ACM Research, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. ACM develops, manufactures and sells semiconductor wafer-cleaning equipment, principally through its Shanghai operations. Its products use SAPS and TEBO technologies. The company reported more than 35 deployed single-wafer cleaning tools; sales were concentrated in Asia.
Key financial metrics
Amounts in U.S. dollars; financial statement amounts are in millions unless indicated.
| Metric | Q1 2018 | Q1 2017 / prior balance |
|---|---|---|
| Revenue | $9.743 | $5.660 |
| Gross profit / margin | $5.122 / 52.6% | $2.402 / 42.4% |
| Operating expenses | $7.026 | $3.955 |
| Operating loss | $(1.904) | $(1.553) |
| Net loss | $(2.780) | $(2.474) consolidated; $(2.089) attributable to ACM |
| Adjusted EBITDA, non-GAAP | $(0.403) | $(0.341) |
| Operating cash flow | $(7.393) | $0.352 |
| Free cash flow, non-GAAP | $(7.788) | $0.316 |
| Cash and cash equivalents | $15.186 | $17.681 at Dec. 31, 2017 |
| Short-term borrowings | $10.376 | $5.095 at Dec. 31, 2017 |
| Working capital | $62.844 | Not provided for comparison |
At March 31, 2018, total current assets were $66.494 million and current liabilities $22.751 million. Accounts receivable was $27.793 million and inventory $19.865 million. Total liabilities were $28.932 million; stockholders’ equity was $43.002 million. Interest expense was $0.103 million. All figures above are reported amounts; adjusted EBITDA and free cash flow are non-GAAP measures.
Material changes versus the prior comparable period
- Revenue increased 72.1%, with management attributing approximately $4.0 million of growth to single-wafer cleaning equipment and $0.1 million to service and parts, primarily from existing customers.
- Gross margin rose 10.2 percentage points, which management attributed mainly to three higher-margin SAPS tool sales versus the prior-year product mix.
- Operating expenses rose 77.6%. General and administrative expense increased 94.7%, including higher stock-based compensation and costs associated with being public. Total stock-based compensation rose to $2.175 million from $0.835 million, primarily due to nonemployee awards.
- Other expense, net, increased to $0.755 million from $0.064 million; management says it primarily reflects foreign-exchange effects and depreciation of grant-funded assets.
- Operating cash flow moved from positive $0.352 million to negative $7.393 million, with increased inventory and prepaid expenses and lower accounts payable among the working-capital factors.
Outlook, commentary, risks and unusual items
- Management expects gross margin of 40%–45% for the foreseeable future; no revenue or earnings guidance is provided. It estimates 2018 capital expenditures of approximately $3.2 million.
- Management believes available cash, operating cash flow and short-term bank borrowing capacity will meet anticipated needs for at least 12 months. It says future funding needs depend on growth, customer payment timing and investment plans, and additional financing may not be available on acceptable terms.
- Customer concentration is acute: SK Hynix accounted for 97.97% of Q1 2018 revenue, versus three customers accounting for 99.43% in Q1 2017. Management expects most revenue to continue coming from Asia.
- Foreign-exchange exposure is principally to the renminbi; the company had not entered into currency hedges. Q1 included a $0.705 million positive currency translation adjustment in comprehensive income.
- SMC, a partnership whose general partner is the CEO’s brother and whose partners include ACM Shanghai employees, exercised a warrant for 397,502 Class A shares in exchange for a roughly $3.0 million senior secured note. The notes in the transaction bear 3.01% interest and mature in 2023.
- After quarter-end, ACM Shanghai renewed its related-party Shanghai facility lease through December 2022. At March 31, the company reported $6.181 million of unearned PRC government subsidies as long-term liabilities and $3.654 million in future minimum lease payments.
- Management and the auditor identified a material weakness in financial-reporting controls relating to insufficient qualified accounting and financial-reporting personnel. Disclosure controls were deemed ineffective at March 31, 2018; the company reported hiring personnel and engaging outside consultants as remediation steps.
- The company disclosed ordinary-course legal proceedings, including potential patent-infringement claims, but no specific material contingency amount. It also noted ongoing tax examinations for relevant open years and that accounting for the Tax Act was not yet complete.
Important facts for investors to verify
- Customer concentration, repeat orders and acceptance/collection timing, particularly given SK Hynix’s share of quarterly revenue.
- The filing’s revenue disclosures contain an apparent inconsistency: it reports Q1 2017 single-wafer equipment revenue of $7.5 million and 99.43% of revenue, although reported total Q1 2017 revenue is $5.660 million. Confirm the correct comparable-period product revenue.
- Cash conversion and working-capital needs, including the increase in inventory and prepaid expenses, and the sustainability of funding through short-term borrowing.
- Stock-based compensation’s scale and valuation, especially nonemployee awards, and its effect on GAAP results and dilution.
- Progress in remediating the material weakness and the continued effectiveness of internal controls.
- Non-GAAP cash-flow presentation: the filing reports Q1 2018 free cash flow of $(7.788) million versus operating cash flow of $(7.393) million, but elsewhere says free cash flow did not differ from operating cash flow. Reconcile this disclosure.
- Related-party arrangements, including the SMC note-and-warrant transaction and Shanghai lease, as well as the dual-class voting structure: Class B shares carry 20 votes per share.