ACM Research, Inc. - Quarter Report: 2017 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2017

or

For the transition period from                      to                     

Commission file number: 000-38273

ACM Research, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code: (510) 445-3700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☒

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

Table of Contents

TABLE OF CONTENTS

We conduct our business operations principally through ACM Research (Shanghai), Inc., or ACM Shanghai, a subsidiary of ACM Research, Inc., or ACM Research. Unless the context requires otherwise, references in this report to “our company,” “our,” “us,” “we” and similar terms refer to ACM Research, Inc. (including its predecessor prior to its redomestication from California to Delaware in November 2016) and its subsidiaries, including ACM Shanghai, collectively.

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

2

Table of Contents

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “anticipate,” “project,” “target,” “design,” “estimate,” “predict,” “potential,” “plan” or the negative of these terms, and similar expressions intended to identify forward-looking statements.

These statements reflect our current views with respect to future events and are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors including those described in “Item 1A. Risk Factors” of Part II of this report. that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.

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

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

3

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ACM RESEARCH, INC.

Condensed Consolidated Balance Sheets (Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Table of Contents

ACM RESEARCH, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents

ACM RESEARCH, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

NOTE 1 – DESCRIPTION OF BUSINESS

ACM Research, Inc. (“ACM”) and its subsidiaries (collectively with ACM, the “Company”) develop, manufacture and sell single-wafer wet cleaning equipment used to improve the manufacturing process and yield for advanced integrated chips. The Company markets and sells, under the brand name “Ultra C,” lines of equipment based on the Company’s proprietary Space Alternated Phase Shift (“SAPS”) and Timely Energized Bubble Oscillation (“TEBO”) technologies. These tools are designed to remove random defects from a wafer surface efficiently, without damaging the wafer or its features, even at increasingly advanced process nodes.

ACM was incorporated in California in 1998, and it initially focused on developing tools for manufacturing process steps involving the integration of ultra low-K materials and copper. The Company’s early efforts focused on stress-free copper-polishing technology, and it sold tools based on that technology in the early 2000s.

In 2006 the Company established its operational center in Shanghai in the People’s Republic of China (the “PRC”), where it operates through ACM’s subsidiary ACM Research (Shanghai), Inc. (“ACM Shanghai”). ACM Shanghai was formed to help establish and build relationships with integrated circuit manufacturers in the PRC, and the Company financed its Shanghai operations in part through sales of non-controlling equity interests in ACM Shanghai.

In 2007 the Company began to focus its development efforts on single-wafer wet-cleaning solutions for the front-end chip fabrication process. The Company introduced its SAPS megasonic technology, which can be applied in wet wafer cleaning at numerous steps during the chip fabrication process, in 2009. It introduced its TEBO technology, which can be applied at numerous steps during the fabrication of small node two-dimensional conventional and three-dimensional patterned wafers, in March 2016. The Company has designed its equipment models for SAPS and TEBO solutions using a modular configuration that enables it to create a wet-cleaning tool meeting the specific requirements of a customer, while using pre-existing designs for chamber, electrical, chemical delivery and other modules. The Company also offers a range of custom-made equipment, including cleaners, coaters and developers, to back-end wafer assembly and packaging factories, principally in the PRC.

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

In November 2016 ACM redomesticated from California to Delaware pursuant to a merger in which ACM Research, Inc., a California corporation, was merged into a newly formed, wholly owned Delaware subsidiary, also named ACM Research, Inc.

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

In August 2017 ACM purchased 18.77% of ACM Shanghai’s equity interests held by Shanghai Science and Technology Venture Capital Co., Ltd. (“SSTVC”). As of September 30, 2017, and December 31, 2016, respectively, ACM owned 81.64% and 62.87% of the outstanding equity interests of ACM Shanghai, and indirectly through ACM Shanghai, owned 81.64% and 62.87% of the outstanding equity interests of ACM Wuxi, respectively. In August 2017 ACM entered into securities purchase agreements pursuant to which ACM proposes to acquire the remaining outstanding non-controlling equity interests of ACM Shanghai (see note 14).

On September 13, 2017, ACM effectuated a 1-for-3 reverse stock split (the “Reverse Split”) of Class A and Class B common stock. Unless otherwise indicated, all share numbers, per share amount, share prices, exercise prices and conversion rates set forth in those notes and the accompanying condensed consolidated financial statements have been adjusted retrospectively to reflect the Reverse Split.

7

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated accounts include ACM and its subsidiaries, ACM Shanghai, ACM Wuxi and CleanChip. Subsidiaries are those entities in which ACM, directly and indirectly, controls more than one half of the voting power. All significant intercompany transactions and balances have been eliminated upon consolidation.

The accompanying condensed consolidated balance sheet as of September 30, 2017, the condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 are unaudited. In the opinion of management, the unaudited condensed consolidated financial statements of the Company reflect all adjustments, which are necessary for a fair presentation of the Company’s financial position and results of operations. Such adjustments are of a normal recurring nature, unless otherwise noted. The balance sheet as of September 30, 2017 and the results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for any future period. The condensed consolidated financial statements herein should be read in conjunction with the historical consolidated financial statements of the Company for the year ended December 31, 2016.

Unaudited Pro Forma Balance Sheet

The unaudited pro forma condensed consolidated balance sheet as of September 30, 2017 gives effect to the automatic conversion of all of the Company’s outstanding redeemable convertible preferred stock into shares of Class A common stock, which occurred upon completion of an IPO of common stock on November 7, 2017.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported revenues and expenses during the reported period in the condensed consolidated financial statements and accompanying notes. The Company’s significant accounting estimates and assumptions include, but are not limited to, those used for the valuation and recognition of stock-based compensation arrangements and warrant liability, realization of deferred tax assets, assessment for impairment of long-lived assets, allowance for doubtful accounts, inventory valuation for excess and obsolete inventories, lower of cost and market value or net realizable value of inventories, depreciable lives of property and equipment, and useful life of intangible assets. Management of the Company believes that the estimates, judgments and assumptions are reasonable, based on information available at the time they are made. Actual results could differ materially from those estimates.

Restricted Cash

Restricted cash is money that is reserved for a specific purpose and therefore not available for immediate or general business use. At September 30, 2017 and December 31, 2016, restricted cash was $433 and $0, respectively. The restricted cash represents a deposit for a letter of credit issued for international purchase.

Deferred Initial Public Offering (“IPO”) Costs

Direct costs incurred by the Company attributable to its IPO of Class A common stock in the United States were deferred and recorded in other current assets and will be offset against the gross proceeds received from the IPO. At September 30, 2017 and December 31, 2016, deferred IPO costs were $819 and $41, respectively.

8

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

Basic and Diluted Net Income (Loss) per Common Share

Basic and diluted net income (loss) per common share is calculated as follows:

Basic and diluted net income (loss) per common share is presented using the two-class method, which allocates undistributed earnings to common stock and any participating securities according to dividend rights and participation rights on a proportionate basis. Under the two-class method, basic net income (loss) per common share is computed by dividing the sum of distributed and undistributed earnings attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Shares of ACM’s Series A, B, C, D, E and F convertible preferred stock are participating securities, as the holders are entitled to participate in and receive the same dividends as may be declared for common stockholders on a pro-rata, if-converted basis.

ACM has been authorized to issue Class A and Class B common stock since redomesticating in Delaware in November 2016. The two classes of common stock are substantially identical in all material respects, except for voting rights. Since ACM did not declare any dividends for the three and nine months ended September 30, 2017 and 2016, the net income (loss) per common share attributable to each class is the same under the “two-class” method. As such, the two classes of common stock have been presented on a combined basis in the consolidated statements of operations and comprehensive income (loss) and in the above computation of net income (loss) per common share.

Diluted net income (loss) per common share reflects the potential dilution from securities that could share in ACM’s earnings. ACM’s potential dilutive securities consist of convertible preferred stocks, stock options and warrants for the three and nine months ended September 30, 2017 and 2016. Certain potential dilutive securities were excluded from the net income (loss) per share calculation because the impact would be anti-dilutive.

Fair Value of Financial Instruments

Under the authoritative guidance of the Financial Accounting Standards Board (“FASB”) on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining the fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable,

9

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

market corroborated or generally unobservable inputs. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

All transfers between fair value hierarchy levels are recognized by the Company at the end of each reporting period. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. The inputs or methodology used for valuing financial instruments are not necessarily an indication of the risks associated with investment in those instruments.

Fair Value Measured or Disclosed on a Recurring Basis

Short-term borrowings—Interest rates under the borrowing agreements with the lending parties were determined based on the prevailing interest rates in the market. The Company classifies the valuation techniques that use these inputs as Level 2 fair value measurement.

Warrant liability—The fair value of the warrant liability derives from the Black-Scholes valuation model which incorporates certain unobservable assumptions (note 9). The Company classifies the valuation techniques that use these inputs as Level 3 fair value measurement.

Other financial items for disclosure purpose—The fair value of other financial items of the Company for disclosure purpose, including cash and cash equivalents, accounts receivable, other receivables, prepaid expenses, other current assets, notes payable, investors’ deposits, accounts payable, advances from customers, income taxes payable, and other payables and accrued expenses, approximate their carrying value due to their short-term nature.

10

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

As of September 30, 2017 and December 31, 2016, information about inputs into the fair value measurement of the Company’s liabilities that are measured and recorded at fair value on a recurring basis in periods subsequent to their initial recognition is as follows:

Fair Value Measured on a Non-Recurring Basis

The Company reviews long-lived assets for impairment annually or more frequently if events or changes in circumstances indicate the possibility of impairment. Long-lived assets are measured at fair value on a nonrecurring basis when there is an indicator of impairment, and they are recorded at fair value only when impairment is recognized. In determining the fair value, the Company used projections of cash flows directly associated with, and which are expected to arise as a direct result of, the use and eventual disposition of the assets. This approach required significant judgments including the Company’s projected net cash flows, which were derived using the most recent available estimate for the reporting unit containing the assets tested. Several key assumptions included periods of operation, projections of product pricing, production levels, product costs, market supply and demand, and inflation.

Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted in the Consolidated Financial Statements for the Nine Months Ended September 30, 2017

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

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Topic 740, Income Taxes, requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. To simplify the presentation of deferred income taxes, the amendments in ASU No. 2015-17 require that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of ASU No. 2015-17 did not have a material impact on the Company’s consolidated financial statements.

11

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

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

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

Recent Accounting Pronouncements Not Yet Adopted

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

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company does not expect the adoption of ASU No. 2017-09 to have a material impact on its consolidated financial statements.

In February 2017, the FASB issued ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope of nonfinancial asset guidance in

12

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

Subtopic 610-20. This ASU also clarifies that derecognition of all businesses and nonprofit activities (except those related to conveyances of oil and gas mineral rights or contracts with customers) should be accounted for in accordance with the derecognition and deconsolidation guidance in Subtopic 810-10. The amendments in this ASU also provide guidance on the accounting for so-called “partial sales” of nonfinancial assets within the scope of Subtopic 610-20 and contributions of nonfinancial assets to a joint venture or other noncontrolled investee. The amendments in this ASU are effective for annual reporting reports beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company does not expect the adoption of ASU No. 2017-05 to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes Step 2 from the goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. A business entity that is a U.S. Securities and Exchange Commission filer must adopt the amendments in this ASU for its annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is evaluating the impact of the adoption of ASU 2017-04 on its consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU do not provide a definition of restricted cash or restricted cash equivalents. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU No. 2016-18 to have a material impact on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses the following cash flow issues: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years and are effective for all other entities for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the impact of the adoption of ASU No. 2016-15 on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this update create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference between Topic 842 and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified as operating leases under Topic 840. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP. The

13

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

amendments in ASU No. 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Early application of the amendments in ASU No. 2016-02 is permitted. The Company is in the process of evaluating the impact of the adoption of ASU No. 2016-02 on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date in August 2015. The amendments in ASU No. 2015-14 defer the effective date of ASU No. 2014-09. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Further to ASU No. 2014-09 and ASU No. 2015-14, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) in March 2016, ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing in April 2016, ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, respectively. The amendments in ASU No. 2016-08 clarify the implementation guidance on principal versus agent considerations, including indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. ASU No. 2016-10 clarifies guideline related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The updates in ASU No. 2016-10 include targeted improvements based on input the FASB received from the Transition Resource Group for Revenue Recognition and other stakeholders. It seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. ASU No. 2016-12 addresses narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition. Additionally, the amendments in this ASU provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The amendments in ASU No. 2016-20 represents changes to make minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The effective date and transition requirements for ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20 are the same as ASU No. 2014-09. The Company will adopt ASU No. 2014-09, ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20 at January 1, 2018 if the IPO is completed by December 31, 2017. The Company is in the process of assessing the potential effects of these ASUs on its consolidated financial statements, business processes, systems and controls. While the assessment process is ongoing, the Company anticipates adopting ASC Topic 606, Revenue from Contracts with Customers, using the modified retrospective transition approach. Under this approach, ASC Topic 606 would apply to all new contracts initiated on or after January 1, 2018. For existing contracts that have remaining obligations as of January 1, 2018, any difference between the recognition criteria in these ASUs and the Company’s current revenue recognition practices would be recognized using a cumulative effect adjustment to the opening balance of accumulated deficit. The Company does not expect the adoption of these ASUs to have a material impact on its consolidated financial statements.

14

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

NOTE 3 – ACCOUNTS RECEIVABLE

At September 30, 2017 and December 31, 2016, accounts receivable consisted of the following:

The Company reviews accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. No allowance for doubtful accounts was considered necessary at September 30, 2017 or December 31, 2016. At September 30, 2017 and December 31, 2016, no accounts receivable were pledged as collateral for borrowings from financial institutions.

NOTE 4 – INVENTORY

At September 30, 2017 and December 31, 2016, inventory consisted of the following:

At September 30, 2017 and December 31, 2016, the Company did not have an inventory reserve and no inventory was pledged as collateral for borrowings from financial institutions.

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET

At September 30, 2017 and December 31, 2016, property, plant and equipment consisted of the following:

Depreciation expense was $55 and $31 for the three months ended September 30, 2017 and 2016, respectively, and $162 and $119 for the nine months ended September 30, 2017 and 2016, respectively.

15

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

NOTE 6 – SHORT-TERM BORROWINGS

At September 30, 2017 and December 31, 2016, short-term borrowing consisted of the following:

Interest expense related to short-term borrowings amounted to $33 and $39 for the three months ended September 30, 2017 and 2016, respectively, and $196 and $150 for the nine months ended September 30, 2017 and 2016, respectively.

NOTE 7 – OTHER PAYABLE AND ACCRUED EXPENSES

At September 30, 2017 and December 31, 2016, other payable and accrued expenses consisted of the following:

16

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

NOTE 8 – INVESTORS’ DEPOSITS

On December 9, 2016, Shengxin (Shanghai) Management Consulting Limited Partnership (“SMC”), a related party (note 12), delivered RMB 20,124 (approximately $2,981 as of the close of business on such date) in cash (the “SMC Investment”) to ACM Shanghai for potential investment pursuant to terms to be subsequently negotiated. On March 14, 2017, ACM, ACM Shanghai and SMC entered into a securities purchase agreement pursuant to which, in exchange for the SMC Investment, ACM issued to SMC a warrant exercisable to purchase 397,502 shares of ACM’s Class A common stock at a price of $7.50 per share (note 9).

NOTE 9 – WARRANT LIABILITY

On December 9, 2016, SMC delivered the SMC Investment to ACM Shanghai for potential investment pursuant to terms to be subsequently negotiated. As of December 31, 2016, the terms of the SMC Investment had not yet been negotiated and the SMC Investment was recorded as investors’ deposit.

On March 14, 2017, ACM, ACM Shanghai and SMC entered into a securities purchase agreement (the “SMC Agreement”) pursuant to which, in exchange for the SMC Investment, ACM issued to SMC a warrant exercisable, for cash or on a cashless basis, to purchase, at any time on or before May 17, 2023, all, but not less than all, of 397,502 shares of ACM’s Class A common stock at a price of $7.50 per share. Under the SMC Agreement, if SMC does not exercise the warrant by May 17, 2023, ACM Shanghai will be obligated, subject to approval of governmental authorities and ACM Shanghai’s equity holders, to deliver an equity interest of 3.6394% (subject to dilution) in satisfaction of the SMC Investment. If SMC exercises the warrant or if SMC does not exercise the warrant and the issuance of the equity interest in ACM Shanghai is not completed by August 17, 2023 due to the inability of the parties to obtain required governmental or equity holder approvals, then ACM Shanghai will be obligated to pay to SMC, in satisfaction of the SMC Investment, an amount equal to $2,981, converted into RMB at the lesser of 6.75 and the then-current RMB-to-US dollar exchange rate.

In accordance with FASB ASC 480, Distinguishing Liabilities from Equity, the warrant is classified as a liability as the warrant is conditional puttable. The fair value of the warrant is adjusted for changes in fair value at each reporting period but cannot be lower than the proceeds of the SMC Investment. The corresponding non-cash gain or loss of the changes in fair value is recorded in earnings. The methodology used to value the warrant was the Black-Scholes valuation model with the following assumptions:

17

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

NOTE 10 – OTHER LONG-TERM LIABILITIES

Other long-term liabilities represent government subsidies received from PRC governmental authorities for development and commercialization of certain technology but not yet recognized. As of September 30, 2017, and December 31, 2016, other long-term liabilities consisted of the following unearned government subsidies:

NOTE 11 – EQUITY METHOD INVESTMENT

On September 6, 2017, ACM and Ninebell Co., Ltd. (“Ninebell”), a Korean company that is one of the Company’s principal materials suppliers, entered into an ordinary share purchase agreement, effective as of September 11, 2017, pursuant to which Ninebell issued to ACM ordinary shares representing 20% of Ninebell’s post-closing equity for a purchase price of $1,200, and a common stock purchase agreement, effective as of September 11, 2017, pursuant to which ACM issued 133,334 shares of Class A common stock to Ninebell for a purchase price of $1,000 at $7.50 per share. The investment in Ninebell is accounted for under the equity method. Undistributed earnings attributable to ACM’s equity method investment represented $20 of the consolidated retained earnings at September 30, 2017.

NOTE 12 – RELATED PARTY BALANCES AND TRANSACTIONS

On August 18, 2017, ACM and Ninebell, its equity method investment affiliate (note 11), entered into a loan agreement, pursuant to which ACM made an interest-free loan of $946 to Ninebell, payable in 180 days or automatically extended another 180 days if in default. The loan is secured by a pledge of Ninebell’s accounts receivable due from ACM and all money that Ninebell receives from ACM. ACM purchased materials from Ninebell amounting to $807 and $382 during the three months ended September 30, 2017 and 2016, respectively, and $2,624 and $1,446 during the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017 and December 31, 2016, accounts payable due to Ninebell was $1,925 and $508, respectively.

In 2007, ACM Shanghai entered into an operating lease agreement with Shanghai Zhangjiang Group Co., Ltd. (“Zhangjiang Group”), one of the holders of non-controlling interests in ACM Shanghai, to lease manufacturing and office space located in Shanghai, China. Pursuant to the lease agreement, Zhangjiang Group provided $771 to ACM Shanghai for leasehold improvements. In September 2016, the lease agreement was amended to modify payment terms and extend the lease through December 31, 2017. During the three and nine months ended September 30, 2017 and 2016, the Company incurred leasing expenses under the lease agreement of $130, $161, $451 and $491, respectively. As of September 30, 2017, and December 31, 2016, payables to Zhangjiang Group for lease expenses and leasehold improvements recorded as other payables and accrued expenses, amounted to $2,024 and $1,883, respectively (note 7).

On December 9, 2016, ACM Shanghai received the SMC Investment from SMC for potential investment pursuant to terms to be subsequently negotiated (notes 8 and 9). SMC is a limited partnership incorporated in the PRC, whose partners consist of employees of ACM Shanghai. As of September 30, 2017, and December 31, 2016, investors’ deposits from SMC amounted to $0, and $2,902, respectively. On March 14, 2017, ACM, ACM Shanghai and SMC entered into a securities purchase agreement (the “SMC Agreement”) pursuant to which, in exchange for the SMC Investment, ACM issued to SMC a warrant exercisable, for cash or on a cashless basis, to purchase, at any time on or before May 17, 2023, all, but not less than all, of 397,502 shares of ACM’s Class A common stock at a price of $7.50 per share, for a total exercise price of $2,981. Under the SMC Agreement, if SMC does not exercise the warrant by May 17, 2023, ACM Shanghai will be obligated, subject to approval of governmental authorities and ACM Shanghai’s equity holders, to deliver an equity interest of 3.6394% (subject to dilution) in satisfaction of the

18

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

SMC Investment. If SMC exercises the warrant or if SMC does not exercise the warrant and the issuance of the equity interest in ACM Shanghai is not completed by August 17, 2023 due to the inability of the parties to obtain required governmental or equity holder approvals, then ACM Shanghai will be obligated to pay to SMC, in satisfaction of the SMC Investment, an amount equal to $2,981, converted into RMB at the lesser of 6.75 and the then-current RMB-to-US dollar exchange rate.

NOTE 13 – LEASES

ACM entered into a two-year lease agreement in March 2015 for office and warehouse space of approximately 3,000 square feet for its headquarters in Fremont, California, at a rate of $2 per month. On March 22, 2017, ACM amended the lease agreement to extend the lease term through September 30, 2018 and increase the base rent to $3 per month.

ACM Shanghai entered into an operating lease agreement with Zhangjiang Group (a related party, see note 12) in 2007 for manufacturing and office space of approximately 63,510 square feet in Shanghai, China. The lease agreement has been amended several times to modify payment terms and extend the lease term, most recently through December 31, 2017. Monthly rent is $58 during 2017.

ACM Wuxi leases office space in Wuxi, China, at a rate of less than $1 per month.

Future minimum lease payments under the non-cancelable lease agreements as of September 30, 2017 and December 31, 2016 were as follows:

Rent expense was $140 and $168 for the three months ended September 30, 2017 and 2016, respectively, and $476 and $437 for the nine months ended September 30, 2017 and 2016, respectively.

NOTE 14 – COMMON STOCK

ACM is authorized to issue 100,000,000 shares of Class A common stock and 7,303,533 shares of Class B common stock, each with a par value of $0.0001. Each share of Class A common stock is entitled to one vote, and each share of Class B common stock is entitled to twenty votes and is convertible at any time into one share of Class A common stock. Shares of Class A common stock and Class B common stock are treated equally, identically and ratably with respect to any dividends if declared by the Board of Directors unless the Board of Directors declares different dividends to the Class A common stock and Class B common stock by getting approval from a majority of common stock holders.

In August 2017 ACM entered into a securities purchase agreement with Shanghai Pudong High-Tech Investment Co., Ltd. (“PDHTI”) and its subsidiary Pudong Science and Technology (Cayman) Co., Ltd. (“PST”), in which ACM agreed to bid, in an auction process mandated by PRC regulations, to purchase PDHTI’s 10.78% equity interests in ACM Shanghai and to sell shares of Class A common stock to PST. On September 8, 2017, ACM issued 1,119,576 shares of Class A common stock to PST for a purchase price of $7.50 per share, representing an aggregate purchase price of $8,397. The non-controlling equity interest transfer to ACM is subject to Chinese government’s approval and had not been closed as of September 30, 2017.

In August 2017 ACM entered into a securities purchase agreement with Shanghai Zhangjiang Science & Technology Venture Capital Co., Ltd. (“ZSTVC”) and its subsidiary Zhangjiang AJ Company Limited (“ZJAJ”), in which ACM agreed to bid, in an auction process mandated by PRC regulations, to purchase ZSTVC’s 7.58% equity interests in ACM Shanghai and to sell shares of Class A common stock to ZJAJ. On September 8, 2017, ACM issued 787,098 shares of Class A common stock to ZJAJ for a purchase price of $7.50 per share, or an aggregate purchase price of $5,903. The non-controlling equity interest transfer to ACM is subject to Chinese government’s approval and had not been closed as of September 30, 2017.

19

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

In September 2017 ACM issued 133,334 shares of Class A common stock to Ninebell for a purchase price of $7.50 per share, or an aggregate purchase price of $1,000 (note 11).

At various dates during the nine months ended September 30, 2017, ACM issued 472,887 shares of Class A common stock for options exercised by certain employee and non-employees.

At September 30, 2017 and December 31, 2016, the number of shares of Class A common stock issued and outstanding was 4,741,635 and 2,228,740, respectively. At September 30, 2017 and December 31, 2016, the number of shares of Class B common stock issued and outstanding was 2,409,738.

NOTE 15 – REDEEMABLE CONVERTIBLE PREFERRED STOCK

Upon ACM’s redomestication in Delaware in November 2016, ACM had 22,696,467 authorized shares of preferred stock, of which 385,000, 1,572,000, 1,360,962, 2,659,975, 10,718,530, and 6,000,000 shares were designated as Series A, Series B, Series C, Series D, Series E and Series F preferred stock, respectively.

In March 2017 ACM entered into a securities purchase agreement, amended in July 2017, with Shanghai Science and Technology Venture Capital Co., Ltd. (“SSTVC”) pursuant to which, effective as of August 31, 2017, ACM acquired SSTVC’s equity interests in ACM Shanghai for a purchase price of $6,154 (RMB 40,000) and issued to SSTVC 4,998,508 shares of Series E convertible preferred stock for a purchase price of $5,800.

The number of outstanding shares of Series A, Series B, Series C, Series D, Series E and Series F was 385,000, 1,572,000, 1,360,962, 1,326,642, 4,998,508 and 3,663,254, and 385,000, 1,572,000, 1,360,962, 1,326,642, 0 and 3,663,254, respectively, at September 30, 2017 and December 31, 2016.

Shares of ACM’s convertible preferred stock have rights, preferences and privileges as follows:

Voting Rights

Each share of Series A through Series F convertible preferred stock is entitled to a number of votes equal to the number of whole shares of common stock into which such share can be converted.

Dividends

Holders of Series A through Series F convertible preferred stock have a non-cumulative right to participate in and receive the same dividends as may be declared for common stockholders, as and if declared by the Board of Directors, payable out of funds legally available.

Conversion

Each share of Series A through Series F convertible preferred stock is convertible at any time, at the option of the holder. At September 30, 2017, each share of Series A, B, E and F convertible preferred stock was convertible into one-third share of Class A common stock, each share of Series C convertible preferred stock was convertible into 0.3544 shares of Class A common stock, and each share of Series D convertible preferred stock was convertible into 0.4562 shares of Class A common stock. The Series A through Series F convertible preferred stock will convert automatically into Class A common stock upon the closing of an initial public offering of Class A common stock with aggregate proceeds of at least $20,000 and a per-share price of at least $15.00. At September 30, 2017 and December 31, 2016, 4,627,577 shares and 2,960,968 shares of Class A common stock were reserved for issuance upon conversion of outstanding Series A through Series F convertible preferred stock.

20

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

Liquidation Preferences

Holders of Series A through Series F convertible preferred stock are entitled to receive specified liquidation amounts in the event of a liquidation, dissolution or winding-up of ACM or of certain deemed liquidation events. The deemed liquidation events generally include (a) a merger or stock sale after which new stockholders would own a majority of the voting stock of ACM and (b) a sale of all or substantially all of the assets of the Company.

In the event of a liquidation, dissolution or winding-up of ACM or a deemed liquidation, the holders of Series A through Series F convertible preferred stock shall be entitled to be paid, prior to and in preference to the holders of common stock, an amount equal to $0.80, $1.00, $1.50, $3.75, $1.00 and $2.50 per share of Series A through Series F convertible preferred stock, respectively, plus any accumulated and unpaid dividends as of the redemption date.

NOTE 16 – STOCK-BASED COMPENSATION

ACM’s stock-based compensation awards consisting of employee and non-employee awards were issued under the 1998 Stock Option Plan and 2016 Omnibus Incentive Plan.

Employee Awards

The following table summarizes the Company’s employee share option activities during the nine months ended September 30, 2017:

ACM recognized employee stock-based compensation expense of $72 and $22 during the three months ended September 30, 2017 and 2016, respectively, and $200 and $68 during the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, and December 31, 2016, $712 and $726, respectively, of total unrecognized employee stock-based compensation expense, net of estimated forfeitures, related to stock-based awards were expected to be recognized over a weighted-average period of 1.92 years and 2.25 years, respectively. Total recognized compensation cost may be adjusted for future changes in estimated forfeitures.

21

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

The fair value of each option granted to an employee during the nine months ended September 30, 2017 was estimated on the grant date using the Black-Scholes valuation model with the following assumptions. No options were granted to employees during the nine months ended September 30, 2016.

Non-employee Awards

The following table summarizes the Company’s non-employee share option activities during the nine months ended September 30, 2017:

The Company recognized non-employee stock-based compensation expense of $272 and $(23) during the three months ended September 30, 2017 and 2016, respectively, and $1,492 and $125 during the nine months ended September 30, 2017 and 2016, respectively.

22

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

The fair value of each option granted to a non-employee during the nine months ended September 30, 2017 was calculated by application of the Black-Scholes valuation model with the following assumptions. No options were granted to any non-employee during the nine months ended September 30, 2016.

NOTE 17 – INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period during which such rates are enacted.

The Company considers all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become realizable. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carry-forward periods), and projected taxable income in assessing the realizability of deferred tax assets. In making such judgments, significant weight is given to evidence that can be objectively verified. Based on all available evidence, in particular the Company’s three-year historical cumulative losses, recent operating losses and U.S. pre-tax loss for the nine months ended September 30, 2017, the Company recorded a valuation allowance against its U.S. net deferred tax assets. In order to fully realize the U.S. deferred tax assets, the Company will need to generate sufficient taxable income in future periods before the expiration of the deferred tax assets governed by the tax code.

In each period since inception, the Company has recorded a valuation allowance for the full amount of net deferred tax assets in the US, as the realization of deferred tax assets is uncertain. The China subsidiary has shown a three year historical cumulative profit and has projections of future income. As a result, the Company maintained a partial consolidated valuation allowance for the nine months ended September 30, 2017 and 2016.

The Company accounts for uncertain tax positions in accordance with the authoritative guidance on income taxes under which the Company may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.

23

Table of Contents

ACM RESEARCH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data)

The Company’s effective tax rate differs from statutory rates of 34% for U.S. federal income tax purposes and 15%-25% for Chinese income tax purpose due to the effects of the valuation allowance and certain permanent differences as it pertains to book-tax differences. As a result, the company recorded a tax provision of $471 and $59 for the nine months ended September 30, 2017 and 2016.

As of September 30, 2017, the Company’s total unrecognized tax benefits were approximately $44, which would not affect the effective tax rate if recognized. The Company will recognize interest and penalties, when they occur, related to uncertain tax provisions as a component of tax expense. No interest or penalties were recognized for the nine months ended September 30, 2017.

The Company files income tax returns in the United States, and state and foreign jurisdictions. The federal, state and foreign income tax returns are under the statute of limitations subject to tax examinations for the tax years ended December 31, 2009 through December 31, 2016. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may be adjusted upon examination by the U.S. Internal Revenue Service, state or foreign tax authorities to the extent utilized in a future period.

As of September 30, 2017 and December 31, 2016, the Company intended that its PRC earnings would be indefinitely reinvested outside of the United States. Thus, deferred taxes were not, for U.S. federal income tax purposes, provided with respect to unremitted earnings from the PRC.

NOTE 18 – COMMITMENTS AND CONTINGENCIES

The Company leases offices under non-cancelable operating lease agreements. The rental expenses were $473 and $511 for the nine months ended September 30, 2017 and 2016, respectively. See note 13 for future minimum lease payments under non-cancelable operating lease agreements with initial terms of one year or more.

The Company did not have any capital commitments during the reported periods.

From time to time the Company is subject to legal proceedings, including claims in the ordinary course of business and claims with respect to patent infringements.

NOTE 19 – SUBSEQUENT EVENTS

Under PRC regulations, PDHTI and ZSTVC could sell their minority ACM Shanghai equity interests (see note 14) only by means of auction processes. In October 2017 ACM was advised that its bids had won both auctions and that the sales of both of the minority equity interests would be completed by no later than December 31, 2017. Upon completion of the two auction processes, ACM will own all of the outstanding equity interests of ACM Shanghai.

In November 2017 ACM issued and sold 2,233,000 shares of Class A common stock in the IPO. Of the shares sold in the IPO, 2,000,000 were sold upon completion of the IPO on November 7, 2017 and 233,000 shares were sold on November 14, 2017 upon exercise of an over-allotment option granted to the underwriters of the IPO. In addition, on November 7, 2017, following the completion of the IPO, ACM issued and sold 1,333,334 shares of Class A common stock in a private placement to two entities (the “Private Placement”). All of the 3,566,334 shares of Class A common stock issued in the IPO and the Private Placement were sold at a price of $5.60 per share, for aggregate gross proceeds of $20.0 million. The Company received approximately $16.5 million in net proceeds after deducting underwriting discounts and commissions, placement fees, and offering costs.

The condensed consolidated financial statements as of September 30, 2017, including share and per share amounts, do not give effect to the IPO, the Private Placement, the conversion of the convertible preferred stock or the amendment and restatement of the certificate of incorporation as all of such events were completed subsequent to September 30, 2017.

24

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this report and our final prospectus filed with the Securities and Exchange Commission on November 3, 2017 pursuant to Rule 424(b) under the Securities Act of 1933. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in the section titled “Item 1A. Risk Factors” in Part II. In this discussion, we use financial measures that are considered non-GAAP financial measures under Securities and Exchange Commission rules. These rules require supplemental explanation and reconciliation, which is included elsewhere in this report. Investors should not consider non-GAAP financial measures in isolation from or in substitution for, financial information presented in compliance with U.S. generally accepted accounting principles.

Overview

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

In November 2017 we issued and sold 2,233,000 shares of Class A common stock in our initial public offering, or IPO. Of the shares sold in the IPO, 2,000,000 were sold upon completion of the IPO on November 7, 2017 and 233,000 shares were sold on November 14, 2017 upon exercise of an over-allotment option granted to the underwriters of the IPO. In addition, on November 7, 2017, following the completion of the IPO, we issued and sold 1,333,334 shares of Class A common stock in a private placement to two investors, which we refer to as the concurrent private placement. All of the 3,566,334 shares of Class A common stock issued in the IPO and the concurrent private placement were sold at a price of $5.60 per share, for aggregate gross proceeds of $20.0 million. We received $16.5 million in net proceeds from the IPO and the concurrent private placement, after deducting underwriting discounts and commissions, placement fees, and offering costs.

Minority Interests in Our Operating Company

We conduct our business operations principally through ACM Shanghai, a subsidiary of ACM Research. Until August 31, 2017 ACM Research owned 62.87% of the outstanding equity interests in ACM Shanghai. Three third-party investors based in the People’s Republic of China, or PRC, held the remaining 37.13% of the ACM Shanghai equity interests, which are reflected as “non-controlling interests” in our consolidated balance sheets.

On August 31, 2017 we acquired an additional 18.77% of the ACM equity interests, increasing our ownership of ACM equity interests to 81.64%. On that date, Shanghai Science and Technology Venture Capital Co., Ltd. contemporaneously sold to ACM Research, for an aggregate price of $6.2 million, its 18.77% equity interests in ACM Shanghai and purchased from ACM Research, for an aggregate price of $5.8 million, shares of Series E preferred stock that converted, upon completion of the IPO, into 1,666,170 shares of Class A common stock, for an effective purchase price of $3.48 per share.

Under PRC regulations, each of the two remaining minority investors could sell its ACM Shanghai equity interests only by means of an auction process. In September 2017 each of the two minority investors commenced an auction process for the sale of its ACM Shanghai equity interests and, pursuant to securities purchase agreements entered into by ACM Research and each of the minority investors in August 2017, ACM Research submitted auction bids for the ACM Shanghai equity interests held by the two minority investors. In October 2017 ACM

25

Table of Contents

Research was advised that its bids for the minority ACM Shanghai equity interests had won both auctions and that the sales of the minority interests would be completed by no later than December 31, 2017:

Upon completion of the two auction processes in the fourth quarter of 2017, ACM will own all of the outstanding equity interests of ACM Shanghai.

Key Components of Results of Operations

Revenue

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

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

Evaluation Periods. When a chip manufacturer proposes to purchase a particular type of tool from us for the first time, we offer the manufacturer an opportunity to evaluate the tool for a period that can extend for 24 months or longer. We do not receive any payment on first-time purchases until the tool is accepted. As a result, we may spend between $1.0 and $2.0 million to produce a tool without receiving payment for more than 24 months or, if the tool is not accepted, without receiving any payment. Please see “Item 1A. Risk Factors—Risks Related to Our Business and Our Industry—We may incur significant expenses long before we can recognize revenue from new products, if at all, due to the costs and length of research, development, manufacturing and customer evaluation process cycles” in Part II below.

Purchase Orders. In accordance with industry practice, sales of our tools are made pursuant to purchase orders. Each purchase order from a customer for one of our tools contains specific technical requirements intended to ensure, among other things, that the tool will be compatible with the customer’s manufacturing process line. Until a purchase order is received, we do not have a binding purchase commitment. Our SAPS and TEBO customers to date have provided us with non-binding one- to two-year forecasts of their anticipated demands, and we expect future customers to furnish similar non-binding forecasts for planning purposes. Any of those forecasts would be subject to change, however, by the customer at any time, without notice to us.

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

26

Table of Contents

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

Because of the relatively large purchase prices of our tools, customers generally pay in installments. For a customer’s repeat purchase of a particular type of tool, the specific payment terms are negotiated in connection with acceptance of a purchase order. Based on our limited experience with repeat sales of SAPS and TEBO tools, we expect that we will receive an initial payment upon delivery of a tool in connection with a repeat purchase, with the balance being paid once the tool has been tested and accepted by the customer. Our sales arrangements for repeat purchases do not include a general right of return.

Since introducing SAPS technology in 2009, we have focused on selling SAPS-based tools and, beginning in 2016, TEBO-based tools. Our revenue from sales of single-wafer wet cleaning equipment totaled $14.8 million, or 76.8% of our revenue, in the nine months of 2017 (compared with $5.8 million, or 44.6% of revenue, in the first nine months of 2016), $21.5 million, or 78.4% of our revenue, in 2016 and $26.8 million, or 86.0% of our revenue, in 2015.

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

Based on our market experience, we believe that implementation of our equipment by one of our selected leading companies will attract and encourage other manufacturers to evaluate our equipment, because the leading company’s implementation will serve as validation of our equipment and will enable the other manufacturers to shorten their evaluation processes. We placed our first SAPS-based tool in 2009 as a prototype. We worked closely with the customer for two years in debugging and modifying the tool, and the customer then spent two more years of qualification and running pilot production before beginning volume manufacturing. Our revenue in 2015 included sales of SAPS-based tools following the customer’s completion of its qualification process. We expect that the period from new product introduction to high volume manufacturing will be three years or less in the future. Please see “Item 1A. Risk Factors—Business—We depend on a small number of customers for a substantial portion of our revenue, and the loss of, or a significant reduction in orders from, one or more of our major customers could have a material adverse effect on our revenue and operating results. There are also a limited number of potential customers for our products” in Part II below.

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

We recognize revenue in accordance with the Accounting Standards Codification, or ASC, Topic 605, Revenue Recognition, of the Financial Accounting Standards Board, or FASB, as described below under “—Critical Accounting Policies and Significant Judgments and Estimates—Revenue Recognition.”

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

27

Table of Contents

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

The loss or delay of one or more large sale transactions in a quarter could impact our results of operations for that quarter and any future quarters for which revenue from that transaction is lost or delayed, as described under “Item 1A. Risk Factors—Risks Related to Our Business and Our Industry—Our quarterly operating results can be difficult to predict and can fluctuate substantially, which could result in volatility in the price of Class A common stock” in Part II below. It is difficult to predict accurately when, or even if, we can complete a sale of a tool to a potential customer or to increase sales to any existing customer. Our tool demand forecasts are based on multiple assumptions, including non-binding forecasts received from customers years in advance, each of which may introduce error into our estimates. Difficulties in forecasting demand for our tools make it difficult for us to project future operating results and may lead to periodic inventory shortages or excess spending on inventory or on tools that may not be purchased, as further described in “Item 1A. Risk Factors—Risks Related to Our Business and Our Industry—Difficulties in forecasting demand for our tools may lead to periodic inventory shortages or excess spending on inventory items that may not be used” in Part II below.

Cost of Revenue

Cost of revenue for capital equipment consists primarily of:

We are not party to any long-term purchasing agreements with suppliers. Please see “Item 1A. Risk Factors—Risks Related to Our Business and Our Industry—Our customers do not enter into long-term purchase commitments, and they may decrease, cancel or delay their projected purchases at any time” in Part II below. As our customer base and tool installations continue to grow, we will need to hire additional manufacturing personnel. The rates at which we add customers and install tools will affect the level and time of this spending. In addition, because we often import components and spare parts from the United States, we have experienced, and expect to continue to experience, the effect of the dollar’s growth on our cost of revenue.

Gross Margin

Our gross margin was 41.7% in the first nine months of 2017 (compared with 44.1% in the first nine months of 2016), 48.7% in 2016 and 45.3% in 2015. Gross margin may vary from period to period, primarily related to the level of utilization and the timing and mix of purchase orders. We expect gross margin to be between 40% and 45% for the foreseeable future, with direct manufacturing costs approximating 50% to 55% of revenue and overhead costs totaling approximately 5% of revenue.

We seek to maintain our gross margin by continuing to develop proprietary technologies that avoid pricing pressure for our wet cleaning equipment. We actively manage our operations through principles of operational excellence designed to ensure continuing improvement in the efficiency and quality of our manufacturing operations by, for example, implementing factory constraint management and change control and inventory management systems. In addition, our purchasing department actively seeks to identify and negotiate supply contracts with improved pricing to reduce cost of revenue.

28

Table of Contents

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

Operating Expenses

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

    Sales and Marketing

Sales and marketing expense accounted for 18.7% of our revenue in the first nine months of 2017 (compared with 19.4% of revenue in the first nine months of 2016), 14.3% of our revenue in 2016 and 13.5% of our revenue in 2015. Sales and marketing expense consists primarily of:

Sales and marketing expense can be significant and may fluctuate, in part because of the resource-intensive nature of our sales efforts and the length and variability of our sales cycle. The length of our sales cycle, from initial contact with a customer to the execution of a purchase order, is generally 6 to 24 months.

During the sales cycle, we expend significant time and money on sales and marketing activities, including educating customers about our tools, participating in extended tool evaluations and configuring our tools to customer-specific needs. Sales and marketing expense in a given period can be particularly affected by the increase in travel and entertainment expenses associated with the finalization of purchase orders or the installation of tools.

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

    Research and Development

Research and development expense accounted for 15.9% of our revenue in the first nine months of 2017 (compared with 17.7% of revenue in the first nine months of 2016), 11.9% of our revenue in 2016 and 9.4% of our revenue in 2015. Research and development expense relates to the development of new products and processes and encompasses our research, development and customer support activities. Research and development expense consists primarily of:

29

Table of Contents

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

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

    General and Administrative

General and administrative expense accounted for 22.9% of our revenue in the first nine months of 2017 (compared with 13.0% of revenue in the first nine months of 2016), 9.8% of our revenue in 2016 and 6.7% of our revenue in 2015. General and administrative expense consists primarily of:

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

Stock-Based Compensation Expense

We grant stock options to employees and non-employee consultants and directors, and we accounts for those stock-based awards in accordance with the FASB’s ASC Topic 718, Compensation—Stock Compensation and ASC Subtopic 505-50, Equity-Based Payments to Non-Employees.

30

Table of Contents

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

We recognized stock-based compensation expense to employees of $72,000 in the third quarter of 2017 (compared to $23,000 in the third quarter of 2016), $200,000 in the first nine months of 2017 (compared to $68,000 in the first nine months of 2016), $92,000 in 2016 and $73,000 in 2015. As of September 30, 2017 and December 31, 2016 and 2015, there was $712,000, $726,000 and $299,000 of total unrecognized employee share-based compensation expense, net of estimated forfeitures, related to unvested share-based awards, which are expected to be recognized over a weighted-average period of 1.92 years, 2.25 years and 1.24 years, respectively.

We recognized stock-based compensation expense to non-employees of $272,000 in the third quarter of 2017 (compared to ($23,000) in the third quarter of 2016), $1.5 million in the first nine months of 2017 (compared to $125,000 in the first nine months of 2016), $291,000 in 2016 and $350,000 in 2015. The fair value of each option granted to a non-employee is re-measured at each period end until the vesting date.

PRC Government Research and Development Funding

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

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

31

Table of Contents

Net Income Attributable to Non-Controlling Interests

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

How We Evaluate Our Operations

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

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

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

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

32

Table of Contents

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

Adjusted EBITDA in the third quarter ended September 30, 2017, as compared with the comparable period in 2016, reflected an increase of $1.1 million in non-GAAP operating expenses and a decrease of $621,000 in gross profit. Adjusted EBITDA in the nine months ended September 30, 2017, as compared with the comparable period in 2016, reflected an increase of $3.2 million in non-GAAP operating expenses and an increase of $1.0 million in other non-operating expenses, substantially offset by an increase of $2.4 million in gross profit. We do not exclude from adjusted EBITDA expense reductions and non-operating other income attributable to PRC governmental grants because we consider and incorporate the expected amounts and timing of those grants in incurring expenses and capital expenditures. If we did not receive the grants, our cash expenses therefore would be lower, and our cash position would not be affected, to the extent we have accurately anticipated the amounts of the grants. For additional information regarding our PRC grants, please see “—Key Components of Results of Operations—PRC Government Research and Development Funding.”

33

Table of Contents

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

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

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

34

Table of Contents

Adjusted operating loss in the third quarter ended September 30, 2017, as compared with the comparable period in 2016, reflected an increase of $343,000 in stock-based compensation expense. Adjusted operating loss in the nine months ended September 30, 2017, as compared with the comparable period in 2016, reflected an increase of $1.5 million in stock-based compensation expense.

Critical Accounting Policies and Significant Judgments and Estimates

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

Revenue Recognition

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

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

35

Table of Contents

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

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

Stock-Based Compensation

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

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

No stock options were granted to employees during the three months ended September 30, 2017 or the nine months ended September 30, 2016. For employee stock option grants made during the nine months ended September 30, 2017, the weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of those grants were as follows:

36

Table of Contents

No stock options were granted to non-employees during the three months ended September 30, 2017 or the nine months ended September 30, 2016. For non-employee stock option grants made during the nine months ended September 30, 2017, the weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of those grants were as follows:

The following table summarizes by grant date the number of shares of common stock underlying stock options granted from January 1, 2016 through September 30, 2017, as well as the associated per share exercise price and the estimated fair value per share of common stock on the grant date: