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.