ACM Research, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results; amounts below are in U.S. dollars unless noted. ACM develops and sells semiconductor manufacturing equipment, with most operations conducted through its Shanghai subsidiary.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $39.0 million | $29.0 million | $63.4 million | $49.5 million |
| Gross profit / margin | $19.4 million / 49.6% | $13.1 million / 45.3% | $29.6 million / 46.7% | $22.0 million / 44.4% |
| Operating income | $7.3 million | $4.7 million | $8.6 million | $6.9 million |
| Consolidated net income | $0.5 million | $4.3 million | $2.5 million | $6.2 million |
| Net income (loss) attributable to ACM Research | $(0.08) million | $4.3 million | $1.6 million | $6.2 million |
Q2 revenue increased 34.6% year over year; first-half revenue increased 28.1%. Front-end single-wafer cleaning and other processing equipment generated 97% of Q2 revenue and 95.8% of first-half revenue. The Q2 loss attributable to ACM reflected, in part, allocation of income to minority holders of ACM Shanghai and a $5.4 million non-cash fair-value expense on an SMC-related financial liability. First-half diluted EPS was $0.08, versus $0.33 a year earlier; Q2 diluted EPS was reported as $(0.00), versus $0.23.
- Operating expenses rose 41.9% in Q2 and 39.8% in the first half, led by higher sales and marketing and R&D spending.
- First-half operating cash flow was negative $10.7 million, compared with negative $4.6 million in 2019. Investing cash outflow was $31.2 million, including $14.1 million for a strategic investment and $15.4 million for Lingang land and property-related payments. Financing provided $11.3 million.
- Cash and cash equivalents were $86.4 million at June 30, 2020, versus $58.3 million at year-end. The company ended the period with no restricted cash, after releasing previously restricted private-placement proceeds. Current assets were $205.9 million and current liabilities $96.5 million.
- Short-term borrowings were $25.8 million, up from $13.8 million at year-end; the filing reports no long-term borrowings. Operating lease liabilities totaled $4.6 million.
Changes, outlook and risks
- Margins and growth: Management attributed the higher gross margin to product mix and increased production scale, while noting margins vary with utilization and order timing. It expects gross margin of 40%–45% for the foreseeable future.
- Capacity and listing: The company expanded its second Shanghai factory by 50,000 square feet in Q2. Construction of a planned 1-million-square-foot Lingang development and production facility began in July. ACM Shanghai proposed a STAR Market IPO of up to 10% of its shares; IPO proceeds are intended for the facility, product development and working capital.
- Liquidity outlook: Management said existing cash, operating cash flows and short-term bank borrowing capacity should meet anticipated needs for at least 12 months. It may seek additional financing if those resources prove insufficient. Management does not expect near-term needs to require PRC government subsidies.
- COVID-19: Management reported no significant adverse effect on operations or liquidity through June 30, though restrictions delayed some Q1 customer shipments that were delivered in Q2. Future effects remain uncertain and could affect customers, demand, operations and projects.
- Concentration: The three largest customers represented 91.0% of Q2 revenue and 92.4% of first-half revenue. They accounted for 83.9% of receivables at quarter-end.
- Unusual liability and subsequent event: The SMC-related financial liability rose from $9.7 million on April 30 to $15.1 million at June 30, producing the $5.4 million expense. On July 29, ACM settled the matter by issuing SMC a warrant to purchase 242,681 Class A shares at $7.50 per share and cancelling the SMC Note.
- Other commitments and risks: A Lingang land-use agreement includes investment, sales and tax milestones; failure to meet specified requirements could trigger liquidated damages. The company had $0.9 million of open capital commitments and reported no legal proceedings at June 30. Its auditor is not subject to PCAOB inspection, and the filing warns of potential regulatory, Nasdaq-listing and stock-price consequences. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether revenue growth and customer acceptance of first-tool shipments are sustained; Q2 shipments were $45 million, but some first-tool revenue depends on future customer acceptance.
- Collection of receivables and working-capital demands, given negative operating cash flow and high customer concentration.
- Execution, funding and milestone compliance for the Lingang facility, and the status and terms of ACM Shanghai’s proposed STAR Market listing.
- Accounting and economic effects of the SMC warrant settlement, minority ownership in ACM Shanghai, and the SMIC-related investment, whose shares were subject to a one-year lock-up.
- COVID-19 effects and developments in PRC audit-inspection and U.S. listing requirements that could affect the company or its stock.