Investment Co., Ltd.
(“PDHTI”) and Shanghai Zhangjiang Science &
Technology Venture Capital Co., Ltd. (“ZSTVC”). At
December 31, 2017, ACM owned all of the outstanding equity
interests of ACM Shanghai, and indirectly through ACM Shanghai,
owned all of the outstanding equity interests of ACM
Wuxi.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
On
September 13, 2017, ACM effectuated a 1-for-3 reverse stock split
of Class A and Class B common stock. Unless otherwise indicated,
all share numbers, per share amount, share prices, exercise prices
and conversion rates set forth in these notes and the accompanying
condensed consolidated financial statements have been adjusted
retrospectively to reflect the reverse stock split.
In
December 2017 ACM formed a wholly owned subsidiary in the Republic
of Korea, ACM Research Korea CO., LTD. (“ACM Korea”),
to serve customers based in Republic of Korea and perform sales,
marketing, research and development activities for new products and
solutions.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The
consolidated accounts include ACM and its subsidiaries, ACM
Shanghai, ACM Wuxi, CleanChip and ACM Korea. Subsidiaries are those
entities in which ACM, directly and indirectly, controls more than
one half of the voting power. All significant intercompany
transactions and balances have been eliminated upon
consolidation.
The
accompanying condensed consolidated financial statements of the
Company have been prepared in accordance with accounting principles
generally accepted in the United States of America
(“GAAP”) for interim financial information and the
rules and regulations of the SEC for reporting on Form 10-Q.
Accordingly, they do not include all the information and footnotes
required by GAAP for complete financial statements herein. The
unaudited condensed consolidated financial statements herein should
be read in conjunction with the historical consolidated financial
statements of the Company for the year ended December 31, 2018
included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2018.
The
accompanying condensed consolidated balance sheet as of March 31,
2019, the condensed consolidated statements of operations and
comprehensive income (loss) for the three months ended March 31,
2019 and 2018, and the condensed consolidated statements of cash
flows for the three months ended March 31, 2019 and 2018 are
unaudited. In the opinion of management, the unaudited condensed
consolidated financial statements of the Company reflect all
adjustments that are necessary for a fair presentation of the
Company’s financial position and results of operations. Such
adjustments are of a normal recurring nature, unless otherwise
noted. The balance sheet as of March 31, 2019 and the results of
operations for the three months ended March 31, 2019 are not
necessarily indicative of the results to be expected for any future
period.
Use of Estimates
The
preparation of condensed consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the balance sheet date and the reported revenue and expenses during
the reported period in the condensed consolidated financial
statements and accompanying notes. The Company’s significant
accounting estimates and assumptions include, but are not limited
to, those used for the valuation and recognition of stock-based
compensation arrangements and warrant liability, realization of
deferred tax assets, assessment for impairment of long-lived
assets, allowance for doubtful accounts, inventory valuation for
excess and obsolete inventories, lower of cost and market value or
net realizable value of inventories, depreciable lives of property
and equipment, and useful life of intangible assets. Management of
the Company believes that the estimates, judgments and assumptions
are reasonable, based on information available at the time they are
made. Actual results could differ materially from those
estimates.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
Basic and Diluted Net Income (Loss) per Common Share
Basic
and diluted net income (loss) per common share is calculated as
follows:
|
Three Months Ended March 31,
|
|
|
|
Numerator:
|
|
|
Net income
(loss)
|
$
1,857
|
$
(2,780
)
|
Denominator:
|
|
|
Weighted average shares outstanding, basic
|
16,044,655
|
15,383,086
|
Effect of dilutive securities
|
2,180,662
|
-
|
Weighted average shares outstanding, diluted
|
18,225,317
|
15,383,086
|
Net
income (loss) per common share:
|
|
|
Basic
|
$
0.12
|
$
(0.18
)
|
Diluted
|
$
0.10
|
$
(0.18
)
|
ACM has
been authorized to issue Class A and Class B common stock since
redomesticating in Delaware in November 2016. The two classes of
common stock are substantially identical in all material respects,
except for voting rights. Since ACM did not declare any dividends
during the three months ended March 31, 2019 and 2018, the net
income (
loss)
per common share
attributable to each class is the same under the
“two-class” method. As such, the two classes of common
stock have been presented on a combined basis in the condensed
consolidated statements of operations and comprehensive income
(loss) and in the above computation of net income (
loss)
per common share.
Diluted
net income (
loss)
per common
share reflects the potential dilution from securities that could
share in ACM’s earnings. ACM’s potential dilutive
securities consist of convertible preferred stocks, warrants and
stock options for the three months ended March 31, 2019 and 2018.
Certain potential dilutive securities
were excluded from the net income (loss) per share calculation
because the impact would be anti-dilutive.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”)
. The amendments
in
ASU 2016-02
create Topic
842,
Leases
, and supersede
the leases requirements in Topic 840,
Leases
. Topic 842 specifies the
accounting for leases. The objective of Topic 842 is to establish
the principles that lessees and lessors shall apply to report
useful information to users of financial statements about the
amount, timing, and uncertainty of cash flows arising from a lease.
The main difference between Topic 842 and Topic 840 is the
recognition of lease assets and lease liabilities for those leases
classified as operating leases under Topic 840. Topic 842 retains a
distinction between finance leases and operating leases. The
classification criteria for distinguishing between finance leases
and operating leases are substantially similar to the
classification criteria for distinguishing between capital leases
and operating leases in the previous lease guidance. The result of
retaining a distinction between finance leases and operating leases
is that under the lessee accounting model in Topic 842, the effect
of leases in the statement of comprehensive income and the
statement of cash flows is largely unchanged from previous
GAAP.
Effective January
1, 2019, we adopted the ASU 2016-02,
Leases,
which requires the recognition
of lease assets and these liabilities by leases for those leases
classified as an operating lease under previous guidance. The
original guidance required application on a modified retrospective
basis with the earliest period presented. In August, 2018, the FASB
issues ASU 2018-11,
Targeted
Improvements to ASC 842
, which included an option to not
restate comparative periods in transition and elect to use the
effective date of ASC 842,
Leases,
as the date of initial
application of transition which we elected. As a result of the
adoption of ASC 842 on January 1, 2019, we recorded both operating
lease right-of-use (“ROU”) assets of $5,109 and lease
liabilities of $5,109. The adoption of ASC 842 had no impact on our
profit or loss and cash flows for the three-month period ended
March 31, 2019. In addition, we elected the package of practical
expedients permitted under the transition guidance within the new
standard which allowed us to carry forward the historical lease
classification. Additional information and disclosures required by
this new standard are contained in Note 8, ‘Operating lease
right-of-use assets’.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
In June
2018, the FASB issued ASU No. 2018-07,
Compensation — Stock Compensation (Topic
718) — Improvements to Nonemployee Share-Based Payment
Accounting
(“ASU 2018-07”), which simplifies
several aspects of the accounting for nonemployee share-based
payment transactions resulting from expanding the scope of Topic
718, Compensation-Stock Compensation, to include share-based
payment transactions for acquiring goods and services from
nonemployees. Some of the areas for simplification apply only to
nonpublic entities. ASU 2018-07 specifies that Topic 718 applies to
all share-based payment transactions in which a grantor acquires
goods or services to be used or consumed in a grantor’s own
operations by issuing share-based payment awards. ASU 2018-07 also
clarify that Topic 718 does not apply to share-based payments used
to effectively provide (1) financing to the issuer or (2) awards
granted in conjunction with selling goods or services to customers
as part of a contract accounted for under the New Revenue
Standard.
Effective January
1, 2019, we adopted ASU 2018-07 and it did not have a material
impact on our condensed consolidated financial
statements.
Recent Accounting Pronouncements Not Yet Adopted
In
August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820)
(“ASU 2018-13”)
,
which eliminates, adds and modifies certain disclosure requirements
for fair value measurements. The modified standard eliminates the
requirement to disclose changes in unrealized gains and losses
included in earnings for recurring Level 3 fair value measurements
and requires changes in unrealized gains and losses be included in
other comprehensive income for recurring Level 3 fair value
measurements of instruments. The standard also requires the
disclosure of the range and weighted average used to develop
significant unobservable inputs and how weighted average is
calculate for recurring and nonrecurring Level 3 fair value
measurements. The amendment is effective for fiscal years beginning
after December 15, 2019 and interim periods within that fiscal year
with early adoption permitted. We are currently evaluating the
impact of the adoption of ASU 2018-13 on our consolidated financial
statements.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles—Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”)
,
which removes Step 2 from the goodwill impairment test. An entity
will apply a one-step quantitative test and record the amount of
goodwill impairment as the excess of a reporting unit’s
carrying amount over its fair value, not to exceed the total amount
of goodwill allocated to the reporting unit.
ASU 2017-04
does not amend the optional
qualitative assessment of goodwill impairment. A business entity
that is an SEC filer must adopt the amendments in
ASU 2017-04
for its annual or any interim
goodwill impairment test in fiscal years beginning after December
15, 2019. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January
1, 2017. We are currently evaluating the impact of the adoption of
ASU 2017-04 on our consolidated financial statements.
In June
2016, the FASB issued ASU 2016-13, Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. ASU 2016-13 replaced the incurred loss impairment
methodology under current GAAP with a methodology that reflects
expected credit losses and requires consideration of a broader
range of reasonable and supportable information to inform credit
loss estimates. ASU 2016-13 requires use of a forward-looking
expected credit loss model for accounts receivables, loans, and
other financial instruments. ASU 2016-13 is effective for fiscal
years beginning after December 15, 2019, with early adoption
permitted. Adoption of the standard requires using a modified
retrospective approach through a cumulative-effect adjustment to
retained earnings as of the effective date to align existing credit
loss methodology with the new standard. We will adopt ASU 2016-13
effective January 1, 2020. We are currently evaluating the impact
of this standard on our consolidated financial statements,
including accounting policies, processes, and systems, but do not
expect the standard will have a material impact on our consolidated
financial statements.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
NOTE 3 – ACCOUNTS RECEIVABLE
At
March 31, 2019 and December 31, 2018, accounts receivable consisted
of the following:
|
|
|
|
|
|
Accounts receivable
|
$
25,070
|
$
24,608
|
Less: Allowance for doubtful accounts
|
-
|
-
|
Total
|
$
25,070
|
$
24,608
|
The
Company reviews accounts receivable on a periodic basis and makes
general and specific allowances when there is doubt as to the
collectability of individual balances. No allowance for doubtful
accounts was considered necessary at March 31, 2019 or December 31,
2018. At March 31, 2019
and December
31, 2018, accounts receivable of $0 and
$1,457,
respectively,
were pledged as
collateral for borrowings from financial
institutions.
NOTE 4 – INVENTORIES
At
March 31, 2019 and December 31, 2018, inventory consisted of the
following:
|
|
|
Raw materials
|
$
13,285
|
$
12,646
|
Work in process
|
15,981
|
9,631
|
Finished goods
|
12,987
|
16,487
|
Total inventory, gross
|
42,253
|
38,764
|
Inventory reserve
|
-
|
-
|
Total inventory, net
|
$
42,253
|
$
38,764
|
At
March 31, 2019 and December 31, 2018, the Company did not have an
inventory reserve and no inventory was pledged as collateral for
borrowings from financial institutions. System shipments of
first-tools to an existing or prospective customer, for which
ownership does not transfer until customer acceptance, are
classified as finished goods inventory and carried at cost until
ownership is transferred.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET
At
March 31, 2019 and December 31, 2018, property, plant and equipment
consisted of the following:
|
|
|
|
|
|
Manufacturing equipment
|
$
9,894
|
$
9,703
|
Office equipment
|
549
|
512
|
Transportation equipment
|
129
|
184
|
Leasehold improvement
|
1,444
|
1,379
|
Total cost
|
12,016
|
11,778
|
Less: Total accumulated depreciation
|
(8,377
)
|
(8,102
)
|
Construction in progress
|
80
|
32
|
Total property, plant and equipment, net
|
$
3,719
|
$
3,708
|
Depreciation
expense was $175 and $85 for the three months ended March 31, 2019
and 2018, respectively.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
NOTE 6 – SHORT-TERM BORROWINGS
At
March 31, 2019 and December 31, 2018, short-term borrowings
consisted of the following:
|
|
|
Line
of credit up to RMB 50,000 from Bank of Shanghai Pudong Branch, due
on April 17,2019 with an annual interest rate of 4.99%, guaranteed
by the Company’s CEO and fully repaid on March 27,
2019.
|
$
-
|
$
3,133
|
Line
of credit up to RMB 50,000 from Bank of Shanghai Pudong Branch, due
on February 14,2019 with an annual interest rate of 5.15%,
guaranteed by the Company’s CEO and fully repaid on February
14, 2019.
|
-
|
485
|
Line
of credit up to RMB 50,000 from Bank of Shanghai Pudong Branch, due
on January 23, 2020 with an annual interest rate of 5.22%,
guaranteed by the Company’s CEO and Cleanchip Technologies
Limited.
|
668
|
|
Line
of credit up to RMB 30,000 from Bank of China Pudong Branch, due on
June 06, 2019 with annual interest rate of 5.22%, secured by
certain of the Company’s intellectual property and the
Company’s CEO.
|
2,228
|
2,186
|
Line
of credit up to RMB 30,000 from Bank of China Pudong Branch, due on
June 13, 2019 with annual interest rate of 5.22%, secured by
certain of the Company’s intellectual property and the
Company’s CEO.
|
2,228
|
2,186
|
Line
of credit up to RMB 10,000 from Shanghai Rural Commercial Bank, due
on January 23, 2019 with an annual interest rate of 5.44%,
guaranteed by the Company’s CEO and pledged by accounts
receivable,and fully repaid on January 23, 2019.
|
-
|
1,457
|
Line
of credit up to RMB 20,000 from Shanghai Rural Commercial Bank, due
on February 21, 2020 with an annual interest rate of 5.66%,
guaranteed by the Company’s CEO and pledged by accounts
receivable.
|
1,485
|
|
Line
of credit up to RMB 20,000 from Bank of Communications, due on
January 18, 2020 with an annual interest rate of
5.66%.
|
1,485
|
|
Line
of credit up to RMB 20,000 from Bank of Communications, due on
January 22, 2020 with an annual interest rate of
5.66%.
|
743
|
|
Line
of credit up to RMB 20,000 from Bank of Communications, due on
February 14, 2020 with an annual interest rate of
5.66%.
|
742
|
|
Line
of credit up to RMB 50,000 from China Everbright Bank, due on March
25, 2020 with an annual interest rate of 4.94%, guaranteed by the
Company’s CEO.
|
3,250
|
|
Total
|
$
12,829
|
$
9,447
|
Interest
expense related to short-term borrowings amounted to $139 and $103
for the three months ended March 31, 2019 and 2018,
respectively.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
NOTE 7 – OTHER PAYABLE AND ACCRUED EXPENSES
At
March 31, 2019 and December 31, 2018, other payable and accrued
expenses consisted of the following:
|
|
|
Lease expenses and payable for leasehold improvement due to a related party (note 11)
|
$
-
|
$
53
|
Accrued
commissions
|
2,663
|
2,931
|
Accrued warranty
|
2,017
|
1,710
|
Accrued payroll
|
1,240
|
626
|
Accrued professional fees
|
139
|
64
|
Accrued machine testing fees
|
2,978
|
3,076
|
Others
|
2,797
|
1,950
|
Total
|
$
11,834
|
$
10,410
|
NOTE 8 –LEASES
We
lease space under non-cancelable operating leases for several
office and manufacturing locations. These leases do not have
significant rent escalation holidays, concessions, leasehold
improvement incentives, or other build-out clauses. Further, the
leases do not contain contingent rent provisions.
Most
leases include one or more options to renew. The exercise of lease
renewal options is typically at our sole discretion; therefore, the
majority of renewals to extend the lease terms are not included in
our right-of–use assets and lease liabilities as they are not
reasonably certain of exercise. We regularly evaluate the renewal
options and when they are reasonably certain of exercise, we
include the renewal period in our lease term.
As most
of our leases do not provide an implicit rate, we use our
incremental borrowing rate based on the information available at
the lease commencement date in determining the present value of the
lease payments. We have a centrally managed treasury function;
therefore, based on the applicable lease terms and the current
economic environment, we apply a portfolio approach for determining
the incremental borrowing rate.
The
components of our lease expense are as follows:
|
|
Operating lease
cost
|
$
437
|
Short-term lease
cost
|
18
|
Lease
cost
|
$
455
|
Supplemental cash flow information related to our operating leases
was as follows for the period ended March 31, 2019:
|
Three months
ended
March
31,
2019
|
Cash
paid for amounts included in the measurement of lease
liabilities:
|
|
Operating cash outflow from
operating leases
|
455
|
Maturities of our
lease liabilities for all operating leases are as follows as of
March 31, 2019:
|
|
2019
|
$
1,057
|
2020
|
1,424
|
2021
|
1,456
|
2022
|
1,494
|
2023
|
53
|
2024
|
13
|
Total
lease payments
|
5,497
|
Less:
Interest
|
(710
)
|
Present
value of lease liabilities
|
$
4,787
|
The
weighted average remaining lease terms and discount rates for all
of our operating leases were as follows as of March 31,
2019:
Remaining
lease term and discount rate:
|
|
Weighted
average remaining lease term (years)
|
3.80
|
Weighted
average discount rate
|
5.43
%
|
NOTE 9 – OTHER LONG-TERM LIABILITIES
Other
long-term liabilities represent government subsidies received from
PRC governmental authorities for development and commercialization
of certain technology but not yet recognized. As of March 31, 2019,
and December 31, 2018, other long-term liabilities consisted of the
following unearned government subsidies:
|
|
|
Subsidies to Stress Free Polishing project, commenced in 2008 and 2017
|
$
1,449
|
$
1,483
|
Subsidies to Electro Copper Plating project, commenced in 2014
|
1,598
|
2,860
|
Subsidies to Polytetrafluoroethylene, commenced in 2018
|
171
|
178
|
Other
|
78
|
62
|
Total
|
$
3,296
|
$
4,583
|
NOTE 10 – EQUITY METHOD INVESTMENT
On
September 6, 2017, ACM and Ninebell Co., Ltd.
(“Ninebell”), a Korean company that is one of the
Company’s principal materials suppliers, entered into an
ordinary share purchase agreement, effective as of September 11,
2017, pursuant to which Ninebell issued to ACM ordinary shares
representing 20% of Ninebell’s post-closing equity for a
purchase price of $1,200, and a common stock purchase agreement,
effective as of September 11, 2017, pursuant to which ACM issued
133,334 shares of Class A common stock to Ninebell for a purchase
price of $1,000 at $7.50 per share
.
The investment in Ninebell is accounted for under the equity
method.
NOTE 11– RELATED PARTY BALANCES AND TRANSACTIONS
On
August 18, 2017, ACM and Ninebell, its equity method investment
affiliate (note 10), entered into a loan agreement pursuant to
which ACM made an interest-free loan of $946 to Ninebell, payable
in 180 days or automatically extended another 180 days if in
default. The loan was secured by a pledge of Ninebell’s
accounts receivable due from ACM and all money that Ninebell
received from ACM. Ninebell repaid the loan in March 2018.
ACM purchased materials from Ninebell
amounting to $2,320 and $970 during the three months ended March
31, 2019 and 2018. As of March 31, 2019 and December 31, 2018,
accounts payable due to Ninebell were $1,476 and $1,477,
respectively, and prepaid to Ninebell for material purchases were
$871 and $572, respectively.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
In 2007
ACM Shanghai entered into an operating lease agreement with
Shanghai Zhangjiang Group Co., Ltd. (“Zhangjiang
Group”) to lease manufacturing and office space located in
Shanghai, China. An affiliate of Zhangjiang Group holds 787,098
shares of Class A common stock that it acquired in September 2017
for $5,903. Pursuant to the lease agreement, Zhangjiang Group
provided $771 to ACM Shanghai for leasehold improvements. In
September 2016 the lease agreement was amended to modify payment
terms and extend the lease through December 31, 2017. From January
1 to April 25, 2018, ACM Shanghai leased the property on a
month-to-month basis. On April 26, 2018, ACM Shanghai entered into
a renewed lease with Zhangjiang Group for the period from January
1, 2018 through December 31, 2022. Under the lease, ACM Shanghai
would pay a monthly rental fee of approximately RMB 366 (equivalent
to $55). The required security deposit is RMB 1,077 (equivalent to
$163). T
he Company incurred leasing
expenses under the lease agreement of $150 and $172 during the
three months ended March 31, 2019 and 2018, respectively. As of
March 31, 2019 and December 31, 2018, payables to Zhangjiang Group
for lease expenses and leasehold improvements recorded as other
payables and accrued expenses amounted to $0 and $53, respectively
(note 7).
On
December 9, 2016, ACM Shanghai received the SMC Investment from SMC
for potential investment pursuant to terms to be subsequently
negotiated (note 8). SMC is a limited partnership incorporated in
the PRC, whose partners consist of employees of ACM Shanghai. On
March 14, 2017, ACM, ACM Shanghai and SMC entered into a securities
purchase agreement (the “SMC Agreement”) pursuant to
which, in exchange for the SMC Investment, ACM issued to SMC a
warrant exercisable, for cash or on a cashless basis, to purchase,
at any time on or before May 17, 2023, all, but not less than all,
of 397,502 shares of Class A common stock at a price of $7.50 per
share, for a total exercise price of $2,981. On March 30, 2018, SMC
exercised the warrant and purchased 397,502 shares of Class A
common stock (note 12).
NOTE 12 – WARRANT LIABILITY
On
December 9, 2016, Shengxin (Shanghai) Management Consulting Limited
Partnership (“SMC”), a related party (note 11),
delivered RMB 20,124 (approximately $2,981 as of the close of
business on such date) in cash (the “SMC Investment”)
to ACM Shanghai for potential investment pursuant to terms to be
subsequently negotiated
On
March 14, 2017, ACM, ACM Shanghai and SMC entered into a securities
purchase agreement (the “SMC Agreement”) pursuant to
which, in exchange for the SMC Investment, ACM issued to SMC a
warrant exercisable, for cash or on a cashless basis, to purchase,
at any time on or before May 17, 2023, all, but not less than all,
of 397,502 shares of Class A common stock at a price of $7.50 per
share.
The
warrant issued to SMC, while outstanding as of December 31, 2017,
was classified as a liability as it was conditionally puttable in
accordance with FASB ASC 480,
Distinguishing Liabilities from Equity
.
The fair value of the warrant was adjusted for changes in fair
value at each reporting period but could not be lower than the
proceeds of the SMC Investment. The corresponding non-cash gain or
loss of the changes in fair value was recorded in earnings. The
methodology used to value the warrant was the Black-Scholes
valuation model.
On
March 30, 2018, ACM entered into a warrant exercise agreement with
ACM Shanghai and SMC pursuant to which SMC exercised its warrant in
full by issuing to ACM a senior secured promissory note in the
principal amount of approximately $3,000. ACM then transferred the
SMC note to ACM Shanghai in exchange for an intercompany promissory
note of ACM Shanghai in the principal amount of approximately
$3,000. Each of the two notes bears interest at a rate of 3.01% per
annum and matures on August 17, 2023. As security for its
performance of its obligations under its note, SMC granted to ACM
Shanghai a security interest in the 397,502 shares of Class A
common stock issued to SMC upon its exercise of the warrant. Upon
the issuance of 397,502 shares of Class A common stock to SMC, the
senior secured promissory note issued to AMC by SMC was offset
against the SMC investment.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
NOTE 13 – COMMON STOCK
ACM is
authorized to issue 100,000,000 shares of Class A common stock and
7,303,533 shares of Class B common stock, each with a par value of
$0.0001. Each share of Class A common stock is entitled to one
vote, and each share of Class B common stock is entitled to twenty
votes and is convertible at any time into one share of Class A
common stock. Shares of Class A common stock and Class B common
stock are treated equally, identically and ratably with respect to
any dividends declared by the Board of Directors unless the Board
of Directors declares different dividends to the Class A common
stock and Class B common stock by getting approval from a majority
of common stock holders.
At
December 31, 2017, the number of shares of Class A common stock
issued and outstanding was 12,935,546. At December 31, 2017, the
number of shares of Class B common stock issued and outstanding was
2,409,738, respectively.
On
March 30, 2018, SMC exercised its warrant (note 12) and purchased
397,502 shares of Class A common stock.
At
March 31, 2018, the number of shares of Class A common stock issued
and outstanding was 13,390,270. At March 31, 2018, the number of
shares of Class B common stock issued and outstanding was
2,409,738. During the three months ended March 31, 2018, no share
of Class B common stock was converted into Class A common
stock.
At
December 31, 2018, the number of shares of Class A common stock
issued and outstanding was 14,110,315. At December 31, 2018, the
number of shares of Class B common stock issued and outstanding was
1,898,423. During the three months ended March 31, 2019, the
Company issued 66,375 shares of Class A common stock, respectively,
upon options exercises by certain employees and non-employees.
During the three months ended March 31, 2019, no shares of Class B
common stock were converted into Class A common stock.
At
March 31, 2019, the number of shares of Class A common stock issued
and outstanding was 14,176,790. At March 31, 2019, the number of
shares of Class B common stock issued and outstanding was
1,898,423.
NOTE 14– STOCK-BASED COMPENSATION
ACM’s
stock-based compensation awards consisting of employee and
non-employee awards were issued under the 1998 Stock Option Plan
and 2016 Omnibus Incentive Plan and as standalone
options.
Employee Awards
The
following table summarizes the Company’s employee share
option activities during the three months ended March 31,
2019:
|
|
Weighted Average Grant Date Fair Value
|
Weighted Average Exercise Price
|
Weighed Average Remaining Contractual Term
|
Outstanding at December 31, 2018
|
2,503,405
|
$
0.91
|
$
4.09
|
7.30
years
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
(11,375
)
|
0.65
|
1.68
|
|
Expired
|
(628
)
|
0.55
|
3.00
|
|
Forfeited
|
-
|
-
|
-
|
|
Outstanding at March
31, 2019
|
2,491,402
|
$
1.53
|
$
4.10
|
7.06
years
|
Vested and exercisable at March
31, 2019
|
1,544,974
|
|
|
|
During the three months ended March 31, 2019 and 2018, the Company
recognized employee stock-based compensation expense of $221 and
$93, respectively. As of March 31, 2019 and December 31, 2018,
$2,203 and $2,424, respectively, of total unrecognized employee
stock-based compensation expense, net of estimated forfeitures,
related to stock-based awards were expected to be recognized over a
weighted-average period of 1.41 years and 1.62 years, respectively.
Total recognized compensation cost may be adjusted for future
changes in estimated forfeitures.
No options were granted to employees during the three months ended
March 31, 2019.
Non-employee Awards
The
following table summarizes the Company’s non-employee share
option activities during the three months ended March 31,
2019:
|
|
Weighted Average Grant Date Fair Value
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Term
|
Outstanding at December 31, 2018
|
1,212,374
|
$
0.78
|
$
2.57
|
6.66 years
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
(55,000
)
|
0.32
|
0.75
|
|
Expired
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
|
Outstanding at March
31, 2019
|
1,157,374
|
$
0.78
|
$
2.57
|
6.66 years
|
Vested and exercisable at March
31, 2019
|
950,237
|
|
|
|
We
adopted ASU 2018-07 on January 1, 2019 and the stock-based
compensation expense for grants before the adoption of ASU 2018-07
is based on the grant date fair value as of December 31, 2018,
which was the last business day before we adopted ASU 2018-07, for
all nonemployee awards that have not vested as of December 31,
2018. Furthermore, for future awards, compensation expense is based
on the market value of the shares at the grant date. Refer to "Note
2 - Summary of Significant Accounting Policies" for further
discussion on our adoption of ASU 2018-07.
During the three months
ended March 31, 2019 and 2018,
the Company recognized
stock-based compensation expense of $523 and $
2,083
for the three months ended
March 31, 2019 and 2018, respectively, related to share option
vesting.
As
of March 31, 2019 and December 31, 2018, $1,190 and $1,713,
respectively, of total unrecognized non-employee stock-based
compensation expense, net of estimated forfeitures, related to
stock-based awards were expected to be recognized over a
weighted-average period of 1.37 years and 1.31 years, respectively.
Total recognized compensation cost may be adjusted for future
changes in estimated forfeitures.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
NOTE 15 – INCOME TAXES
Income
taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the
period during which such rates are enacted.
The
Company considers all available evidence to determine whether it is
more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become
realizable. Management considers the scheduled reversal of deferred
tax liabilities (including the impact of available carryback and
carry-forward periods), and projected taxable income in assessing
the realizability of deferred tax assets. In making such judgments,
significant weight is given to evidence that can be objectively
verified. Based on all available evidence, in particular the
Company’s three-year historical cumulative losses, recent
operating results and U.S. pre-tax loss for the three months ended
March 31, 2019, the Company recorded a valuation allowance against
its U.S. net deferred tax assets. In order to fully realize the
U.S. deferred tax assets, the Company will need to generate
sufficient taxable income in future periods before the expiration
of the deferred tax assets governed by the tax code.
In each
period since inception, the Company has recorded a valuation
allowance for the full amount of net deferred tax assets in the
United States, as the realization of deferred tax assets is
uncertain. ACM Shanghai has shown a three-year historical
cumulative profit and has projections of future income. As a
result, the Company maintained a partial consolidated valuation
allowance for the three and nine months ended March 31, 2019 and
December 31, 2018.
The
Company accounts for uncertain tax positions in accordance with the
authoritative guidance on income taxes under which the Company may
only recognize or continue to recognize tax positions that meet a
"more likely than not" threshold. The Company recognizes accrued
interest and penalties related to unrecognized tax benefits as a
component of the provision for income taxes.
The
Company’s effective tax rate differs from statutory rates of
21% for U.S. federal income tax purposes and 15% to 25% for Chinese
income tax purposes due to the effects of the valuation allowance
and certain permanent differences from book-tax differences. As a
result, the Company recorded income tax expense of $119 and $22
during the three months ended March 31, 2019 and 2018,
respectively.
As of
March 31, 2019, the Company's total unrecognized tax benefits were
approximately $44, which would not affect the effective tax rate if
recognized. The Company will recognize interest and penalties, when
they occur, related to uncertain tax provisions as a component of
tax expense. No interest or penalties were recognized for the three
months ended March 31, 2019.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
The
Company files income tax returns in the United States, and state
and foreign jurisdictions. The federal, state and foreign income
tax returns are under the statute of limitations subject to tax
examinations for the tax years ended December 31, 1999 through
December 31, 2017. This is due to the Company’s tax attribute
carry-forwards, the tax years in which the attribute was generated
may still be adjusted upon examination by the U.S. Internal Revenue
Service, state or foreign tax authorities to the extent utilized in
a future period.
The Tax
Cuts and Jobs Act (the "Tax Act"), enacted on December 22, 2017,
introduced significant changes to U.S. income tax law. Effective
January 1, 2018, the Tax Act reduced the U.S. statutory tax rate
from 35% to 21% and created new taxes on certain foreign-sourced
earnings and certain intercompany payments. Due to the timing of
the enactment and the complexity involved in applying the
provisions of the Tax Act, the Company made reasonable estimates of
the effects and recorded provisional amounts in its financial
statements as of December 31, 2017. There were no adjustments made
in the three months ended March 31, 2019. The accounting for the
tax effects of the Tax Act was completed in 2018.
NOTE 16 – COMMITMENTS AND CONTINGENCIES
The
Company leases offices under non-cancelable operating lease
agreements. See note 12 for future minimum lease payments under
non-cancelable operating lease agreements with initial terms of one
year or more.
As of
March 31, 2019, the Company did not have any capital
commitments.
From
time to time the Company is subject to legal proceedings, including
claims in the ordinary course of business and claims with respect
to patent infringements. As of March 31, 2019, the Company did not
have any legal proceedings.