Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
NOTE 1 – DESCRIPTION OF BUSINESS
ACM
Research, Inc. (“ACM”) and its subsidiaries
(collectively with ACM, the “Company”) develop,
manufacture and sell single-wafer wet cleaning equipment used to
improve the manufacturing process and yield for advanced integrated
chips. The Company markets and sells its single-wafer wet-cleaning
equipment, under the brand name “Ultra C,” based on the
Company’s proprietary Space Alternated Phase Shift
(“SAPS”) and Timely Energized Bubble Oscillation
(“TEBO”) technologies. These tools are designed to
remove random defects from a wafer surface efficiently, without
damaging the wafer or its features, even at increasingly advanced
process nodes.
ACM was
incorporated in California in 1998, and it initially focused on
developing tools for manufacturing process steps involving the
integration of ultra low-K materials and copper. The
Company’s early efforts focused on stress-free
copper-polishing technology, and it sold tools based on that
technology in the early 2000s.
In 2006
the Company established its operational center in Shanghai in the
People’s Republic of China (the “PRC”), where it
operates through ACM’s subsidiary ACM Research (Shanghai),
Inc. (“ACM Shanghai”). ACM Shanghai was formed to help
establish and build relationships with integrated circuit
manufacturers in the PRC, and the Company initially financed its
Shanghai operations in part through sales of non-controlling equity
interests in ACM Shanghai.
In 2007
the Company began to focus its development efforts on single-wafer
wet-cleaning solutions for the front-end chip fabrication process.
The Company introduced its SAPS megasonic technology, which can be
applied in wet wafer cleaning at numerous steps during the chip
fabrication process, in 2009. It introduced its TEBO technology,
which can be applied at numerous steps during the fabrication of
small node two-dimensional conventional and three-dimensional
patterned wafers, in March 2016. The Company has designed its
equipment models for SAPS and TEBO solutions using a modular
configuration that enables it to create a wet-cleaning tool meeting
the specific requirements of a customer, while using pre-existing
designs for chamber, electrical, chemical delivery and other
modules. In August 2018, the Company introduced its Ultra-C Tahoe
wafer cleaning tool, which can deliver high cleaning performance
with significantly less sulfuric acid than typically consumed by
conventional high-temperature single-wafer cleaning tools. The
Company also offers a range of custom-made equipment, including
cleaners, coaters and developers, to back-end wafer assembly and
packaging factories, principally in the PRC.
In 2011
ACM Shanghai formed a wholly owned subsidiary in the PRC, ACM
Research (Wuxi), Inc. (“ACM Wuxi”), to manage sales and
service operations.
In
November 2016 ACM redomesticated from California to Delaware
pursuant to a merger in which ACM Research, Inc., a California
corporation, was merged into a newly formed, wholly owned Delaware
subsidiary, also named ACM Research, Inc.
In June
2017 ACM formed a wholly owned subsidiary in Hong Kong, CleanChip
Technologies Limited (“CleanChip”), to act on the
Company’s behalf in Asian markets outside the PRC by, for
example, serving as a trading partner between ACM Shanghai and its
customers, procuring raw materials and components, performing sales
and marketing activities, and making strategic
investments.
In
August 2017 ACM purchased 18.77% of ACM Shanghai’s equity
interests held by Shanghai Science and Technology Venture Capital
Co., Ltd. On November 8, 2017, ACM purchased the remaining 18.36%
of ACM Shanghai’s equity interest held by third parties,
Shanghai Pudong High-Tech Investment Co., Ltd.
(“PDHTI”) and Shanghai Zhangjiang Science &
Technology Venture Capital Co., Ltd. (“ZSTVC”). At
December 31, 2017, ACM owned all of the outstanding equity
interests of ACM Shanghai, and indirectly through ACM Shanghai,
owned all of the outstanding equity interests of ACM
Wuxi.
On
September 13, 2017, ACM effectuated a 1-for-3 reverse stock split
of Class A and Class B common stock. Unless otherwise indicated,
all share numbers, per share amount, share prices, exercise prices
and conversion rates set forth in these notes and the accompanying
condensed consolidated financial statements have been adjusted
retrospectively to reflect the reverse stock split.
In
December 2017 ACM formed a wholly owned subsidiary in the Republic
of Korea, ACM Research Korea CO., LTD. (“ACM Korea”),
to serve customers based in Republic of Korea and perform sales,
marketing, research and development activities for new products and
solutions.
On June
17, 2019 ACM announced plans to complete over the next three years
a listing (the “Listing”) of shares of ACM Shanghai on
the Shanghai Stock Exchange’s new Sci-Tech innovAtion boaRd,
known as the STAR Market, and a concurrent initial public offering
(the “IPO”), of ACM Shanghai shares in the PRC. ACM
Shanghai is currently our principal operating company and a
wholly-owned subsidiary of ACM Research. Following the Listing and
IPO, ACM Shanghai will be a majority-owned subsidiary of ACM
Research.
ACM RESEARCH, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(in thousands, except share and per share data)
As an
initial step in qualifying for the Listing and IPO, on June 12,
2019 ACM Shanghai entered into agreements with seven investors
pursuant to which those investors agreed to pay a purchase price
totaling RMB 187.9 million (equivalent to $27.3 million) to ACM
Shanghai for shares representing 4.2% of the then-outstanding ACM
Shanghai shares. Pursuant to these agreements, the investors are
obligated to fund their purchases (see note 17) after ACM Shanghai
made the required filings for the capital increase with the local
agency of the PRC Ministry of Commerce. Once it has received
payment of the purchase prices from all of the parties, ACM
Shanghai is obligated to process necessary PRC governmental
registrations for the capital increase with the local branch of the
PRC State Administration for Market Regulation. Upon completion of
those registrations, the investors will be regarded as the owners
of their subscribed shares.
In
March 2019, ACM Shanghai formed a wholly owned subsidiary in the
PRC, Shengwei Research (Shanghai), Inc., to manage activities
related to addition of future long-term production capacity. The
subsidiary was formed with registered capital of RMB 5.0 million
($727). As of June 30, 2019, no capital had been injected in this
new subsidiary.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The
consolidated accounts include ACM and its subsidiaries ACM
Shanghai, ACM Wuxi, CleanChip and ACM Korea. Subsidiaries are those
entities in which ACM, directly and indirectly, controls more than
one half of the voting power. All significant intercompany
transactions and balances have been eliminated upon
consolidation.
The
accompanying condensed consolidated financial statements of the
Company have been prepared in accordance with accounting principles
generally accepted in the United States of America
(“GAAP”) for interim financial information and the
rules and regulations of the SEC for reporting on Form 10-Q.
Accordingly, they do not include all the information and footnotes
required by GAAP for complete financial statements herein. The
unaudited condensed consolidated financial statements herein should
be read in conjunction with the historical consolidated financial
statements of the Company for the year ended December 31, 2018
included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2018.
The
accompanying condensed consolidated balance sheet as of June 30,
2019, the condensed consolidated statements of operations and
comprehensive income for the three and six months ended June 30,
2019 and 2018, the condensed consolidated statements of changes in
stockholders’ equity for the six months ended June 30, 2019
and 2018, and the condensed consolidated statements of cash flows
for the six months ended June 30, 2019 and 2018 are unaudited. In
the opinion of management, the unaudited condensed consolidated
financial statements of the Company reflect all adjustments that
are necessary for a fair presentation of the Company’s
financial position and results of operations. Such adjustments are
of a normal recurring nature, unless otherwise noted. The balance
sheet as of June 30, 2019 and the results of operations for the
three and six months ended June 30, 2019 are not necessarily
indicative of the results to be expected for any future
period.
Use of Estimates
The
preparation of condensed consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the balance sheet date and the reported revenue and expenses during
the reported period in the condensed consolidated financial
statements and accompanying notes. The Company’s significant
accounting estimates and assumptions include, but are not limited
to, those used for the valuation and recognition of stock-based
compensation arrangements and warrant liability, realization of
deferred tax assets, assessment for impairment of long-lived
assets, allowance for doubtful accounts, inventory valuation for
excess and obsolete inventories, lower of cost and market value or
net realizable value of inventories, depreciable lives of property
and equipment, and useful life of intangible assets. Management of
the Company believes that the estimates, judgments and assumptions
are reasonable, based on information available at the time they are
made. Actual results could differ materially from those
estimates.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
Basic and Diluted Net Income per Common Share
Basic
and diluted net income per common share is calculated as
follows:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
|
|
|
|
Numerator:
|
|
|
|
|
Net income
|
$
4,311
|
$
3,215
|
$
6,168
|
$
435
|
Denominator:
|
|
|
|
|
Weighted average shares outstanding, basic
|
16,090,937
|
15,838,540
|
16,067,924
|
15,611,863
|
Effect of dilutive securities
|
2,513,410
|
2,281,193
|
2,387,610
|
2,057,787
|
Weighted average shares outstanding, diluted
|
18,604,347
|
18,119,733
|
18,455,534
|
17,669,650
|
Net
income per common share:
|
|
|
|
|
Basic
|
$
0.27
|
$
0.20
|
$
0.38
|
$
0.03
|
Diluted
|
$
0.23
|
$
0.18
|
$
0.33
|
$
0.02
|
ACM has
been authorized to issue Class A and Class B common stock since
redomesticating in Delaware in November 2016. The two classes of
common stock are substantially identical in all material respects,
except for voting rights. Since ACM did not declare any dividends
during the three and six months ended June 30, 2019 and 2018, the
net income per common share attributable to each class is the same
under the “two-class” method. As such, the two classes
of common stock have been presented on a combined basis in the
condensed consolidated statements of operations and comprehensive
income and in the above computation of net income per common
share.
Diluted
net income per common share reflects the potential dilution from
securities that could share in ACM’s earnings. ACM’s
potential dilutive securities consist warrants and stock options
for the three and six months ended June 30, 2019 and 2018.
Certain potential dilutive securities
were excluded from the net income per share calculation because the
impact would be anti-dilutive.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2016-02,
Leases (Topic 842)
. The amendments in
ASU 2016-02
create Topic 842,
Leases
, and supersede the
leases requirements in Topic 840,
Leases
. Topic 842 specifies the
accounting for leases. The objective of Topic 842 is to establish
the principles that lessees and lessors shall apply to report
useful information to users of financial statements about the
amount, timing, and uncertainty of cash flows arising from a lease.
The main difference between Topic 842 and Topic 840 is the
recognition of lease assets and lease liabilities for those leases
classified as operating leases under Topic 840. Topic 842 retains a
distinction between finance leases and operating leases. The
classification criteria for distinguishing between finance leases
and operating leases are substantially similar to the
classification criteria for distinguishing between capital leases
and operating leases in the previous lease guidance. The result of
retaining a distinction between finance leases and operating leases
is that under the lessee accounting model in Topic 842, the effect
of leases in the statement of comprehensive income and the
statement of cash flows is largely unchanged from previous
GAAP.
Effective January
1, 2019, the Company adopted ASU 2016-02. The original guidance
required application on a modified retrospective basis with the
earliest period presented. In August 2018, the FASB issued ASU
2018-11,
Targeted Improvements to
ASC 842
,
Leases
,
which included an option to not restate comparative periods in
transition and elect to use the effective date of Accounting
Standards Codification (“ASC”) 842
as the date of initial
application of transition, which the Company elected. As a result
of its adoption of ASC 842 as of January 1, 2019, the Company
recorded operating lease right-of-use assets of $5,109 and lease
liabilities of $5,109. The adoption of ASC 842 had no impact on the
Company’s profit or cash flows for the three and six month
period ended June 30, 2019. In addition, the Company elected the
package of practical expedients permitted under the transition
guidance within the new standard, which allowed the Company to
carry forward the historical lease classification. Additional
information and disclosures required by this new standard are
contained in note 8.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
In June
2018, the FASB issued ASU 2018-07,
Compensation—Stock Compensation (Topic
718)—Improvements to Nonemployee Share-Based Payment
Accounting
, which simplifies several aspects of the
accounting for nonemployee share-based payment transactions
resulting from expanding the scope of Topic 718,
Compensation—Stock Compensation
,
to include share-based payment transactions for acquiring goods and
services from nonemployees. Some of the areas for simplification
apply only to nonpublic entities. ASU 2018-07 specifies that Topic
718 applies to all share-based payment transactions in which a
grantor acquires goods or services to be used or consumed in a
grantor’s own operations by issuing share-based payment
awards. ASU 2018-07 also clarifies that Topic 718 does not apply to
share-based payments used to effectively provide (1) financing to
the issuer or (2) awards granted in conjunction with selling goods
or services to customers as part of a contract accounted for under
the new revenue recognition standard set forth in ASU 2014-09,
Revenue from Contracts with
Customers (Topic 606)
. Effective January 1, 2019, the
Company adopted ASU 2018-07, which did not have a material impact
on the Company’s consolidated financial
statements.
Recent Accounting Pronouncements Not Yet Adopted
In
August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820)
,
which eliminates, adds and modifies certain disclosure requirements
for fair value measurements. The modified standard eliminates the
requirement to disclose changes in unrealized gains and losses
included in earnings for recurring Level 3 fair value measurements
and requires changes in unrealized gains and losses be included in
other comprehensive income for recurring Level 3 fair value
measurements of instruments. The standard also requires the
disclosure of the range and weighted average used to develop
significant unobservable inputs and how weighted average is
calculate for recurring and nonrecurring Level 3 fair value
measurements. The amendment is effective for fiscal years beginning
after December 15, 2019 and interim periods within that fiscal
year, with early adoption permitted. The Company is evaluating the
impact of the adoption of ASU 2018-13 on its consolidated financial
statements.
In
January 2017, the FASB issued ASU 2017-04,
Intangibles—Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment
, which
removes Step 2 from the goodwill impairment test. An entity will
apply a one-step quantitative test and record the amount of
goodwill impairment as the excess of a reporting unit’s
carrying amount over its fair value, not to exceed the total amount
of goodwill allocated to the reporting unit.
ASU 2017-04
does not amend the optional
qualitative assessment of goodwill impairment. A business entity
that files periodic reports with the Securities and Exchange
Commission must adopt the amendments in
ASU 2017-04
for its annual or any interim
goodwill impairment test in fiscal years beginning after December
15, 2019. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January
1, 2017. The Company is evaluating the impact of the adoption of
ASU 2017-04 on its consolidated financial statements.
In June
2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments
.
ASU 2016-13 replaced the incurred loss impairment methodology under
current GAAP with a methodology that reflects expected credit
losses and requires consideration of a broader range of reasonable
and supportable information to inform credit loss estimates. ASU
2016-13 requires use of a forward-looking expected credit loss
model for accounts receivables, loans, and other financial
instruments. ASU 2016-13 is effective for fiscal years beginning
after December 15, 2019, with early adoption permitted. Adoption of
the standard requires using a modified retrospective approach
through a cumulative-effect adjustment to retained earnings as of
the effective date to align existing credit loss methodology with
the new standard. The Company will adopt ASU 2016-13 effective
January 1, 2020. The Company is evaluating the impact of this
standard on its consolidated financial statements, including
accounting policies, processes, and systems, but does not expect
the standard will have a material impact on its consolidated
financial statements.
NOTE 3 – ACCOUNTS RECEIVABLE
At June
30, 2019 and December 31, 2018, accounts receivable consisted of
the following:
|
|
|
|
|
|
Accounts receivable
|
$
31,393
|
$
24,608
|
Less: Allowance for doubtful accounts
|
-
|
-
|
Total
|
$
31,393
|
$
24,608
|
The
Company reviews accounts receivable on a periodic basis and makes
general and specific allowances when there is doubt as to the
collectability of individual balances. No allowance for doubtful
accounts was considered necessary at June 30, 2019 or December 31,
2018. At June 30, 2019
and December
31, 2018, accounts receivable of $0 and
$1,457,
respectively,
were pledged as
collateral for borrowings from financial
institutions.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
NOTE 4 – INVENTORIES
At June
30, 2019 and December 31, 2018, inventory consisted of the
following:
|
|
|
Raw materials
|
$
17,425
|
$
12,646
|
Work in process
|
15,103
|
9,631
|
Finished goods
|
12,966
|
16,487
|
Total inventory, gross
|
45,494
|
38,764
|
Inventory reserve
|
-
|
-
|
Total inventory, net
|
$
45,494
|
$
38,764
|
At June
30, 2019 and December 31, 2018, the Company did not have an
inventory reserve and no inventory was pledged as collateral for
borrowings from financial institutions. System shipments of
first-tools to an existing or prospective customer, for which
ownership does not transfer until customer acceptance, are
classified as finished goods inventory and carried at cost until
ownership is transferred.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET
At June
30, 2019 and December 31, 2018, property, plant and equipment
consisted of the following:
|
|
|
|
|
|
Manufacturing equipment
|
$
3,948
|
$
9,703
|
Office equipment
|
601
|
512
|
Transportation equipment
|
126
|
184
|
Leasehold improvement
|
1,424
|
1,379
|
Total cost
|
6,099
|
11,778
|
Less: Total accumulated depreciation
|
(2,831
)
|
(8,102
)
|
Construction in progress
|
108
|
32
|
Total property, plant and equipment, net
|
$
3,376
|
$
3,708
|
Depreciation
expense was $177 and $88 for the three months ended June 30, 2019
and 2018, respectively, and $352 and $173 for the six months ended
June 30, 2019 and 2018, respectively.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
NOTE 6 – SHORT-TERM BORROWINGS
At June
30, 2019 and December 31, 2018, short-term borrowings consisted of
the following:
|
|
|
Line
of credit up to RMB 50,000 from Bank of Shanghai Pudong Branch, due
on April 17,2019 with an annual interest rate of 4.99%, guaranteed
by the Company’s CEO and fully repaid on March 27,
2019.
|
$
-
|
$
3,133
|
Line
of credit up to RMB 50,000 from Bank of Shanghai Pudong Branch, due
on February 14,2019 with an annual interest rate of 5.15%,
guaranteed by the Company’s CEO and fully repaid on February
14, 2019.
|
-
|
485
|
Line
of credit up to RMB 50,000 from Bank of Shanghai Pudong Branch, due
on January 23, 2020 with an annual interest rate of 5.22%,
guaranteed by the Company’s CEO and Cleanchip Technologies
Limited.
|
3,565
|
|
Line of credit up to RMB 30,000 from Bank of China
Pudong Branch, due on June 6,2019 with annual interest rate of
5.22%,secured by certain of the Company’s intellectual
property and the Company’s CEO and fully repaid on
June
6
,2019.
|
-
|
2,186
|
Line
of credit up to RMB 30,000 from Bank of China Pudong Branch, due on
June 13,2019 with annual interest rate of 5.22%,secured by certain
of the Company’s intellectual property and the
Company’s CEO and fully repaid on June 13,2019.
|
-
|
2,186
|
Line
of credit up to RMB 10,000 from Shanghai Rural Commercial Bank, due
on January 23, 2019 with an annual interest rate of 5.44%,
guaranteed by the Company’s CEO and pledged by accounts
receivable,and fully repaid on January 23, 2019.
|
-
|
1,457
|
Line
of credit up to RMB 20,000 from Shanghai Rural Commercial Bank, due
on February 21, 2020 with an annual interest rate of 5.66%,
guaranteed by the Company’s CEO and pledged by accounts
receivable.
|
1,455
|
|
Line
of credit up to RMB 20,000 from Bank of Communications, due on
January 18, 2020 with an annual interest rate of
5.66%.
|
1,455
|
|
Line
of credit up to RMB 20,000 from Bank of Communications, due on
January 22, 2020 with an annual interest rate of
5.66%.
|
728
|
|
Line
of credit up to RMB 20,000 from Bank of Communications, due on
February 14, 2020 with an annual interest rate of
5.66%.
|
728
|
|
Line
of credit up to RMB 50,000 from China Everbright Bank, due on March
25, 2020 with an annual interest rate of 4.94%, guaranteed by the
Company’s CEO.
|
3,251
|
|
Line
of credit up to RMB 50,000 from China Everbright Bank, due on April
17, 2020 with an annual interest rate of 5.66%, guaranteed by the
Company’s CEO.
|
1,164
|
|
Line
of credit up to RMB 50,000 from China Everbright Bank, due on June
26, 2020 with an annual interest rate of 5.66%, guaranteed by the
Company’s CEO.
|
2,764
|
|
Total
|
$
15,110
|
$
9,447
|
Interest
expense related to short-term borrowings amounted to $194 and $149
for the three months ended June 30, 2019 and 2018, respectively,
and $333 and $252 for the six months ended June 30, 2019 and 2018,
respectively.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
NOTE 7 – OTHER PAYABLE AND ACCRUED EXPENSES
At June
30, 2019 and December 31, 2018, other payable and accrued expenses
consisted of the following:
|
|
|
Lease expenses and payable for leasehold improvement due to a related party (note 11)
|
$
52
|
$
53
|
Accrued
commissions
|
2,455
|
2,931
|
Accrued warranty
|
2,338
|
1,710
|
Accrued payroll
|
1,392
|
626
|
Accrued professional fees
|
234
|
64
|
Accrued machine testing fees
|
2,859
|
3,076
|
Others
|
2,663
|
1,950
|
Total
|
$
11,993
|
$
10,410
|
NOTE 8 –LEASES
The
Company leases space under non-cancelable operating leases for
several office and manufacturing locations. These leases do not
have significant rent escalation holidays, concessions, leasehold
improvement incentives, or other build-out clauses. Further, the
leases do not contain contingent rent provisions.
Most
leases include one or more options to renew. The exercise of lease
renewal options is typically at the Company’s sole
discretion; therefore, the majority of renewals to extend the lease
terms are not included in the Company’s right-of-use assets
and lease liabilities as they are not reasonably certain of
exercise. The Company regularly evaluates the renewal options, and
when they are reasonably certain of exercise, the Company includes
the renewal period in its lease term.
As most
of the Company’s leases do not provide an implicit rate, the
Company uses its incremental borrowing rate based on the
information available at the lease commencement date in determining
the present value of the lease payments. The Company has a
centrally managed treasury function; therefore, based on the
applicable lease terms and the current economic environment, it
applies a portfolio approach for determining the incremental
borrowing rate.
The
components of lease expense were as follows:
|
Three
months
ended
June
30,
2019
|
Six
months
ended
June
30,
2019
|
Operating lease
cost
|
$
264
|
$
701
|
Short-term lease
cost
|
7
|
25
|
Lease
cost
|
$
271
|
$
726
|
Supplemental cash
flow information related to operating leases was as follows for the
period ended June 30, 2019:
|
Three
months
ended
June
30,
2019
|
Six
months
ended
June
30,
2019
|
Cash paid for
amounts included in the measurement of lease
liabilities:
|
|
|
Operating
cash outflow from operating leases
|
271
|
726
|
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
Maturities of lease
liabilities for all operating leases were as follows as of June 30,
2019:
|
|
2019
|
$
728
|
2020
|
1,488
|
2021
|
1,475
|
2022
|
1,495
|
2023
|
53
|
2024
|
13
|
Total lease
payments
|
5,252
|
Less:
Interest
|
(702
)
|
Present value of
lease liabilities
|
$
4,550
|
The
weighted average remaining lease terms and discount rates for all
operating leases were as follows as of June 30, 2019:
|
|
Remaining lease
term and discount rate:
|
|
Weighted average
remaining lease term (years)
|
3.50
|
Weighted average
discount rate
|
5.43
%
|
NOTE 9 – OTHER LONG-TERM LIABILITIES
Other
long-term liabilities represent government subsidies received from
PRC governmental authorities for development and commercialization
of certain technology but not yet recognized. As of June 30, 2019,
and December 31, 2018, other long-term liabilities consisted of the
following unearned government subsidies:
|
|
|
Subsidies to Stress Free Polishing project, commenced in 2008 and 2017
|
$
1,362
|
$
1,483
|
Subsidies to Electro Copper Plating project, commenced in 2014
|
2,370
|
2,860
|
Subsidies to Polytetrafluoroethylene, commenced in 2018
|
158
|
178
|
Other
|
73
|
62
|
Total
|
$
3,963
|
$
4,583
|
NOTE 10 – LONG-TERM INVESTMENT
On
September 6, 2017, ACM and Ninebell Co., Ltd.
(“Ninebell”), a Korean company that is one of the
Company’s principal materials suppliers, entered into an
ordinary share purchase agreement, effective as of September 11,
2017, pursuant to which Ninebell issued to ACM ordinary shares
representing 20% of Ninebell’s post-closing equity for a
purchase price of $1,200, and a common stock purchase agreement,
effective as of September 11, 2017, pursuant to which ACM issued
133,334 shares of Class A common stock to Ninebell for a purchase
price of $1,000 at $7.50 per share
.
The investment in Ninebell is accounted for under the equity
method.
On June 27, 2019,
ACM Shanghai and Shengyi
Semiconductor Technology Co., Ltd. (“Shengyi”), a
company based in Wuxi, China that is one of the Company’s
components suppliers, entered into an agreement pursuant to which
Shengyi issued to ACM Shanghai shares representing 15% of
Shengyi’s post-closing equity for a purchase price of $109.
The investment in Shengyi is accounted for under the cost
method.
|
|
|
Investment
– equity method
|
$
1,629
|
$
1,360
|
Investment
– cost method
|
109
|
-
|
Total
|
$
1,738
|
$
1,360
|
ACM
RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
NOTE 11– RELATED PARTY BALANCES AND TRANSACTIONS
On
August 18, 2017, ACM and Ninebell, its equity method investment
affiliate (note 10), entered into a loan agreement pursuant to
which ACM made an interest-free loan of $946 to Ninebell, payable
in 180 days or automatically extended another 180 days if in
default. The loan was secured by a pledge of Ninebell’s
accounts receivable due from ACM and all money that Ninebell
received from
ACM.
Ninebell repaid the loan in March 2018.
ACM purchased materials from Ninebell amounting to
$2,483 and $1,865 during the three months ended June 30, 2019 and
2018, and $4,803 and $2,835 during the six months ended June 30,
2019 and 2018, respectively. As of June 30, 2019 and December 31,
2018, accounts payable due to Ninebell were $2,131 and $1,477,
respectively, and prepaid expenses prepaid to Ninebell for material
purchases were $751 and $572, respectively.
ACM
purchased materials from Shengyi amounting to $192 during the three
and six months ended June 30, 2019. As of June 30, 2019, accounts
payable due to Shengyi was $189.
In 2007
ACM Shanghai entered into an operating lease agreement with
Shanghai Zhangjiang Group Co., Ltd. (“Zhangjiang
Group”) to lease manufacturing and office space located in
Shanghai, China. An affiliate of Zhangjiang Group holds 787,098
shares of Class A common stock that it acquired in September 2017
for $5,903. Pursuant to the lease agreement, Zhangjiang Group
provided $771 to ACM Shanghai for leasehold improvements. In
September 2016 the lease agreement was amended to modify payment
terms and extend the lease through December 31, 2017. From January
1 to April 25, 2018, ACM Shanghai leased the property on a
month-to-month basis. On April 26, 2018, ACM Shanghai entered into
a renewed lease with Zhangjiang Group for the period from January
1, 2018 through December 31, 2022. Under the lease, ACM Shanghai
pays a monthly rental fee of RMB 366 (equivalent to $55). The
required security deposit was RMB 1,077 (equivalent to $163).
T
he Company incurred leasing expenses
under the lease agreement of $150 and $147 during the three months
ended June 30, 2019 and 2018, respectively, and $300 and $319
during the six months ended June 30, 2019 and 2018, respectively.
As of June 30, 2019 and December 31, 2018, payables to Zhangjiang
Group for lease expenses and leasehold improvements recorded as
other payables and accrued expenses amounted to $52 and $53,
respectively (note 7).
On
December 9, 2016, Shengxin (Shanghai) Management Consulting Limited
Partnership (“SMC”), a related party (note 11),
delivered RMB 20,124 (approximately $2,981 as of the close of
business on such date) in cash (the “SMC Investment”)
to ACM Shanghai for potential investment pursuant to terms to be
subsequently negotiated. SMC is a limited partnership incorporated
in the PRC, whose partners consist of employees of ACM Shanghai. On
March 14, 2017, ACM, ACM Shanghai and SMC entered into a securities
purchase agreement (the “SMC Agreement”) pursuant to
which, in exchange for the SMC Investment, ACM issued to SMC a
warrant (the “SMC Warrant”) exercisable, for cash or on
a cashless basis, to purchase, at any time on or before May 17,
2023, all, but not less than all, of 397,502 shares of Class A
common stock at a price of $7.50 per share, for a total exercise
price of $2,981. On March 30, 2018, SMC exercised the SMC Warrant
in full and purchased 397,502 shares of Class A common stock (note
12).
NOTE 12 – WARRANT LIABILITY
On
December 9, 2016, ACM Shanghai received the SMC Investment from SMC
for potential investment pursuant to terms to be subsequently
negotiated, and on March 14, 2017, ACM, ACM Shanghai and SMC
entered into the SMC Agreement pursuant to which, in exchange for
the SMC Investment, ACM issued the SMC Warrant to SMC (note
11).
The SMC
Warrant, while outstanding as of December 31, 2017, was classified
as a liability as it was conditionally puttable in accordance with
FASB ASC 480,
Distinguishing
Liabilities from Equity
. The fair value of the SMC Warrant
was adjusted for changes in fair value at each reporting period,
but could not be lower than the proceeds of the SMC Investment. The
corresponding non-cash gain or loss of the changes in fair value
was recorded in earnings. The Black-Scholes valuation model was
used to value the SMC Warrant.
On
March 30, 2018, ACM entered into a warrant exercise agreement with
ACM Shanghai and SMC pursuant to which SMC exercised the SMC
Warrant in full by issuing to ACM a senior secured promissory note
in the principal amount of $3,000. ACM then transferred such note
to ACM Shanghai in exchange for an intercompany promissory note of
ACM Shanghai in the principal amount of $3,000. Each of the two
notes bears interest at a rate of 3.01% per annum and matures on
August 17, 2023. As security for its performance of its obligations
under its note, SMC granted to ACM Shanghai a security interest in
the 397,502 shares of Class A common stock issued to SMC upon its
exercise of the SMC Warrant. Upon the issuance of 397,502 shares of
Class A common stock to SMC, the senior secured promissory note
issued to AMC by SMC was offset against the SMC
Investment.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
NOTE 13 – COMMON STOCK
ACM is
authorized to issue 50,000,000 shares of Class A common stock and
2,409,738 shares of Class B common stock, each with a par value of
$0.0001. Each share of Class A common stock is entitled to one
vote, and each share of Class B common stock is entitled to twenty
votes and is convertible at any time into one share of Class A
common stock. Shares of Class A common stock and Class B common
stock are treated equally, identically and ratably with respect to
any dividends declared by the Board of Directors unless the Board
of Directors declares different dividends to the Class A common
stock and Class B common stock by getting approval from a majority
of common stockholders.
On
March 30, 2018, SMC exercised the SMC Warrant in full (note 12) to
purchase 397,502 shares of Class A common stock.
During
the six months ended June 30, 2019, the Company issued 104,627
shares of Class A common stock upon option exercises by employees
and non-employees and an additional 15,000 shares of Class A common
stock upon conversion of an equal number of shares of Class B
common stock.
There
were issued and outstanding 14,229,942 shares of Class A common
stock and 1,883,423 shares of Class B common stock at June 30, 2019
and 14,110,315 shares of Class A common stock and 1,898,423 shares
of Class B common stock at December 31, 2018.
NOTE 14– STOCK-BASED COMPENSATION
ACM’s
stock-based compensation awards consisting of employee and
non-employee awards were issued under the 1998 Stock Option Plan
and 2016 Omnibus Incentive Plan and as standalone
options.
Employee Awards
The
following table summarizes the Company’s employee share
option activities during the six months ended June 30,
2019:
|
|
Weighted Average Grant Date Fair Value
|
Weighted Average Exercise Price
|
Weighed Average Remaining Contractual Term
|
Outstanding at December 31, 2018
|
2,503,405
|
0.91
|
4.09
|
7.30
years
|
Granted
|
295,000
|
6.50
|
16.81
|
|
Exercised
|
(48,098
)
|
0.78
|
2.62
|
|
Expired
|
(628
)
|
0.55
|
3.00
|
|
Forfeited
|
(4,085
)
|
1.90
|
4.83
|
|
Outstanding at June
30, 2019
|
2,745,594
|
2.07
|
5.48
|
7.14
years
|
Vested and exercisable at June
30, 2019
|
1,608,352
|
|
|
|
During the three months ended June 30, 2019 and 2018, the Company
recognized employee stock-based compensation expense of $291 and
$170, respectively. During the six months ended June 30, 2019 and
2018, the Company recognized employee stock-based compensation
expense of $512 and $263, respectively. As of June 30, 2019 and
December 31, 2018, $3,662 and $2,424, respectively, of total
unrecognized employee stock-based compensation expense, net of
estimated forfeitures, related to stock-based awards were expected
to be recognized over a weighted-average period of 1.51 years and
1.62 years, respectively. Total recognized compensation cost may be
adjusted for future changes in estimated forfeitures.
Stock options to acquire 295,000 and 295,000 shares, respectively,
of Class A common stock were granted to employees during the three
and six months ended June 30, 2019.
The
following table summarizes the Company’s non-employee share
option activities during the six months ended June 30,
2019:
|
|
Weighted Average Grant Date Fair Value
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Term
|
Outstanding at December 31, 2018
|
1,212,374
|
$
0.78
|
$
2.57
|
6.66
years
|
Granted
|
-
|
-
|
-
|
-
|
Exercised
|
(56,529
)
|
0.33
|
0.81
|
-
|
Expired
|
-
|
-
|
-
|
-
|
Forfeited
|
-
|
-
|
-
|
-
|
Outstanding at June
30, 2019
|
1,155,845
|
$
0.81
|
$
2.66
|
6.62
years
|
Vested and exercisable at June
30, 2019
|
986,572
|
|
|
|
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
The
Company adopted ASU 2018-07 on January 1, 2019, and the stock-based
compensation expense for grants before the adoption of ASU 2018-07
is based on the grant date fair value as of December 31, 2018,
which was the last business day before the Company adopted ASU
2018-07, for all nonemployee awards that have not vested as of
December 31, 2018. The cumulative-effect adjustment to retained
earnings as of January 1, 2019 was immaterial to the financial
statements as a whole. Accordingly, the Company did not record this
adjustment as of January 1, 2019. Furthermore, for future awards,
compensation expense is based on the market value of the shares at
the grant date.
During the three months
ended June 30, 2019 and 2018,
the Company recognized
stock-based compensation expense of $327 and $
14
, respectively, related to
share option vesting.
During the six months
ended June 30, 2019 and 2018,
the Company recognized
stock-based compensation expense of $850 and $
2,097
, respectively, related to
share option vesting.
As of June 30, 2019 and
December 31, 2018, $863 and $1,713, respectively, of total
unrecognized non-employee stock-based compensation expense, net of
estimated forfeitures, related to stock-based awards were expected
to be recognized over a weighted-average period of 0.64 years and
1.31 years, respectively. Total recognized compensation cost may be
adjusted for future changes in estimated
forfeitures.
NOTE 15 – INCOME TAXES
Income
taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the
period during which such rates are enacted.
The
Company considers all available evidence to determine whether it is
more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become
realizable. Management considers the scheduled reversal of deferred
tax liabilities (including the impact of available carryback and
carry-forward periods), and projected taxable income in assessing
the realizability of deferred tax assets. In making such judgments,
significant weight is given to evidence that can be objectively
verified. Based on all available evidence, in particular the
Company’s three-year historical cumulative losses, recent
operating results and U.S. pre-tax loss for the six months ended
June 30, 2019, the Company recorded a valuation allowance against
its U.S. net deferred tax assets. In order to fully realize the
U.S. deferred tax assets, the Company will need to generate
sufficient taxable income in future periods before the expiration
of the deferred tax assets governed by the tax code.
In
each period since inception, the Company has recorded a valuation
allowance for the full amount of net deferred tax assets in the
United States, as the realization of deferred tax assets is
uncertain. ACM Shanghai has shown a three-year historical
cumulative profit and has projections of future income. As a
result, the Company maintained a partial consolidated valuation
allowance for the three and six months ended June 30, 2019 and
December 31, 2018.
The
Company accounts for uncertain tax positions in accordance with the
authoritative guidance on income taxes under which the Company may
only recognize or continue to recognize tax positions that meet a
"more likely than not" threshold. The Company recognizes accrued
interest and penalties related to unrecognized tax benefits as a
component of the provision for income taxes.
The
Company’s effective tax rate differs from statutory rates of
21% for U.S. federal income tax purposes and 15% to 25% for Chinese
income tax purposes due to the effects of the valuation allowance
and certain permanent differences from book-tax differences. As a
result, the Company recorded income tax expense of $876 and $164
during the three months ended June 30, 2019 and 2018, respectively,
and $995 and $186 during the six months ended June 30, 2019 and
2018, respectively.
As of
June 30, 2019, the Company's total unrecognized tax benefits were
approximately $44, which would not affect the effective tax rate if
recognized. The Company will recognize interest and penalties, when
they occur, related to uncertain tax provisions as a component of
tax expense. No interest or penalties were recognized for the six
months ended June 30, 2019.
The
Company files income tax returns in the United States, and state
and foreign jurisdictions. The federal, state and foreign income
tax returns are under the statute of limitations subject to tax
examinations for the tax years ended December 31, 1999 through
December 31, 2017. This is due to the Company’s tax attribute
carry-forwards, the tax years in which the attribute was generated
may still be adjusted upon examination by the U.S. Internal Revenue
Service, state or foreign tax authorities to the extent utilized in
a future period.
ACM RESEARCH, INC.
Notes to
Condensed Consolidated
Financial Statements (unaudited)
(in thousands, except share and per share data)
The Tax
Cuts and Jobs Act (the "Tax Act"), enacted on December 22, 2017,
introduced significant changes to U.S. income tax law. Effective
January 1, 2018, the Tax Act reduced the U.S. statutory tax rate
from 35% to 21% and created new taxes on certain foreign-sourced
earnings and certain intercompany payments. Due to the timing of
the enactment and the complexity involved in applying the
provisions of the Tax Act, the Company made reasonable estimates of
the effects and recorded provisional amounts in its financial
statements as of December 31, 2017. There were no adjustments made
in the six months ended June 30, 2019. The accounting for the tax
effects of the Tax Act was completed in 2018.
NOTE 16 – COMMITMENTS AND CONTINGENCIES
The
Company leases offices under non-cancelable operating lease
agreements. See note 12 for future minimum lease payments under
non-cancelable operating lease agreements with initial terms of one
year or more.
As of
June 30, 2019, the Company did not have any capital
commitments.
From
time to time the Company is subject to legal proceedings, including
claims in the ordinary course of business and claims with respect
to patent infringements. As of June 30, 2019, the Company did not
have any legal proceedings.
NOTE 17 – SUBSEQUENT EVENTS
In
connection with the Listing and the IPO, in July 2019, ACM Shanghai
submitted the required filings for approval of its capital increase
with the local agency of the PRC Ministry of Commerce (see note 1).
Once ACM Shanghai has received payment of the funding from all
committed investors, ACM Shanghai is to process additional PRC
governmental registrations for the capital increase with the local
branch of the PRC State Administration for Market Regulation. Upon
successful completion of those registrations, the investors will be
issued additional equity, representing 4.2% of the outstanding ACM
Shanghai shares.