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 report, including the consolidated financial statements and related notes set forth in Item 1. Financial
Statements of Part I above, 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 report 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 September 30, 2017 we had an accumulated deficit of
$13.6 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:
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research and development, including continued investments in our research and development team;
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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;
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the cost of goods being manufactured and sold for our installed base;
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expansion of field service; and
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general and administrative expenses, including legal and accounting expenses related to being a public company.
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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 $19.3 million in the first nine months 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 nine months of 2017, we incurred an operating loss of $3.1 million, which was an increase from our operating loss of $775,000 in the first nine months of 2016, and a net loss of $3.7 million, which
was an increase from a net loss of $191,000 in the first nine months 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:
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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;
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continue to expand our supplier relationships with third parties; and
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establish and maintain our reputation for providing efficient
on-time
delivery of high quality products.
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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:
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the costs of applying our existing technologies to new or enhanced products;
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the costs of developing new technologies and introducing new products;
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the costs associated with protecting our intellectual property;
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the costs associated with our expansion, including capital expenditures, increasing our sales and marketing and service and support efforts, and expanding our geographic operations;
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our ability to continue to obtain governmental subsidies for developmental projects in the future;
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future debt repayment obligations; and
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the number and timing of any future acquisitions.
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To the extent that our existing sources of
cash, together with any cash generated from operations 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:
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the cyclicality of the semiconductor industry and the related impact on the purchase of equipment used in the manufacture of integrated circuits, or chips;
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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;
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the significant expenditures required to customize our products often exceed the deposits received from our customers;
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the lead time required to manufacture our tools;
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the timing of recognizing revenue due to the timing of shipment and acceptance of our tools;
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our ability to sell additional tools to existing customers;
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the changes in customer specifications or requirements;
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the length of our product sales cycle;
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changes in our product mix, including the mix of systems, upgrades, spare parts and service;
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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;
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our ability to enhance our tools with new and better functionality that meet customer requirements and changing industry trends;
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constraints on our suppliers capacity;
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the timing of investments in research and development related to releasing new applications of our technologies and new products;
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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;
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our ability to control costs, including operating expenses and the costs of the components and subassemblies used in our products;
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the costs related to the acquisition and integration of product lines, technologies or businesses; and
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the costs associated with protecting our intellectual property, including defending our intellectual property against third-party claims or litigation.
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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.
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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.
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 Peoples 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.
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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:
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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;
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the level of customer service available to support our products; and
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the experiences our customers have with our products.
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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 suppliers 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 tools development, including the following:
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accurate anticipation of market requirements, changes in technology and evolving standards;
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the availability of qualified product designers and technologies needed to solve difficult design challenges in a cost-effective, reliable manner;
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our ability to design products that meet chip manufacturers cost, size, acceptance and specification criteria, and performance requirements;
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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;
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market acceptance of our customers products, and the lifecycle of those products; and
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our ability to deliver products in a timely manner within our customers product planning and deployment cycle.
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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.
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:
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greater financial, technical, sales and marketing, manufacturing, distribution and other resources;
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established credibility and market reputations;
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longer operating histories;
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broader product offerings;
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more extensive service offerings, including the ability to have large inventories of spare parts available near, or even at, customer locations;
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local sales forces; and
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more extensive geographic coverage.
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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.
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 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 customers 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 customers 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 customers 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
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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.
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:
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efforts by our sales force;
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the complexity of our customers manufacturing processes and the compatibility of our tools with those processes;
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our customers internal technical capabilities and sophistication; and
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our customers capital spending plans and processes, including budgetary constraints, internal approvals, extended negotiations or administrative delays.
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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
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introduce error into our estimates. Inventory levels for components necessary to build our tools in 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:
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our customers may delay or reject acceptance of our tools that contain defects or fail to meet their specifications;
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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;
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we may incur substantial costs as a result of warranty claims or service obligations or in order to enhance the reliability of our tools;
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the attention of our technical and management resources may be diverted;
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we may be required to replace defective systems or invest significant capital to resolve these problems; and
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we may be required to write off inventory and other assets related to our tools.
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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 managements attention from our ongoing operations. In addition, if our business liability insurance coverage proves
inadequate with respect to a claim or future coverage is 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.
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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:
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potential price increases;
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capacity shortages or other inability to meet any increase in demand for our products;
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reduced control over manufacturing process for components and subassemblies and delivery schedules;
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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;
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increased exposure to potential misappropriation of our intellectual property; and
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limited warranties on subassemblies and components supplied to us.
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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 SAPS 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 28.1% from January 1, 2017 to September 30, 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 position and increase our costs disproportionately to the amount of growth we achieve. To manage our growth, we believe we must effectively:
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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;
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manage multiple relationships with our customers, suppliers and other third parties; and
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continue to enhance our information technology infrastructure, systems and controls.
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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 Chair of the Board, 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 September 30, 2017, we had net operating loss carryforward amounts, or NOLs, of $19.0 million for U.S. federal income tax
purposes and $591,000 for U.S. state income tax purposes. The federal and state NOLs will expire at various dates beginning in 2019.
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 previous ownership changes, including in connection with this offering, the concurrent private placement 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.
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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:
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the acquired product lines, technologies or businesses may not improve our financial and strategic position as planned;
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we may determine we have overpaid for the product lines, technologies or businesses, or that the economic conditions underlying our acquisition have changed;
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we may have difficulty integrating the operations and personnel of the acquired company;
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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;
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the acquisition may be viewed negatively by customers, employees, suppliers, financial markets or investors;
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we may have difficulty incorporating the acquired product lines or technologies with our existing technologies;
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we may encounter a competitive response, including price competition or intellectual property litigation;
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we may become a party to product liability or intellectual property infringement claims as a result of our sale of the acquired companys products;
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we may incur
one-time
write-offs, such as acquired
in-process
research and development costs, and restructuring charges;
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we may acquire goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges;
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our ongoing business and managements attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises; and
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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.
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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:
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a decline in demand for our products;
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an increase in reserves on accounts receivable due to our customers inability to pay us;
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an increase in reserves on inventory balances due to excess or obsolete inventory as a result of our inability to sell such inventory;
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valuation allowances on deferred tax assets;
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asset impairments including the potential impairment of goodwill and other intangible assets;
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a decline in the value of our investments;
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exposure to claims from our suppliers for payment on inventory that is ordered in anticipation of customer purchases that do not come to fruition;
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a decline in the value of certain facilities we lease to less than our residual value guarantee with the lessor; and
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challenges maintaining reliable and uninterrupted sources of supply.
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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 nine months 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:
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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;
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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;
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competition from local suppliers with which potential customers may prefer to do business;
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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;
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increased exposure to foreign currency exchange rates;
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reduced protection for intellectual property;
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longer sales cycles and reliance on indirect sales in certain regions;
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increased length of time for shipping and acceptance of our products;
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greater difficulty in responding to customer requests for maintenance and spare parts on a timely basis;
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greater difficulty in enforcing contracts and accounts receivable collection and longer collection periods;
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difficulties in staffing and managing foreign operations and the increased travel, infrastructure and legal and compliance costs associated with multiple international locations;
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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
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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.
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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 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.
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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.
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
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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 is the independent registered public accounting firm that issued the audit report included in our final prospectus filed with the
Securities and Exchange Commission on November 3, 2017 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 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 PCAOBs 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 Chinas 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,
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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:
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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.
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Patent applications may not result in any patents being issued.
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Patents that may be issued may be challenged, invalidated, modified, revoked, circumvented, found to be unenforceable or otherwise may not provide any competitive advantage.
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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.
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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.
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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 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:
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be time consuming and expensive to defend, whether or not meritorious;
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force us to stop selling products or using technology that allegedly infringes the third partys intellectual property rights;
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delay shipments of our products;
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require us to pay damages or settlement fees to the party claiming infringement;
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require us to attempt to obtain a license to the relevant intellectual property, which may not be available on reasonable terms or at all;
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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;
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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 partys intellectual property rights; or
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divert the attention of our technical and managerial resources.
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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 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.
Class A common stock only commenced trading on the
Nasdaq Global Market, or Nasdaq, on November 3, 2017, and the market price of Class A common stock has been, and could continue to be, subject to significant fluctuations. You may not be able to resell your shares at or above the initial
public offering price. The market price of Class A common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
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actual or anticipated fluctuations in our revenue and other operating results;
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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
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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;
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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;
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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;
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additional shares of Class A common stock being sold into the market by us or our existing stockholders or the anticipation of such sales;
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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
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lawsuits threatened or filed against us;
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litigation and other developments relating to our patents or other proprietary rights or those of our competitors;
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developments in new legislation and pending lawsuits or regulatory actions, including interim or final rulings by judicial or regulatory bodies; and
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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.
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In recent years, the stock market in general, and 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.
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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 managements attention and
resources.
In the past, following periods of volatility in the overall market and the market price of a particular companys
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 managements attention and resources.
An active trading market for Class A common stock may not be sustained.
Class A common stock has been listed on Nasdaq only since November 3, 2017, and we cannot assure you that an active trading market
for Class A common stock will be sustained or maintained. 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 or maintain a liquid market for Class A common stock.
We have broad discretion in the use of the net proceeds from our initial public offering and the concurrent private placement, and we
may not succeed in using those net proceeds effectively.
In November 2017 we issued and sold 2,233,000 shares of Class A
common stock in our initial public offering, or IPO, and an additional 1,333,334 shares of Class A common stock in a private placement, which we refer to as the concurrent private placement. We cannot specify with any certainty the particular
uses of the net proceeds that we received from the IPO and the concurrent private placement. Our management has broad discretion in the application of these 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 management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds in a manner
that does not produce income or that loses value.
If securities or industry analysts do not publish research or reports about us,
our business or our market, or if they publish negative evaluations of Class A common stock or the stock of other companies in our industry, the price of our stock and trading volume 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 are 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. 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
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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.
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. As of December 1,
2017 stockholders who hold shares of Class B common stock, who consist principally of our executive officers, employees, directors and their respective affiliates, collectively held 79.1% of the voting power of our outstanding capital stock.
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. As of December 1, 2017, only the shares of Class A common stock sold in the IPO and an additional 113,984 shares not subject to
lock-up
agreements were freely tradable in the
public market. Holders of substantially all of the outstanding shares of Class A common stock, including all of our officers and directors, have entered into contractual
lock-up
agreements with the
underwriters of our IPO 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 until May 2, 2018.
We and the lead underwriter in the IPO may, however, permit these holders to sell shares prior to the expiration of the
lock-up
agreements with the underwriters.
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In addition to the 113,984 shares of Class A common stock that were outstanding prior to the IPO and not subject to lock-up agreements, 12,998,300 shares of Class A common stock (including
2,409,738 shares issuable upon conversion of Class B common stock) will become eligible for sale in the public market when the lock-up agreements expire on May 2, 2018. Of those 12,998,300 shares, 9,604,309 shares (including 1,731,272 issuable upon
conversion of Class B common stock) held by directors, executive officers and other affiliates will be eligible for sale in the public market 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:
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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;
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when the outstanding shares of Class B common stock represent less than a majority of the combined voting power of common stock:
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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;
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vacancies on the board of directors will be able to be filled only by the board and not by stockholders;
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the board, which currently is not staggered, will be automatically separated into three classes with staggered three-year terms;
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directors will only be able to be removed from office for cause; and
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our stockholders will only be able to take action at a meeting and not by written consent;
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only our chair, our chief executive officer or a majority of our directors is authorized to call a special meeting of stockholders;
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advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders;
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our restated charter authorizes undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without stockholder approval; and
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cumulative voting in the election of directors is prohibited.
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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.
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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:
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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;
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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
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any action asserting a claim that is governed by the internal affairs doctrine.
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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 auditors report providing additional information about the audit and the financial statements. 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 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.
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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 managements 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.