S-1 1 d311227ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on September 13, 2017.

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ACM RESEARCH, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3559   94-3290283

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

42307 Osgood Road, Suite I

Fremont, California 94539

(510) 445-3700

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

David H. Wang

Chief Executive Officer and President

ACM Research, Inc.

42307 Osgood Road, Suite I

Fremont, California 94539

Telephone: (510) 445-3700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Mark L. Johnson

Bella Zaslavsky

K&L Gates LLP

One Lincoln Street

Boston, Massachusetts 02111

Telephone: (617) 261-3100

Telecopy: (617) 261-3175

 

Michael D. Maline

Seo Salimi

Goodwin Procter LLP

620 Eighth Avenue

New York, New York 10018

Telephone: (212) 813-8800

Telecopy: (212) 355-3333

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☒

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate
Offering Price(1)

 

Amount of

Registration Fee(2)

Class A common stock, $0.0001 par value per share

  $34,500,000   $3,998.55

 

 

(1) Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes the offering price attributable to additional shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED SEPTEMBER 13, 2017

PROSPECTUS

                 Shares

 

 

LOGO

Class A Common Stock

 

 

This is the initial public offering of common stock of ACM Research, Inc. We are selling                  shares of Class A common stock. We anticipate that the initial public offering price of shares of Class A common stock will be between $         and $         per share. After the pricing of the offering, we expect that shares of Class A common stock will trade on The Nasdaq Global Market under the symbol “ACMR.”

We have two classes of common stock, Class A and Class B. Each share of Class A common stock is entitled to one vote. 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. The rights attributable to each class of common stock are otherwise identical. Immediately following this offering, holders of Class B will have         % of the voting power of our outstanding capital stock and holders of Class A common stock will have the remaining         %.

 

 

Investing in Class A common stock involves a high degree of risk. See “Risk Factors” beginning on page 11.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and will be subject to reduced public company reporting requirements. See “Prospectus Summary—Our Company—Implications of Being an Emerging Growth Company” on page 5.

 

     Per Share      Total  

Initial public offering price

   $                   $               

Underwriting discounts and commissions(1)

   $      $  

Proceeds to us, before expenses

   $      $  

 

(1) Does not include warrants that are issuable by us to the underwriters for the purchase of              shares of Class A common stock at a price of $         per share or certain out-of-pocket expenses of the underwriters that are reimbursable by us. See “Underwriting” beginning on page 136 for additional disclosure regarding underwriter discounts, commissions and estimated offering expenses.

We have granted a 30-day option to the underwriters to purchase up to             additional shares of Class A common stock to cover over-allotments, if any.

The underwriters expect to deliver the shares of Class A common stock to purchasers in the offering on or about                     , 2017.

 

 

Roth Capital Partners

 

Craig-Hallum Capital Group      The Benchmark Company

Prospectus dated                     , 2017


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TABLE OF CONTENTS

 

     Page  

Management

     104  

Director Compensation

     112  

Executive Compensation

     113  

Related-Party Transactions

     120  

Principal Stockholders

     122  

Description of Capital Stock

     124  

Shares Eligible For Future Sale

     130  

Material U.S. Federal Income Tax Considerations

     132  

Underwriting

     136  

Legal Matters

     142  

Experts

     142  

Where You Can Find Additional Information

     142  

Index to Consolidated Financial Statements

     F-1  
 

 

 

You should rely only on the information contained in this prospectus and any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus and any related free writing prospectus. We and the underwriters take no responsibility for, and can provide no assurances as to the reliability of, any information that others may give you. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is only accurate as of the date of this prospectus, regardless of the time of delivery of this prospectus and any sale of shares of Class A common stock.

For investors outside of the United States: Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside of the United States.

 

 

Unless the context requires otherwise, references in this prospectus to “our company,” “our,” “us,” “we” and similar terms refer to ACM Research, Inc. (including its predecessor prior to its redomestication from California to Delaware in November 2016) and its subsidiaries. References to “ACM Research” refer to ACM Research, Inc., and references to “ACM Shanghai” are to ACM Research (Shanghai), Inc., a subsidiary of ACM Research.

SAPS, TEBO, ULTRA C and our logo design are our trademarks. This prospectus also contains other companies’ trademarks, registered marks and trade names, which are the property of those companies.

 

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PROSPECTUS SUMMARY

The following summary highlights selected information contained elsewhere in this prospectus. Because the following is only a summary, it does not contain all of the information you should consider before investing in Class A common stock. You should carefully read this entire prospectus, including the risks set forth under the heading “Risk Factors” and our consolidated financial statements and related notes included at the end of this prospectus, before making an investment decision.

Our Company

We develop, manufacture and sell single-wafer wet cleaning equipment, which semiconductor manufacturers can use in numerous manufacturing steps to remove particles, contaminants and other random defects, and thereby improve product yield, in fabricating advanced integrated circuits, or chips. Our Ultra C equipment is designed to remove random defects from a wafer surface effectively, without damaging a wafer or its features, even at an increasingly advanced process node (the minimum line width on a chip) of 22 nanometers, or nm, or less. Our equipment is based on our innovative, proprietary Space Alternated Phase Shift, or SAPS, and Timely Energized Bubble Oscillation, or TEBO, technologies. We developed our proprietary technologies to enable manufacturers to produce chips that reach their ultimate physical limitations while maintaining product yield, which is the percentage of chips on a wafer that meet manufacturing specifications.

Differentiated technologies for advanced chips. Our SAPS and TEBO single-wafer wet cleaning technologies control the power, intensity and distribution of megasonic cleaning in order to remove random defects from a wafer surface effectively, without damaging the wafer or its features, even at process nodes of 22nm or less. As process nodes continue to shrink to 22nm and less, finer feature sizes and denser, more complex architectures make the cleaning process even more complicated and challenging. Our SAPS and TEBO technologies specifically address the inadequacies of conventional equipment available for the critical cleaning steps in chip manufacturing processes. One of our customers has implemented SAPS-based equipment for the 22nm process node, and we have demonstrated TEBO technology to be effective for the 16nm node. Furthermore, we believe both SAPS and TEBO technologies can be applied for even smaller process nodes. According to Transparency Market Research Pvt. Ltd, the global market for cleaning equipment for single-wafer processing systems totaled $2.6 billion in 2015 and will increase to an estimated $3.7 billion in 2020, a compound annual growth rate of 6.8%.

China-based operations positioned for growth in new chip fabrication plants. In 2006 we established our operational center in Shanghai, and we currently conduct substantially all of our development and manufacturing activities in the People’s Republic of China, or the PRC. The PRC’s share of worldwide semiconductor manufacturing capacity expanded from 7.3% in 2006 to 12.7% in 2015, and its semiconductor manufacturing revenue increased at a compound annual growth rate of 17.6% over the ten-year period ending in 2015 (PricewaterhouseCoopers, January 2017). Our Shanghai operations position us near potential customers in not only the PRC but also Taiwan, Korea and throughout Asia, giving us increased access to those customers and reducing shipping and manufacturing costs for equipment they purchase. 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.

Referenceable customer base. In commercializing our equipment, we place evaluation equipment with a selected group of leading chip manufacturers, whose use of our products can influence decisions by other manufacturers. We believe this process is helping us penetrate the mature chip manufacturing markets and build credibility with industry leaders. Since beginning to place evaluation SAPS equipment with a small number of selected customers in 2009, we have worked on equipment improvements and qualification with those customers, who include a leading Korean memory chip company and four leading PRC memory and logic chip foundries. In 2016, using a similar “demo-to-sales” process, we placed TEBO evaluation equipment with a leading PRC foundry and a leading Taiwanese foundry and recognized revenue from our initial sale of TEBO equipment. Our revenue

 



 

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from the selected customers’ purchases of single-wafer wet cleaning equipment totaled $10.6 million, or 73.6% of our revenue, in the first six months of 2017, $21.5 million, or 78.4% of our revenue, in 2016 and $26.8 million, or 86.0% of our revenue, in 2015.

Extensive intellectual property protection. Since our formation in 1998, we have focused on building a strategic portfolio of intellectual property to support and protect our key innovations, including most recently our SAPS and TEBO technologies. As of September 11, 2017, we had been issued more than 140 patents in the United States, the PRC, Japan, Korea, Singapore and Taiwan.

Industry Background and Trends

Semiconductors are the foundation of the exponential growth of digital technologies and applications. After 30 years of growth fueled by demand for personal computers, tablet computers, mobile phones and other digital products, semiconductor shipments are expected to reach 1.0 trillion units in 2018 based on demand driven by the migration of computing, networking and storage to the cloud and the proliferation of the “Internet of Things” (IC Insights, Inc., March 2016).

New and enhanced digital applications and products have relied on the development and deployment of progressively faster and more powerful—but ever smaller and less costly—semiconductors known as integrated circuits, or chips. For a half century the number of transistors that can fit in a given area has roughly doubled every two years, a rate of improvement referred to as “Moore’s Law.” Chip feature sizes have been repeatedly scaled down to pack more transistors in smaller chips, as nodes shrank from 30,000nm in 1963 to 14nm in 2014. In recent years the rate of chip improvement delivered solely by shrinking feature sizes has slowed as conventional two-dimensional, or 2D, chips have begun to approach their critical performance limitations. In order to extend Moore’s Law, chip designers and manufacturers are developing and implementing technologies and architectures to transition to advanced chips with three-dimensional, or 3D, structures.

Manufacturing advanced chips at smaller nodes requires a more complex process flow that incorporates enhanced, more expensive capital equipment, or tools, to perform increasingly complex process steps, as well as an increased number of tools to perform a greater number of process steps per wafer. A fabrication plant capable of producing advanced 3D chips may have more than 500 highly specialized tools representing more than 70 categories of equipment and may cost between $5 and $10 billion. Because of significant capital expenditures and manufacturing expenses, chip makers must focus on avoiding product yield loss by implementing additional fabrication process steps and innovative, reliable tool solutions.

Chip yield loss can result directly from random defects, which can originate from nearly every aspect of the manufacturing process. As a result, cleaning steps to eliminate random defects, without damaging features, are critical to chip fabrication. Wet cleaning, which uses liquid chemistry to spray, scrub, etch and dissolve random defects, has become the standard method for wafer cleaning. Wet cleaning’s chemistry has not changed appreciably over the past 25 years, but its implementation has shifted from simple immersion to increasingly sophisticated techniques such as tools using jet spraying and megasonic energy, which transmits acoustic waves through a fluid bath to produce bubble oscillation that dislodges random defects.

As chip complexity has increased, cleaning has become the most frequently repeated step in chip fabrication and may be performed in as many as 200 steps for each wafer. As process nodes continue to shrink to 22nm and less, finer feature sizes and denser, more complex architectures make the cleaning process even more complicated and challenging. Effective, damage-free cleaning poses a significant challenge for manufacturers seeking to fabricate chips in the advanced process nodes available today or introduced in the future. In order to extend Moore’s law, chip manufacturers must be able to remove ever smaller random defects from not only flat wafer surfaces but also progressively more intricate, finer-featured 3D chip structures, in each case without incurring damage or material loss that curtails yield and profits.

 



 

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Our Product Offerings

We have developed single-wafer wet cleaning equipment that chip manufacturers can use in numerous steps of the fabrication process in order to avoid yield loss at existing and future process nodes. Using our proprietary technologies, we have designed our tools to remove random defects from chip wafers with fine feature sizes, complex patterning, dense circuit structures and high aspect ratios (the ratio of the structure’s depth to its width) more effectively than traditional jet spray and transient megasonic technologies.

Flat and patterned wafer surfaces. Our SAPS technology, which we introduced in 2009, employs alternating phases of megasonic waves to deliver megasonic energy to flat and patterned wafer surfaces 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 45nm, including node sizes for which jet spray technology has proven to be ineffective. Based on their initial mass production experience with SAPS equipment, customers have increased their use of SAPS equipment by adding cleaning steps to the manufacturing processes for advanced chips in order to achieve higher yields and reduce chemical usage.

High-aspect ratio conventional 2D and advanced 3D patterned wafer surfaces. Our TEBO technology, which we introduced in March 2016, has been developed to provide effective, damage-free cleaning for both conventional 2D and 3D patterned wafers at advanced process nodes. TEBO technology provides multi-parameter control of bubble cavitation during megasonic cleaning by using a sequence of rapid pressure changes to force bubbles to oscillate at controlled sizes, shapes and temperatures. Because the bubbles oscillate instead of imploding or collapsing, TEBO technology avoids the pattern damage caused by traditional megasonic cleaning processes. 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 that TEBO technology can be applied in manufacturing processes for patterned chips with 3D structures having aspect ratios as high as 60-to-1. We believe TEBO technology can be applied for even smaller process nodes. TEBO tools are currently being evaluated by a selected group of leading memory and logic chip manufacturers.

Custom-made wafer assembly and packaging solutions. In addition to our product offerings for single-wafer cleaning, we leverage our technologies and expertise to provide a wide range of advanced packaging equipment, such as coaters, developers, photoresist strippers, scrubbers, wet etchers and copper-plating tools, to wafer assembly and packaging factories, particularly in the PRC. For these offerings, we focus on providing customized equipment with competitive performance, service and pricing.

Our Strategy

Our objective is to be the leading global provider of a full range of wet cleaning equipment for the manufacture of advanced integrated circuits. To achieve this goal, we are pursuing the following strategies:

Extend technology leadership. We intend to build upon our technology leadership in wet processing by continuing to develop and refine our differentiated SAPS and TEBO technologies and equipment to address cleaning challenges presented by the manufacture of increasingly advanced chip nodes.

Establish referenceable customer base. In commercializing our SAPS equipment, we placed evaluation equipment with selected customers, who subsequently purchased additional SAPS equipment to enable them to add more cleaning steps during their manufacturing processes. Using a similar “demo-to-sales” process, we have placed TEBO evaluation equipment with a leading PRC foundry and a leading Taiwanese foundry and we recognized revenue from our initial sale of TEBO equipment in 2016. Based on our market experience, we believe that implementation of our SAPS and TEBO equipment by selected leading memory and logic chip manufacturers will encourage evaluation of our equipment by other manufacturers, who will view the leading companies’ implementation as a validation of our equipment that facilitates a shorter evaluation process.

 



 

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Leverage local presence to address growing Chinese market. The market for semiconductor manufacturing equipment in the PRC is expected to grow markedly in the upcoming years. Our experience has shown that chip manufacturers in the PRC demand equipment meeting their specific technical requirements and prefer building relationships with local suppliers. We established our operations in Shanghai a decade ago, and we will continue to work closely with chip manufacturers in China and throughout Asia to understand their specific requirements, encourage them to adopt our SAPS and TEBO technologies, and enable us to design innovative products and solutions to address their needs.

Continue to improve performance through operational excellence. We actively manage our business through principles of operational excellence designed to ensure continuous improvement of our key operational and financial metrics. As we increase the breadth of our product offerings and the size of our operations and customer base, we must continue to develop and implement these principles in order to improve the efficiency and quality of our operations, satisfy our customers’ needs, and meet our financial goals.

Pursue strategic acquisitions and relationships. To complement and accelerate our internal growth, we may pursue acquisitions of businesses, technologies, products or business relationships that will expand the functionality of our products, provide access to new markets or customers, or otherwise complement our existing operations.

Acquisition of Outstanding Minority Interests in Our Operating Company

In 2006 we established our operational center in Shanghai in the PRC, where we operate through our subsidiary ACM Shanghai. Until recently ACM Research owned 62.87% of the outstanding equity interests in ACM Shanghai and three PRC-based third-party investors held the remaining 37.13%.

 

    Effective as of August 31, 2017, ACM Research acquired, for a purchase price of $5.8 million, an additional 18.77% of ACM Shanghai’s equity interests from one of the minority investors and issued, for a purchase price of $5.8 million, capital stock that, upon the closing of this offering, will convert into 1,666,170 shares of Class A common stock.

 

    Pursuant to agreements entered into as of August 31, 2017, ACM Research issued to the other two minority investors a total of 1,906,674 shares of Class A common stock on September 8, 2017 for a purchase price of $14.3 million and expects to acquire, prior to the closing of this offering, the remaining 18.36% of ACM Shanghai’s minority equity interests for a purchase price of approximately $14.3 million.

As a result of these arrangements, ACM Research owned 81.64% of ACM Shanghai’s equity interests as of August 31, 2017 and expects to own 100% of those equity interests as of the closing of this offering.

Risks Related to Our Business

Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows or prospects. These risks are discussed more fully in “Risk Factors” beginning on page 11. Before making a decision to invest in Class A common stock, you should carefully consider all of those risks, including the following:

 

    We have incurred significant losses since our inception and have generated limited revenue to date, and we may not be able to maintain profitability.

 

    Demand for our tools is subject to substantial variation due to the cyclic nature of the chip industry.

 

   

The commercial success of our tools requires that we demonstrate the differentiated, innovative nature of our technology to gain acceptance by leading chip manufacturers and then leverage our reputation to

 



 

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gain market acceptance by additional manufacturers, which may have existing relationships with our competitors.

 

    The chip equipment industry is highly competitive, and many of our competitors are larger and better-established than we are, have significantly greater operating and financial resources than we have, and may have existing relationships with our potential customers.

 

    We depend on a small number of customers for a significant percentage of our revenue and the number of potential customers for our tools is limited, so the loss of a major customer could harm our financial condition.

 

    Our success depends on our ability to protect the intellectual property of our SAPS and TEBO technologies and to combat infringement from competitors who may try to replicate our technologies.

Our Corporate Information

We incorporated in California in January 1998 and redomesticated in Delaware in November 2016. Our headquarters are located at 42307 Osgood Road, Suite I, Fremont, California 94539, where our telephone number is (510) 445-3700. Our website address is www.acmrcsh.com. The information contained in, or accessible through, our website is not part of, and is not incorporated into, this prospectus, and investors should not rely on any such information in deciding whether to invest in Class A common stock.

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act. An emerging growth company may take advantage of provisions that reduce its reporting and other obligations from those otherwise generally applicable to public companies. An emerging growth company may, among other things, elect to:

 

    present only two years of audited financial statements and related disclosure under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;

 

    not obtain from its auditors an attestation and report on the assessment of internal control over financial reporting pursuant to the Sarbanes-Oxley Act;

 

    provide less extensive disclosure about its executive compensation arrangements; and

 

    not present to its stockholders non-binding advisory votes on executive compensation and golden parachute arrangements.

We may take advantage of these provisions until the earliest of December 31, 2022 or such time that we have annual revenue greater than $1.0 billion, the market value of our capital stock held by non-affiliates exceeds $700 million or we have issued more than $1.0 billion of non-convertible debt in a three-year period. We have chosen to take advantage of some of these provisions, and as a result we may not provide stockholders with all of the information that is provided by other public companies. For example, Section 107 of the JOBS Act provides that an emerging growth company can use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. We have, however, irrevocably elected not to avail ourselves of the extended transition period for complying with new or revised accounting standards, and we therefore will be subject to the same new or revised accounting standards as public companies that are not emerging growth companies.

 



 

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Offering

 

Class A common stock offered by us

                 shares

 

Class A common stock to be outstanding after this offering


                 shares

 

Class B common stock outstanding

2,409,738 shares

 

Total Class A and Class B common stock to be outstanding after this offering


                 shares

 

Over-allotment option of Class A common stock

                 shares

 

Use of proceeds

We estimate we will receive net proceeds from this offering of $        million, assuming an initial public offering price of $        per share, the midpoint of the initial offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses. If the underwriters’ option to purchase additional shares is exercised in full, we estimate our net proceeds will be $        million.

 

  We intend to use our net proceeds from this offering for working capital and other general corporate purposes, which may include financing our growth, developing new products, and acquiring complementary businesses, technologies and products. See “Use of Proceeds.”

 

Proposed NASDAQ symbol

ACMR

 

Voting Rights

Holders of Class A common stock and Class B common stock will generally vote together as a single class, unless otherwise required by law. Class A common stock is entitled to one vote per share, and Class B common stock is entitled to twenty votes per share. After this offering, our executive officers and directors, some of whom hold Class B common stock, will control     % of the voting power of our outstanding capital stock and therefore may be able to control the outcome of matters submitted to stockholders, including the election of directors. See “Principal Stockholders” and “Description of Capital Stock.”

 



 

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The numbers of shares of Class A and Class B common stock to be outstanding following this offering are based on 9,302,983 shares of Class A common stock and 2,409,738 shares of Class B common stock outstanding as of September 11, 2017, and exclude the following as of September 11, 2017:

 

    397,502 shares of Class A common stock issuable upon the exercise of an outstanding warrant, with an exercise price of $7.50 per share, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Equity Transactions—Issuance of Warrants”;

 

    3,442,743 shares of Class A common stock issuable upon the exercise of outstanding options, with a weighted-average exercise price of $2.31 per share; and

 

    705,383 shares of Class A common stock reserved for future issuance under our equity incentive plan.

Unless otherwise indicated, this prospectus reflects and assumes the following:

 

    effective immediately prior to the completion of this offering, the automatic conversion of all of our outstanding preferred stock into an aggregate of 4,628,015 shares of Class A common stock and the restatement of our charter and bylaws;

 

    a 1-for-3 reverse split of Class A and Class B common stock effective as of September 13, 2017;

 

    no exercises of outstanding stock options; and

 

    no exercise of the underwriters’ over-allotment option.

The information in this prospectus does not reflect our issuance to the underwriters of warrants exercisable for                  shares of Class A common stock at a price of $         per share, as described in “Underwriting—Discounts, Commissions and Expenses” beginning on page 136.

 



 

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Summary Consolidated Financial Information

The following tables summarize our consolidated financial data. You should read the following data in conjunction with “Selected Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included at the end of this prospectus.

 

     Six Months Ended June 30,     Year Ended December 31,  
     2017     2016     2016     2015  
     (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

        

Revenue

   $ 14,423     $ 8,122     $ 27,371     $ 31,206  

Cost of revenue

     8,570       5,292       14,042       17,085  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     5,853       2,830       13,329       14,121  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Sales and marketing

     2,583       1,818       3,907       4,213  

Research and development

     1,867       1,486       3,259       2,942  

General and administrative

     3,158       1,089       2,673       2,103  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses, net

     7,608       4,393       9,839       9,258  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (1,755     (1,563     3,490       4,863  

Interest expense, net

     (159     (45     (165     (105

Other income (expense), net

     (292     506       (343     632  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (2,206     (1,102     2,982       5,390  

Income tax benefit (expense)

     (749     73       (595     2,525  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (2,955     (1,029     2,387       7,915  

Less: Net income (loss) attributable to non-controlling interests(1)

     (208     (476     1,356       2,535  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ACM Research, Inc.

   $ (2,747   $ (553   $ 1,031     $ 5,380  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share(2):

        

Basic

   $ (0.56   $ (0.27   $ 0.30     $ 1.50  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.56   $ (0.27   $ 0.18     $ 0.97  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding used in computing per share amounts(2):

        

Basic

     4,927,973       2,061,339       2,176,315       2,047,383  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     4,927,973       2,061,339       3,792,137       3,144,120  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per common share(2):

        

Basic

   $ (0.35)       $ 0.20    
  

 

 

     

 

 

   

Diluted

   $ (0.35)       $ 0.15    
  

 

 

     

 

 

   

Pro forma weighted-average common shares outstanding used in computing per share amounts(2):

        

Basic

     7,889,818         5,137,211    
  

 

 

     

 

 

   

Diluted

     7,889,818         6,753,033    
  

 

 

     

 

 

   

 

(1) As of each date ACM Research held 62.87% of the outstanding equity interests of its operating subsidiary ACM Shanghai and the remaining 37.13% was held by third-party investors. As described above under “—Our Company—Acquisition of Outstanding Minority Interests in Our Operating Company,” we have entered into agreements pursuant to which ACM Research acquired an additional 18.77% of the outstanding ACM Shanghai equity interests as of August 31, 2017 and expects to acquire, prior to the closing of this offering, all of the remaining outstanding equity interests held by minority investors.
(2) See note 2 to our consolidated financial statements included at the end of this prospectus for an explanation of the method used to determine the number of shares used in computing historical and pro forma net income (loss) per share.

 



 

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In the following table:

 

    “As Adjusted” data gives effect to the following:

 

  (a) the closing of strategic investment transactions on September 11, 2017, with Ninebell Co., Ltd. or Ninebell, one of our key subassembly providers, in which we issued 133,334 shares of Class A common stock to Ninebell for a purchase price of $1.0 million and Ninebell issued ordinary shares, representing 20% of its post-closing equity, to us for a purchase price of $1.2 million; and

 

  (b) the completion of the transactions described under “—Our Company—Acquisition of Outstanding Minority Interests in Our Operating Company” on page 4, pursuant to which, in the third quarter of 2017, (i) we issued 3,572,844 shares of Class A common stock (on an as-converted basis) to the minority investors in ACM Shanghai for an aggregate purchase price of $20.1 million and (ii) ACM Research acquired 18.77% of the outstanding ACM Shanghai equity interests, for a purchase price of $5.8 million and expects to acquire, prior to the closing of this offering, all of the remaining outstanding minority ACM Shanghai equity interests for an aggregate purchase price of $14.3 million;

 

    “Pro Forma” data gives further effect to the automatic conversion of all of our outstanding convertible preferred stock into Class A common stock, which will occur automatically upon completion of this offering; and

 

    “Pro Forma As Adjusted” data further adjusts “Pro Forma” data to reflect our sale of                  shares of Class A common stock in this offering at an assumed initial public offering price of $        per share, the midpoint of the initial public offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and offering expenses, and our issuance to the underwriters upon completion of this offering of a warrant to purchase                  shares of Class A common stock (see “Underwriting—Discounts, Commissions and Expenses”).

 

     As of June 30, 2017  
     Actual     As Adjusted     Pro Forma      Pro Forma
As Adjusted
 
     (in thousands)  

Consolidated Balance Sheet Data:

         

Cash and cash equivalents

   $ 13,206     $ 13,006     $ 13,006      $  

Working capital(1)

     23,433       23,433       23,433     

Total assets

     47,437       48,437       48,437     

Total indebtedness

     4,595       4,595       4,595        4,595  

Total liabilities

     27,883       27,883       27,883        27,883  

Total redeemable convertible preferred stock

     18,034       23,834       —          —    

Total ACM Research, Inc. stockholders’ (deficit) equity

     (3,289     (3,281     20,553     

Non-controlling interests

     4,809       —         —          —    

Total stockholders’ equity

     1,520       (3,281     20,553     

 

(1) Calculated as current assets less current liabilities.

 



 

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To supplement our consolidated financial statements presented in accordance with U.S. generally accepted accounting principles, or GAAP, we monitor and consider adjusted EBITDA, free cash flow and adjusted operating income (loss), which are non-GAAP financial measures. We are presenting adjusted EBITDA, free cash flow and adjusted operating income (loss) because they are key metrics used by our management in tracking business performance. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Components of Results of Operations.”

 

    We define adjusted EBITDA as our net income excluding interest expense (net), income tax expense (benefit), depreciation and amortization, and stock-based compensation. The following table reconciles net income (loss), the most directly comparable GAAP financial measure, to adjusted EBITDA:

 

     Six Months Ended June 30,     Year Ended December 31,  
         2017             2016             2016              2015      
     (in thousands)  

Adjusted EBITDA Data:

         

Net income (loss)

   $ (2,955   $ (1,029   $ 2,387      $ 7,915  

Interest expense, net

     159       45       165        105  

Income tax expense (benefit)

     749       (73     595        (2,525

Depreciation and amortization

     118       88       187        160  

Stock-based compensation

     1,348       193       383        423  
  

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted EBITDA

   $ (581   $ (776   $ 3,717      $ 6,078  
  

 

 

   

 

 

   

 

 

    

 

 

 

 

    We define free cash flow as net cash provided by operating activities less purchases of property and equipment (net of proceeds from disposals) and of intangible assets. The following table reconciles net cash provided by operating activities, the most directly comparable GAAP financial measure, to free cash flow:

 

     Six Months Ended June 30,     Year Ended December 31,  
         2017             2016             2016             2015      
     (in thousands)  

Free Cash Flow Data:

      

Net cash provided by operating activities

   $ 2,983     $ 4,739     $ (3,702   $ 2,702  

Purchase of property and equipment, net of proceeds from disposals

     (26     (95     (788     (1,371

Purchase of intangible assets

     (36     (9     (22     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 2,921     $ 4,635     $ (4,512   $ 1,331  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

    We define adjusted operating income (loss) as our income (loss) from operations excluding stock-based compensation. The following table reconciles income (loss) from operations, the most directly comparable GAAP financial measure, to adjusted operating income (loss):

 

     Six Months Ended
June 30,
     Year Ended
December 31,
 
     2017      2016      2016      2015  
     (in thousands)  

Adjusted Operating Income (Loss) Data:

           

Income (loss) from operations

   $ (1,755    $ (1,563    $ 3,490      $ 4,863  

Stock-based compensation

     1,348        193        383        423  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted operating income (loss)

   $ (407    $ (1,370    $ 3,873      $ 5,286  
  

 

 

    

 

 

    

 

 

    

 

 

 

 



 

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RISK FACTORS

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 prospectus, including our audited consolidated financial statements and related notes appearing at the end of this prospectus, 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 prospectus 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 June 30, 2017 we had an accumulated deficit of $12.4 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 $31.2 million in 2015, $27.4 million in 2016 and $14.4 million in the first half of 2017. Our revenue was not sufficient to cover our operating expenses prior to 2015, and our net income decreased to $2.4 million in 2016 from $7.9 million in 2015. In the first half of 2017, we incurred an operating loss of $1.8 million, which was an increase from our operating loss of $1.6 million in the first half of 2016, and a net loss of $3.0 million, which was an increase from a net loss of $1.0 million in the first half of 2016. Our ability to generate significant revenue and operate profitably depends upon our ability to commercialize our Ultra C single-wafer wet cleaning equipment based on our Space Alternated Phase Shift, or SAPS, and Timely Energized Bubble Oscillation, or TEBO, technologies. 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 technology as well as Ultra C equipment based on TEBO technology;

 

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    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:

 

    our sales growth;

 

    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 and the net proceeds from this offering, 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;

 

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    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.

 

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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 government of the People’s Republic of China, or the PRC, 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 and TEBO 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 and TEBO 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 and TEBO 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 and TEBO technologies and the advantages of our tools over those of our competitors;

 

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    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 and TEBO 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.

 

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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.

 

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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 a significant portion of our revenue from the sale of our products to a small number of customers. In the first half of 2017, 62.8% of our revenue was derived from three customers: SK Hynix Inc., 22.8%; Shanghai Huali Microelectronics Corporation, 20.6%; and Yangtze Memory Technologies Co., Ltd. and a subsidiary, 19.4%. In 2016 99.3% of our revenue was derived from four customers: Shanghai Huali Microelectronics Corporation, 33.7%; Semiconductor Manufacturing International Corporation, 25.0%; SK Hynix Inc., 24.0%; and JiangYin ChangDian Advanced Packaging Co. Ltd., 16.6%. In 2015 all of our revenue was derived from three customers, including SK Hynix Inc., which accounted for 86.0% of our revenue, and JiangYin ChangDian Advanced Packaging Co., Ltd., which accounted for 10.1% 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.

 

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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 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 $2.0 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 complete a first-time sale, we may not receive payment for up to 24 months. 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

 

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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

 

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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. To date we have not accrued a significant 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.

 

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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 and 2014. 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 SARS and TEBO. 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 18.7% during 2016 and by an additional 27.4% from January 1, 2017 to September 11, 2017. 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

 

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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.

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 Chief Executive Officer, President and founder. If one or more of our 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 his or her employment at any time. The loss of Dr. Wang or other key management personnel 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 June 30, 2017, we had net operating loss carryforward amounts, or NOLs, of $18.9 million for U.S. federal income tax purposes and $322,000 for U.S. state income tax purposes. The federal and state NOLs will expire at various dates beginning in 2036.

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

 

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previous ownership changes, including in connection with this offering 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.

 

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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;

 

    restructuring charges;

 

    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 2015, 2016 and the first half of 2017 were made to customers outside the United States. Our manufacturing center has been located in Shanghai, PRC 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;

 

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    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 revenues and costs are denominated in other currencies, primarily the Chinese Renminbi. 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.

 

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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

 

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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.

 

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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.

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 audits of our consolidated financial statements as of, and for the years ended, December 31, 2016 and 2015, 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 Securities and Exchange Commission financial reporting requirements. We are taking remedial measures to improve the effectiveness of our controls, including by hiring additional accounting and finance personnel and by engaging outside consulting firms.

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 the measures we take will be sufficient to remediate the material weakness identified by BDO China or 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 our remediation efforts are not successful or 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 Shu Lun Pan Certified Public Accountants LLP, or BDO China, is the independent registered public accounting firm that issued the audit report included at the end of this prospectus in connection with our consolidated financial statements as of, and for the years ended, December 31, 2016 and 2015. 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 has 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

 

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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 and TEBO 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 and TEBO 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.

 

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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

 

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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 Our Initial Public Offering and Ownership of Class A Common Stock

The market price of Class A common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

The initial public offering price for Class A common stock was determined through negotiations between the underwriters and us and may vary from the market price of Class A common stock following this offering. If you purchase shares of Class A common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. We cannot assure you that the market price following this offering will equal or exceed prices in privately negotiated transactions of our stock that have occurred from time to time prior to this offering. 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;

 

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    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 the NASDAQ Global Market, or 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. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering.

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.

No public market for Class A common stock currently exists, and an active trading market may not develop or be sustained following this offering.

Prior to this offering, there has been no public market for Class A common stock. An active trading market may not develop following completion of this offering or, if developed, may not be sustained. 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 a liquid market for Class A common stock.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

We cannot specify with any certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including working capital and other general corporate purposes, and we may spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

 

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If securities or industry analysts publish inaccurate or unfavorable research about our business, our stock price 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 will increase our costs significantly, as well as divert significant company resources and management attention.

We will be 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 upon consummation of this offering. 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.

 

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If you purchase shares of Class A common stock in this offering, you will experience substantial and immediate dilution.

If you purchase shares of Class A common stock in this offering, you will experience substantial and immediate dilution in the pro forma as adjusted net tangible book value per share of Class A common stock of $        per share as of June 30, 2017. Investors purchasing Class A common stock in this offering will pay a price per share that substantially exceeds the as adjusted net tangible book value per share. As a result, investors purchasing Class A common stock in this offering will incur immediate dilution of $        per share, based on the initial public offering price of $        per share, the midpoint of the price range on the cover page of this prospectus. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. You will experience additional dilution upon exercise of options to purchase common stock under our equity incentive plans or if we issue restricted stock to our employees under our equity incentive plans, and you may experience additional dilution in the future if we otherwise issue additional shares of Class A common stock.

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. Stockholders who hold shares of Class B common stock, who consist principally of our executive officers, employees, directors and their respective affiliates, will collectively hold approximately     % of the voting power of our outstanding capital stock following this offering. 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.

Substantial future sales of shares by existing stockholders, or the perception that such sales may occur, could cause our stock price to decline.

If our existing stockholders, particularly our directors and executive officers, sell substantial amounts of Class A common stock in the public market, or are perceived by the public market as intending to sell substantial numbers of shares of Class A common stock, the trading price of Class A common stock could decline below the initial public offering price. Based on shares outstanding as of                 , 2017, upon completion of this offering, we will have                outstanding shares of common stock. Of these shares, only the shares of common stock sold in this offering and registered shares issued pursuant to our equity plans will be freely tradable in the public market, subject to any applicable lock-up agreements or Rule 144 transfer restrictions applicable to affiliates. Our officers, directors and holders of substantially all of our equity securities have entered into contractual lock-up agreements with the underwriters pursuant to which they have agreed, subject to certain exceptions, not to sell or otherwise transfer any of their common stock or securities convertible into or exchangeable for shares of common stock for a period of 180 days after the date of the final prospectus for this offering. We and the lead underwriter in this offering may, however, permit these holders to sell shares prior to the expiration of the lock-up agreements with the underwriters.

 

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Based on shares outstanding as of                 , 2017, after the contractual lock-up agreements pertaining to this offering expire 180 days from the date of this prospectus, up to an additional                  shares will be eligible for sale in the public market,                of which are held by directors, executive officers and other affiliates and will be subject to volume and other limitations under Rule 144 under the Securities Act.

Delaware law and provisions in our restated 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 restated 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 restated 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 chairman, our chief executive officer or a majority of our directors will be authorized to call a special meeting of stockholders;

 

    advance notice procedures will apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders;

 

    our restated charter will authorize 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 restated 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 restated 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;

 

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    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 restated charter related to choice of forum. The choice of forum provision in our restated 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 restated 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.

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. In this prospectus, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. 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

 

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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.

 

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FORWARD-LOOKING STATEMENTS AND STATISTICAL DATA

Special Note Regarding Forward-Looking Statements

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management are forward-looking statements. The forward-looking statements are contained principally in “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “anticipate,” “project,” “target,” “design,” “estimate,” “predict,” “potential,” “plan” or the negative of these terms, and similar expressions intended to identify forward-looking statements.

These statements reflect our current views with respect to future events and are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:

 

    our expectations regarding our expenses and revenue, our ability to maintain and expand gross profit;

 

    the rate and degree of market acceptance of any of our products, particularly in the PRC;

 

    the size and growth of the potential markets for our products and our ability to serve those markets;

 

    the progress and costs of developing and commercializing new products;

 

    our expectations regarding competition;

 

    the anticipated trends and challenges in our business and the market in which we operate;

 

    our anticipated growth strategies;

 

    our ability to attract or retain key personnel;

 

    our expectations regarding, and the stability of our, supply chain and manufacturing;

 

    our expectations regarding federal, state and foreign regulatory requirements, including export controls, tax law changes and interpretations, economic sanctions and anti-corruption regulations;

 

    regulatory developments in the United States and foreign countries;

 

    our ability to obtain and maintain intellectual property protection for our products; and

 

    our use of proceeds from this offering.

Any forward-looking statement made by us in this prospectus speaks only as of the date on which it is made. Except as required by law, we assume no obligation to update these statements publicly, or to update the reasons actual results could differ materially from those anticipated in these statements, even if new information becomes available in the future.

You should read this prospectus, and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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Industry and Market Data

This prospectus contains statistical data and estimates, including forecasts, that are based on independent industry and government organization publications or other publicly available information, as well as other information based on our internal sources. While we are not aware of any misstatements regarding any third-party data presented in this prospectus, estimates, and in particular forecasts, involve numerous assumptions and are subject to risks and uncertainties as well as change based on various factors, including those discussed under “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates included in this prospectus.

The following list identifies the sources of certain of the third-party forecasts and other estimates included in this prospectus, together with the section or subsection of this prospectus in which that estimate appears. As of September 11, 2017, each of the following sources was publicly available without charge:

 

    PricewaterhouseCoopers, China’s impact on the semiconductor industry: 2016 update, January 2017 (“Prospectus Summary—Our Company” and “Business—Industry Background—Growing Influence of the PRC Across the Semiconductor Industry”);

 

    IC Insights, Inc., Semiconductor Unit Shipments To Exceed One Trillion Devices in 2018, March 7, 2016 (“Prospectus Summary—Industry Background and Trends” and “Business—Industry Background”);

 

    Semiconductor Industry Association and Nathan Associates, Beyond Borders: The Global Semiconductor Value Chain: How an Interconnected Industry Promotes Innovation and Growth, May 2016 (“Business—Industry Background—Ongoing Need for Improved Chip Manufacturing Equipment”);

 

    Semiconductor Equipment and Materials International, Fab Equipment Spending Trending Upward in 2016 and 2017, September 6, 2016 (“Business—Industry Background—Escalating Need for Advanced Chip Manufacturing Equipment”);

 

    International Trade Administration of the United States Department of Commerce, 2016 Top Markets Report Semiconductors and Semiconductor Manufacturing Equipment Country Case Study, July 1, 2016 (“Business—Industry Background—Growing Influence of the PRC Across the Semiconductor Industry”); and

 

    Semiconductor Equipment and Materials International, World Fab Forecast Report, November 2016 (“Business—Our Solutions—China-based operations”).

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of $        million, assuming an initial public offering price of $        per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses. If the underwriters’ option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be $        million.

A $1.00 increase (decrease) in the assumed initial public offering price of $        per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by $        million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and offering expenses. Similarly, each increase (decrease) of 1,000,000 in the number of shares offered by us would increase (decrease) our net proceeds by $        million, assuming the assumed initial public offering price of $        per share remains the same, and after deducting estimated underwriting discounts and commissions and offering expenses.

We intend to use the net proceeds from this offering for working capital and other general corporate purposes, which may include financing our growth and developing new products. The other principal purposes for this offering are to:

 

    create a public market for Class A common stock, which will, among other things, provide future liquidity for our existing security holders;

 

    facilitate our future access to the public capital markets; and

 

    improve the effectiveness of our equity compensation plans in attracting and retaining directors and key employees.

We may use a portion of our net proceeds to acquire businesses, technologies and products that will help us expand the breadth and features of our product offerings, provide access to new markets or customers, or otherwise complement our existing operations. We assess acquisition opportunities on an ongoing basis. We do not currently have any agreement with respect to an acquisition, and we cannot assure you that we will make any acquisitions in the future.

Our expected use of the net proceeds of this offering represents our current intentions based upon our present plans and business conditions. The amounts and timing of our actual expenditures may vary significantly from our expectations depending upon numerous factors, including our operating costs and capital expenditures and the factors described under “Risk Factors.” Because we cannot currently specify with any certainty the particular uses of our net proceeds, our management will have broad discretion in the application of the net proceeds.

Pending use of our net proceeds, we intend to invest the net proceeds in short-term, investment-grade, interest-bearing instruments, certificates of deposit, or direct or guaranteed obligation of the U.S. government.

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends on Class A and Class B common stock is subject to the discretion of the board of directors and will depend upon various factors, including our results of operations, financial condition, liquidity requirements, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by applicable law, general business conditions and other factors that the board may deem relevant.

Our ability to pay dividends on Class A and Class B 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. As of June 30, 2017, no cash was restricted under those PRC regulations or our subsidiaries’ articles because our subsidiaries had never generated net after-tax profits. In addition, our subsidiaries’ short-term bank loans restrict their ability to pay dividends to us.

 

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CAPITALIZATION

The table below sets forth our capitalization as of June 30, 2017:

 

    on an actual basis;

 

    as adjusted to reflect the following:

 

  (a) the closing of strategic investment transactions on September 11, 2017, with Ninebell Co., Ltd. or Ninebell, one of our key subassembly providers, in which we issued 133,334 shares of Class A common stock to Ninebell for a purchase price of $1.0 million and Ninebell issued ordinary shares, representing 20% of its post-closing equity, to us for a purchase price of $1.2 million; and

 

  (b) the completion of transactions with minority investors in ACM Shanghai in the third-quarter of 2017, pursuant to which (i) we issued, capital stock consisting of (or convertible, upon the closing of this offering, into) a total of 3,572,844 shares of Class A common stock to the minority investors for an aggregate purchase price of $20.1 million and (ii) ACM Research acquired 18.77% of the outstanding ACM Shanghai equity interests for a purchase price of $5.8 million and expects to acquire, prior to the closing of this offering, all of the remaining outstanding minority ACM Shanghai equity interests for an aggregate purchase price of $14.3 million, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Equity Transactions—Acquisition of Outstanding Minority Interests in Our Operating Company”;

 

    on a pro forma basis to further reflect the automatic conversion of all outstanding shares of our convertible preferred stock into Class A common stock and the restatement of our charter, all of which will occur upon completion of this offering; and

 

    on a pro forma basis as further adjusted to reflect our issuance and sale of                  shares of Class A common stock in this offering at an assumed initial public offering price of $        per share, the midpoint of the price range on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and offering expenses, and our issuance to the underwriters upon completion of this offering of warrants to purchase                  shares of Class A common stock (see “Underwriting—Discounts, Commissions and Expenses”).

You should read the information in this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing at the end of this prospectus.

 

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    As of June 30, 2017  
    Actual     As Adjusted     Pro Forma     Pro Forma
As Adjusted
 
    (in thousands, except share and per share data)  

Short-term debt

  $ 4,595     $ 4,595     $ 4,595     $ 4,595  
 

 

 

   

 

 

   

 

 

   

 

 

 

Redeemable convertible preferred stock, without par value, actual, $0.0001 par value per share, as adjusted, pro forma and pro forma as adjusted:

       

Series A: 385,000 shares authorized, issued and outstanding, actual and as adjusted; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

  $ 288     $ 288     $ —       $ —    

Series B: 1,572,000 shares authorized, issued and outstanding, actual and as adjusted; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    1,572       1,572       —         —    

Series C: 1,360,962 shares authorized, issued and outstanding, actual and as adjusted; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    2,041       2,041       —         —    

Series D: 2,659,975 shares authorized and 1,326,642 shares issued and outstanding, actual and as adjusted; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    4,975       4,975       —         —    

Series E: 10,718,530 shares authorized and no shares issued and outstanding, actual; 10,718,530 shares authorized and 4,998,530 shares issued and outstanding, as adjusted; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    —         5,800       —         —    

Series F: 6,000,000 shares authorized and 3,663,254 shares, issued and outstanding, actual and as adjusted; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    9,158       9,158       —         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total redeemable convertible preferred stock

    18,034       23,834       —         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ (deficit) equity:

       

Undesignated preferred stock, $0.0001 par value per share: no shares authorized, issued and outstanding, actual or as adjusted; 25,000,000 shares authorized and no shares issued or outstanding, pro forma and pro forma as adjusted

    —         —         —         —    

Common stock, $0.0001 par value per share:

       

Class A: 100,000,000 shares authorized; 2,627,293 shares issued and outstanding, actual; 4,674,968 shares issued and outstanding, as adjusted; 9,302,983 shares issued and outstanding pro forma;             shares issued and outstanding, pro forma as adjusted

    1       1       1    

Class B: 7,303,533 shares authorized and 2,409,738 shares issued and outstanding, actual, and as adjusted; 2,409,738 shares authorized, issued and outstanding, pro forma and pro forma as adjusted

    1       1       1       1  

Additional paid-in capital

    9,346       9,354       33,188    

Accumulated deficit

    (12,390     (12,390     (12,390     (12,390

Accumulated other comprehensive loss

    (247     (247     (247     (247
 

 

 

   

 

 

   

 

 

   

 

 

 

Total ACM Research, Inc. stockholders’ (deficit) equity

    (3,289     (3,281     20,553    

Non-controlling interests

    4,809       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

    1,520       (3,281     20,553    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 19,554     $ 20,553     $ 20,553     $               
 

 

 

   

 

 

   

 

 

   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $        per share, the midpoint of the initial public offering price range set forth on the cover page of this prospectus, would increase (decrease) the amount of additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by $        million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and offering expenses. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by $        million, assuming the assumed initial public offering price of $        per share remains the same, and after deducting estimated underwriting discounts and commissions and offering expenses. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

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The table above excludes the shares of Class A common stock issuable upon the exercise of an outstanding warrant and outstanding options as well as shares of Class A common stock reserved for future issuance under our equity incentive plan, which consisted of:

 

    397,502 shares of Class A common stock issuable upon the exercise of an outstanding warrant, with an exercise price of $7.50 per share, at June 30, 2017 and September 11, 2017, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Equity Transactions—Issuance of Warrant”);

 

    3,489,959 shares of Class A common stock issuable upon the exercise of outstanding options with a weighted-average exercise price of $2.29 per share at June 30, 2017 and 3,442,743 shares of Class A common stock issuable upon the exercise of outstanding options with a weighted-average exercise price of $2.31 per share at September 11, 2017; and

 

    705,383 shares of Class A common stock reserved for issuance under our equity incentive plan at June 30, 2017 and September 11, 2017.

 

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DILUTION

If you invest in Class A common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the initial public offering price per share you will pay in this offering and the pro forma as adjusted net tangible book value per share of Class A common stock immediately after this offering.

As of June 30, 2017, the actual net tangible book value of Class A and Class B common stock was $14.7 million, or $1.84 per share. Actual net tangible book value per share of common stock represents (a) total tangible assets less total liabilities and non-controlling interests, divided by (b) the total number of shares of common stock outstanding on an as-converted basis, assuming the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 2,960,968 shares of Class A common stock, upon completion of this offering.

As of June 30, 2017, the as adjusted net tangible book value of Class A and Class B common stock was $20.5 million, or $1.75 per share. Our as adjusted net tangible book value per share gives effect to:

 

    the closing of strategic investment transactions on September 11, 2017, with Ninebell, in which we issued 133,334 shares of Class A common stock to Ninebell for a purchase price of $1.0 million and Ninebell issued ordinary shares, representing 20% of its post-closing equity, to us for a purchase price of $1.2 million;

 

    the completion of transactions with minority investors in ACM Shanghai, pursuant to which in the third-quarter of 2017 (i) we issued, 3,572,844 shares of Class A common stock (on an as-converted basis) to the minority investors for an aggregate purchase price of $20.1 million and (ii) ACM Research acquired 18.77% of the outstanding ACM Shanghai equity interests for a purchase price of $5.8 million and expects to acquire, prior to the closing of this offering, all of the remaining outstanding minority ACM Shanghai equity interests for an aggregate purchase price of $14.3 million, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Equity Transactions—Acquisition of Outstanding Minority Interests in Our Operating Company”; and

 

    the conversion, upon completion of this offering, of all outstanding shares of our convertible preferred stock into an aggregate of 4,628,015 shares of Class A common stock.

Our pro forma as adjusted net tangible book value of Class A common stock as of June 30, 2017 would have been $         million, or $         per share. Pro forma as adjusted net tangible book value further adjusts as adjusted data to reflect our sale of shares of Class A common stock in this offering at an assumed initial public offering price of $             , the midpoint of the offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and offering expenses, and our issuance to the underwriters upon the closing of this offering of warrants to purchase shares of Class A common stock (see “Underwriting—Discounts, Commissions and Expenses”). This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing stockholders and an immediate dilution of $         per share to purchasers

 

Assumed initial public offering price per share

      $               

As adjusted net tangible book value per share as of June 30, 2017

   $ 1.75     

Increase in net tangible book value per share attributable to this offering

     
  

 

 

    

Pro forma as adjusted net tangible book value per share after this offering

     
     

 

 

 

Dilution per share to purchasers of Class A common stock in this offering

      $               
     

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $        per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, would increase (decrease) the as adjusted net tangible book value by $        per share and the dilution per share to purchasers of Class A common stock in this offering by $        per share, assuming the number of shares offered by us, as set forth on

 

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the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and offering expenses. We may also increase (decrease) the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares offered by us would increase (decrease) the as adjusted net tangible book value by $        per share and the dilution per share to purchasers of Class A common stock in this offering by $        per share, assuming the assumed initial public offering price of $        per share remains the same, and after deducting estimated underwriting discounts and commissions and offering expenses. The pro forma information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

The following table summarizes, on a pro forma as adjusted basis as of June 30, 2017, the differences between existing stockholders and purchasers of Class A common stock in this offering with respect to the number of shares of Class A common stock purchased from us, the total consideration paid to us and the average price per share paid. The calculation below is based on the assumed initial public offering price of $        per share, the midpoint of the initial public offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and offering expenses.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     11,712,721                   $ 42,953,811                   $ 3.67  

Purchasers of Class A common stock in this offering

            
  

 

 

    

 

 

   

 

 

    

 

 

   

Totals

        100.0        100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

The table above excludes the shares of Class A common stock issuable upon the exercise of an outstanding warrant and outstanding options as well as shares of Class A common stock reserved for future issuance under out equity incentive plan, which consisted of:

 

    397,502 shares of Class A common stock issuable upon the exercise of an outstanding warrant, with an exercise price of $7.50 per share, at June 30, 2017 and September 11, 2017, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Equity Transactions—Issuance of Warrant”);

 

    3,489,959 shares of Class A common stock issuable upon the exercise of outstanding options with a weighted-average exercise price of $2.29 per share at June 30, 2017 and 3,442,743 shares of Class A common stock issuable upon the exercise of outstanding options with a weighted-average exercise price of $2.31 per share at September 11, 2017; and

 

    705,383 shares of Class A common stock reserved for issuance under our equity incentive plan at June 30, 2017 and September 11, 2017.

 

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EXCHANGE RATE INFORMATION

This prospectus contains translations of Renminbi, or RMB, amounts into U.S. dollars at specific rates solely for the convenience of the reader. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On September 11, 2017, the conversion rate was RMB 6.4997 to U.S. $1.00.

The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you.

 

     Exchange Rate  

Period

   Period End      Average(1)      Low      High  
     (RMB per U.S. $1.00)  

2012

     6.3001        6.2928        6.2670        6.3495  

2013

     6.2897        6.1933        6.0969        6.2898  

2014

     6.0990        6.1090        6.0930        6.1710  

2015

     6.4936        6.2284        6.1079        6.4936  

2016

     6.9370        6.6423        6.4565        6.9508  

2017 (through September 11)

     6.4997        6.8166        6.4997        6.9526  

 

Source: safe.gov.cn

 

(1) Calculated using the average of the daily exchange rates during the relevant period.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following tables set forth selected consolidated financial data. We derived the consolidated statement of operations data for the years ended December 31, 2015 and 2016 and the consolidated balance sheet data as of December 31, 2016 from our consolidated financial statements audited by BDO China Shu Lun Pan Certified Public Accountants LLP and included at the end of this prospectus. We derived the consolidated statement of operations data for the six months ended June 30, 2016 and June 30, 2017 and the consolidated balance sheet data as of June 30, 2017 from our unaudited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information set forth therein. The following tables also show certain operational and non-GAAP financial measures. Our historical results and key metrics are not necessarily indicative of the results to be expected for any future period, and the results for any interim period are not necessarily indicative of the results that may be expected for a full year. The following should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included at the end of this prospectus.

 

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Pro forma information in the following tables gives effect to the automatic conversion of all outstanding shares of our convertible preferred stock into Class A common stock upon completion of this offering. See note 2 to the consolidated financial statements appearing at the end of this prospectus for an explanation of the method used to determine the number of shares used in computing historical and pro forma net income (loss) per share.

 

     Six Months Ended June 30,      Year Ended December 31,  
     2017      2016      2016      2015  
    

(in thousands, except share and per share data)

 

Consolidated Statement of Operations Data:

           

Revenue

   $ 14,423      $ 8,122      $ 27,371      $ 31,206  

Cost of revenue

     8,570        5,292        14,042        17,085  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     5,853        2,830        13,329        14,121  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses:

           

Sales and marketing

     2,583        1,818        3,907        4,213  

Research and development

     1,867        1,486        3,259        2,942  

General and administrative

     3,158        1,089        2,673        2,103  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses, net

     7,608        4,393        9,839        9,258  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from operations

     (1,755      (1,563      3,490        4,863  

Interest expense, net

     (159      (45      (165      (105

Other income (expense), net

     (292      506        (343      632  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income taxes

     (2,206      (1,102      2,982        5,390  

Income tax benefit (expense)

     (749      73        (595      2,525  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     (2,955      (1,029      2,387        7,915  

Less: Net income (loss) attributable to non-controlling interests(1)

     (208      (476      1,356        2,535  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to ACM Research, Inc.

   $ (2,747      (553    $ 1,031      $ 5,380  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) per share of common share:

           

Basic

   $ (0.56)      $ (0.27)      $ 0.30      $ 1.50  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ (0.56)      $ (0.27)      $ 0.18      $ 0.97  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding used in computing per share amounts:

           

Basic

     4,927,973        2,061,339        2,176,315        2,047,383  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     4,927,973        2,061,339        3,792,137        3,144,120  
  

 

 

    

 

 

    

 

 

    

 

 

 

Pro forma net income (loss) per common share:

           

Basic

   $ (0.35)         $ 0.20     
  

 

 

       

 

 

    

Diluted

   $ (0.35)         $ 0.15     
  

 

 

       

 

 

    

Pro forma weighted-average common shares outstanding used in computing per share amounts:

           

Basic

     7,889,818           5,137,211     
  

 

 

       

 

 

    

Diluted

     7,889,818           6,753,033     
  

 

 

       

 

 

    

 

(1) As of each date, ACM Research held 62.87% of the outstanding equity interests of ACM Shanghai and the remaining 37.13% was held by three third-party investors. As described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Equity Transactions—Acquisition of Minority Interests in Our Operating Company,” ACM Research acquired an additional 18.77% of the outstanding ACM Shanghai equity interests as of August 31, 2017 and expects to acquire, prior to the closing of this offering, all of the remaining outstanding equity interests held by the minority investors.

 

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     Six Months Ended
June 30, 2017
     Year Ended December 31,  
            2016              2015      
     (in thousands)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 13,206      $ 10,119      $ 4,401  

Working capital(1)

     23,433        23,278        7,381  

Total assets

     47,437        44,467        32,151  

Total indebtedness

     4,595        4,772        9,691  

Total liabilities

     27,883        23,948        27,754  

Total redeemable convertible preferred stock

     18,034        18,034        8,876  

Total ACM Research, Inc. stockholders’ deficit

     (3,289      (2,434      (8,236

Non-controlling interests

     4,809        4,919        3,757  

Total stockholders’ (deficit) equity

     1,520        2,485        (4,479

 

(1) Calculated as current assets minus current liabilities.

To supplement our consolidated financial statements presented in accordance with U.S. generally accepted accounting principles, or GAAP, we monitor and consider adjusted EBITDA, free cash flow and adjusted operating income (loss), which are non-GAAP financial measures. These measures are commonly used by management and investors as performance measures. They are not considered measures of financial performance under GAAP, and the items excluded from the measures are significant components in understanding and assessing our financial performance. Each of adjusted EBITDA, free cash flow and adjusted operating income (loss) has limitations as an analytical tool, and should not be considered in isolation or as an alternative to such GAAP measures as net income, cash flows provided by or used in operations, investing or financing activities, or other financial statement data presented in our consolidated financial statements as an indicator of financial performance or liquidity. In addition, because they are not measures determined in accordance with GAAP and are susceptible to varying calculations, adjusted EBITDA, free cash flow and adjusted operating income (loss), as presented, may not be comparable to other similarly titled measures of other companies.

 

    We define adjusted EBITDA as our net income excluding interest expense (net), income tax benefit (expense), depreciation and amortization, and stock-based compensation. The following table reconciles net income (loss), the most directly comparable GAAP financial measure, to adjusted EBITDA:

 

     Six Months Ended June 30,      Year Ended December 31,  
         2017              2016              2016              2015      
     (in thousands)  

Adjusted EBITDA Data:

        

Net income (loss)

   $ (2,955    $ (1,029    $ 2,387      $ 7,915  

Interest expense, net

     159        45        165        105  

Income tax expense (benefit)

     749        (73      595        (2,525

Depreciation and amortization

     118        88        187        160  

Stock-based compensation

     1,348        193        383        423  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ (581    $ (776    $ 3,717      $ 6,078  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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    We define free cash flow as net cash provided by operating activities less purchases of property and equipment, net of proceeds from disposals, and purchase of intangible assets. The following table reconciles net cash provided by operating activities, the most directly comparable GAAP financial measure, to free cash flow:

 

     Six Months Ended June 30,      Year Ended December 31,  
         2017              2016              2016              2015      
     (in thousands)  

Consolidated Statement of Cash Flows and Free Cash Flow Data:

           

Net cash provided by operating activities

   $ 2,983      $ 4,739      $ (3,702    $ 2,702  

Purchase of property and equipment, net

     (26      (95      (788      (1,371

Purchase of intangible assets

     (36      (9      (22      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Free cash flow

   $ 2,921      $ 4,635      $ (4,512    $ (1,331
  

 

 

    

 

 

    

 

 

    

 

 

 

 

    We define adjusted operating income (loss) as our income (loss) from operations excluding stock-based compensation. The following table reconciles income (loss) from operations, the most directly comparable GAAP financial measure, to adjusted operating income (loss):

 

     Six Months Ended June 30,      Year Ended December 31,  
         2017              2016              2016              2015      
     (in thousands)  

Adjusted Operating Income (Loss) Data:

           

Income (loss) from operations

   $ (1,755    $ (1,563    $ 3,490      $ 4,863  

Stock-based compensation

     1,348        193        383        423  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted operating income (loss)

   $ (407    $ (1,370    $ 3,873      $ 5,286  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our consolidated financial statements and related notes appearing at the end of this prospectus. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. You should read “Risk Factors” for a discussion of factors that could cause our actual results to differ materially from our expectations.

Overview

We develop, manufacture and sell single-wafer wet cleaning equipment, which semiconductor manufacturers can use in numerous manufacturing steps to remove particles, contaminants and other random defects, and thereby improve product yield, in fabricating advanced integrated circuits, or chips. Our Ultra C equipment is designed to remove random defects from a wafer surface effectively, without damaging a wafer or its features, even at an increasingly advanced process node (the minimum line width on a chip) of 22 nanometers, or nm, or less. Our equipment is based on our innovative, proprietary Space Alternated Phase Shift, or SAPS, and Timely Energized Bubble Oscillation, or TEBO, technologies. We developed our proprietary technologies to enable manufacturers to produce chips that reach their ultimate physical limitations while maintaining product yield, which is the percentage of chips on a wafer that meet manufacturing specifications

We seek to market our wet processing equipment by first establishing a referenceable base of leading logic and memory chip makers, whose use of our products can influence decisions by other manufacturers. We believe this process will help us to penetrate the mature integrated circuit manufacturing markets and to build credibility with industry leaders. We have placed evaluation SAPS equipment with selected memory and logic chip customers since 2009 and recognized revenue from SAPS equipment since 2011. Using a similar “demo-to-sales” process, we began placing TEBO evaluation equipment with selected customers in 2016 and recognized revenue from our initial sale of TEBO equipment in December 2016. As of June 30, 2017, we had sold and deployed more than 30 single-wafer wet cleaning tools. We recognized revenue from the selected customers’ purchases of single-wafer wet cleaning equipment totaling $10.6 million, or 73.6% of our revenue, in the first half of 2017, $21.5 million, or 78.4% of our revenue, in 2016, and $26.8 million, or 86.0% of our revenue, in 2015.

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 People’s Republic of China, or PRC, Korea, Taiwan and the United States. To supplement our direct sales teams, we have contacts with several independent sales representatives in the PRC, Taiwan and Korea. We also provide after-sales services to our customers by installing new replacement parts as well as making small scale modifications to improve our customers’ product yields.

We established our operational center in Shanghai in 2006 to help us establish and build relationships with chip manufacturers in China and throughout Asia. In addition to our SAPS and TEBO tools, we offer a range of custom-made wafer assembly and packaging equipment, such as coaters and developers, to wafer assembly and packaging factories, principally in the PRC.

Corporate Background

ACM Research incorporated in California in 1998 and redomesticated to Delaware in November 2016. Key events in our corporate development have included:

 

    Initially we focused on developing tools for semiconductor manufacturing process steps involving the integration of ultra-low-K materials and copper. In the early 2000s, we sold tools based on stress-free copper-polishing technology.

 

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    In 2006 we moved our operational center to Shanghai, where we began to conduct our business through our subsidiary ACM Shanghai. This move was made to help us establish and build relationships with chip manufacturers in the PRC. We have financed our operations in part through the sale of minority equity interests in ACM Shanghai.

 

    In 2007 we began to focus our development efforts on single-wafer wet-cleaning solutions for the front-end chip fabrication process.

 

    In 2008 ACM Shanghai received an initial grant from local and central governmental authorities in the PRC. The grant relates to the development and commercialization of 65nm to 45nm stress-free polishing technology.

 

    In 2009 we introduced SAPS megasonic technology, which can be applied in wet wafer cleaning at numerous steps during the chip fabrication process.

 

    In 2011 ACM Shanghai formed a wholly owned subsidiary in the PRC, ACM Research (Wuxi), Inc., to manage sales and service operations.

 

    In 2014 ACM Shanghai received an additional grant from local and central governmental authorities in the PRC. The grant relates to the development of electro copper-plating technology.

 

    In March 2016 we introduced TEBO technology, which can be applied at numerous steps during the fabrication of small node conventional two-dimensional and three-dimensional patterned wafers.

 

    In March and August 2017, we entered into agreements pursuant to which we expect to acquire all of the outstanding minority equity interests in ACM Shanghai prior to the closing of this offering, as described below under “—Recent Equity Transactions—Acquisition of Outstanding Minority Interests in Our Operating Company.”

 

    In June 2017 we formed a wholly owned subsidiary in Hong Kong, CleanChip Technologies Limited, to act on our behalf in Asian markets outside the PRC by, for example, serving as a trading partner between ACM Shanghai and its customers, procuring raw materials and components, performing sales and marketing activities, and making strategic investments.

Recent Equity Transactions

Issuance of Warrant

In December 2016 Shengxin (Shanghai) Management Consulting Limited Partnership, or SMC, delivered to our subsidiary ACM Shanghai 20,123,500 RMB (approximately $3.0 million as of the date of funding) in cash, which we refer to as the SMC Investment, for potential investment pursuant to terms to be subsequently negotiated. SMC is a PRC limited partnership owned by Jian Wang, our Vice President, Research and Development and the brother of our Chief Executive Officer and President David H. Wang, and other employees of ACM Shanghai. In March 2017 we issued to SMC a warrant exercisable to purchase 397,502 shares of Class A common stock at a price of $7.50 per share, for a total exercise price of approximately $3.0 million. The warrant may be exercised for cash or on a cashless basis, at the option of SMC, at any time on or before May 17, 2023 to acquire all, but not less than all, of the shares of Class A common stock subject to the warrant.

 

    If SMC does not exercise the warrant by May 17, 2023, ACM Shanghai will be obligated, subject to approval of PRC governmental authorities and ACM Shanghai’s equity holders, to deliver an equity interest of 3.6394% (subject to dilution) in satisfaction of the SMC Investment.

 

    If SMC exercises the warrant or SMC does not exercise the warrant and the issuance of the equity interest in ACM Shanghai is not completed by August 17, 2023 due to the inability of the parties to obtain required governmental or equity holder approvals, then ACM Shanghai will be obligated to pay to SMC, in satisfaction of the SMC Investment, an amount equal to approximately $3.0 million.

For more information, see “Related Party Transactions—Issuance of Warrant,” “Principal Stockholders,” and “Description of Capital Stock—Warrant.”

 

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Acquisition of Outstanding Minority Interests in Our Operating Company

Until August 31, 2017, ACM Research owned 62.87% of the outstanding equity interests in ACM Shanghai and three PRC-based third-party investors held the remaining 37.13% of equity interests, which are reflected as “non-controlling interests” in our consolidated balance sheets and related notes. We have taken the following actions in order to enable ACM Research to acquire, consistent with requirements of arrangements previously entered into in connection with the investors’ acquisition of ACM Shanghai equity interests, the outstanding non-controlling interests in ACM Shanghai:

 

    In March 2017 we entered into a securities purchase agreement with Shanghai Science and Technology Venture Capital Co., Ltd., or SSTVC, which held 18.77% of the ACM Shanghai equity interests. Pursuant to that agreement, effective as of August 31, 2017, we (a) acquired, for a purchase price of $5.8 million, SSTVC’s equity interests in ACM Shanghai and (b) issued to SSTVC, for a purchase price of $5.8 million, shares of Series E preferred stock that will convert, upon the closing of this offering, into 1,666,170 shares of Class A common stock, which SSTVC will have acquired at an effective purchase price of $3.48 per share.

 

    In August 2017 we entered into a securities purchase agreement with Shanghai Pudong High-Tech Investment Co., Ltd., or PDHTI, and its subsidiary Pudong Science and Technology (Cayman) Co., Ltd., or PST, in which we agreed to bid, in an auction process mandated by PRC regulations, to purchase PDHTI’s 10.78% equity interests in ACM Shanghai and to sell shares of Class A common stock to PST. The auction process for PDHTI’s equity interests commenced on September 5, 2017. On September 8, 2017, we issued 1,119,576 shares of Class A common stock to PST for a purchase price of $7.50 per share, representing an aggregate purchase price of $8.4 million.

 

    In August 2017 we entered into a securities purchase agreement with Shanghai Zhangjiang Science & Technology Venture Capital Co., Ltd., or ZSTVC, and its subsidiary Zhangjiang AJ Company Limited, or ZJAJ, in which we agreed to bid, in an auction process mandated by PRC regulations, to purchase ZSTVC’s 7.58% equity interests in ACM Shanghai and to sell shares of Class A common stock to ZJAJ. The auction process for ZSTVC’s equity interest commenced on September 5, 2017. On September 8, 2017, we issued 787,098 shares of Class A common stock to ZJAJ for a purchase price of $7.50 per share, or an aggregate purchase price of $5.9 million.

As a result of the foregoing arrangements, ACM Research owned 81.64% of ACM Shanghai’s equity interests as of August 31, 2017 and expects to own 100% of those equity interests as of the closing of this offering.

In accordance with the foregoing agreements, we will (a) enter into a voting agreement with SSTVC pursuant to which SSTVC will have certain rights to designate one individual for nomination and election to our board of directors, as described in “Management—Board of Directors—Director Nomination Rights,” and (b) grant SSTVC, PST and ZJAJ certain registration rights with respect to the shares of Class A common stock, as described in “Description of Capital Stock—Registration Rights.”

Strategic Investment in Key Supplier

Ninebell Co., Ltd., or Ninebell, which is located in Seoul, Korea, is the principal supplier of robotic delivery system subassemblies used in our single-wafer cleaning equipment. On September 11, 2017 we and Ninebell entered into:

 

    an ordinary share purchase agreement pursuant to which, contemporaneously with signing, Ninebell issued to us, for a purchase price of $1.2 million, ordinary shares representing 20% of Ninebell’s post-closing equity; and

 

    a common stock purchase agreement pursuant to which, contemporaneously with signing, we issued 133,334 shares of Class A common stock to Ninebell for a purchase price of $7.50 per share, or an aggregate purchase price of $1.0 million.

 

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In addition, under the ordinary share purchase agreement, Ninebell granted us a preemptive right for all future issuances of equity-related securities by Ninebell and the founder of Ninebell, who is the only other equity holder of Ninebell, granted us a right of first refusal with respect to any future sales of his equity securities.

Key Components of Results of Operations

Revenue

We develop, manufacture and sell single-wafer wet cleaning equipment and custom-made wafer assembly and packaging equipment. Because we currently sell our capital equipment, or tools, to a small number of customers and we customize those tools to fulfill the customers’ specific requirements, our revenue generation fluctuates, depending on the length of the sales, development and evaluation phases:

Sales and Development. During the sale process we may, depending on a prospective customer’s specifications and requirements, need to perform additional research, development and testing to establish that a tool can meet the prospective customer’s requirements. We then host an in-house demonstration of the customized tool prototype. Sales cycles for orders that require limited customization and do not require that we develop new technology usually take from 6 to 12 months, while the product life cycle, including the initial design, demonstration and final assembly phases, for orders requiring development and testing of new technologies can take as long as 2 to 4 years. As we expand our customer base, we expect to gain more repeat purchase orders for tools that we have already developed and tested, which will eliminate the need for a demonstration phase and shorten the development cycle.

Evaluation Periods. When a chip manufacturer proposes to purchase a particular type of tool from us for the first time, we offer the manufacturer an opportunity to evaluate the tool for a period that can extend for 24 months or longer. We do not receive any payment on first-time purchases until the tool is accepted. As a result, we may spend between $1.0 and $2.0 million to produce a tool without receiving payment for more than 24 months or, if the tool is not accepted, without receiving any payment. Please see “Risk Factors—Risks Related to Our Business and Our Industry—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.”

Purchase Orders. In accordance with industry practice, sales of our tools are made pursuant to purchase orders. Each purchase order from a customer for one of our tools contains specific technical requirements intended to ensure, among other things, that the tool will be compatible with the customer’s manufacturing process line. 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, and we expect future customers to furnish similar non-binding forecasts for planning purposes. Any of those forecasts would be subject to change, however, by the customer at any time, without notice to us.

Fulfillment. We seek to obtain a purchase order for a tool from three to four months in advance of the expected delivery date. Depending upon the nature of a customer’s specifications, the lead time for production of a tool generally will extend from two to four months. The lead-time can be as long as six months, however, and in some cases we may need to begin producing a tool based on a customer’s non-binding forecast, rather than waiting to receive a binding purchase order.

We expect our sales prices generally to range between $2.5 million and $5.0 million for SAPs tools and between $3.5 million and $6.5 million for TEBO tools. The sales price of a particular tool will vary depending upon the required specifications. We have designed equipment models using a modular configuration that we customize to meet customers’ technical specifications. For example, our Ultra C models for SAPS and TEBO solutions use modular configurations that enable us to create a wet-cleaning tool meeting a customer’s specific requirements, while using pre-existing designs for chamber, electrical, chemical delivery and other modules.

Because of the relatively large purchase prices of our tools, customers generally pay in installments. For a customer’s repeat purchase of a particular type of tool, the specific payment terms are negotiated in connection

 

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with acceptance of a purchase order. Based on our limited experience with repeat sales of SAPS and TEBO tools, we expect that we will receive an initial payment upon delivery of a tool in connection with a repeat purchase, with the balance being paid once the tool has been tested and accepted by the customer. Our sales arrangements for repeat purchases do not include a general right of return.

Since introducing SAPS technology in 2009, we have focused on selling SAPS-based tools and, beginning in 2016, TEBO-based tools. Our revenue from sales of single-wafer wet cleaning equipment totaled $10.6 million, or 73.6% of our revenue, in the first half of 2017 (compared with $5.6 million, or 69.1% of revenue, in the first half of 2016), $21.5 million, or 78.4% of our revenue, in 2016 and $26.8 million, or 86.0% of our revenue, in 2015.

We have generated most of our revenue from a limited number of customers as the result of our strategy of initially placing SAPS- and TEBO-based equipment with a small number of leading chip manufacturers that are driving technology trends and key capability implementation. In the first half of 2017, 62.8% of our revenue was derived from three customers: SK Hynix Inc., a leading Korean memory chip company that accounted for 22.8% of our revenue; Shanghai Huali Microelectronics Corporation, a leading PRC foundry that accounted for 20.6% of our revenue; and Yangtze Memory Technologies Co., Ltd., a leading PRC memory chip company that, together with one of its subsidiaries, accounted 19.4% of our revenue. In 2016 99.3% of our revenue was derived from four customers: Shanghai Huali Microelectronics Corporation, which accounted for 33.7% of our revenue; Semiconductor Manufacturing International Corporation, a leading PRC foundry that accounted for 25.0% of our revenue; SK Hynix Inc., which accounted for 24.0% of our revenue; and JiangYin ChangDian Advanced Packaging Co. Ltd., a leading PRC foundry that accounted for 16.6% of our revenue. In 2015 all of our revenue was derived from three customers, including SK Hynix Inc., which accounted for 86.0% of our revenue, and JiangYin ChangDian Advanced Packaging Co., Ltd., which accounted for 10.1% of our revenue.

Based on our market experience, we believe that implementation of our equipment by one of our selected leading companies will attract and encourage other manufacturers to evaluate our equipment, because the leading company’s implementation will serve as validation of our equipment and will enable the other manufacturers to shorten their evaluation processes. We placed our first SAPS-based 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-based tools following the customer’s completion of its qualification process. We expect that the period from new product introduction to high volume manufacturing will be three years or less in the future. Please see “Risk Factors—Business—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 or more 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.”

All of our sales in 2015, 2016 and the first half of 2017 were to customers located in Asia, and we anticipate that a substantial majority of our revenue will continue to come from customers located in this region for the near future. We have increased our sales efforts to penetrate the markets in North America and Western Europe.

We recognize revenue in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104, as described below under “—Critical Accounting Policies and Significant Judgments and Estimates—Revenue Recognition.”

We offer extended maintenance service contracts to provide services such as trouble-shooting or fine-tuning tools, and installing spare parts, following expiration of applicable initial warranty coverage periods, which for sales to date have extended from 12 to 36 months as described under “—Critical Accounting Policies and Significant Judgments and Estimates—Warranty.” A limited number of the single-wafer wet cleaning tools we have sold to date are no longer covered by their initial warranties. In 2015, 2016 and the first half of 2017, we received payments for parts and labor for service activities provided from time to time, but as of June 30, 2017

 

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we had not yet entered into extended maintenance service contracts with respect to any of the tools for which initial warranty coverage had expired. We expect to enter into extended maintenance service contracts with customers as additional initial warranties expire, but we do not expect revenue from extended maintenance service contracts to represent a material portion of our revenue in the future.

The loss or delay of one or more large sale 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, as described under “Risk Factors—Risks Related to Our Business and Our Industry—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.” It is difficult to predict accurately when, or even if, we can complete a sale of a tool to a potential customer or to increase sales to any existing customer. Our tool demand forecasts are based on multiple assumptions, including non-binding forecasts received from customers years in advance, each of which may introduce error into our estimates. Difficulties in forecasting demand for our tools make it difficult for us to project future operating results and may lead to periodic inventory shortages or excess spending on inventory or on tools that may not be purchased, as further described in “Risk Factors—Risks Related to Our Business and Our Industry—Difficulties in forecasting demand for our tools may lead to periodic inventory shortages or excess spending on inventory items that may not be used.”

Cost of Revenue

Cost of revenue for capital equipment consists primarily of:

 

    direct costs, which consist principally of costs of tool components and subassemblies purchased from third-party vendors;

 

    compensation of personnel associated with our manufacturing operations, including stock-based compensation;

 

    depreciation of manufacturing equipment;

 

    amortization of costs of software used for manufacturing purposes;

 

    other expenses attributable to our manufacturing department; and

 

    allocated overhead for rent and utilities.

We are not party to any long-term purchasing agreements with suppliers. Please see “Risk Factors—Risks Related to Our Business and Our Industry—Our customers do not enter into long-term purchase commitments, and they may decrease, cancel or delay their projected purchases at any time.”

As our customer base and tool installations continue to grow, we will need to hire additional manufacturing personnel. The rates at which we add customers and install tools will affect the level and time of this spending. In addition, because we often import components and spare parts from the United States, we have experienced, and expect to continue to experience, the effect of the dollar’s growth on our cost of revenue.

Gross Margin

Our gross margin was 40.6% in the first half of 2017 (compared with 34.8% in the first half of 2016), 48.7% in 2016 and 45.3% in 2015. Gross margin may vary from period to period, primarily related to the level of utilization and the timing and mix of purchase orders. We expect gross margin to be between 40% and 45% for the foreseeable future, with direct manufacturing costs approximating 50% to 55% of revenue and overhead costs totaling approximately 5% of revenue.

We seek to maintain our gross margin by continuing to develop proprietary technologies that avoid pricing pressure for our wet cleaning equipment. We actively manage our operations through principles of operational

 

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excellence designed to ensure continuing improvement in the efficiency and quality of our manufacturing operations by, for example, implementing factory constraint management and change control and inventory management systems. In addition, our purchasing department actively seeks to identify and negotiate supply contracts with improved pricing to reduce cost of revenue.

A significant portion of our raw materials are denominated in Renminbi, or RMB, while the majority of our purchase orders are denominated in U.S. dollars. As a result, currency exchange rates may have a significant effect on our gross margin. For further information, please see “Exchange Rate Information.”

Operating Expenses

We have experienced, and expect to continue to experience, growth in the dollar amount of our operating expenses, as we make investments to support the anticipated growth of our customer base and the continued development of proprietary technologies. As we continue to grow our business, we expect operating expenses to increase in absolute dollars.

Sales and Marketing

Sales and marketing expense accounted for 17.9% of our revenue in the first half of 2017 (compared with 22.4% of revenue in the first half of 2016), 14.3% of our revenue in 2016 and 13.5% of our revenue in 2015. Sales and marketing expense consists primarily of:

 

    compensation of personnel associated with pre- and after-sales support and other sales and marketing activities, including stock-based compensation;

 

    sales commissions paid to independent sales representatives;

 

    fees paid to sales consultants;

 

    shipping and handling costs for transportation of products to customers;

 

    warranty costs;

 

    cost of trade shows;

 

    travel and entertainment; and

 

    allocated overhead for rent and utilities.

Sales and marketing expense can be significant and may fluctuate, in part because of the resource-intensive nature of our sales efforts and the length and variability of our sales cycle. 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, including educating customers about our tools, participating in extended tool evaluations and configuring our tools to customer-specific needs. Sales and marketing expense in a given period can be particularly affected by the increase in travel and entertainment expenses associated with the finalization of purchase orders or the installation of tools.

We expect that, for the foreseeable future, sales and marketing expense will increase in absolute dollars, as we continue to invest in sales and marketing by hiring additional employees and expanding marketing programs in existing or new markets. We must invest in sales and marketing processes in order to develop and maintain close relationships with customers. We are making dollar-based investments in dollars in order to support growth of our customer base in the United States, and the relative strength of the dollar could have a significant effect on our sales and marketing expense.

 

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Research and Development

Research and development expense accounted for 13.0% of our revenue in the first half of 2017 (compared with 18.3% of revenue in the first half of 2016), 11.9% of our revenue in 2016 and 9.4% of our revenue in 2015. Research and development expense relates to the development of new products and processes and encompasses our research, development and customer support activities. Research and development expense consists primarily of:

 

    compensation of personnel associated with our research and development activities, including stock-based compensation;

 

    costs of components and other research and development supplies;

 

    travel expense associated with customer support;

 

    amortization of costs of software used for research and development purposes; and

 

    allocated overhead for rent and utilities.

Some of our research and development has been funded by grants from the PRC government, as described in “—PRC Government Research and Development Funding” below.

We expect that, for the foreseeable future, research and development expense will increase in absolute dollars and will range between 10% and 12% of revenue, as we continue to invest in research and development to advance our technologies. We intend to continue to invest in research and development to support and enhance our existing single-wafer wet cleaning products and to develop future product offerings to build and maintain our technology leadership position.

General and Administrative

General and administrative expense accounted for 21.9% of our revenue in the first half of 2017 (compared with 13.4% of revenue in the first half of 2016), 9.8% of our revenue in 2016 and 6.7% of our revenue in 2015. General and administrative expense consists primarily of:

 

    compensation of executive, accounting and finance, human resources, information technology, and other administrative personnel, including stock-based compensation;

 

    professional fees, including accounting and legal fees;

 

    other corporate expenses; and

 

    allocated overhead for rent and utilities.

We expect that, for the foreseeable future, general and administrative expense will increase in absolute dollars, as we incur additional costs associated with growing our business and operating as a public company.

Stock-Based Compensation Expense

We grant stock options to employees and non-employee consultants and directors, and we accounts for those stock-based awards in accordance with Accounting Standards Codification, or ASC, Topic 718, Compensation—Stock Compensation and ASC Subtopic 505-50, Equity-Based Payments to Non-Employees, each as adopted by the Financial Accounting Standards Board, or FASB.

 

    Stock-based awards granted to employees are measured at the fair value of the awards on the grant date and are recognized as expenses either (a) immediately on grant, if no vesting conditions are required, or (b) using the graded vesting method, net of estimated forfeitures, over the requisite service period. The fair value of stock options is determined using the Black-Scholes valuation model. Stock-based compensation expense, when recognized, is charged to cost of revenue or to the category of operating expense corresponding to the employee’s service function.

 

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    Stock-based awards granted to non-employees are accounted for at the fair value of the awards at the earlier of (a) the date at which a commitment for performance by the non-employee to earn the awards is reached and (b) the date at which the non-employee’s performance is complete. The fair value of such non-employee awards is re-measured at each reporting date using the fair value at each period end until the vesting date. Changes in fair value between the reporting dates are recognized by the graded vesting method.

Cost of revenue and operating expenses during the periods presented below have included stock-based compensation as follows:

 

     Six Months Ended
June 30,
     Year Ended
December 31,
 
     2017      2016      2016      2015  
     (in thousands)  

Stock-Based Compensation Expense:

           

Cost of revenue

   $ 10      $ 6      $ 11      $ 9  

Sales and marketing expense

     18        2        5        4  

Research and development expense

     26        2        5        4  

General and administrative expense

     1,294        183        362        406  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,348      $ 193      $ 383      $ 423  
  

 

 

    

 

 

    

 

 

    

 

 

 

We recognized stock-based compensation expense to employees of $128,000 in the first half of 2017 (compared to $46,000 in the first half of 2016), $92,000 in 2016 and $73,000 in 2015. As of June 30, 2017 and December 31, 2016 and 2015, there was $788,000, $726,000 and $299,000 of total unrecognized employee share-based compensation expense, net of estimated forfeitures, related to unvested share-based awards, which are expected to be recognized over a weighted-average period of 2.12 years, 2.25 years and 1.24 years, respectively.

We recognized stock-based compensation expense to non-employees of $1.2 million in the first half of 2017 (compared to $148,000 in the first half of 2016), $291,000 in 2016 and $350,000 in 2015. The fair value of each option granted to a non-employee is re-measured at each period end until the vesting date.

PRC Government Research and Development Funding

ACM Shanghai has received three grants from local and central governmental authorities in the PRC. The first grant, which was awarded in 2008, relates to the development and commercialization of 65nm to 45nm stress-free polishing technology. The second grant was awarded in 2009 to fund interest expense on short-term borrowings. The most recent grant was made in 2014 and relates to the development of electro copper-plating technology. PRC governmental authorities provide the majority of the funding, although ACM Shanghai is also required to invest certain amounts in the projects.

The PRC governmental grants contain certain operating conditions, and we are required to go through a government due diligence process once the project is complete. The grants therefore are recorded as long-term liabilities upon receipt, although we are not required to return any funds we receive. Grant amounts are recognized in our statements of operations and comprehensive income as follows:

 

    Government subsidies relating to current expenses are reflected as reductions of those expenses in the periods in which they are reported. Those reductions totaled $2.1 million in the first half of 2017 (compared to $2.0 million in the first half of 2016), $6.2 million in 2016 and $3.8 million in 2015.

 

    Government subsidies for interest on short-term borrowings are reported as reductions of interest expense in the periods the interest is accrued. Those reductions totaled $0 in the first half of 2017 (compared to $101,000 in the first half of 2016), $99,000 in 2016 and $303,000 in 2015.

 

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    Government grants used to acquire depreciable assets are transferred from long-term liabilities to property, plant and equipment when the assets are acquired and then the recorded amounts of the assets are credited to other income over the useful lives of the assets. Related government subsidies recognized as other income totaled $65,000 in the first half of 2017 (compared to $63,000 in the first half of 2016), $127,000 in 2016 and $105,000 in 2015.

Net Income Attributable to Non-Controlling Interests

Since 2006 we have conducted our business through our subsidiary ACM Shanghai, and we have financed our operations in part through sale of minority equity interests in ACM Shanghai. From January 1, 2015 to August 31, 2017, ACM Research owned 62.87% of the equity interests of ACM Shanghai and three non-controlling, unrelated investors held the remaining 37.13%. As described above under “—Our Company—Acquisition of Outstanding Minority Interests in Our Operating Company,” ACM Research (a) acquired an additional 18.77% equity interest from one of the minority investors as of August 31, 2017 and (b) entered into agreements with the other two minority investors pursuant to which we expect it will acquire the remaining non-controlling interests prior to the closing of this offering.

How We Evaluate Our Operations

We present information below with respect to three measures of financial performance:

 

    We define “adjusted EBITDA” as our net income excluding interest expense (net), income tax benefit (expense), depreciation and amortization, and stock-based compensation. We define adjusted EBITDA to also exclude restructuring costs, although we have not incurred any such costs to date.

 

    We define “free cash flow” as net cash provided by operating activities less purchases of property and equipment (net of proceeds from disposals) and of intangible assets.

 

    We define “adjusted operating income (loss)” as our income (loss) from operations excluding stock-based compensation.

These financial measures are not based on any standardized methodologies prescribed by accounting principles generally accepted in the United States, or GAAP, and are not necessarily comparable to similarly titled measures presented by other companies.

We have presented adjusted EBITDA, free cash flow and adjusted operating income (loss) because they are key measures used by our management and board of directors to understand and evaluate our operating performance, to establish budgets and to develop operational goals for managing our business. We believe that these financial measures help identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. In particular, we believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA and adjusted operating income (loss) can provide useful measures for period-to-period comparisons of our core operating performance and that the exclusion of property and equipment purchases from operating cash flow can provide a usual means to gauge our capability to generate cash. Accordingly, we believe that these financial measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making.

Adjusted EBITDA, free cash flow and adjusted operating income (loss) are not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest GAAP equivalent. Some of these limitations are:

 

    adjusted EBITDA excludes depreciation and amortization and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future;

 

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    we exclude stock-based compensation expense from adjusted EBITDA and adjusted operating income (loss), although (a) it has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses would be higher, which would affect our cash position;

 

    the expenses and other items that we exclude in our calculation of adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from adjusted EBITDA when they report their operating results;

 

    adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs;

 

    adjusted EBITDA does not reflect interest expense, or the requirements necessary to service interest or principal payments on debt;

 

    adjusted EBITDA does not reflect income tax expense (benefit) or the cash requirements to pay taxes;

 

    adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

 

    although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements; and

 

    adjusted EBITDA includes expense reductions and non-operating other income attributable to PRC governmental grants, which may mask the effect of underlying developments in net income (loss), including trends in current expenses and interest expense, and free cash flow includes the PRC governmental grants, the amount and timing of which can be difficult to predict and are outside our control.

The following table reconciles net income (loss), the most directly comparable GAAP financial measure, to adjusted EBITDA:

 

     Six Months Ended
June 30,
    Year Ended
December 31,
 
     2017     2016     2016      2015  
     (in thousands)  

Adjusted EBITDA Data:

         

Net income (loss)

   $ (2,955   $ (1,029   $ 2,387      $ 7,915  

Interest expense, net

     159       45       165        105  

Income tax expense (benefit)

     749       (73     595        (2,525

Depreciation and amortization

     118       88       187        160  

Stock-based compensation

     1,348       193       383        423  
  

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted EBITDA

   $ (581   $ (776   $ 3,717      $ 6,078  
  

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted EBITDA in the six months ended June 30, 2017, as compared with the comparable period in 2016, reflected an increase of $3.2 million in net operating expenses, substantially offset by an increase of $3.0 million in gross profit. Adjusted EBITDA in 2016, as compared with 2016, reflected a decrease of $792,000 in gross profit and an increase of $582,000 in net operating expenses, in addition to the other factors driving net income. We do not exclude from adjusted EBITDA expense reductions and non-operating other income attributable to PRC governmental grants because we consider and incorporate the expected amounts and timing of those grants in incurring expenses and capital expenditures. If we did not receive the grants, our cash expenses therefore would be lower, and our cash position would not be affected, to the extent we have accurately anticipated the amounts of the grants. For additional information regarding our PRC grants, please see “—Key Components of Results of Operations—PRC Government Research and Development Funding.”

 

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The following table reconciles net cash provided by operating activities, the most directly comparable GAAP financial measure, to free cash flow:

 

     Six Months Ended
June 30,
    Year Ended
December 31,
 
     2017     2016     2016     2015  
     (in thousands)  

Free Cash Flow Data:

        

Net cash (used in) provided by operating activities

   $ 2,983     $ 4,739     $ (3,702   $ 2,702  

Purchases of property and equipment, net of proceeds from disposals

     (26     (95     (788     (1,371

Purchases of intangible assets

     (36     (9     (22     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 2,921     $ 4,635     $ (4,512   $ 1,331  
  

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow in the six months ended June 30, 2017, as compared with the comparable period in 2016, reflected, in addition to the factors driving net cash provided by operating activities, (a) decreases in accounts receivable offset by increases in accounts payable and (b) increases in stock-based compensation. Free cash flow in 2016, as compared with 2015, reflected, in addition to the factors driving net cash provided by operating activities, (a) increases in inventory and accounts receivable resulting from increased sales activities and (b) our continued expenditures on property and equipment. Consistent with our methodology for calculating adjusted EBITDA, we do not adjust free cash flow for the effects of PRC government subsidies, because we take those subsidies into account in incurring expenses and capital expenditures.

Adjusted operating income (loss) excludes stock-based compensation from income (loss) from operations. Although stock-based compensation is an important aspect of the compensation of our employees and executives, determining the fair value of certain of the stock-based instruments we utilize involves a high degree of judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the vesting or future exercise of the related stock-based awards. Furthermore, unlike cash compensation, the value of stock options, which is an element of our ongoing stock-based compensation expense, is determined using a complex formula that incorporates factors, such as market volatility, that are beyond our control. Management believes it is useful to exclude stock-based compensation in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies. The use of non-GAAP financial measures excluding stock-based compensation has limitations, however. If we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses would be higher, which would affect our cash position. The following tables reflect the exclusion of stock-based compensation from line items comprising income (loss) from operations:

 

     Six Months Ended June 30,  
     2017     2016  
     Actual
(GAAP)
    SBC     Adjusted
(Non-GAAP)
    Actual
(GAAP)
    SBC     Adjusted
(Non-GAAP)
 
     (in thousands)  

Adjusted Operating Income (Loss):

            

Revenue

   $ 14,423     $ —       $ 14,423     $ 8,122     $ —       $ 8,122  

Cost of revenue

     (8,570     (10     (8,560   $ (5,292     (6     (5,286
  

 

 

     

 

 

   

 

 

     

 

 

 

Gross profit

     5,853         5,863       2,830         2,836  

Operating expenses:

            

Sales and marketing

     (2,583     (18     (2,565     (1,818     (2     (1,816

Research and development

     (1,867     (26     (1,841     (1,486     (2     (1,484

General and administrative

     (3,158     (1,294     (1,864     (1,089     (183     (906
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

   $ (1,755   $ (1,348   $ (407   $ (1,563     (193   $ (1,370
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Year Ended December 31,  
     2016     2015  
     Actual
(GAAP)
    SBC     Adjusted
(Non-GAAP)
    Actual
(GAAP)
    SBC     Adjusted
(Non-GAAP)
 
     (in thousands)  

Adjusted Operating Income (Loss):

            

Revenue

   $ 27,371     $ —       $ 27,371     $ 31,206     $ —       $ 31,206  

Cost of revenue

     (14,042     (11     (14,031     (17,085     (9     (17,076
  

 

 

     

 

 

   

 

 

     

 

 

 

Gross profit

     13,329         13,340       14,121         14,130  

Operating expenses:

            

Sales and marketing

     (3,907     (5     (3,902     (4,213     (4     (4,209

Research and development

     (3,259     (5     (3,254     (2,942     (4     (2,938

General and administrative

     (2,673     (362     (2,311     (2,103     (406     (1,697
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

   $ 3,490     $ (383   $ 3,873     $ 4,863     $ (423   $ 5,286  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted operating loss in the six months ended June 30, 2017, as compared with the comparable period in 2016, reflected an increase of $1.2 million in stock-based compensation expense. Adjusted operating income in 2016, as compared with 2015, reflected a decrease of $44,000 in stock based compensation expense.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions in applying our accounting policies that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base these estimates and assumptions on historical experience, and evaluate them on an on-going basis to ensure that they remain reasonable under current conditions. Actual results could differ from those estimates. The accounting policies that reflect our more significant estimates, judgments and assumptions and that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Revenue Recognition

We utilize the guidance set forth in the FASB’s ASC Topic 605, Revenue Recognition, regarding the recognition, presentation and disclosure of revenue in our financial statements. We recognize revenue when persuasive evidence of an arrangement exists; delivery has occurred and the major risks and remunerations of ownership have been transferred to the customer; collectability is probable; and the selling price is fixed or determinable.

In general, we recognize revenue when a tool has been demonstrated to meet the customer’s predetermined specifications and is accepted by the customer. If terms of the sale provide for a lapsing customer acceptance period, we recognize revenue as of the earlier of the expiration of the lapsing acceptance period and customer acceptance. In the following circumstances, however, we recognize revenue upon shipment or delivery, when legal title to the tool is passed to a customer as follows:

 

    when the customer has previously accepted the same type of tool with the same specifications and when we can objectively demonstrate that the tool meets all of the required acceptance criteria;

 

    when the sales contract or purchase order does not contain an acceptance agreement or a lapsing acceptance provision and when we can objectively demonstrate that the tool meets all of the required acceptance criteria;

 

    when the customer withholds acceptance due to issues unrelated to product performance, in which case revenue is recognized when the system is performing as intended and meets predetermined specifications; or

 

    when our sales arrangements do not include a general right of return.

 

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Customization, production, installation and delivery are essential elements of the functionality of our delivered tools, but the related services we offer, principally warranty services, are not essential to tool functionality. We treat the customization, production, installation and delivery of tools, together with the provision of related warranty and other services, as a single unit of accounting in accordance with the FASB’s ASC Subtopic 605-25, Revenue Recognition—Multiple Element Arrangements. In the first half of 2017 and in 2016 and 2015 all of our tools were sold in stand-alone arrangements.

We offer post-warranty period services, which consist principally of the installation and replacement of parts and small-scale modifications to the equipment. The related revenue and costs of revenue are recognized when parts have been delivered and installed, risk of loss has passed to the customer, and collection is probable. We do not expect revenue from extended maintenance service contracts to represent a material portion of our revenue in the future.

Stock-Based Compensation

We account for grants of stock options based on their grant date fair value and recognize compensation expense over the vesting periods. We estimate the fair value of stock options as of the date of grant using the Black-Scholes option pricing model. Stock options granted to non-employees are subject to periodic revaluation over their vesting terms.

Stock-based compensation expense represents the cost of the grant date fair value of employee stock option grants recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis, net of estimated forfeitures. We estimate the fair value of stock option grants using the Black-Scholes option pricing model, which requires the input of highly subjective assumptions, including (a) the risk-free interest rate, (b) the expected volatility of our stock, (c) the expected term of the award and (d) the expected dividend yield.

 

    The risk-free interest rates for periods within the expected life of the option are based on the yields of zero-coupon U.S. Treasury securities.

 

    Due to the lack of a public market for the trading of the common stock and a lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. For these analyses, we have selected companies with comparable characteristics to ours including enterprise value, risk profile, position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards. We compute the historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of our stock-based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available.

 

    The expected term represents the period of time that options are expected to be outstanding. The expected term of stock options is based on the average between the vesting period and the contractual term for each grant according to Staff Accounting Bulletin No. 110.

 

    The expected dividend yield is assumed to be 0%, based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends.

 

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No stock options were granted to employees during the six months ended June 30, 2016. For employee stock option grants made during the six months ended June 30, 2017 and the years ended December 31, 2016 and 2015, the weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of those grants were as follows:

 

     Six
Months
Ended
June 30,

2017
   Year Ended December 31,
        2016    2015

Risk-free interest rate

   2.22%    2.02% - 2.32%    1.87%

Expected volatility

   29.18%    29.93%    37.67%

Expected term (in years)

   6.25%    5.75 - 6.25    6.25

Expected dividend yield

   0%    0%    0%

For non-employee stock option grants made during the six months ended June 30, 2017 and 2016 and the years ended December 31, 2016 and 2015, the weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of those grants were as follows:

 

    Six Months Ended June 30,   Year Ended December 31,
    2017   2016   2016   2015

Risk-free interest rate

  1.85% - 2.33%   0.71% - 1.21%   1.00% - 2.25%   1.31% - 1.76%

Expected volatility

  28.87% - 29.41%   30.59% - 31.43%   29.93%   33.21%

Expected term
(in years)

  4.08 - 6.19   2.62 - 5.69   2.11 - 6.24   3.12 - 5.94

Expected dividend yield

  0%   0%   0%   0%

The following table summarizes by grant date the number of shares of common stock underlying stock options granted since January 1, 2015, as well as the associated per share exercise price and the estimated fair value per share of common stock on the grant date:

 

Grant Dates

   Number of
Common Shares
Underlying
Options Granted
     Exercise Price
per Common
Share
     Estimated Fair
Value per
Common Share
 

May 1, 2015

     783,338      $ 1.50      $ 1.50  

September 8, 2015

     263,335        1.50        1.50  

December 28, 2016

     1,424,596        3.00        2.28  

March 9, 2017

     33,334        7.50        7.50  

May 9, 2017

     183,335        7.50        7.50  

As of June 30, 2017, the unrecognized compensation cost related to outstanding options was $788,000 and is expected to be recognized as expense over a weighted-average of 2.12 years. As of December 31, 2016, the unrecognized compensation cost related to outstanding options was $726,000 and is expected to be recognized as expense over a weighted-average of 2.25 years. As of December 31, 2015, the unrecognized compensation cost related to outstanding options was $299,000 and is expected to be recognized as expense over a weighted-average of 1.24 years.

Based on the assumed initial public offering, or IPO, price of $        per share (the midpoint of the price range set forth on the cover page of this prospectus), the intrinsic value of stock options outstanding as of June 30, 2017 would be $        , of which $        would have been related to stock options that were vested and $        would have been related to stock options that were unvested.

 

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Determination of Fair Value of Common Stock

We are required to estimate the fair value of common stock underlying our stock-based awards when performing fair value calculations. All options to purchase shares of common stock are intended to be granted with an exercise price per share no less than the fair value per share of the common stock underlying those options on the date of grant, based on the information known to us on the date of grant. In the absence of a public trading market for the common stock, on each grant date we develop an estimate of the fair value of the common stock with the assistance of a third party valuation specialist to determine an exercise price for the option grants.

We historically have granted stock options at exercise prices equal to the fair value of the common stock as of the date of grant, as determined by the board of directors with input from management. Because there has been no public market for the common stock, the board determined the fair value of the common stock by considering a number of objective and subjective factors, including our financial performance and projections, the relative illiquidity of the common stock, the pricing of sales of convertible preferred stock to third parties, the preferences of our outstanding convertible preferred stock as compared to the common stock, including the liquidation preferences and dividend rights, peer group trading multiples, and trends in the broad semiconductor equipment market.

On December 28, 2016, the compensation committee of the board of directors, acting with the assistance of a third-party valuation specialist, considered the fair value of the common stock. In considering the fair value, the compensation committee took into account the methodologies, approaches and assumptions provided by the Audit and Accounting Practice Aid Series: Valuation of Privately Held Company Equity Securities Issued as Compensation of the American Institute of Certified Public Accountants, or the Practice Aid.

There are significant judgments and estimates inherent in the compensation committee’s determination of the fair value of the common stock. These judgments and estimates include assumptions regarding our future operating performance, the time to completing an IPO or other liquidity event, and the determination of the appropriate valuation methods. If we had made different assumptions, our stock-based compensation expense, net loss and net loss per common share could have been significantly different.

In accordance with the Practice Aid, the compensation committee considered the various methods for allocating the enterprise value across the classes and series of capital stock to determine the fair value of our common stock at each valuation date.

The compensation committee considered, but did not use, the following methods:

 

    The liquidation value method assumes the discontinuance of the business as a going concern.

 

    The single period capitalization method is most appropriate when a company’s current and historical operations can reasonably be considered indicative of its future operations. The compensation committee determined that, since we are planning for higher annual growth than shown by our current and historical results, this method will not produce a value indicative of our growing company.

 

    The excess earnings method estimates the value of a company’s intangible assets and assumes that earnings in excess of a reasonable return of the net tangible assets are a product of a company’s intangible assets. The compensation committee deemed this method not to be a meaningful indication of value for the same reasons it rejected the single period capitalization method and also because our actual investment in net tangible assets is minimal.

 

    The comparative transaction method derives indications of fair value from actual merger and acquisition transactions in the markets. The purchase prices in merger and acquisition transactions may be a better reflection of investment value than fair value of a target. Given the stage of our growth, the compensation committee determined a comparative transaction would not adequately reflect our value.

 

   

The capital market method seeks valuation guidance from prices paid by shareholders for similarly situated publicly traded companies. With the capital market method, the compensation committee

 

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would determine an appropriate multiple to apply to our financial measures by dividing the price of a guideline company’s stock and, in some instances, the value of all invested capital, by some relative economic variable observed or calculated from such company’s financial statement. Given the stage of our growth, the compensation committee determined the application of value metrics fails to capture value that we have created but that has not yet been reflected in our operating results.

 

    The discounted cash flow method is based on the assumed returns from a company’s assets, and converts this into an enterprise value. The present value of a stream of benefits is obtained by a discount rate that takes into account a company’s stage of development and risks involved. The compensation committee deemed this method not suitable in the instant case due to our then-recent transactions involving the sale of our securities.

In light of our placement and sale of Series F preferred stock in December 2016, the compensation committee applied the company transaction method, which uses the most recent negotiated arm’s-length transactions involving the sale or transfer of stock or other equity interests. In applying the company transaction method, the compensation committee used the option-pricing model, or OPM, under which shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The values of preferred stock and common stock are inferred by analyzing these options.

Under the company transaction method, the compensation committee analyzed equity value in the context of both an initial public offering and a sale or merger of our company. Using the OPM and the post-money value of the Series F preferred stock, it was possible to determine the implied equity value for all classes of stock. In applying the OPM, the compensation committee relied on the equity value of our company based upon the Series F preferred stock investment, which was completed at a price of $2.50 per share. This value was then used to determine the implied Class A common stock value using the OPM, considering (a) the applicable conversion rate of 0.3333 shares of Class A common stock for each share of Series F preferred stock and (b) the claims of the various classes of equity securities. The compensation committee then applied a discount for lack of marketability to obtain the value of Class A common stock on a minority/marketable basis. The assumptions used in calculating the fair value of option grants in 2016 were a risk-free rate based on the weighted average of the one year and two year Treasury Constant Maturity Rates, expected expiration at 1.25 years from the valuation date, and expected volatility estimated at 45%. These assumptions represented the best estimates of management and the compensation committee, but the estimates necessarily involve inherent uncertainties and the application of judgment.

Based on the foregoing, the compensation committee determined the fair value of Class A common stock for financial reporting purposes to be $2.28 as of December 28, 2016. As a result, the exercise price of $3.00 of the stock options granted on December 28, 2016 exceeded the fair value of Class A common stock on that date.

On March 9, 2017, the compensation committee of the board of directors considered the fair value of the common stock. In considering the fair value, the compensation committee took into account the methodologies, approaches and assumptions provided by the Practice Aid. In accordance with the Practice Aid, the compensation committee considered the various methods for allocating the enterprise value across the classes and series of capital stock to determine the fair value of our common stock at each valuation date. Consistent with its process and analysis on December 28, 2016, the compensation committee considered, but did not use, the liquidation value, single period capitalization, excess earnings, comparative transaction, capital market and discounted cash flow methods. The compensation committee determined that the terms of a share purchase agreement being negotiated and discussed at arm’s length in March 2017 and involving the transfer of Class A common stock provided the best evidence of the fair value of the Class A common stock. In the transaction, we expected to issue, and ultimately issued, 133,334 shares of Class A common stock at a purchase price of $7.50 per share. Because this direct evidence of the fair value of the Class A common stock was available, the compensation committee did not need to apply the company transaction method.

 

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Based on the foregoing, the compensation committee determined the fair value of Class A common stock for financial reporting purposes to be $7.50 as of March 9, 2017. As a result, the exercise price of $7.50 of the stock option granted on March 9, 2017 equaled the fair value of Class A common stock on that date.

On May 9, 2017, the compensation committee of the board of directors considered the fair value of the common stock. In considering the fair value, the compensation committee took into account the methodologies, approaches and assumptions provided by the Practice Aid. In accordance with the Practice Aid, the compensation committee considered the various methods for allocating the enterprise value across the classes and series of capital stock to determine the fair value of our common stock at each valuation date. Consistent with its process and analysis on December 28, 2016 and March 9, 2017, the compensation committee considered, but did not use, the liquidation value, single period capitalization, excess earnings, comparative transaction, capital market and discounted cash flow methods. The compensation committee determined that the terms of the share purchase agreement considered in connection with the option grants on March 9, 2017, but still being negotiated as of May 9, 2017, provided the best evidence of the fair value of the Class A common stock. Pursuant to this proposed agreement, we continued to contemplate the issuance and sale of 133,334 shares of Class A common stock at a purchase price of $7.50 per share. Because this direct evidence of the fair value of the Class A common stock was available, the compensation committee did not need to apply the company transaction method.

Based on the foregoing, the compensation committee determined the fair value of Class A common stock for financial reporting purposes to be $7.50 as of May 9, 2017. As a result, the exercise price of $7.50 of the stock option granted on May 9, 2017 equaled the fair value of Class A common stock on that date.

Inventory

Inventories consist of finished goods, raw materials, work-in-process and consumable materials. Finished goods are comprised of direct materials, direct labor, depreciation and manufacturing overhead. Inventory is stated at the lower of cost and net recognizable value of the inventory at June 30, 2017 and at the lower of cost and market value of the inventory at December 31, 2016 and 2015. The cost of a general inventory item is determined using the weighted average method. The cost of an inventory item purchased specifically for a customized tool is determined using the specific identification method. Market value is determined as the lower of replacement cost and net realizable value, which is the estimated selling price, in the ordinary course of business, less estimated costs to complete or dispose.

We assess the recoverability of all inventories quarterly to determine if any adjustments are required. We write down excess or obsolete tool-related inventory based on management’s analysis of inventory levels and forecasted 12-month demand and technological obsolescence and spare parts inventory based on forecasted usage. These factors are affected by market and economic conditions, technology changes, new product introductions and changes in strategic direction, and they require estimates that may include uncertain elements. Actual demand may differ from forecasted demand, and those differences may have a material effect on recorded inventory values.

Our manufacturing overhead standards for product costs are calculated assuming full absorption of forecasted spending over projected volumes, adjusted for excess capacity. Abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and spoilage are recognized as current period charges.

Allowance for Doubtful Accounts

Accounts receivable are reflected in our consolidated balance sheets at their estimated collectible amounts. A substantial majority of our accounts receivable are derived from sales to large multinational semiconductor manufacturers in Asia. We follow the allowance method of recognizing uncollectible accounts receivable, pursuant to which we regularly assess our ability to collect outstanding customer invoices and make estimates of the collectability of accounts receivable. We provide an allowance for doubtful accounts when we determine that the collection of an outstanding customer receivable is not probable. The allowance for doubtful accounts is reviewed

 

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on a quarterly basis to assess the adequacy of the allowance. We take into consideration (a) accounts receivable and historical bad debts experience, (b) any circumstances of which we are aware of a customer’s inability to meet its financial obligations, (c) changes in our customer payment history, and (d) our judgments as to prevailing economic conditions in the industry and the impact of those conditions on our customers. If circumstances change, such that the financial conditions of our customers are adversely affected and they are unable to meet their financial obligations to us, we may need to record additional allowances, which would result in a reduction of our net income.

Deferred Initial Public Offering Costs

Direct costs attributable to this offering have been deferred and recorded in other current assets and will be offset against the gross proceeds received from this offering. At June 30, 2017 and December 30, 2016 and 2015, deferred costs attributable to this offering were $797,000, $41,000 and $0, respectively.

Property, Plant and Equipment

Assets comprising property, plant and equipment are recorded at cost. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets and begins when the assets are placed in service. Betterments or renewals are capitalized when incurred. Maintenance and repairs with respect to an asset are expensed as incurred if they neither materially add to the value of the asset nor appreciably prolong its life. Assets comprising plant, property and equipment are reviewed each year to determine whether any events or circumstances indicate that the carrying amount of the asset may not be recoverable.

Intangible Assets

Intangible assets represent the fair value of separately recognizable intangible assets acquired in connection with our business operations. We evaluate intangibles for impairment on an annual basis or whenever events or circumstances indicate that an impairment may have occurred.

Valuation of Long-Lived Assets

Long-lived assets are evaluated for impairment whenever events or changes in circumstance indicate that the carrying value of an asset may not be fully recoverable or that the useful life is shorter than we had originally estimated. When these events or changes occur, we evaluate the impairment of the long-lived assets by comparing the carrying value of the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their eventual disposition. If the sum of the expected future undiscounted cash flow is less than the carrying value of the assets, we recognize an impairment loss based on the excess of the carrying value over the fair value. No impairment charge was recognized in 2015, 2016 and the six months ended June 30, 2017.

Income Taxes

Income taxes are accounted for using the liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance would be provided for the deferred tax assets if it is more likely than not that the related benefit will not be realized.

On a quarterly basis, we provide income tax provisions based upon an estimated annual effective income tax rate. The effective tax rate is highly dependent upon the geographic composition of worldwide earnings, tax regulations governing each region, availability of tax credits and the effectiveness of our tax planning strategies. We carefully monitor the changes in many factors and adjust our effective income tax rate on a timely basis. If actual results differ from these estimates, this could have a material effect on our financial condition and results of operations.

 

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We maintained a partial valuation allowance as of December 31, 2016 with respect to certain net deferred tax assets based on our estimates of recoverability. We determined that the partial valuation allowance was appropriate given our historical operating losses and uncertainty with respect to our ability to generate profits from our business model sufficient to take advantage of the deferred tax assets in all applicable tax jurisdictions.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. In accordance with the authoritative guidance on accounting for uncertainty in income taxes, we recognize liabilities for uncertain tax positions based on the two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained in audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than fifty-percent likely of being realized upon ultimate settlement. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any change in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.

Interest and penalties related to uncertain tax positions are recorded in the provision for income tax expense on the consolidated statements of operations.

Foreign Currency Translation

Our consolidated financial statements are presented in U.S. dollars, which is our reporting currency, while the functional currency of our subsidiaries in the PRC is RMB. Transactions in foreign currencies are initially recorded at the functional currency rate prevailing at the date of the transactions. Any difference between the initially recorded amount and the settlement amount is recorded as a gain or loss on foreign currency transaction in our consolidated statements of operations. Monetary assets and liabilities denominated in a foreign currency are translated at the functional currency rate of exchange as of the date of a consolidated balance sheet. Any difference is recorded as a gain or loss on foreign currency translation in the appropriate consolidated statement of operations. In accordance with the FASB’s ASC Topic 830, Foreign Currency Matters, we translate the assets and liabilities into U.S. dollars from RMB using the rate of exchange prevailing at the applicable balance sheet date and the consolidated statements of operations and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation are recorded in stockholders’ equity as part of accumulated other comprehensive income.

The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. To date these restrictions have not had a material impact on us because we have not engaged in any significant transactions that are subject to the restrictions.

Warranty

We have provided warranty coverage on our tools for 12 to 36 months, covering labor and parts necessary to repair a tool during the warranty period. We account for the estimated warranty cost as sales and marketing expense at the time revenue is recognized. Warranty obligations are affected by historical failure rates and associated replacement costs. Utilizing historical warranty cost records, we calculate a rate of warranty expenses to revenue to determine the estimated warranty charge. We update these estimated charges on a regular basis. The actual product performance and field expense profiles may differ, and in those cases we adjust our warranty accruals accordingly.

Recent Accounting Pronouncements

The following description summarizes recent accounting pronouncements that we have adopted or will be required to adopt in the future.

 

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In July 2017 the FASB issued Accounting Standards Update (“ASU”) ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. We are currently evaluating the impact of adoption of ASU 2017-11.

In May 2017 the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance on determining which changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (a) public business entities for reporting periods for which financial statements have not yet been issued and (b) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. We do not expect the adoption of ASU No. 2017-09 to have a material impact on our consolidated financial statements.

In February 2017 the FASB issued ASU No. 2017-05, Other Income —Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope of nonfinancial asset guidance in Subtopic 610-20. This ASU also clarifies that derecognition of all businesses and nonprofit activities (except those related to conveyances of oil and gas mineral rights or contracts with customers) should be accounted for in accordance with the derecognition and deconsolidation guidance in Subtopic 810-10. The amendments in this ASU also provide guidance on the accounting for so-called “partial sales” of nonfinancial assets within the scope of Subtopic 610-20 and contributions of nonfinancial assets to a joint venture or other noncontrolled investee. The amendments in this ASU are effective for annual reporting reports beginning after December 15, 2017, including interim reporting periods within that reporting period. We do not expect the adoption of ASU No. 2017-05 to have a material impact on our consolidated financial statements.

In January 2017 the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, 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. The new guidance does not amend the optional qualitative assessment of goodwill impairment. A business entity that is a U.S. Securities and Exchange Commission filer must adopt the amendments in this ASU for its annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of ASU No. 2016-18 to have a material impact on our consolidated financial statements.

In November 2016 the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash

 

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equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU do not provide a definition of restricted cash or restricted cash equivalents. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of the adoption of ASU No. 2016-18 on our consolidated financial statements.

In August 2016 the FASB issued Accounting Standards Update, or ASU, No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses the following cash flow issues: (a) debt prepayment or debt extinguishment costs; (b) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (c) contingent consideration payments made after a business combination; (d) proceeds from the settlement of insurance claims; (e) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (f) distributions received from equity method investees; (g) beneficial interests in securitization transactions; and (h) separately identifiable cash flows and application of the predominance principle. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years and are effective for all other entities for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of the adoption of ASU No. 2016-15 on our consolidated financial statements.

In April 2016 the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee stock-based payment transactions. The areas for simplification in ASU No. 2016-09 include the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU will be effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The adoption of ASU No. 2016-09 did not have a material impact on our consolidated financial statements.

In February 2016 the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this update 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 leases 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. The amendments in ASU No. 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Early application of the amendments in ASU No. 2016-02 is permitted. We are currently evaluating the impact of the adoption of ASU No. 2016-02 on our consolidated financial statements.

In November 2015 the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Topic 740, Income Taxes, requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. To simplify the presentation of deferred income taxes, the amendments in ASU No. 2015-17 require that deferred income tax

 

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liabilities and assets be classified as noncurrent in a classified statement of financial position. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of ASU No. 2015-17 did not have a material impact on our consolidated financial statements.

In July 2015 the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this update require an entity to measure inventory within the scope of ASU No. 2015-11 (the amendments in ASU No. 2015-11 do not apply to inventory that is measured using last-in, first-out or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out or average cost) at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is uncharged for inventory measured using last-in, first-out or the retail inventory method. The amendments in ASU No. 2015-11 more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards. ASU No. 2015-11 is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in ASU No. 2015-11 should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of ASU No. 2015-11 did not have a material impact on our consolidated financial statements. The relevant descriptions have been included in the inventory accounting policy.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern. The amendments in this update require management to evaluate whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern for both annual and interim reporting. The guidance is effective for us for the annual period ended after December 15, 2016 and interim periods thereafter. Management performed an evaluation of the our ability to fund operations and to continue as a going concern according to ASC Topic 205-40, Presentation of Financial Statements—Going Concern. The adoption of ASU No. 2014-15 did not have a material impact on our consolidated financial statements.

In May 2014 the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which ASU No. 2014-09 supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, in August 2015. The amendments in ASU No. 2015-14 defer the effective date of ASU No. 2014-09. Public business entities, certain not-for-profit entities and certain employee benefit plans should apply the guidance in ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Further to ASU No. 2014-09 and ASU No. 2015-14, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), in March 2016, ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing in April 2016, ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, respectively. The amendments in ASU No. 2016-08 clarify the implementation guidance on principal versus agent considerations, including indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. ASU No. 2016-10 clarifies guideline related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The updates in ASU No. 2016-10 include targeted improvements based on input the FASB received from the Transition Resource Group for Revenue Recognition and other stakeholders. It seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity

 

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of applying certain aspects of the guidance both at implementation and on an ongoing basis. ASU No. 2016-12 addresses narrow-scope improvements to the guidance on collectability, non-cash consideration and completed contracts at transition. Additionally, the amendments in this ASU provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The amendments in ASU No. 2016-20 represent changes to make minor corrections or minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The effective date and transition requirements for ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20 are the same as ASU No. 2014-09. We will adopt ASU No. 2014-09, ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20 at January 1, 2018 if this offering is completed by December 31, 2017. We are currently in the process of assessing the potential effects of these ASUs on our consolidated financial statements, business processes, systems and controls. While the assessment process is ongoing, we anticipate adopting ASC Topic 606, Revenue from Contracts with Customers, using the modified retrospective transition approach. Under this approach, ASC Topic 606 would apply to all new contracts initiated on or after January 1, 2018. For existing contracts that have remaining obligations as of January 1, 2018, any difference between the recognition criteria in these ASUs and our current revenue recognition practices would be recognized using a cumulative effect adjustment to the opening balance of accumulated deficit. We do not expect the adoption of these ASUs to have a material impact on our consolidated financial statements.

Results of Operations

The following table sets forth our results of operations for the periods presented, as percentages of revenue.

 

     Six Months Ended
June 30,
    Year Ended
December 31,
 
     2017     2016     2016     2015  
     (percentage of revenue)  

Revenue

     100.0     100.0     100.0     100.0

Cost of revenue

     59.4       65.2       51.3       54.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     40.6       34.8       48.7       45.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Sales and marketing

     17.9       22.4       14.3       13.5  

Research and development

     13.0       18.3       11.9       9.4  

General and administrative

     21.9       13.4       9.7       6.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses, net

     52.8       54.1       35.9       29.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (12.2     (19.3     12.8       15.6  

Interest expense, net

     (1.1     (0.6     (0.6     (0.3

Other income (expense), net

     (2.0     6.2       (1.3     2.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (15.3     (13.7     10.9       17.3  

Income tax (expense) benefit

     (5.2     0.9       (2.2     8.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (20.5     (12.8     8.7       25.4  

Less: Net income (loss) attributable to non-controlling interests

     (1.4     (5.9     4.9       8.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ACM Research, Inc.

     (19.1 )%      (6.9 )%      3.8     17.2
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Comparison of Six Months Ended June 30, 2017 and 2016

Revenue

 

     Six Months Ended
June 30,
     % Change  
     2017      2016      2016 v 2017  
     (in thousands)         

Revenue

   $ 14,423      $ 8,122        77.6

The increase in revenue of $6.3 million in the six months ended June 30, 2017 reflected increases in revenue from single-wafer cleaning equipment of $5.0 million and from advanced packing equipment of $1.1 million. Our revenue in the six months ended June 30, 2017 compared to the corresponding period of 2016 reflected sales of $4.5 million to two new customers and an increase of $1.8 million in sales to existing customers.

Cost of Revenue and Gross Margin

 

     Six Months Ended
June 30,
    % Change  
     2017     2016     2016 v 2017  
     (in thousands)        

Cost of revenue

   $ 8,570     $ 5,292       61.9

Gross profit

   $ 5,853     $ 2,830       106.8  

Gross margin

     40.6     34.8     16.5  

Cost of revenue increased $3.3 million, and gross profit increased $3.0 million, from the six months ended June 30, 2016 to the comparable period in 2017, reflecting the growth in sales. Gross margin increased 5.8%, primarily due to sales of relatively lower-margin tools to new customers during the six months ended June 30, 2017.

Operating Expenses

 

     Six Months Ended
June 30,
     % Change  
     2017      2016      2016 v 2017  
     (in thousands)         

Sales and marketing expense

   $ 2,583      $ 1,818        42.1

Research and development expense

     1,867        1,486        25.6  

General and administrative expense

     3,158        1,089        190.0  
  

 

 

    

 

 

    

Total operating expenses, net

   $ 7,608      $ 4,393        73.2
  

 

 

    

 

 

    

Sales and marketing expense increased $765,000 in the six months ended June 30, 2017 as compared to the corresponding period in 2016, primarily due to an increase in employee salaries and sales services.

Research and development expense increased $381,000 in the six months ended June 30, 2017 as compared to the corresponding period in 2016, principally as a result of increases of in employee salaries and research and development parts. Research and development expense represented 12.9% and 18.3% of our revenue in the six months ended June 30, 2017 and 2016, respectively. Without reduction by grant amounts received from PRC governmental authorities (see “—Key Components of Results of Operations—PRC Government Research and Development Funding”), gross research and development expense totaled $5.0 million, or 34.8% of revenue, in the six months ended June 30, 2017 and $3.5 million, or 42.6% of revenue, in the six months ended June 30, 2016.

 

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General and administrative expense increased $2.1 million in the six months ended June 30, 2017 as compared to the corresponding period in 2016, principally resulting from preparations to become a public company. These costs reflected increases of $1.1 million in stock compensation expense, $511,000 in professional fees, $90,000 in consulting fees, $80,000 in personnel costs and $75,000 in tax expense.

Other Income and Expenses

 

     Six Months Ended
June 30,
     % Change  
     2017      2016      2016 v 2017  
     (in thousands)         

Interest expense, net

   $ (159    $ (45      253.3

Other income (expense), net

     (292      506        (157.7

Interest expense consists of interest incurred from outstanding short-term borrowings and notes payable. Interest expense increased to $164,000 in the six months ended June 30, 2017 from $51,000 in the six months ended June 30, 2016, principally as a result of increased borrowings under short-term bank loans. We earn interest income from depositary accounts. Interest income was nominal in the six months ended June 30, 2017 and 2016.

Other income, net primarily reflects (a) gains or losses recognized from the effect of exchange rates on our foreign currency-denominated asset and liability balances, (b) depreciation of assets acquired with government subsidies, as described under “—Key Components of Results of Operations—PRC Government Research and Development Funding” above, and (c) losses we recognized upon dispositions of fixed assets.

Income Tax (Expense) Benefit

The following presents components of income tax (expense) benefit for the indicated periods:

 

     Six Months Ended
June 30,
 
     2017      2016  
     (in thousands)  

Current:

     

U.S. federal

   $ —        $ —    

U.S. state

     —          —    

Foreign

     —          —    
  

 

 

    

 

 

 

Total current income tax (expense) benefit

     —          —    
  

 

 

    

 

 

 

Deferred:

     

U.S. federal

     —          —    

U.S. state

     —          —    

Foreign

     (749      73  
  

 

 

    

 

 

 

Total deferred income tax (expense) benefit

     (749      73  
  

 

 

    

 

 

 

Total income tax (expense) benefit

   $ (749    $ 73  
  

 

 

    

 

 

 

Our effective tax rate differs from statutory rates of 34% for U.S. federal income tax purposes and 15% to 25% for Chinese income tax purpose due to the effects of the valuation allowance and certain permanent differences as it pertains to book-tax differences in the value of client equity securities received for services. Our two PRC subsidiaries, ACM Shanghai and ACM Wuxi, are liable for PRC corporate income taxes at the rates of 15% and 25%, respectively. Pursuant to the Corporate Income Tax Law of the PRC, our PRC subsidiaries generally would be liable for PRC corporate income taxes as a rate of 25%. According to Guoshuihan 2009 No. 203, an entity certified as an “advanced and new technology enterprise” is entitled to a preferential income

 

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tax rate of 15%. ACM Shanghai was certified as an “advanced and new technology enterprise” in 2012 and again in 2016, with an effective period of three years.

We file income tax returns in the United States and state and foreign jurisdictions. Those federal, state and foreign income tax returns are under the statute of limitations subject to tax examinations for 2009 through 2016. To the extent we have tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state or foreign tax authorities to the extent utilized in a future period.

We intend to reinvest indefinitely our PRC earnings as of June 30, 2017 outside of the United States, and we therefore have not provided for taxes with respect to the remissions of such earnings from the PRC to the United States.

Comparison of Years Ended 2016 and 2015

Revenue

 

     Year Ended
December 31,
     % Change  
     2016      2015      2015 v 2016  
     (in thousands)         

Revenue

   $ 27,371      $ 31,206        (12.3 )% 

The decrease in revenue in 2016 from 2015 reflected a decline in revenue from single-wafer wet cleaning equipment of $5.4 million, offset in part by a $1.5 million increase in revenue from advanced packaging equipment. Our revenue in 2016 compared to 2015 reflected a $20.2 million reduction in sales, from $26.8 million in 2015 to $6.6 million in 2016, to our largest customer in 2015, offset in part by (a) a $1.3 million increase from 2015 to 2016 in purchases by our second largest customer in 2015 and (b) $16.1 million in revenue in 2016 from initial purchases of our single-wafer wet cleaning equipment by two PRC foundries. Chip fabricators typically purchase types of tools in phases based on multi-year capital plans, and their purchases of specific types of tools therefore vary from year to year. We believe the decline in sales to our largest customer from 2015 to 2016 reflected the customer’s multi-year capital plan.

Cost of Revenue and Gross Margin

 

     Year Ended
December 31,
    % of Change  
     2016     2015     2015 v 2016  
     (in thousands)        

Cost of revenue

   $ 14,042     $ 17,085       (17.8 )% 

Gross profit

   $ 13,329     $ 14,121       (5.6

Gross margin

     48.7     45.3     7.6

Cost of revenue decreased $3.0 million in 2016 from 2015, primarily due to decreases in component costs related to lower volume Gross margin increased 3.4%, reflecting a relative increase in sales of higher-margin products.

 

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Operating Expenses

 

     Year Ended
December 31,
     % Change  
     2016      2015      2015 v 2016  
     (in thousands)         

Sales and marketing expense

   $ 3,907      $ 4,213        (7.3 )% 

Research and development expense

     3,259        2,942        10.8  

General and administrative expense

     2,673        2,103        27.1  
  

 

 

    

 

 

    

Total operating expenses, net

   $ 9,839      $ 9,258        6.3  
  

 

 

    

 

 

    

Sales and marketing expense decreased $306,000 in 2016 compared to 2015, primarily due to a decrease of $520,000 in sales commissions reflecting our lower level of sales in 2016, offset in part by a $385,000 increase in consulting fees.

Research and development expense increased $317,000 in 2016 from 2015, principally as a result of increases of $147,000 in personnel costs, $104,000 in material consumption expense and $57,000 in travel expense. Research and development expense represented 11.9% of revenue in 2016 and 9.4% of revenue in 2015. Without reduction by grant amounts received from PRC governmental authorities (see “—Key Components of Results of Operations—PRC Government Research and Development Funding”), gross research and development expense totaled $7.5 million, or 27.4% of revenue, in 2016 and $6.6 million, or 21.1% of revenue, in 2015.

General and administrative expense increased $571,000 in 2016 compared to 2015, principally resulting from preparations to become a public company. These costs reflected increases of $321,000 in professional fees, $84,000 in personnel costs and $77,000 in travel expense.

Other Income and Expenses

 

     Year Ended
December 31,
     % Change  
       2016          2015        2015 v 2016  
     (in thousands)         

Interest expense, net

   $ (165    $ (105      57.1

Other income, net

     (343      632        (154.3

Interest expense consists of interest incurred from outstanding short-term borrowings and notes payable. Interest expense increased to $181,000 in 2016 from $122,000 in 2015, principally as a result of increased borrowings under short-term bank loans. We earn interest income from depositary accounts. Interest income totaled $16,000 in 2016 and $17,000 in 2015.

 

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Income Tax Benefit (Expense)

The following presents components of income tax benefit (expense) for the indicated periods:

 

     Year Ended
December 31,
 
       2016          2015    
     (in thousands)  

Current:

     

U.S. federal

   $ —          (40

U.S. state

     (1      30  

Foreign

     —          —    
  

 

 

    

 

 

 

Total current income tax benefit (expense)

     (1      (10
  

 

 

    

 

 

 

Deferred:

     

U.S. federal

     —          —    

U.S. state

     —          —    

Foreign

     (594      2,535  
  

 

 

    

 

 

 

Total deferred income tax benefit

     (594      2,535  
  

 

 

    

 

 

 

Total income tax benefit

   $ (595    $ 2,525  
  

 

 

    

 

 

 

Our effective tax rate differs from statutory rates of 34% for U.S. federal income tax purposes and 15% to 25% for PRC income tax purposes, due to the effects of the valuation allowance and permanent book-tax differences pertaining to the value of client equity securities received for services.

Liquidity and Capital Resources

Initially we funded our operations principally through issuances of four series of convertible preferred stock from our formation in 1998 through 2001 and issuances of convertible and term promissory notes in 2003 and 2004. We issued additional convertible and term promissory notes in 2005 and 2006 in anticipation of moving our operational center to Shanghai in 2006, and following that transition, our new subsidiary ACM Shanghai initially raised funds through sales of its non-controlling equity interests in 2007. Since 2008 we have funded our technology development and operations through:

 

    issuances of two additional series of convertible preferred stock in 2016 and the third quarter of 2017;

 

    an investment deposit in 2016 made in connection with issuance of a Class A common stock warrant in March 2017;

 

    additional issuances of ACM Shanghai equity interests in 2008 and 2009;

 

    subsidies received from PRC governmental authorities pursuant to grants made in 2008, 2009 and 2014;

 

    short-term borrowings by ACM Shanghai from local financial institutions in 2009 and each year since 2011;

 

    additional issuances of term promissory notes in 2013, 2014 and 2015; and

 

    operating cash flow in 2015 and the first half of 2017.

We believe our existing cash and cash equivalents, our cash flow from operating activities, short-term bank borrowings by ACM Shanghai and our net proceeds of this offering will be sufficient to meet our anticipated cash needs for at least the next twelve months. We do not expect that our anticipated cash needs for the next twelve months will require our receipt of any PRC government subsidies. Our future working capital needs will depend on many factors, including the rate of our business and revenue growth, the payment schedules of our

 

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customers, and the timing of investment in our research and development as well as sales and marketing. To the extent our cash and cash equivalents, cash flow from operating activities, short-term bank borrowings and net proceeds of this offering are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private debt or equity financings. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies and products. If additional funding is required, we may not be able to obtain bank credit arrangements or to effect an equity or debt financing on terms acceptable to us or at all.

Sources of Funds

Equity and Equity-Related Securities

Since 1998 we have received gross proceeds of $41.9 million from sales of common stock, convertible preferred stock, convertible preferred notes and a warrant of ACM Research Inc. and sales of equity securities of ACM Shanghai, as described below.

Common Stock. From 1998 through September 11, 2017 we sold common stock to founders, investors and exercising option holders for gross proceeds of $2.7 million.

Convertible Preferred Stock. We have sold convertible preferred stock to investors for gross proceeds of $23.7 million, as follows:

 

Year Issued

  

Convertible Preferred Stock

    

Gross Proceeds

 
            (in thousands)  
1998      Series A      $ 288  
1998      Series B        1,572  
1999      Series C        2,041  
2001      Series D        4,975  
2016      Series F        9,040  
2017      Series E        5,800  
     

 

 

 
      $ 23,716  
     

 

 

 

Convertible Promissory Notes. In the years following our issuance of Series D convertible preferred stock in 2001, we borrowed an aggregate of $1.6 million pursuant to promissory “bridge” notes that bore interest at the rate of 6% per annum and subsequently converted into equity securities.

 

Year Issued

  

Gross Proceeds

 
     (in thousands)  
2003    $ 444  
2004      292  
2005      200  
2006      616  
  

 

 

 
   $ 1,552  
  

 

 

 

The convertible promissory notes were issued with common stock warrants, all of which expired unexercised. Upon the closing of our issuance of Series F convertible preferred stock in December 2016, the outstanding convertible promissory notes converted into 47,454 shares of Series F convertible preferred stock and 1,812,069 shares of Class A common stock.

 

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ACM Shanghai Equity. Three investors have paid a total of $11.0 million to purchase from ACM Shanghai equity interests currently representing 37.1% of ACM Shanghai’s outstanding equity.

 

Year Issued

   Gross Proceeds  
     (in thousands)  
2007    $ 5,252  
2008      2,358  
2009      3,365  
  

 

 

 
   $ 10,975  
  

 

 

 

We have entered into agreements with the three minority investors pursuant to which ACM Research expects to acquire, before the closing of this offering, all of the minority equity interests in ACM Shanghai, as described under “—Recent Equity Transactions—Acquisitions of Outstanding Minority Interests in Our Operating Company.”

Warrant. In December 2016 SMC delivered to ACM Shanghai 20,123,500 RMB (approximately $3.0 million as of the date of funding) in cash for potential investment pursuant to terms to be subsequently negotiated. In March 2017 we issued to SMC a warrant exercisable to purchase 397,502 shares of Class A common stock at a price of $7.50 per share, for a total exercise price of approximately $3.0 million. ACM Shanghai may become obligated to repay to SMC an amount equal to approximately $3.0 million in the circumstances described under “—Recent Equity Transactions—Issuance of Warrant.”

Indebtedness

Promissory Notes. From 2003 through 2014 we borrowed an aggregate of $888,000 pursuant to non-convertible term notes as well as from convertible promissory notes that were repaid in cash. All of these notes bore interest at a rate of 6% per annum.

 

Date Issued

   Gross Proceeds  
     (in thousands)  
2003    $ 98  
2004      162  
2006      468  
2013      100  
2014      60  
  

 

 

 
   $ 888  
  

 

 

 

ACM Shanghai Short-Term Loan Facilities. ACM Shanghai is a party to two lines of credit with Bank of Shanghai Pudong Branch for a total of up to RMB9,558,750 ($1,470,665 as of September 11, 2017), under which $1.4 million was outstanding as of September 11, 2017, with an annual interest rate of 5.66% and maturity dates in September and October 2017. All of the amounts owing under the lines of credit are guaranteed by David Wang, our Chief Executive Officer and President and one of our directors. We currently are negotiating with Bank of Shanghai Pudong Branch for a line of credit agreement for a total of up to RMB25,000,000 ($3,846,331 as of September 11, 2017) that would be entered into before, or contemporaneously with, the expiration of the existing line that matures in September 2017. The new line of credit agreement will replace both of the existing facilities.

Cash Flow from Operating Activities

As we initiated and grew our business from our inception in 1998 through 2014, in 2016 and in the first half of 2017, our operating activities used cash flow. Our operations provided cash flow of $2.7 million in 2015, and

 

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used cash flow of $3.7 million in 2016 and provided cash flow of $3.0 million in the first half of 2017. Our cash flow from operating activities is influenced by (a) the amount of cash we invest in personnel and technology development to support anticipated future growth in our business, (b) increases in the number of customers using our products and services, and (c) the amount and timing of payments by customers.

Government Research and Development Grants

As described under “—Key Components of Results of Operations—PRC Government Research and Development Funding,” ACM Shanghai has received research and development grants from local and central PRC governmental authorities.

 

Award Date

   Grant Amount  
     (in thousands)  

2007-2010

   $ 4,288  

2011

     6,334  

2012

     3,278  

2013

     2,442  

2014

     6,256  

2015

     6,579  

2016

     6,620  

2017 (through August 15)

     2,387  
  

 

 

 
   $ 38,184  
  

 

 

 

Not all grant amounts are received in the year in which a grant is awarded. As of August 15, 2017, ACM Shanghai expected to receive an additional $2.9 million in the future. We currently estimate ACM Shanghai will receive between $1.6 and $2.7 million in 2017, $2.4 million of which had been received as of August 15, 2017. Because of the nature and terms of the grants, the amounts and timing of payments under the grants are difficult to predict and vary from period to period. In addition, we expect to apply for additional grants when available in the future, but the grant application process can extend for a significant period of time and we cannot predict whether, or when, we will determine to apply for any such grants.

Working Capital

The following table sets forth selected working capital information:

 

     June 30,
2017
 
     (in thousands)  

Cash and cash equivalents

   $ 13,206  

Accounts receivable, less allowance for doubtful amounts

     12,310  

Inventory

     14,106  

Working capital

     23,433  

Our cash and cash equivalents at June 30, 2017 were unrestricted and held for working capital purposes. ACM Shanghai, our only direct PRC subsidiary, is, however, subject to PRC restrictions on distributions to equity holders. We currently intend for ACM Shanghai to retain all available funds any future earnings for use in the operation of its business and do not anticipate its paying any cash dividends. See “Dividend Policy.”

We have not entered into, and do not expect to enter into, investments for trading or speculative purposes.

Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating activities. Fluctuations vary depending on cash collections, client mix, and the timing of shipment and acceptance of our tools.

 

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Uses of Funds

Capital Expenditures

Our capital expenditures totaled $795,000 in 2016. Substantially all of the capital expenditures were made to purchase equipment or improve infrastructure for our research and development and manufacturing facilities.

During 2017 we are continuing to invest in equipment and infrastructure improvements for our manufacturing and research and development facilities and, to a lesser extent, leasehold improvements for our administrative facilities. The extent of these investments may be affected by the pace with which we add new customers and obtain additional purchase orders. Our capital expenditures totaled $26,000 in the six months ended June 30, 2017. We are not currently party to any purchase contracts related to future capital expenditures.

Contractual Obligations and Requirements

The following table sets forth sets forth our commitments to settle contractual obligations as of December 31, 2016:

 

     Less than
1 Year
     1 to 3
Years
     3 to 5
Years
     More than
5 Years
     Total  
     (in thousands)  

Operating leases:

   $ 2,538      $ 8      $      $      $ 2,546  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating lease obligations with respect to office space consisted of amounts arising under lease agreements for our headquarters in Fremont, California, our operation center in Shanghai, PRC, and other small regional office locations. For additional information about these lease agreements, see “Business—Facilities.” The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty.

As of June 30, 2017, we did not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in trading activities involving non-exchange traded contracts. We therefore believe we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Effects of Inflation

Inflation and changing prices have not had a material effect on our business, and we do not expect that they will materially affect our business in the foreseeable future. Any impact of inflation on cost of revenue and operating expenses, especially employee compensation costs, may not be readily recoverable in the price of our product offerings.

Off-Balance Sheet Arrangements

As of June 30, 2017, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K of the Securities and Exchange Commission.

Quantitative and Qualitative Disclosures about Market Risks

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in foreign exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.

 

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Foreign Exchange Risk

Although our financial statements are denominated in U.S. dollars, a sizable portion of our revenues and costs are denominated in other currencies, primarily the Renminbi. The Renminbi is not freely convertible into foreign currencies for capital account transactions. The value of the Renminbi against the U.S. dollar and other currencies is affected by changes in the PRC’s political and economic conditions and by the PRC’s foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation subsided and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. To the extent that we need to convert U.S. dollars we received from this offering into Renminbi for our operations or capital expenditures, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our Class A common stock or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

We estimate that we will receive net proceeds from this offering of $         million, if the underwriters do not exercise their over-allotment option, assuming an initial public offering price of $         per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses. Assuming that we convert the full amount of the net proceeds from this offering into Renminbi, a 10% appreciation of the U.S. dollar against Renminbi, from a rate of RMB             to $1.00 to a rate of RMB             to $1.00, will result in an increase of RMB             million in our net proceeds from this offering. Conversely, a 10% depreciation of the U.S. dollar against the Renminbi, from a rate of RMB to $1.00 to a rate of RMB             to $1.00, will result in a decrease of RMB             million in our net proceeds from this offering.

Interest Rate Risk

At June 30, 2017, we had unrestricted cash and cash equivalents totaling $13.2 million. These amounts were held for working capital purposes and were primarily in checking accounts of various banks. We believe we do not have any material exposure to changes in our cash balance as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income.

 

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BUSINESS

Overview

We develop, manufacture and sell single-wafer wet cleaning equipment, which semiconductor manufacturers can use in numerous manufacturing steps to remove particles, contaminants and other random defects, and thereby improve product yield, in fabricating advanced integrated circuits, or chips. Our Ultra C equipment is designed to remove random defects from a wafer surface effectively, without damaging a wafer or its features, even at an increasingly advanced process node (the minimum line width on a chip) of 22 nanometers, or nm, or less. Our equipment is based on our innovative, proprietary Space Alternated Phase Shift, or SAPS, and Timely Energized Bubble Oscillation, or TEBO, technologies. We developed our proprietary technologies to enable manufacturers to produce chips that reach their ultimate physical limitations while maintaining product yield, which is the percentage of chips on a wafer that meet manufacturing specifications.

Since 2007 we have focused our development efforts on developing single-wafer wet cleaning equipment based on differentiated proprietary technology:

 

    Our SAPS technology, which we introduced in 2009, employs alternating phases of megasonic waves to deliver megasonic energy to flat and patterned wafer surfaces 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 45nm, including node sizes, for which jet spray technology has proven to be ineffective.

 

    Our TEBO technology, which we introduced in March 2016, has been developed to provide effective, damage-free cleaning for both conventional two-dimensional, or 2D, and three-dimensional, or 3D, patterned wafers at advanced process nodes. We have demonstrated the damage-free cleaning capabilities of TEBO technology on 3D patterned wafers for feature nodes as small as 16nm.

As of September 11, 2017, we had been issued more than 140 patents in the United States, the People’s Republic of China or the PRC, Japan, Korea, Singapore and Taiwan.

We seek to market our single-wafer wet processing equipment by first establishing a referenceable base of leading logic and memory chip makers, whose use of our products can influence decisions by other manufacturers. Our SAPS technology employs alternating phases of megasonic waves to deliver megasonic energy to flat and patterned wafer surfaces in a highly uniform manner on a microscopic level. We believe this process is helping us penetrate the mature integrated circuit manufacturing markets and build credibility with industry leaders. Since beginning to place evaluation SAPS equipment with a small number of selected customers in 2009, we have worked on equipment improvements and qualification with those customers, who include a leading Korean memory chip company and four leading PRC memory and logic chip foundries. Using a similar “demo-to-sales” process, we have placed TEBO evaluation equipment with a leading PRC foundry and a leading Taiwanese foundry and we recognized revenue from our initial sale of TEBO equipment in 2016. Our revenue from the selected customers’ purchases of single-wafer wet cleaning equipment totaled $10.6 million, or 73.6% of our revenue, in the first half of 2017, $21.5 million, or 78.4% of our total revenue, in 2016 and $26.8 million, or 86.0% of our total revenue, in 2015.

In 2006 we established our operational center in Shanghai, and we currently conduct substantially all of our development and manufacturing activities in the PRC. Our Shanghai operations position us near potential customers in not only the PRC but also Taiwan, Korea and throughout Asia, giving us increased access to those customers and reducing shipping and manufacturing costs for equipment they purchase. We continue to perform strategic planning and marketing activities in our corporate headquarters in Fremont, California, and we intend to increase the personnel and functions at our Fremont headquarters as part of our plan to expand our market presence in North America and Europe.

 

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Industry Background

Semiconductors are the foundation of the exponential growth of digital technologies and applications. For more than thirty years, strong demand for personal computers, tablet computers, mobile phones and other digital products has fueled the growth of the semiconductor industry. Today the migration of computing, networking and storage to the cloud and the proliferation of “smart” appliances, buildings, cars and devices—the “Internet of Things”—are driving semiconductor development and manufacturing. IC Insights, Inc. (March 2016) estimates that worldwide semiconductor shipments grew from 103.7 billion units in 1987 to 840.4 billion units in 2015 and will increase at a compound annual growth rate, or CAGR, of 6.7% to reach 1.0 trillion units in 2018.

Continuing Demand for Faster, Better, Cheaper Chips

New and enhanced digital applications and products have relied on the development and deployment of progressively faster and more powerful—but ever smaller and less costly—semiconductors known as integrated circuits, or chips. A chip is an array of transistors and other circuit elements built on a wafer of substrate material, typically silicon, with wiring and other interconnects that connect the circuit elements to each other and to outside devices. Chips store and manipulate data in binary form, with the two largest categories of integrated circuits being memory chips, for data storage and retrieval, and logic chips, for computer processing and control.

For a half century the number of transistors that can fit in a given area has roughly doubled every two years, a rate of improvement referred to as “Moore’s Law.” Chip feature sizes have been repeatedly scaled down to pack more transistors in smaller chips. The minimum line width on a chip, known as the node, shrank from 30,000nm in 1963 to 1,000nm in 1989, 90nm in 2003 and 14nm in 2014. A chip today may contain more than thirty billion transistors, with features finer than one ten-thousandth of the diameter of a human hair.

In recent years, however, the rate of chip improvement delivered solely by shrinking feature sizes has slowed. At the 22nm node, transistor and interconnect parameters for conventional chips, in which features are arrayed in 2D structures, begin to approach their critical performance limitations. For example, photolithography, a key chip manufacturing process that projects 193nm laser light through masks to print patterns on a wafer surface, may be unable to create patterning with sufficient resolution and selectivity. Moreover, the feature density and power levels of a 22nm chip may require additional circuit elements, such as special circuitry to correct errors or to track and adapt to performance variations, that occupy chip area and increase cost.

In order to extend Moore’s Law, chip designers and manufacturers are developing and implementing technologies and architectures to transition to advanced chips with 3D structures. Logic chip makers are rapidly adopting use of 3D, fin-shaped Fin Field Effect Transistors, or FinFET, which provide faster switching while consuming less power. For memory chip manufacturers, 3D NAND stacks memory cells to deliver greater capacity at lower cost and 3D cross point, a transistor-less memory cell architecture, is being developed to accelerate processing of massive data sets. EUV lithography is a promising manufacturing technology that could improve patterning capability and increase feature density at nodes of 5nm and beyond by extending photolithography to the extreme ultraviolet wavelength of 13.5nm.

Escalating Need for Advanced Chip Manufacturing Equipment

Manufacturing steps differ for logic and memory chips, but all chips are manufactured in two general processes:

 

    In the front-end fabrication process, hundreds of copies of functional circuitry are created on a 100–to 300–millimeter, or mm, silicon wafer over a period of 6 to 8 weeks. A sequence of a few hundred complex, repetitive steps forms transistors, other circuit elements and interconnects on the wafer through the deposit and selective removal of successive material layers, using photolithography to create a design, deposition to add layers of materials, etching to remove unwanted exposed materials, and chemical mechanical planarization or CMP to smooth the surface for the next cycle of process steps.

 

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    In the back-end assembly and testing process, a completed wafer from the front-end process is cut into individual “dies.” Each die is tested against specifications and, if compliant, encapsulated in a package that protects the die and supports critical power and electrical connections. The resulting chip is then subjected to final electrical and reliability tests.

Manufacturing advanced chips at smaller nodes requires a more complex process flow that incorporates enhanced, more expensive capital equipment, or tools, to perform increasingly complex process steps, as well as an increased number of tools to perform a greater number of process steps per wafer. A chip fabrication plant, or fab, may have more than 500 highly specialized tools representing more than 70 categories of equipment, all situated in an environmentally controlled “clean room.” As a result, construction of a new advanced fab can cost between $5 and $10 billion (Semiconductor Industry Association/Nathan Associates, May 2016). Semiconductor Equipment and Materials International or SEMI (August 2016) estimates that worldwide fab tool billings totaled $36.0 billion in 2015 and will reach $41.4 billion by 2017, a CAGR of 7.2%.

Because of the significant capital expenditures and manufacturing expenses, chip makers focus on improving their yield, which is the percentage of chips on a wafer that conform to specifications. Even with use of precision tools in a controlled manufacturing environment, a substantial number of chips may contain defects and be rejected, directly impacting cost-per-chip and profitability. We estimate that a 1% decrease in yield can reduce annual profits by $30 to $50 million for a fab producing dynamic random-access memory, or DRAM, chips on 100,000 wafers per month—and a 1% yield loss may decrease profits even more for a fab making logic chips, which typically have higher prices. Moreover, lower yield may necessitate greater fab capacity, increasing capital expenditures.

New technologies and architectures introduced in transitioning to more advanced nodes can lead to significant yield loss. We believe chip manufacturers with state-of-the-art, established fabs for process nodes of 22nm or more typically target a yield of 90% or more, but yield can drop to as low as 50% when, for example, a manufacturer migrates to chips incorporating FinFET. To reduce yield loss, a manufacturer transitioning to a more advanced node must implement additional fabrication steps and new process capabilities, which in turn require innovative, reliable front-end tool solutions.

Growing Influence of the PRC Across the Semiconductor Industry

The PRC is both the largest and the fastest-growing market for semiconductors. According to a study by PricewaterhouseCoopers (January 2017), during the ten-year period ending in 2015, the PRC’s semiconductor consumption grew at a CAGR of 14.3% while worldwide consumption increased by only 4.0%, and by 2015 the PRC consumed 58.5% of the world’s semiconductors. 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. The PRC has already made significant progress across the principal semiconductor industry sectors, as shown in the following market information compiled by PricewaterhouseCoopers:

 

    The chip design, or “fabless,” industry is the fastest growing segment of the PRC’s semiconductor industry, with revenue increasing from $1.5 billion in 2005 to $21.1 billion in 2015, a CAGR of 30.1%.

 

    China’s share of worldwide semiconductor manufacturing capacity expanded from 7.3% in 2006 to 12.7% in 2015, and its semiconductor manufacturing revenue increased at a CAGR of 17.6% over the ten-year period ending in 2015.

 

    China’s semiconductor packaging, assembly and test revenue also grew at a CAGR of 18% over the ten-year period ending in 2015.

The PRC’s semiconductor tools industry produced less than 0.5% of the world’s semiconductor manufacturing equipment in 2014 (International Trade Association of U.S. Department of Commerce, July 2016). The PRC’s governmental goals anticipate significant growth in all segments of the domestic semiconductor industry, however, and tool manufacturers with a Chinese presence should experience support from both upstream and downstream Chinese companies in the semiconductor supply chain.

 

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Emerging Criticality of Wafer Cleaning

In the chip fabrication process, random defects such as particles, residual chemicals and other contaminants can lead directly to yield loss by distorting images for pattern formation in a lithographic step, obstructing deposition of a film, blocking an etch or otherwise impairing chip performance. Random defects can originate from substrate material, tools, fab personnel, clean room air and nearly every other aspect of the manufacturing process. Shapes and sizes of random defects vary widely, and with each decrease in process node, the dimension of the smallest random defect that can cause a chip to fail, known as the “killer defect” size, shrinks.

Chip fabrication includes steps designed to eliminate random defects without collapsing patterns, causing loss of materials or otherwise damaging features. The number of these steps has increased dramatically with chip complexity. Cleaning is now the most frequently repeated step in chip fabrication and may be performed in as many as 200 steps for each wafer. A sub-optimal cleaning process has repeated opportunities to reduce yield by being either insufficiently forceful, which leaves random defects behind, or overly aggressive, which damages the chip. Over the past decade, fabricators seeking to improve cleaning performance have switched from batch processes, in which several wafers are processed at the same time, to single-wafer cleaning tools.

There are two basic types of cleaning methods. Wet cleaning uses liquid chemistry by applying combinations of solvents, acids and water to spray, scrub, etch and dissolve random defects. Dry cleaning uses gas phase chemistry, relying on chemical reactions and techniques such as lasers, aerosols and ozonated chemistries. Wet cleaning typically outperforms dry cleaning in achieving wafer surface cleanliness and smoothness, and it is the standard method for single-wafer cleaning, constituting more than 90% of the cleaning steps in the fabrication process. RCA clean, a standardized process using hot alkaline and acidic hydrogen peroxide solutions, has been the industry standard for wet cleaning for a quarter century.

Wet cleaning’s chemistry has not changed appreciably over the past 25 years, but its implementation has shifted from simple immersion to increasingly sophisticated techniques such as jet spraying and megasonic vibration. Jet spray cleaning shoots high-velocity, tens of micron-sized water droplets at a wafer surface to remove random defects. Megasonic cleaning transmits acoustic waves through a fluid bath to produce, in a process known as transient cavitation, bubble oscillation that dislodges random defects. The cavitation can dislodge defects unreachable by jet spray, but the bubbles collapse quickly and can generate energy that damages wafer features.

As jet spray and megasonic cleaning techniques have continued to develop, chip makers have regularly upgraded from simple tanks with on-off switches to complex, specialized, expensive single-wafer cleaning tools. According to Transparency Market Research Pvt. Ltd, the global market for cleaning equipment for single-wafer processing systems totaled $2.6 billion in 2015 and is expected to increase to $3.7 billion in 2020, a CAGR of 6.8%.

Inadequacy of Traditional Single-Wafer Cleaning Technologies

At process nodes of 100nm or more, chips consisted of 2D features and architectures, which made wafer cleaning relatively straightforward. Cleaning was most commonly performed in batch processes using an immersion tool with megasonic energy. Megasonic vibrations transmit at relatively high frequencies and therefore create smaller bubbles that remove more-diminutive defects and that generate lower levels of destructive transient energy when they collapse.

As process nodes shrank below 100nm, equipment manufacturers introduced single-wafer megasonic cleaning tools, which processed wafers one by one, rather than in batches. Because these tools did not deliver energy uniformly across the wafer surface, manufacturers found the tools did not clean wafers thoroughly and evenly and, increasingly as process nodes continued to shrink, led to damage to patterned wafer structures. Equipment makers also began to offer single-wafer cleaning tools that used jet spraying rather than acoustic

 

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vibrations. The physical energy of jet spraying enabled these tools to be used with less assertive chemicals, which reduced wafer material loss. Once process nodes reach 45nm, however, the force of jet sprayed water droplets can damage finer chip features and jet spraying can fail to eliminate killer defect-sized contaminants due to its reduced lateral fluid speed as the fluid approaches the wafer surfaces.

As process nodes continue to shrink to 22nm and less, finer feature sizes and denser, more complex architectures make the cleaning process even more complicated and challenging:

 

    Random defects are harder to remove as the killer defect size decreases. Smaller random defects are denser and bind to a wafer more strongly than larger contaminants, and additional energy is required to deliver greater levels of necessary force to more minuscule sizes.

 

    New 3D architectures are often more delicate or fragile than 2D conventional structures. FinFET structures, for example, are relatively tall, thin and deep, which makes them more susceptible to damage or destruction by the physical force of jet sprays and megasonic transient cavitation used in the cleaning process.

 

    New chip technologies and architectures amplify cleaning challenges. It is, for example, progressively more difficult to remove random defects from the bottom of a chip structure, such as a via, as the “aspect ratio” of the structure’s depth to its width increases. While conventional 2D structures typically have aspect ratios of 3-to-1 or less, FinFET structures have aspect ratios of 10-to-1 currently and are expected to have aspect ratios in excess of 20-to-1 for future process nodes. Moreover, aspect ratios for 3D NAND, 3D cross point and other 3D structures may reach 60-to-1.

Effective, damage-free cleaning poses a significant challenge for manufacturers seeking to fabricate chips in the advanced process nodes available today or introduced in the future, including the 10nm node announced for 2017 and the 7nm node announced for 2018. In order to extend Moore’s law, chip manufacturers must be able to remove ever smaller random defects from not only flat wafer surfaces but also progressively more intricate, finer-featured 3D chip architectures, in each case without incurring damage or material loss that curtails yield and profits. Because fabrication of chips at 22nm or less requires an increasingly complex, specialized process flow, a next-generation single-wafer cleaning tool solution should be designed to be easily tailored to meet a manufacturer’s unique process requirements. The single-wafer cleaning tools should produce less environmentally harmful chemical waste and should be easily accessible to manufacturers in the burgeoning Chinese market.

Our Solutions

We have developed single-wafer wet cleaning equipment that chip manufacturers can use in numerous steps of the fabrication process in order to avoid yield loss at existing and future process nodes. Using our proprietary technologies, we have designed our wet cleaning equipment to remove random defects from chip wafers with fine feature sizes, complex patterning, dense circuit architectures and high aspect ratios more effectively than traditional jet spray and transient megasonic technologies. Key elements of our solutions include:

Differentiated technologies for advanced chips. Our proprietary single-wafer wet cleaning technologies control the power intensity and distribution of megasonic cleaning in order to remove random defects from a wafer surface effectively, without damaging the wafer or its features, even at process nodes of 22nm or less. We developed these technologies to help semiconductor manufacturers produce chips that reach their ultimate physical limitations.

 

   

Flat and patterned wafer surfaces. Our Space Alternated Phase Shift, or SAPS, technology, which we introduced in 2009, employs alternating phases of megasonic waves to deliver megasonic energy to flat and patterned wafer surfaces 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 45nm, including node sizes

 

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less than 50nm in size, for which jet spray technology has proven to be ineffective. Based on their initial mass production experience with SAPS equipment, customers have increased their use of SAPS equipment by adding cleaning steps to the manufacturing processes for advanced chips in order to achieve higher yields and reduce chemical usage.

 

    High-aspect ratio conventional 2D and advanced 3D patterned wafer surfaces. Our Timely Energized Bubble Oscillation, or TEBO, technology, which we introduced in March 2016, has been developed to provide effective, damage-free cleaning for both conventional 2D and 3D patterned wafers at advanced process nodes. TEBO technology provides multi-parameter control of bubble cavitation during megasonic cleaning by using a sequence of rapid pressure changes to force bubbles to oscillate at controlled sizes, shapes and temperatures. Because the bubbles oscillate instead of imploding or collapsing, TEBO technology avoids the pattern damage caused by transient cavitation in traditional megasonic cleaning processes. 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 that TEBO technology can be applied in manufacturing processes for patterned chips with 3D architectures such as FinFET, DRAM, 3D NAND and 3D cross point memory having aspect ratios as high as 60-to-1. We believe TEBO technology can be applied for even smaller process nodes. TEBO tools are currently being evaluated by a selected group of leading memory and logic chip manufacturers.

China-based operations. In 2006 we established our operational center in Shanghai, and currently we conduct substantially all of our development and manufacturing activities in the PRC. This strategy positions us near potential customers throughout Asia, giving us increased access to those customers and reducing shipping and manufacturing costs for equipment they purchase. An estimated 78% of new front-end facilities and production lines starting operation from 2017 through 2020 are projected to be constructed in Asia, with 42% expected to be built in the PRC. Our Shanghai location also gives us access to a large pool of highly qualified potential employees.

Extensive intellectual property protection. Since our formation in 1998, we have focused on building a strategic portfolio of intellectual property to support and protect our key innovations, including most recently our SAPS and TEBO technologies. As of September 11, 2017, we had been issued more than 140 patents in the United States, the PRC, Japan, Korea, Singapore and Taiwan.

Custom-made wafer assembly packaging solutions. In addition to our product offerings for single-wafer cleaning in the front-end wafer fabrication process, we leverage our technology and expertise to provide a wide range of advanced packaging equipment, such as coaters, developers, photoresist strippers, scrubbers, wet etchers and copper-plating tools, to back-end wafer assembly and packaging factories, particularly in the PRC. For these offerings, we focus on providing customized equipment with competitive performance, service and pricing.

Our Strategy

Our objective is to be the leading global provider of a full range of wet cleaning equipment for the manufacture of advanced integrated circuits. To achieve this goal, we are pursuing the following strategies:

Extend technology leadership. We intend to build upon our technology leadership in wet processing by continuing to develop and refine our differentiated SAPS and TEBO technologies and equipment designed to address cleaning challenges presented by the manufacture of increasingly advanced chip nodes. To continue to build our strategic intellectual property portfolio, which included more than 140 patents as of September 11, 2017. Our investment in research and development totaled $1.9 million, or 12.9% of our revenue, in the first half of 2017 and $3.3 million, or 11.9% of our revenue, in 2016. We will continue to invest in product development and to strengthen our global patent portfolio in strategic jurisdictions.

Establish referenceable customer base. Semiconductors fall into two principal product categories, memory and logic, and the processes associated with manufacturing products in those two categories differ. In

 

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commercializing our SAPS equipment, we placed evaluation equipment with selected customers, who subsequently purchased additional SAPS equipment to enable them to add more cleaning steps during their manufacturing processes. We have initiated a similar process for TEBO equipment, and have placed TEBO evaluation equipment with two leading memory and logic chip customers, whose use of our products can influence decisions by other manufacturers.

Leverage local presence to address growing PRC market. The market for semiconductor manufacturing equipment in the PRC is expected to grow markedly in the upcoming years. Our experience has shown that chip manufacturers in the PRC demand equipment meeting their specific technical requirements and prefer building relationships with local suppliers. Since establishing our operations in Shanghai a decade ago, we have leveraged our local presence to begin displacing some incumbent providers of wet cleaning equipment. We will continue to work closely with PRC-based chip manufacturers to understand their specific requirements, encourage them to adopt our SAPS and TEBO technologies, and enable us to design innovative products and solutions to address their needs.

Continue to improve performance through operational excellence. As we increase the breadth of our product offerings and the size of our operations and customer base, we must continually improve the efficiency and quality of our operations in order to satisfy our customers’ needs and meet our financial goals. We actively manage our business through principles of operational excellence designed to ensure continuous improvement of our key operational and financial metrics. We will continue to develop and implement these principles to, for example, identify key quantifiable annual goals for all aspects of our business, implement factory constraint management, change control and inventory management systems, and enhance our risk management system.

Pursue strategic acquisitions and relationships. To complement and accelerate our internal growth, we may pursue acquisitions of businesses, technologies and products that will expand the functionality of our products, provide access to new markets or customers, or otherwise complement our existing operations. We also may seek to expand our product and service offerings by entering into business relationships involving additional distribution channels, investments in other enterprises and joint ventures, or similar arrangements. On September 11, 2017, we acquired 20% of the outstanding equity of Ninebell, one of our key subassembly providers, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Equity Transactions—Strategic Investment in Key Supplier.”

Our Products and Technologies

We develop, manufacture and sell single-wafer wet cleaning equipment usable at numerous steps of the chip manufacturing process flow to improve product yield for conventional 2D and advanced 3D patterned chips at small process nodes. Our equipment, which we market and sell under the brand name “Ultra C,” is designed to remove random defects from a wafer surface effectively, without damaging the wafer or its features, even at increasingly advanced process nodes.

After incorporating in 1998, we initially focused on developing tools for manufacturing process steps involving the integration of ultra-low-K materials and copper. Ultra-low-K materials, which insulate better than silicon, presented opportunities for size scaling and performance improvement, and higher conductivity copper had begun to replace aluminum in forming interconnects. Our early efforts focused in particular on stress-free copper-polishing technology, and we sold tools based on that technology in the early 2000s.

In 2006 we established our operational center in Shanghai. This strategic decision was made to help us establish and build relationships with chip manufacturers in China and throughout Asia, which helps us to understand their requirements and to develop innovative technologies and tools addressing their needs.

In 2007 we began to focus our development efforts on single-wafer wet-cleaning solutions for the front-end fabrication process. We have developed innovative, proprietary technologies that reintroduce megasonic

 

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technology to the wafer cleaning process. Our approach is based on our understanding of the shortfalls and limitations of previously existing megasonic cleaning technologies that led to ineffective cleaning and damaged chip features. In 2009 we introduced our proprietary Space Alternated Phase Shift, or SAPS, megasonic technology, which can be applied in flat patterned wafer cleaning at numerous steps during the chip fabrication process. By delivering megasonic energy uniformly across a wafer, SAPS technology eliminates the particle removal inefficiencies that characterized traditional megasonic cleaning technologies. In March 2016 we introduced our proprietary Timely Energized Bubble Oscillation, or TEBO, technology, which can be applied at numerous steps during the fabrication of small node conventional 2D and 3D patterned wafers. By providing multi-parameter control of bubble cavitation during megasonic cleaning, TEBO technology avoids the fine-pattern damage caused by previously existing megasonic cleaning processes.

We have designed our equipment models for SAPS and TEBO solutions using 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 quartz, sapphire and glass.

In addition to our SAPS and TEBO tool offerings, we offer a range of custom-made equipment, such as cleaners, coaters, developers, photoresist strippers, wet etchers and copper-plating tools, to back-end wafer assembly and packaging factories, principally in the PRC.

Space Alternated Phase Shift Cleaning

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 45nm. These trials show that SAPs technology has an even greater relative advantage over conventional jet spray technology when cleaning defects between 50 and 65nm in size and that SAPs technology continues to be effective for defects of sizes between 45 nm and 50nm, for which jet spray technology has proven to be ineffective.

 

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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,

 

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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 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

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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 purposes of 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. We expect the sales prices of our SAPS tools generally to 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 was released in 2011. Its key features include:

 

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•       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, which was released in 2014, offers increased productivity for chip manufacturers moving to advanced nodes. SAPS V provides all of the features and functionality of SAPS II, upgraded as follows:

 

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•       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.

 

 

 

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Timely Energized Bubble Oscillation Cleaning

TEBO Technology

We developed TEBO technology for application in wet wafer cleaning during the fabrication of both conventional 2D and 3D patterned 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 FinFET, DRAM, 3D NAND and 3D cross point memory as well as other 3D architectures that may be 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: TEBO technology can be applied in up to a total of 47 steps in the fabrication of a dynamic random-access memory, or DRAM, chip, consisting of 8 steps in cleaning ISO structures, 19 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, 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.

 

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Table of Contents

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. We expect the sales prices of our TEBO tools generally to 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:

 

LOGO  

•       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 was released in 2016. Its key features include:

 

LOGO

 

•       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 also was introduced in 2016, and its key features include:

 

 

LOGO

 

•       footprint of 2.45m x 5.30m x 2.85m (WxDxH);