ACM Research, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The unaudited consolidated statements cover ACM Research, Inc. and subsidiaries, principally its Shanghai operating subsidiary. Unless stated otherwise, financial amounts below are in U.S. dollars, thousands.
Business context and financial performance
ACM develops, manufactures and sells single-wafer wet-cleaning equipment for semiconductor production, using its SAPS and TEBO technologies, as well as custom equipment for wafer assembly and packaging. Sales are concentrated among a small number of Asian chip manufacturers; customer qualification and sales cycles can be lengthy.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $4,891 | $4,904 | $19,314 | $13,026 |
| Gross profit / margin | $2,199 / 45.0% | $2,915 / 59.4% | $8,052 / 41.7% | $5,745 / 44.1% |
| Operating income (loss) | $(1,310) | $788 | $(3,065) | $(775) |
| Net income (loss) | $(1,282) | $561 | $(4,237) | $(468) |
| Net income (loss) attributable to ACM | $(955) | $362 | $(3,702) | $(191) |
| Basic and diluted EPS | $(0.17) | $0.07 basic; $0.05 diluted | $(0.72) | $(0.09) |
Cash flow, nine months: Operating activities used $4,661, versus $2,969 provided in 2016. Investing activities used $8,486, including $6,154 to acquire a non-controlling interest and $1,200 invested in an equity-method affiliate. Financing activities provided $20,006, including $15,300 from common-stock issuances and $5,800 from Series E preferred stock. Cash and cash equivalents increased $6,955 to $17,074; restricted cash was $433.
Balance sheet at September 30: Total assets were $61,056; current assets $56,022; current liabilities $20,566; and working capital $35,456. Short-term borrowings were $3,472, down from $4,761 at year-end 2016. Total liabilities were $27,248. Inventory was $18,077, compared with $11,666 at year-end; accounts receivable were $15,784. The company reported $23,834 of redeemable convertible preferred stock before its subsequent IPO conversion.
Changes versus prior comparable periods
- Q3 revenue was essentially flat year over year: a $1.3 million reduction in advanced-packaging equipment revenue was offset by a similar increase in single-wafer cleaning revenue. Nine-month revenue rose 48.3%, principally from single-wafer cleaning equipment.
- Q3 gross margin fell 14.4 percentage points to 45.0%; management attributed the comparison mainly to a higher-margin wet-cleaning tool sold in Q3 2016. Nine-month gross margin declined 2.4 percentage points.
- Operating expenses rose 65.0% in Q3 and 70.5% in the first nine months. Q3 increases included sales and marketing (+46.1%), R&D (+48.7%) and G&A (+108.9%). G&A growth largely reflected public-company preparation costs; nine-month stock-based compensation was $1,692, versus $193 in 2016.
- The company moved from Q3 2016 profit to Q3 2017 loss. For nine months, the operating loss widened to $3,065 from $775, and the net loss attributable to ACM increased to $3,702 from $191.
Outlook, commentary and risks
- Management expected gross margin of 40%–45% for the foreseeable future and R&D expense of 10%–12% of revenue, while anticipating higher absolute operating expenses, including public-company costs.
- Management stated that cash, operating cash flow, short-term bank borrowings and IPO/private-placement proceeds should fund anticipated needs for at least 12 months. The November 2017 IPO and concurrent private placement raised $20.0 million gross and approximately $16.5 million net. This financing occurred after the reporting date.
- In October 2017 ACM reported winning auctions for the two remaining minority interests in ACM Shanghai; completion was expected by December 31, 2017, which would give ACM full ownership. As of September 30, ACM owned 81.64%.
- Key disclosed risks include operating losses and uncertain future profitability; dependence on a few customers and non-binding forecasts; long customer evaluation and acceptance periods; semiconductor cyclicality; competition and technology adoption; dependence on suppliers, including a sole-source megasonic-transducer supplier; PRC regulatory, currency and fund-transfer risks; and lack of foreign-exchange hedging.
- Management and the auditor had identified a material weakness in financial reporting controls related to insufficient qualified accounting personnel. Although additional staff and consultants were engaged, management concluded disclosure controls were not effective as of September 30, 2017.
- Other notable items include a $3,033 warrant liability measured using Level 3 inputs; an interest-free $946 loan to Ninebell, an equity-method affiliate and supplier; and $6,682 of unearned PRC government subsidies recorded as long-term liabilities. The filing notes ordinary-course legal proceedings, including potential patent-infringement claims, but does not quantify a specific contingency.
Investor verification priorities
- Check subsequent filings for completion and final funding of the ACM Shanghai minority-interest acquisitions.
- Compare post-IPO cash, cash use and financing with management’s 12-month liquidity assessment.
- Track customer concentration, order conversion, tool acceptance timing and inventory growth against revenue.
- Assess whether gross margins and operating expenses align with management’s stated ranges and expectations.
- Review remediation of the material weakness and any later conclusions on internal-control effectiveness.
- Monitor the Ninebell loan and supplier relationship, warrant valuation, PRC subsidy recognition, and foreign-exchange exposure.