ACM Research, Inc. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _____________

Commission file number: 001-38273

ACM Research, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		94-3290283
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

42307 Osgood Road, Suite I Fremont, California		94539
(Address of Principal Executive Offices)		(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol	Name of Each Exchange on which Registered
Class A Common Stock, $0.0001 par value per share	ACMR	Nasdaq Global Market

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 every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☑
		Emerging growth company	☑

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 Section13(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.

Class	Number of Shares Outstanding
Class A Common Stock, $0.0001 par value	16,333,879 shares outstanding as of November 5, 2019
Class B Common Stock, $0.0001 par value	1,862,608 shares outstanding as of November 5, 2019

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	3
	Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2019 and 2018	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risks	33
Item 4.	Controls and Procedures	34
PART II.	OTHER INFORMATION	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 6.	Exhibits	36
SIGNATURE		36

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.

For purposes of this report, certain amounts in Renminbi, or RMB, have been translated into U.S. dollars solely for the convenience of the reader. The translations have been made based on the conversion rates published by the State Administration of Foreign Exchange of the People’s Republic of China.

SAPS, TEBO and ULTRA C are our trademarks. For convenience, these trademarks appear in this report without ™ symbols, but that practice does not mean that we will not assert, to the fullest extent under applicable law, our rights to the trademarks. This report also contains other companies’ trademarks, registered marks and trade names, which are the property of those companies.

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 or incorporated by reference 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 this report, 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.

Table of Contents

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

ACM RESEARCH, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	47,264		$	27,124
Restricted cash		26,582			-
Accounts receivable, less allowance for doubtful accounts of $0 as of September 30, 2019 and $0 as of December 31, 2018 (note 3)		43,144			24,608
Other receivables		2,152			3,547
Inventories (note 4)		43,506			38,764
Prepaid expenses		1,006			1,985
Total current assets		163,654			96,028
Property, plant and equipment, net (note 5)		3,573			3,708
Operating lease right-of-use assets, net (note 8)		4,205			-
Intangible assets, net		285			274
Deferred tax assets (note 16)		2,309			1,637
Long-term investments (note 10)		5,968			1,360
Other long-term assets		222			40
Total assets		180,216			103,047
Liabilities, Redeemable Non-controlling Interests and Stockholders’ Equity
Current liabilities:
Short-term borrowings (note 6)		15,665			9,447
Accounts payable		15,440			16,673
Advances from customers		8,397			8,417
Income taxes payable		1,326			1,193
Other payables and accrued expenses (note 7)		13,970			10,410
Current portion of operating lease liability (note 8)		1,350			-
Total current liabilities		56,148			46,140
Long-term operating lease liability (note 8)		2,855			-
Other long-term liabilities (note 9)		2,980			4,583
Total liabilities		61,983			50,723
Commitments and contingencies (note 17)
Redeemable non-controlling interests (note 14)		26,888			-
Stockholders’ equity:
Common stock – Class A, par value $0.0001: 50,000,000 shares authorized as of September 30, 2019 and December 31, 2018; 16,179,058 shares issued and outstanding as of September 30, 2019 and 14,110,315 shares issued and outstanding as of December 31, 2018 (note 13)		2			1
Common stock–Class B, par value $0.0001: 2,409,738 shares authorized as of September 30, 2019 and December 31, 2018; 1,862,608 shares issued and outstanding as of September 30, 2019 and 1,898,423 shares issued and outstanding as of December 31, 2018 (note 13)		-			-
Additional paid in capital		82,857			56,567
Accumulated surplus (deficit)		11,563			(3,387	)
Accumulated other comprehensive loss		(3,077	)		(857	)
Total stockholders’ equity		91,345			52,324
Total liabilities, redeemable non-controlling interests, and stockholders’ equity	$	180,216		$	103,047

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

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ACM RESEARCH, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income

(In thousands, except share and per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue	$	33,427		$	23,179		$	82,916		$	53,795
Cost of revenue		17,173			12,892			44,705			29,662
Gross profit		16,254			10,287			38,211			24,133
Operating expenses:
Sales and marketing		3,886			3,229			8,679			7,766
Research and development		3,492			2,264			9,598			6,224
General and administrative		1,846			1,390			5,992			6,312
Total operating expenses, net		9,224			6,883			24,269			20,302
Income from operations		7,030			3,404			13,942			3,831
Interest income		95			3			128			20
Interest expense		(205	)		(112	)		(538	)		(364	)
Other income, net		1,850			902			2,132			1,213
Equity income (loss) in net income (loss) of affiliates		(9	)		117			260			235
Income before income taxes		8,761			4,314			15,924			4,935
Income tax (expense) benefit (note 16)		328			(461	)		(667	)		(647	)
Net income		9,089			3,853			15,257			4,288
Less: Net income attributable to redeemable non-controlling interests		307			-			307			-
Net income attributable to ACM Research, Inc.	$	8,782		$	3,853		$	14,950		$	4,288
Comprehensive income:
Net income		9,089			3,853			15,257			4,288
Foreign currency translation adjustment		(2,591	)		(746	)		(2,902	)		(1,077	)
Comprehensive Income (note 2)		6,498			3,107			12,355			3,211
Less: Comprehensive income attributable to redeemable non-controlling interests		307			-			307			-
Comprehensive income attributable to ACM Research, Inc.	$	6,191		$	3,107		$	12,048		$	3,211

Net income attributable to ACM Research, Inc. per common share (note 2):
Basic	$	0.52		$	0.24		$	0.91		$	0.27
Diluted	$	0.45		$	0.21		$	0.80		$	0.24

Weighted average common shares outstanding used in computing per share amounts (note 2):
Basic		16,999,746			15,915,864			16,381,944			15,714,310
Diluted		19,354,214			18,169,807			18,699,010			17,816,101

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

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ACM RESEARCH, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended September 30, 2019 and 2018

(In thousands, except share and per share data)

(Unaudited)

	Common Stock Class A					Common Stock Class B
	Shares			Amount		Shares			Amount		Additional Paid-in Capital			Accumulated Surplus (Deficit)		Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance at July 1, 2019		14,229,942		$	1		1,883,423		$	-	$	58,101		$	2,781	$	(1,168	)	$	59,715
Net income attributable to ACM Research, Inc.		-			-		-			-		-			8,782		-			8,782
Foreign currency translation adjustment		-			-		-			-		-			-		(1,909	)		(1,909	)
Exercise of stock options		89,015			-		-			-		140			-		-			140
Cancellation of stock options		-			-		-			-		(576	)		-		-			(576	)
Stock-based compensation		-			-		-			-		1,557			-		-			1,557
Issuance of Class A common stock in connection with public offering		2,053,572			1		-			-		26,462			-		-			26,463
Share repurchases		(214,286	)		-		-			-		(2,827	)		-		-			(2,827	)
Conversion of Class B common stock to Class A common stock		20,815			-		(20,815	)		-		-			-		-			-
Balance at September 30, 2019		16,179,058		$	2		1,862,608		$	-		82,857		$	11,563	$	(3,077	)		91,345

	Common Stock Class A				Common Stock Class B
	Shares		Amount		Shares			Amount		Additional Paid-in Capital		Accumulated Surplus (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance at July 1, 2018		13,957,339	$	1		1,920,173		$	-		55,331	$	(9,526	)		(209	)		45,597
Net income attributable to ACM Research, Inc.		-		-		-			-		-		3,853			-			3,853
Foreign currency translation adjustment		-		-		-			-		-		-			(746	)		(746	)
Exercise of stock options		110,976		-		-			-		217		-			-			217
Stock-based compensation		-		-		-			-		411		-			-			411
Conversion of Class B common stock to Class A common stock		1,750		-		(1,750	)		-		-		-			-			-
Balance at September 30, 2018		14,070,065	$	1		1,918,423		$	-		55,959	$	(5,673	)	$	(955	)		49,332

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

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ACM RESEARCH, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Continued)

For the Nine Months Ended September 30, 2019 and 2018

(In thousands, except share and per share data)

(Unaudited)

	Common Stock Class A					Common Stock Class B
	Shares			Amount		Shares			Amount		Additional Paid-in Capital			Accumulated Surplus (Deficit)			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance at January 1, 2019		14,110,315		$	1		1,898,423		$	-	$	56,567		$	(3,387	)	$	(857	)	$	52,324
Net income attributable to ACM Research, Inc.		-			-		-			-		-			14,950			-			14,950
Foreign currency translation adjustment		-			-		-			-		-			-			(2,220	)		(2,220	)
Exercise of stock options		193,642			-		-			-		312			-			-			312
Cancellation of stock options		-			-		-			-		(576	)		-			-			(576	)
Stock-based compensation		-			-		-			-		2,919			-			-			2,919
Issuance of Class A common stock in connection with public offering		2,053,572			1		-			-		26,462			-			-			26,463
Share repurchase		(214,286	)		-		-			-		(2,827	)		-			-			(2,827	)
Conversion of Class B common stock to Class A common stock		35,815			-		(35,815	)		-		-			-			-			-
Balance at September 30, 2019		16,179,058		$	2		1,862,608		$	-		82,857		$	11,563		$	(3,077	)		91,345

	Common Stock Class A				Common Stock Class B
	Shares		Amount		Shares			Amount		Additional Paid-in Capital		Accumulated Surplus (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance at January 1, 2018		12,935,546	$	1		2,409,738		$	-		49,695	$	(9,961	)		122			39,857
Net income attributable to ACM Research, Inc.		-		-		-			-		-		4,288			-			4,288
Foreign currency translation adjustment		-		-		-			-		-		-			(1,077	)		(1,077	)
Exercise of stock options		245,702		-		-			-		512		-			-			512
Stock-based compensation		-		-		-			-		2,771		-			-			2,771
Conversion of Class B common stock to Class A common stock		491,315		-		(491,315	)		-		-		-			-			-
Exercise of common stock warrant issued to SMC		397,502		-		-			-		2,981		-			-			2,981
Balance at September 30, 2018		14,070,065	$	1		1,918,423		$	-		55,959	$	(5,673	)	$	(955	)		49,332

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

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ACM RESEARCH, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income	$	15,257		$	4,288
Adjustments to reconcile net income from operations to net cash used in operating activities:
Depreciation and amortization		586			380
Loss on disposals of property, plant and equipment		296			-
Equity income in net income of affiliates		(260	)		(235	)
Deferred income taxes		(757	)		-
Stock-based compensation		2,919			2,771
Net changes in operating assets and liabilities:
Accounts receivable		(19,634	)		(5,526	)
Other receivables		1,187			781
Inventory		(5,889	)		(15,157	)
Prepaid expenses		323			(1,653	)
Other long-term assets		(182	)		12
Accounts payable		(417	)		5,165
Advances from customers		746			3,818
Income tax payable		162			645
Other payables and accrued expenses		2,352			2,658
Other long-term liabilities		(1,441	)		(680	)
Net cash used in operating activities		(4,752	)		(2,733	)

Cash flows from investing activities:
Purchase of property and equipment		(832	)		(1,598	)
Purchase of intangible assets		(114	)		(350	)
Investments in unconsolidated affiliates		(4,348	)		-
Net cash used in investing activities		(5,294	)		(1,948	)

Cash flows from financing activities:
Proceeds from short-term borrowings		18,267			13,065
Repayments of short-term borrowings		(11,770	)		(7,962	)
Proceeds from stock option exercise to common stock		312			511
Proceeds from issuance of Class A common stock in connection with public offering, net of direct issuance expenses of $2,287		26,463			-
Payment for repurchase of Class A common stock		(785	)		-
Payment for cancellation of stock option		(576	)		-
Proceeds from issuance of common stock to redeemable Non-controlling interest		27,264			-
Net cash provided by financing activities		59,175			5,614

Effect of exchange rate changes on cash, cash equivalents and restricted cash	$	(2,407	)	$	(376	)
Net increase in cash, cash equivalents and restricted cash	$	46,722		$	557

Cash, cash equivalents and restricted cash at beginning of period		27,124			17,681
Cash, cash equivalents and restricted cash at end of period	$	73,846		$	18,238

Supplemental disclosure of cash flow information:
Interest paid	$	538		$	364

Reconciliation of cash, cash equivalents and restricted cash in condensed consolidated statements of cash flows:
Cash and cash equivalents		47,264			18,238
Restricted cash		26,582			-
Cash, cash equivalents and restricted cash	$	73,846		$	18,238

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

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(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 its single-wafer wet-cleaning equipment, under the brand name “Ultra C,” 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 initially 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. In August 2018, the Company introduced its Ultra-C Tahoe wafer cleaning tool, which can deliver high cleaning performance with significantly less sulfuric acid than typically consumed by conventional high-temperature single-wafer cleaning tools. 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. On November 8, 2017, ACM purchased the remaining 18.36% of ACM Shanghai’s equity interest held by third parties, Shanghai Pudong High-Tech Investment Co., Ltd. (“PDHTI”) and Shanghai Zhangjiang Science & Technology Venture Capital Co., Ltd. (“ZSTVC”). At December 31, 2017, ACM owned all of the outstanding equity interests of ACM Shanghai, and indirectly through ACM Shanghai, owned all of the outstanding equity interests of ACM Wuxi.

On September 13, 2017, ACM effectuated a 1-for-3 reverse stock 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 these notes and the accompanying condensed consolidated financial statements have been adjusted retrospectively to reflect the reverse stock split.

In December 2017 ACM formed a wholly owned subsidiary in the Republic of Korea, ACM Research Korea CO., LTD. (“ACM Korea”), to serve customers based in Republic of Korea and perform sales, marketing, research and development activities for new products and solutions.

In March 2019 ACM Shanghai formed a wholly owned subsidiary in the PRC, Shengwei Research (Shanghai), Inc., to manage activities related to addition of future long-term production capacity. The subsidiary was formed with registered capital of RMB 5,000 ($727). As of September 30, 2019, no capital had been injected into this subsidiary.

In June 2019 Cleanchip formed a wholly owned subsidiary in California, ACM Research (CA), Inc., to provide procurement services on behalf of ACM Shanghai.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands, except share and per share data)

On June 17, 2019 ACM announced plans to complete over the next three years a listing (the “Listing”) of shares of ACM Shanghai on the Shanghai Stock Exchange’s new Sci-Tech innovAtion boaRd, known as the STAR Market, and a concurrent initial public offering (the “STAR IPO”) of ACM Shanghai shares in the PRC. ACM Shanghai is currently ACM’s primary operating subsidiary, and at the time of announcement, was wholly owned by ACM. As an initial step in qualifying for the Listing and STAR IPO, on June 12, 2019 ACM Shanghai entered into agreements with seven investors (the “Investors”), pursuant to which the Investors agreed to pay a purchase price totaling RMB 187,900 (equivalent to $27,300) to ACM Shanghai for shares representing 4.2% of the then-outstanding ACM Shanghai shares (see note 14).

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The consolidated accounts include ACM and its subsidiaries ACM Shanghai, ACM Wuxi, CleanChip, ACM Korea, ACM Research (CA), Inc. and Shengwei Research (Shanghai), Inc. 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 financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the rules and regulations of the SEC for reporting on Form 10-Q. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements herein. The unaudited 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, 2018 included in ACM’s Annual Report on Form 10-K for the year ended December 31, 2018.

The accompanying condensed consolidated balance sheet as of September 30, 2019, the condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2019 and 2018, the condensed consolidated statements of changes in stockholders’ equity for the three and nine months ended September 30, 2019 and 2018, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018 are unaudited. In the opinion of management, the unaudited condensed consolidated financial statements of the Company reflect all adjustments that 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, 2019 and the results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for any future period.

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 revenue 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.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands, except share and per share data)

Basic and Diluted Net Income per Common Share

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Numerator:
Net income	$	9,089	$	3,853	$	15,257	$	4,288
Net income attributable to redeemable non-controlling interests		307		-		307		-
Net income available to common stockholders, basic and diluted	$	8,782	$	3,853	$	14,950	$	4,288
Weighted average shares outstanding, basic		16,999,746		15,915,864		16,381,944		15,714,310
Effect of dilutive securities		2,354,468		2,253,943		2,317,066		2,101,791
Weighted average shares outstanding, diluted		19,354,214		18,169,807		18,699,010		17,816,101
Net income per common share:
Basic	$	0.52	$	0.24	$	0.91	$	0.27
Diluted	$	0.45	$	0.21	$	0.80	$	0.24

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 during the three and nine months ended September 30, 2019 and 2018, the net income 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 condensed consolidated statements of operations and comprehensive income and in the above computation of net income per common share.

Diluted net income per common share reflects the potential dilution from securities that could share in ACM’s earnings. ACM’s potential dilutive securities consist warrants and stock options for the three and nine months ended September 30, 2019 and 2018. Certain potential dilutive securities were excluded from the net income per share calculation because the impact would be anti-dilutive.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The amendments in ASU 2016-02 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 lease 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.

Effective January 1, 2019, the Company adopted ASU 2016-02. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, Leases, which included an option to not restate comparative periods in transition and elect to use the effective date of Accounting Standards Codification (“ASC”) 842 as the date of initial application of transition, which the Company elected. As a result of its adoption of ASC 842 as of January 1, 2019, the Company recorded operating lease right-of-use assets of $5,109 and lease liabilities of $5,109. The adoption of ASC 842 had no impact on the Company’s profit or cash flows for the three and nine months ended September 30, 2019. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward the historical lease classification. Additional information and disclosures required by this new standard are contained in note 8.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands, except share and per share data)

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718)—Improvements to Nonemployee Share-Based Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Some of the areas for simplification apply only to nonpublic entities. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under the new revenue recognition standard set forth in ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Effective January 1, 2019, the Company adopted ASU 2018-07, which did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The modified standard eliminates the requirement to disclose changes in unrealized gains and losses included in earnings for recurring Level 3 fair value measurements and requires changes in unrealized gains and losses be included in other comprehensive income for recurring Level 3 fair value measurements of instruments. The standard also requires the disclosure of the range and weighted average used to develop significant unobservable inputs and how weighted average is calculate for recurring and nonrecurring Level 3 fair value measurements. The amendment is effective for fiscal years beginning after December 15, 2019 and interim periods within that fiscal year, with early adoption permitted. The Company is evaluating the impact of the adoption of ASU 2018-13 on its consolidated financial statements.

In January 2017, the FASB issued ASU 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. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. A business entity that files periodic reports with the Securities and Exchange Commission must adopt the amendments in ASU 2017-04 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 June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Adoption of the standard requires using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align existing credit loss methodology with the new standard. The Company will adopt ASU 2016-13 effective January 1, 2020. The Company is evaluating the impact of this standard on its consolidated financial statements, including accounting policies, processes, and systems, but does not expect the standard will have a material impact on its consolidated financial statements.

NOTE 3 – ACCOUNTS RECEIVABLE

At September 30, 2019 and December 31, 2018, accounts receivable consisted of the following:

	September 30, 2019		December 31, 2018
Accounts receivable	$	43,144	$	24,608
Less: Allowance for doubtful accounts		-		-
Total	$	43,144	$	24,608

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, 2019 or December 31, 2018. At September 30, 2019 and December 31, 2018, accounts receivable of $0 and $1,457, respectively, were pledged as collateral for borrowings from financial institutions.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands, except share and per share data)

NOTE 4 – INVENTORIES

At September 30, 2019 and December 31, 2018, inventory consisted of the following:

	September 30, 2019		December 31, 2018
Raw materials	$	14,313	$	12,646
Work in process		10,610		9,631
Finished goods		18,583		16,487
Total inventory, gross		43,506		38,764
Inventory reserve		-		-
Total inventory, net	$	43,506	$	38,764

At September 30, 2019 and December 31, 2018, the Company did not have an inventory reserve and no inventory was pledged as collateral for borrowings from financial institutions. System shipments of first-tools to an existing or prospective customer, for which ownership does not transfer until customer acceptance, are classified as finished goods inventory and carried at cost until ownership is transferred.

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET

At September 30, 2019 and December 31, 2018, property, plant and equipment consisted of the following:

	September 30, 2019			December 31, 2018
Manufacturing equipment	$	3,851		$	9,703
Office equipment		609			512
Transportation equipment		123			184
Leasehold improvement		1,416			1,379
Total cost		5,999			11,778
Less: Total accumulated depreciation		(2,920	)		(8,102	)
Construction in progress		494			32
Total property, plant and equipment, net	$	3,573		$	3,708

Depreciation expense was $176 and $84 for the three months ended September 30, 2019 and 2018, respectively, and $528 and $257 for the nine months ended September 30, 2019 and 2018, respectively.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands, except share and per share data)

NOTE 6 – SHORT-TERM BORROWINGS

At September 30, 2019 and December 31, 2018, short-term borrowings consisted of the following:

	September 30, 2019		December 31, 2018
Line of credit up to RMB 50,000 from Bank of Shanghai Pudong Branch, due on April 17,2019 with an annual interest rate of 4.99%, guaranteed by the Company’s CEO and fully repaid on March 27, 2019.	$	-	$	3,133
Line of credit up to RMB 50,000 from Bank of Shanghai Pudong Branch, due on February 14,2019 with an annual interest rate of 5.15%, guaranteed by the Company’s CEO and fully repaid on February 14, 2019.				485
Line of credit up to RMB 50,000 from Bank of Shanghai Pudong Branch, due on January 23, 2020 with an annual interest rate of 5.22%, guaranteed by the Company’s CEO and Cleanchip Technologies Limited.		7,041
Line of credit up to RMB 30,000 from Bank of China Pudong Branch, due on June 6,2019 with annual interest rate of 5.22%,secured by certain of the Company’s intellectual property and the Company’s CEO and fully repaid on June 6,2019.				2,186
Line of credit up to RMB 30,000 from Bank of China Pudong Branch, due on June 13,2019 with annual interest rate of 5.22%,secured by certain of the Company’s intellectual property and the Company’s CEO and fully repaid on June 13,2019.				2,186
Line of credit up to RMB 10,000 from Shanghai Rural Commercial Bank, due on January 23, 2019 with an annual interest rate of 5.44%, guaranteed by the Company’s CEO and pledged by accounts receivable,and fully repaid on January 23, 2019.				1,457
Line of credit up to RMB 20,000 from Shanghai Rural Commercial Bank, due on February 21, 2020 with an annual interest rate of 5.66%, guaranteed by the Company’s CEO and pledged by accounts receivable.		1,414
Line of credit up to RMB 20,000 from Bank of Communications, due on January 18, 2020 with an annual interest rate of 5.66%.		1,414
Line of credit up to RMB 20,000 from Bank of Communications, due on January 22, 2020 with an annual interest rate of 5.66%.		707
Line of credit up to RMB 20,000 from Bank of Communications, due on February 14, 2020 with an annual interest rate of 5.66%.		707
Line of credit up to RMB 50,000 from China Everbright Bank, due on March 25, 2020 with an annual interest rate of 4.94%, guaranteed by the Company’s CEO.		3,252
Line of credit up to RMB 50,000 from China Everbright Bank, due on April 17, 2020 with an annual interest rate of 5.66%, guaranteed by the Company’s CEO.		1,130

Total	$	15,665	$	9,447

Interest expense related to short-term borrowings amounted to $205 and $112 for the three months ended September 30, 2019 and 2018, respectively, and $538 and $364 for the nine months ended September 30, 2019 and 2018, respectively.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands, except share and per share data)

NOTE 7 – OTHER PAYABLE AND ACCRUED EXPENSES

At September 30, 2019 and December 31, 2018, other payable and accrued expenses consisted of the following:

	September 30, 2019		December 31, 2018
Lease expenses and payable for leasehold improvement due to a related party (note 11)	$	-	$	53
Accrued commissions		3,235		2,931
Accrued warranty		2,633		1,710
Accrued payroll		1,743		626
Accrued professional fees		176		64
Accrued machine testing fees		1,333		3,076
Accrued due to a related party (note 11)		1,990		-
Others		2,860		1,950
Total	$	13,970	$	10,410

NOTE 8 –LEASES

The Company leases space under non-cancelable operating leases for several office and manufacturing locations. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions.

Most leases include one or more options to renew. The exercise of lease renewal options is typically at the Company’s sole discretion; therefore, the majority of renewals to extend the lease terms are not included in the Company’s right-of-use assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates the renewal options, and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term.

As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The Company has a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, it applies a portfolio approach for determining the incremental borrowing rate.

The components of lease expense were as follows:

	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	363	$	1,064
Short-term lease cost		92		117
Lease cost	$	455	$	1,181

Supplemental cash flow information related to operating leases was as follows for the period ended September 30, 2019:

	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow from operating leases	$	455	$	1,181

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands, except share and per share data)

Maturities of lease liabilities for all operating leases were as follows as of September 30, 2019:

	December 31,
2019	$	364
2020		1,488
2021		1,475
2022		1,495
2023		53
2024		13
Total lease payments		4,888
Less: Interest		(683	)
Present value of lease liabilities	$	4,205

The weighted average remaining lease terms and discount rates for all operating leases were as follows as of September 30, 2019:

	September 30, 2019
Remaining lease term and discount rate:
Weighted average remaining lease term (years)	3.27
Weighted average discount rate	5.42%

NOTE 9 – 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, 2019, and December 31, 2018, other long-term liabilities consisted of the following unearned government subsidies:

	September 30, 2019		December 31, 2018
Subsidies to Stress Free Polishing project, commenced in 2008 and 2017	$	1,281	$	1,483
Subsidies to Electro Copper Plating project, commenced in 2014		1,456		2,860
Subsidies to Polytetrafluoroethylene, commenced in 2018		143		178
Other		100		62
Total	$	2,980	$	4,583

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands, except share and per share data)

NOTE 10 – LONG-TERM 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.

On June 27, 2019, ACM Shanghai and Shengyi Semiconductor Technology Co., Ltd. (“Shengyi”), a company based in Wuxi, China that is one of the Company’s components suppliers, entered into an agreement pursuant to which Shengyi issued to ACM Shanghai shares representing 15% of Shengyi’s post-closing equity for a purchase price of $109. The investment in Shengyi is accounted for under the cost method.

On September 5, 2019, ACM Shanghai, entered into a Partnership Agreement with six other investors, as limited partners, and Beijing Shixi Qingliu Investment Co., Ltd., as general partner and manager, with respect to the formation of Hefei Shixi Chanheng Integrated Circuit Industry Venture Capital Fund Partnership (LP), a Chinese limited partnership based in Hefei, China. Pursuant to such Partnership Agreement, on September 30, 2019, ACM Shanghai invested RMB 30,000 ($4,200), which represented 10% of the Partnership’s total subscribed capital. The investment in Hefei Shixi Chanheng Integrated Circuit Industry Venture Capital Fund Partnership (LP) is accounted for under the cost method.

	September 30, 2019		December 31, 2018
Investment – equity method	$	1,620	$	1,360
Investment – cost method		4,348		-
Total	$	5,968	$	1,360

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands, except share and per share data)

NOTE 11– RELATED PARTY BALANCES AND TRANSACTIONS

On August 18, 2017, ACM and Ninebell, its equity method investment affiliate (note 10), 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 was secured by a pledge of Ninebell’s accounts receivable due from ACM and all money that Ninebell received from ACM. Ninebell repaid the loan in March 2018. ACM purchased materials from Ninebell amounting to $2,591 and $2,529 during the three months ended September 30, 2019 and 2018, and $7,395 and $5,364 during the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019 and December 31, 2018, accounts payable due to Ninebell were $809 and $1,477, respectively, and prepaid expenses prepaid to Ninebell for material purchases were $160 and $572, respectively.

ACM purchased materials from Shengyi amounting to $261 and $453 during the three and nine months ended September 30, 2019, respectively. As of September 30, 2019, accounts payable due to Shengyi was $496.

In 2007 ACM Shanghai entered into an operating lease agreement with Shanghai Zhangjiang Group Co., Ltd. (“Zhangjiang Group”) to lease manufacturing and office space located in Shanghai, China. An affiliate of Zhangjiang Group holds 787,098 shares of Class A common stock that it acquired in September 2017 for $5,903. 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. From January 1 to April 25, 2018, ACM Shanghai leased the property on a month-to-month basis. On April 26, 2018, ACM Shanghai entered into a renewed lease with Zhangjiang Group for the period from January 1, 2018 through December 31, 2022. Under the lease, ACM Shanghai pays a monthly rental fee of RMB 366 (equivalent to $55). The required security deposit was RMB 1,077 (equivalent to $163). The Company incurred leasing expenses under the lease agreement of $148 and $152 during the three months ended September 30, 2019 and 2018, respectively, and $448 and $471 during the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019 and December 31, 2018, payables to Zhangjiang Group for lease expenses and leasehold improvements recorded as other payables and accrued expenses amounted to $0 and $53, respectively (note 7).

On December 9, 2016, Shengxin (Shanghai) Management Consulting Limited Partnership, a PRC limited partnership owned by Jian Wang (Vice President, Research and Development, and brother of David H. Wang) and other employees of ACM Shanghai (“SMC”), delivered RMB 20,124 ($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. SMC is a limited partnership incorporated in the PRC, whose partners consist of employees of ACM Shanghai. 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 (the “SMC 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 Class A common stock at a price of $7.50 per share, for a total exercise price of $2,981. On March 30, 2018, SMC exercised the SMC Warrant in full and purchased 397,502 shares of Class A common stock (note 12).

On August 14, 2019, ACM entered into an equity purchase agreement (the “Equity Purchase Agreement”) under which it agreed to repurchase, at a price per share of $13.195 (the net proceeds per share ACM received in a public offering of Class A common stock, as described in note 13), shares of Class A common stock from certain directors, employees and SMC upon the exercise of the underwriters’ over-allotment option in connection with the public offering in August 2019. The total consideration to the directors, employees and SMC, in exchange for their surrender of 214,286 shares of Class A common stock and cancellation of 53,571 options to acquire Class A common stock (note 15) amounted to $3,403, which was based at a price of $13.195 per share equal to the net proceeds per share ACM received from the over-allotment option in connection with this offering. Of that total amount, $1,990 due to SMC was recorded in other payable and accrued expenses (note 7).

NOTE 12 – WARRANT LIABILITY

On December 9, 2016, ACM Shanghai received the SMC Investment from SMC for potential investment pursuant to terms to be subsequently negotiated, and on March 14, 2017, ACM, ACM Shanghai and SMC entered into the SMC Agreement pursuant to which, in exchange for the SMC Investment, ACM issued the SMC Warrant to SMC (note 11).

The SMC Warrant, while outstanding as of December 31, 2017, was classified as a liability as it was conditionally puttable in accordance with ASC 480, Distinguishing Liabilities from Equity. The fair value of the SMC Warrant was adjusted for changes in fair value at each reporting period, but could not be lower than the proceeds of the SMC Investment. The corresponding non-cash gain or loss of the changes in fair value was recorded in earnings. The Black-Scholes valuation model was used to value the SMC Warrant. On March 30, 2018, ACM entered into a warrant exercise agreement with ACM Shanghai and SMC pursuant to which SMC exercised the SMC Warrant in full by issuing to ACM a senior secured promissory note in the principal amount of $3,000. ACM then transferred such note to ACM Shanghai in exchange for an intercompany promissory note of ACM Shanghai in the principal amount of $3,000. Each of the two notes bears interest at a rate of 3.01% per annum and matures on August 17, 2023. As security for its performance of its obligations under its note, SMC granted to ACM Shanghai a security interest in the 397,502 shares of Class A common stock issued to SMC upon its exercise of the SMC Warrant. Upon the issuance of 397,502 shares of Class A common stock to SMC, the senior secured promissory note issued to ACM by SMC was offset against the SMC Investment.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands, except share and per share data)

NOTE 13 – COMMON STOCK

ACM is authorized to issue 50,000,000 shares of Class A common stock and 2,409,738 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 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 stockholders.

On March 30, 2018, SMC exercised the SMC Warrant in full (note 12) to purchase 397,502 shares of Class A common stock.

During the nine months ended September 30, 2019, ACM issued 193,642 shares of Class A common stock upon option exercises by employees and non-employees and an additional 35,815 shares of Class A common stock upon conversion of an equal number of shares of Class B common stock.

In August 2019, ACM sold a total of 2,053,572 shares of Class A common stock to the public at a price of $14.00 per share for aggregate gross proceeds of $28,750. Net proceeds to ACM excluded an underwriting discount and offering expenses totaling $2,287. As mentioned in note 11, the shares repurchased from certain directors, employees and SMC upon the exercise of the underwriters’ over-allotment option in connection with the offering was for the purpose of share constructive retirement. A total of 214,286 repurchased shares were accounted for share retirement during the three and nine months ended September 30, 2019.

There were issued and outstanding 16,179,058 shares of Class A common stock and 1,862,608 shares of Class B common stock at September 30, 2019 and 14,110,315 shares of Class A common stock and 1,898,423 shares of Class B common stock at December 31, 2018.

NOTE 14 – REDEEMABLE NON-CONTROLLING INTERESTS

As discussed in note 1, during the quarter ended September 30, 2019, ACM Shanghai issued to the Investors equity in the form of redeemable non-controlling interests, representing 4.2% of the outstanding shares of ACM Shanghai. Two of the Investors are entities owned by certain employees of ACM Shanghai (the “Employee Entities”), and the purchase price paid by the Employee Entities represented a discount of 20% from the purchase price paid by the other Investors.

In addition to the capital increase, ACM Shanghai entered into a supplemental agreement (“Supplemental Agreement”) with each of the Investors. Under each Supplemental Agreement, ACM Shanghai and the Investor party thereto agreed to use their respective best efforts to facilitate the completion of the Listing and the STAR IPO within three years from the date on which the Placement Shares are issued. If, by the end of such three-year period, the Listing and the STAR IPO have not been completed and the China Securities Regulatory Commission has not otherwise approved the registration of ACM Shanghai’s Listing registration application, the Investor and ACM Shanghai each will have the right to require that ACM Shanghai repurchase the Investor’s shares for a price equal to the initial purchase price paid by the Investor, without interest. The Supplemental Agreements will be automatically terminated on the date when ACM Shanghai formally submits the Listing registration application document to the Shanghai Stock Exchange.

Because the Investors have the right to require ACM Shanghai to repurchase their ownership interests in ACM Shanghai at a fixed purchase price, those ownership interests are classified as redeemable non-controlling interests under ASC 480. The Company has elected to apply the entire adjustment method (income classification) for subsequent measurement in accordance with ASC 480‑10-S99.

The components of the change in the redeemable non-controlling interests for the nine months ended September 30, 2019 are presented in the following table:

Balance at January 1, 2019	$	-
Increase in redeemable non-controlling interests due to issuance of common stock		27,264
Net income attributable to redeemable non-controlling interests		307
Effect of foreign currency translation loss attributable to redeemable non-controlling interests		(683	)
Balance at September 30, 2019	$	26,888

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NOTE 15– 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 and as standalone options.

Employee Awards

The following table summarizes the Company’s employee share option activities during the nine months ended September 30, 2019:

	Number of Option Share			Weighted Average Grant Date Fair Value		Weighted Average Exercise Price		Weighed Average Remaining Contractual Term
Outstanding at December 31, 2018		2,503,405		$	0.91	$	4.09	7.30 years
Granted		614,000			6.30		16.39
Exercised		(105,113	)		0.60		2.08
Expired		(628	)		0.55		3.00
Forfeited/cancelled		(41,203	)		1.35		3.82
Outstanding at September 30, 2019		2,970,461		$	2.55	$	6.71	7.28 years
Vested and exercisable at September 30, 2019		1,673,780

In addition to the above share option activities, as mentioned in note 14, purchase price paid by the Employee Entities was at a discount of 20% from the purchase price paid by the other investors, and there was no vesting condition attached to the subscription. Accordingly, the Company determined the discount as stock based compensation expenses, which amounted to $949.

During the three months ended September 30, 2019 and 2018, the Company recognized employee stock-based compensation expense of $1,329 and $195, respectively. During the nine months ended September 30, 2019 and 2018, the Company recognized employee stock-based compensation expense of $1,841 and $458, respectively. As of September 30, 2019 and December 31, 2018, $5,009 and $2,424, 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 1.63 years and 1.62 years, respectively. Total recognized compensation cost may be adjusted for future changes in estimated forfeitures.

The change in recognized and unrecognized employee stock-based compensation expense during the three and nine months ended September 30, 2019 included the effect of the employee share option activities in the table above, together with an incremental $949 due to the discounted purchase price paid by the Employee Entities for their investments in ACM Shanghai (note 14).

Stock options to acquire 319,000 and 614,000 shares, respectively, of Class A common stock were granted to employees during the three and nine months ended September 30, 2019. Stock options to acquire 31,339 shares of Class A common stock held by employees were canceled pursuant to the Equity Purchase Agreement (note 11) during the three and nine months ended September 30, 2019.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands, except share and per share data)

Non-employee Awards

The following table summarizes the Company’s non-employee share option activities during the nine months ended September 30, 2019:

	Number of Option Shares			Weighted Average Grant Date Fair Value		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Outstanding at December 31, 2018		1,212,374		$	0.78	$	2.57	6.66 years
Granted		-			-		-		-
Exercised		(88,529	)		0.45		1.06		-
Expired		-			-		-		-
Forfeited/cancelled		(22,232	)		0.55		3.00		-
Outstanding at September 30, 2019		1,101,613		$	0.82	$	2.69		6.10 years
Vested and exercisable at September 30, 2019		959,845

The Company adopted ASU 2018-07 on January 1, 2019, and the stock-based compensation expense for grants before the adoption of ASU 2018-07 is based on the grant date fair value as of December 31, 2018, which was the last business day before the Company adopted ASU 2018-07, for all nonemployee awards that have not vested as of December 31, 2018. The cumulative-effect adjustment to retained earnings as of January 1, 2019 was immaterial to the financial statements as a whole. Accordingly, the Company did not record this adjustment as of January 1, 2019. Furthermore, for future awards, compensation expense is based on the fair value of the shares at the grant date.

During the three months ended September 30, 2019 and 2018, the Company recognized stock-based compensation expense of $228 and $216, respectively, related to share option vesting. During the nine months ended September 30, 2019 and 2018, the Company recognized stock-based compensation expense of $1,078 and $2,313, respectively, related to share option vesting. As of September 30, 2019 and December 31, 2018, $634 and $1,713, respectively, of total unrecognized non-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 0.33 years and 1.31 years, respectively. Total recognized compensation cost may be adjusted for future changes in estimated forfeitures.

Stock options to acquire 22,232 shares of Class A common stock held by a director were canceled pursuant to the Equity Purchase Agreement (note 11) during the three and nine months ended September 30, 2019.

NOTE 16 – 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.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. Prior to September 30, 2019, the Company had recorded a valuation allowance for the full amount of net deferred tax assets in the United States, as the realization of deferred tax assets was uncertain. The Company has now concluded that, as of September 30, 2019, it was more likely than not that the Company will generate sufficient U.S. taxable income within the applicable net operating loss carry-forward periods to realize a portion of its deferred tax assets. This conclusion, and the resulting partial reversal of the deferred tax asset valuation allowance, is based upon consideration of a number of factors, including the Company’s completion of a seventh consecutive quarter of profitability, recent operating results, forecast of future profitability, and a U.S. tax law change which affects reporting of foreign profits in the United States. Thus, the Company determined that there is sufficient positive objective evidence to conclude that it is more likely than not that a portion of deferred taxes are realizable. It, therefore, has reduced the valuation allowance accordingly, which resulted in a one-time tax benefit in the third quarter of $1,440. In order to recognize the remaining U.S. deferred tax assets that continue to be subject to a valuation allowance, the Company will need to generate sufficient U.S. taxable income in future periods before the expiration of the deferred tax assets governed by the tax code.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands, except share and per share data)

ACM Shanghai 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 three and nine months ended September 30, 2019 and December 31, 2018.

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.

The Company’s effective tax rate differs from statutory rates of 21% for U.S. federal income tax purposes and 15% to 25% for Chinese income tax purposes due to the effects of the valuation allowance and certain permanent differences from book-tax differences. As a result, the Company recorded income tax benefit of $328 and income tax expense of $461 during the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, the Company recorded income tax expense of $667 and $647, respectively.

As of September 30, 2019, 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 three and nine months ended September 30, 2019.

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, 2018. To the extent the Company has tax attribute carry-forwards, the tax years in which the attribute was generated may still be adjusted upon examination by the U.S. Internal Revenue Service, state or foreign tax authorities to the extent utilized in a future period.

The Tax Act enacted on December 22, 2017 introduced significant changes to U.S. income tax law. Effective January 1, 2018, the Tax Act reduced the U.S. statutory tax rate from 35% to 21% and created new taxes on certain foreign-sourced earnings and certain intercompany payments. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of December 31, 2017. There were no adjustments made in the nine months ended September 30, 2019. The accounting for the tax effects of the Tax Act was completed in 2018.

NOTE 17 – COMMITMENTS AND CONTINGENCIES

The Company leases offices under non-cancelable operating lease agreements. See note 8 for future minimum lease payments under non-cancelable operating lease agreements with initial terms of one year or more.

As of September 30, 2019, the Company had $303 of open capital commitments.

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. As of September 30, 2019, the Company did not have any legal proceedings.

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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 Annual Report on Form 10-K for the fiscal year ended December 31, 2018, or our Annual Report. 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 below.

Overview

We supply advanced, innovative capital equipment developed for the global semiconductor industry. Fabricators of advanced integrated circuits, or chips, can use our single-wafer wet-cleaning tools in numerous steps to improve product yield, even at increasingly advanced process nodes. We have designed these tools for use in fabricating foundry, logic and memory chips, including dynamic random-access memory (or DRAM) and 3D NAND-flash memory chips. We also develop, manufacture and sell a range of advanced packaging tools to wafer assembly and packaging customers.

Selling prices for our single-wafer wet-cleaning tools range from $2 million to more than $5 million. Our customers for single-wafer wet-cleaning tools have included Semiconductor Manufacturing International Corporation, Shanghai Huali Microelectronics Corporation, SK Hynix Inc. and Yangtze Memory Technologies Co., Ltd. We recognized revenue from sales of single-wafer wet cleaning equipment totaling $69.5 million, or 84% of total revenue, for the first nine months of 2019 compared to $51.4 million, or 96% of total revenue, for the first nine months of 2018.

We focus our selling efforts on establishing a referenceable base of leading foundry, logic and memory chip makers, whose use of our products can influence decisions by other manufacturers. We believe this customer base will help us penetrate the mature chip manufacturing markets and build credibility with additional industry leaders. Using a “demo-to-sales” process, we have placed evaluation equipment, or “first tools,” with a number of selected customers. Since 2009 we have delivered more than 75 single-wafer wet cleaning tools, more than 60 of which have been accepted by customers and thereby generated revenue to us and the balance of which are awaiting customer acceptance should contractual conditions be met.

Since our formation in 1998, we have focused on building a strategic portfolio of intellectual property to support and protect our key innovations. Our wet-cleaning equipment has been developed using our key proprietary technologies:

•

Space Alternated Phase Shift, or SAPS, technology for flat and patterned wafer surfaces, which employs alternating phases of megasonic waves to deliver megasonic energy in a highly uniform manner on a microscopic level;

•

Timely Energized Bubble Oscillation, or TEBO, technology for patterned wafer surfaces at advanced process nodes, which provides effective, damage-free cleaning for 2D and 3D patterned wafers with fine feature sizes; and

•

Tahoe technology for cost and environmental savings, which delivers high cleaning performance using significantly less sulfuric acid and hydrogen peroxide than is typically consumed by conventional high-temperature single-wafer cleaning tools.

We have been issued more than 220 patents in the United States, the People’s Republic of China or PRC, Japan, Korea, Singapore and Taiwan.

We conduct substantially all of our product development, manufacturing, support and services in the PRC. All of our tools are built to order at our manufacturing facilities in Shanghai, which encompass 86,000 square feet of floor space for production capacity. Our experience has shown that chip manufacturers in the PRC and throughout Asia demand equipment meeting their specific technical requirements and prefer building relationships with local suppliers. We will continue to seek to leverage our local presence to address the growing market for semiconductor manufacturing equipment in the region by working closely with regional chip manufacturers to understand their specific requirements, encourage them to adopt our SAPS, TEBO and Tahoe technologies, and enable us to design innovative products and solutions to address their needs.

Corporate Background

ACM Research was incorporated in California in 1998 and redomesticated in Delaware in 2016. We perform strategic planning, marketing, and financial activities at our global corporate headquarters in Fremont, California.

Initially we focused on developing tools for chip manufacturing process steps involving the integration of ultra‑low-K materials and copper. In the early 2000s we sold tools based on stress-free copper polishing technology.

To help us establish and build relationships with chip manufacturers in the PRC, in 2006 we moved our operational center to Shanghai and began to conduct our business through our subsidiary ACM Shanghai. In 2007 we began to focus our development efforts on single-wafer wet-cleaning solutions for the front-end chip fabrication process.

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In 2009 we introduced SAPS megasonic technology, which can be applied in wet wafer cleaning at numerous steps during the chip fabrication process. In 2016 we introduced TEBO technology, which can be applied at numerous steps during the fabrication of small node conventional two-dimensional and three-dimensional patterned wafers.

In 2011 ACM Shanghai formed a wholly owned subsidiary in the PRC, ACM Research (Wuxi), Inc., to manage sales and service operations. In June 2017 we formed a wholly owned subsidiary in Hong Kong, CleanChip Technologies Limited, to act on our 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 December 2017 we formed a wholly owned subsidiary in the Republic of Korea, ACM Research Korea CO., LTD., to serve our customers based in the Republic of Korea and perform sales, marketing, and research and development activities. We currently conduct the majority of our product development, support and services, and substantially all of our manufacturing at ACM Shanghai. Our Shanghai operations position us to be near many of our current and potential new customers in the PR (including Taiwan), Korea and throughout Asia, providing convenient access and reduced shipping and manufacturing costs.

In August 2018 we introduced the Ultra-C Tahoe wafer cleaning tool, which delivers high cleaning performance with significantly less sulfuric acid than typically consumed by conventional high temperature single-wafer cleaning tools.

In September 2018 we announced the opening of a second factory in the Pudong region of Shanghai. The new facility has a total of 50,000 square feet of available floor space for production capacity. This is in addition to our first factory in the Pudong Region of Shanghai, which has a total of 36,000 square feet of available floor space.

In March 2019, we introduced (a) the Ultra ECP AP, or Advanced Wafer Level Packaging tool, a back-end assembly tool used for bumping, or applying copper, tin and nickel to wafers at the die-level prior to packaging, and (b) the Ultra ECP MAP or Multi Anode Plating tool, a front-end process tool that utilizes our proprietary technology to deliver world-class electrochemical copper planting for copper interconnect applications.

Proposed Listing of ACM Shanghai Shares on STAR Market

For purposes of the following description, RMB amounts have been translated into U.S. dollars solely for the convenience of the reader. The translations have been made at the conversion rate of RMB 6.8937 to U.S. $1.00 effective as of June 12, 2019.

On June 17, 2019 we announced our plans to complete, over the next three years:

•

a listing, which we refer to as the Listing, of shares of ACM Shanghai on the Shanghai Stock Exchange’s new Sci-Tech innovAtion boaRd, known as the STAR Market; and

•

a concurrent initial public offering, which we refer to as the STAR IPO, of ACM Shanghai shares in the PRC.

To qualify for the Listing, ACM Shanghai must have multiple independent shareholders in the PRC. As an initial step in qualifying for the Listing, on June 12, 2019 ACM Shanghai entered into agreements with seven investors pursuant to which those investors agreed to pay a purchase price totaling RMB 187.9 million ($27.3 million) to ACM Shanghai for shares representing 4.2% of the then-outstanding ACM Shanghai shares. Pursuant to these agreements, in July 2019, ACM Shanghai made the required filings for the capital increase with the local agency of the PRC Ministry of Commerce, and the investors became obligated to fund their purchases. As of September 30, 2019, all of the investors had funded the purchase prices for their subscribed shares, all capital increase filings had been completed with the local branch of the PRC State Administration for Market Regulation, and all of the subscribed shares had been issued to the investors.

ACM Shanghai and the investors have agreed to use their respective best efforts to facilitate the completion, within three years from the date on which the ACM Shanghai shares are issued to the investors, of the Listing and the STAR IPO, with the STAR IPO to be completed at a pre-offering valuation of not less than RMB 5.15 billion ($747.1 million). If, by the end of such three-year period, the Listing and the STAR IPO have not been completed and the China Securities Regulatory Commission has not otherwise approved the registration of ACM Shanghai’s Listing application, each investor will have the right to require that ACM Shanghai repurchase, and ACM Shanghai will have the right to purchase, the investor’s ACM Shanghai shares for a price equal to the initial purchase price paid by the investor, without interest.

We have determined, voluntarily and not pursuant to any contractual or legal obligation, that ACM Shanghai will deposit, and hold in reserve, the proceeds from the share sales in segregated cash and cash-equivalent accounts pending either (a) completion of the Listing and the STAR IPO or (b) application to repurchase the shares from the investors.

We may determine to enter into additional agreements in the year ending December 31, 2019 pursuant to which certain existing ACM Research stockholders and other investors could purchase additional shares of ACM Shanghai for an aggregate purchase price of approximately $32 million. We expect that, if we were to enter any such agreements, the purchase price and other terms of those agreements would be substantially similar to those under the agreements entered into with the investors other than the employee entities.

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PRC Government Research and Development Funding

ACM Shanghai has received four 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 third grant was made in 2014 and relates to the development of electro copper-plating technology. The fourth grant was made in June 2018 and related to development of polytetrafluoroethylene. 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:

•

Government subsidies relating to current expenses are reflected as reductions of those expenses in the periods in which they are reported. Those reductions totaled $2.9 million in the first nine months of 2019, as compared to $0.8 million in the first nine months of 2018.

•

Government grants used to acquire depreciable assets are transferred from long-term liabilities to property, plant and equipment when the assets are acquired and then the recorded amounts of the assets are credited to other income over the useful lives of the assets. Related government subsidies recognized as other income totaled $111,000 and $109,000 in the first nine months of 2019 and 2018, respectively.

How We Evaluate Our Operations

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

•

We define “shipments” of tools to include (a)a “repeat” delivery to a customer of a type of tool that the customer has previously accepted, for which we recognize revenue upon delivery, and (b)a “first-time” delivery of a tool to a customer on an approval basis, for which we may recognize revenue in the future if contractual conditions are met and customer acceptance is received.

•

We define “adjusted EBITDA” as our net income excluding interest expense (net), income tax benefit (expense), depreciation and amortization, and stock-based compensation. We define adjusted EBITDA to also exclude restructuring costs, although we have not incurred any such costs to date.

•

We define “free cash flow” as net cash provided by operating activities less purchases of property and equipment (net of proceeds from disposals) and of intangible assets.

•

We define “adjusted operating income” as our income from operations excluding stock-based compensation.

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 shipments, adjusted EBITDA, free cash flow and adjusted operating income 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 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.

Shipments, adjusted EBITDA, free cash flow and adjusted operating income 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.

Shipments

Shipments consist of two components:

•

a shipment to a customer of a type of tool that the customer has previously-accepted, for which we recognize revenue when the tool is delivered; and

•

a shipment to a customer of a type of tool that the customer is receiving and evaluating for the first time, in each case a “first tool,” for which we may recognize revenue at a later date, subject to the customer’s acceptance of the tool upon the tool’s satisfaction of applicable contractual requirements.

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“First tool” shipments can be made to either an existing customer that not previously accepted that specific type of tool in the past ─ for example, a delivery of SAPS V tool to a customer that previously had received only SAPS II tools ─ or to a new customer that has never purchased any tool from us.

Shipments in the three months ended September 30, 2019 totaled $43 million, as compared to $32 million in the three months ended September 30, 2018, and $33 million in the three months ended June 30, 2019. Shipments in the nine months ended September 30, 2019 totaled $90 million, as compared to $63 million in the nine months ended September 30, 2018.

The dollar amount attributed to a “first tool” shipment is equal to the consideration we expect to receive if any and all contractual requirements are satisfied and the customer accepts the tool. There are a number of limitations related to the use of shipments in evaluating our business, including that customers have significant discretion in determining whether to accept our tools and their decision not to accept delivered tools is likely to result in our inability to recognize revenue from the delivered tools.

Adjusted EBITDA

There are a number of limitations related to the use of adjusted EBITDA rather than net income, which is the nearest GAAP equivalent. Some of these limitations are:

•

adjusted EBITDA excludes depreciation and amortization and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future;

•

we exclude stock-based compensation expense from adjusted EBITDA and adjusted operating income, although (a) it has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy and (b) 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, which would affect our cash position;

•

the expenses and other items that we exclude in our calculation of adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from adjusted EBITDA when they report their operating results;

•

adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs;

•

adjusted EBITDA does not reflect interest expense, or the requirements necessary to service interest or principal payments on debt;

•

adjusted EBITDA does not reflect income tax expense (benefit) or the cash requirements to pay taxes;

•

adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

•

although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements; and

•

adjusted EBITDA includes expense reductions and non-operating other income attributable to PRC governmental grants, which may mask the effect of underlying developments in net income, including trends in current expenses and interest expense, and free cash flow includes the PRC governmental grants, the amount and timing of which can be difficult to predict and are outside our control.

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

	Nine Months Ended September 30,
	2019		2018
	(in thousands)
Adjusted EBITDA Data:
Net Income	$	15,257	$	4,288
Interest expense, net		410		344
Income tax expense		667		647
Depreciation and amortization		586		380
Stock based compensation		2,919		2,771
Adjusted EBITDA	$	19,839	$	8,430

Adjusted EBITDA in the nine months ended September 30, 2019, increased by $11.4 million as compared to the same period in 2018, due to an increase of $11.0 million in net income, an increase of $66,000 in interest expense, an increase of $20,000 in income tax expense, an increase of $206,000 in depreciation and amortization, and an increase of $148,000 in stock-based compensation expense. 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 materially 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.”

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Free Cash Flow

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

	Nine Months Ended September 30,
	2019			2018
	(in thousands)
Free Cash Flow Data:
Net cash used in operating activities	$	(4,752	)	$	(2,733	)
Purchase of property and equipment		(832	)		(1,598	)
Purchase of intangible assets		(114	)		(350	)
Free cash flow	$	(5,698	)	$	(4,681	)

Free cash flow in the nine months ended September 30, 2019, declined by $1 million as compared with the same period in 2018, due to an increase of $2 million of cash used in operating activities that was offset by a decrease of $1.0 million in purchase of property and equipment and intangible assets. 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

Adjusted operating income excludes stock-based compensation from income 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, or SBC, from line items comprising income from operations:

	Three Months Ended September 30,
	2019									2018
	Actual (GAAP)			SBC			Adjusted (Non-GAAP)			Actual (GAAP)			SBC			Adjusted (Non-GAAP)
							(in thousands)
Revenue	$	33,427		$	-		$	33,427		$	23,179		$	-		$	23,179
Cost of revenue		(17,173	)		(154	)		(17,019	)		(12,892	)		(25	)		(12,867	)
Gross profit		16,254			(154	)		16,408			10,287			(25	)		10,312
Operating expenses:
Sales and marketing		(3,886	)		(172	)		(3,714	)		(3,229	)		(42	)		(3,187	)
Research and development		(3,492	)		(759	)		(2,733	)		(2,264	)		(64	)		(2,200	)
General and administrative		(1,846	)		(472	)		(1,374	)		(1,390	)		(280	)		(1,110	)
Income (loss) from operations	$	7,030		$	(1,557	)	$	8,587		$	3,404		$	(411	)	$	3,815

Adjusted operating income for the three months ended on September 30, 2019, as compared with the same period in 2018 increased by $4.8 million, due to increases of $3.6 million in income from operations and $1.1 million in stock-based compensation expense.

	Nine Months Ended September 30,
	2019									2018
	Actual (GAAP)			SBC			Adjusted (Non-GAAP)			Actual (GAAP)			SBC			Adjusted (Non-GAAP)
							(in thousands)
Revenue	$	82,916		$	-		$	82,916		$	53,795		$	-		$	53,795
Cost of revenue		(44,705	)		(213	)		(44,492	)		(29,662	)		(44	)		(29,618	)
Gross profit		38,211			(213	)		38,424			24,133			(44	)		24,177
Operating expenses:
Sales and marketing		(8,679	)		(252	)		(8,427	)		(7,766	)		(115	)		(7,651	)
Research and development		(9,598	)		(939	)		(8,659	)		(6,224	)		(131	)		(6,093	)
General and administrative		(5,992	)		(1,515	)		(4,477	)		(6,312	)		(2,481	)		(3,831	)
Income (loss) from operations	$	13,942		$	(2,919	)	$	16,861		$	3,831		$	(2,771	)	$	6,602

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Adjusted operating income for the nine months ended on September 30, 2019 as compared with the same period in 2018, increased by $10.3 million, due to increases of $10.1 million in income from operations and $148,000 in stock-based compensation expense.

Critical Accounting Policies and Significant Judgments and Estimates

There were no significant changes in our critical accounting policies or significant judgments or estimates during the nine months ended September 30, 2019 to augment the critical accounting estimates disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report, other than those described in the notes to the condensed consolidated financial statements included in this report, including the adoption of the Financial Accounting Standards Board’s Accounting Standards Update 2016-02, Leases (Topic 842) effective January 1, 2019. As a result of our adoption of the new lease standard, we re-assessed the estimates, assumptions, and judgments that are most critical in our recognition of lease and have revised our lease critical accounting policy. For information regarding the impact of recently adopted accounting standards, refer to note 2 to the condensed financial statements included in this report.

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements is included in our Annual Report and is updated in note 2 to the condensed consolidated financial statements included in this report.

Results of Operations

The following table sets forth our results of operations for the periods presented, as percentages of revenue.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenue		51.4			55.6			53.9			55.1
Gross margin		48.6			44.4			46.1			44.9
Operating expenses:
Sales and marketing		11.6			13.9			10.5			14.4
Research and development		10.4			9.8			11.6			11.6
General and administrative		5.5			6.0			7.2			11.7
Total operating expenses, net		27.6			29.7			29.3			37.7
Income from operations		21.0			14.7			16.8			7.2
Interest expense, net		(0.3	)		(0.5	)		(0.5	)		(0.6	)
Other expense, net		5.5			3.9			2.6			2.3
Equity income (loss) in net income (loss) of affiliates		0.0			0.5			0.3			0.4
Income before income taxes		26.2			18.6			19.2			9.3
Income tax (expense) benefit		1.0			(2.0	)		(0.8	)		(1.2	)
Net income		27.2			16.6			18.4			8.1
Less: Net income attributable to redeemable non-controlling interests		0.9			-			0.4			-
Net income attributable to ACM Research, Inc.		26.3	%		16.6	%		18.0	%		8.1	%

Comparison of Three Months Ended September 30, 2019 and 2018

Revenue

	Three Months Ended September 30,
	2019		2018		% Change 2019 v 2018
	(in thousands)
Revenue	$	33,427	$	23,179		44.2	%

The increase in revenue of $10.3 million in the three months ended September 30, 2019 as compared to the same period in 2018 reflected increases in revenue of $5.7 million from single-wafer cleaning equipment, and increases in revenue of $4.6 million from back-end wafer assembly and packaging equipment. The increase in revenue was driven by a higher number of tools shipped for revenue, offset by a decrease in customer acceptances from prior period shipments received and recognized as revenue during the three months ended September 30, 2019.

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Cost of Revenue and Gross Margin

	Three Months Ended September 30,
	2019			2018			% Change 2019 v 2018
	(in thousands)
Cost of revenue	$	17,173		$	12,892			33.2	%
Gross profit	$	16,254		$	10,287			58.0
Gross margin		48.63	%		44.38	%		4.2

Cost of revenue increased $4.3 million and gross profit increased 6.0 million in the three months ended September 30, 2019, as compared to the corresponding period in 2018, due to increased sales volume and higher gross margin. Gross margin increased by 4.2 percentage points during the three months ended September 30, 2019, versus the comparable period in 2018 due to a favorable product mix.

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 40.0% and 45.0% for the foreseeable future, with direct manufacturing costs approximating 50.0% to 55.0% of revenue and overhead costs totaling 5.0% of revenue.

Operating Expenses

	Three Months Ended September 30,
	2019		2018		% Change 2019 v 2018
	(in thousands)
Sales and marketing expense	$	3,886	$	3,229		20.3	%
Research and development expense		3,492		2,264		54.2
General and administrative expense		1,846		1,390		32.8
Total operating expenses	$	9,224	$	6,883		34.0

Sales and marketing expense increased by $657,000 in the three months ended September 30, 2019, as compared to the corresponding period in 2018. Sales and marketing expense consists primarily of:

•

compensation of personnel associated with pre and aftersales support and other sales and marketing activities, including stock-based compensation;

•

sales commissions paid to independent sales representatives;

•

fees paid to sales consultants;

•

shipping and handling costs for transportation of products to customers;

•

cost of trade shows;

•

travel and entertainment; and

•

allocated overhead for rent and utilities.

Research and development expense increased by $1.2 million in the three months ended September 30, 2019 as compared to the corresponding period in 2018, principally as a result of increases in testing fees and personnel costs. Research and development expense represented 10.4% and 9.8% of our revenue in the three months ended September 30, 2019 and 2018, respectively. Without reduction by grant amounts received from PRC governmental authorities (see “—Key Components of Results of Operations—PRC Government Research and Development Funding”), gross research and development expense totaled $4.4 million, or 13.1% of revenue, in the three months ended September 30, 2019 and $2.7 million, or 11.5% of revenue, in the three months ended September 30, 2018. 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:

•

compensation of personnel associated with our research and development activities, including stock based compensation;

•

costs of components and other research and development supplies;

•

travel expense associated with customer support;

•

amortization of costs of software used for research and development purposes; and

•

allocated overhead for rent and utilities.

General and administrative expense increased by $456,000 in the three months ended September 30, 2019 as compared to the corresponding period in 2018. General and administrative expense consists primarily of:

•

compensation of executive, accounting and finance, human resources, information technology, and other administrative personnel, including stock-based compensation;

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•

professional fees, including accounting and legal fees;

•

other corporate expenses; and

•

allocated overhead for rent and utilities.

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

Other Income and Expenses

	Three Months Ended September 30,
	2019			2018			% Change 2019 v 2018
	(in thousands)
Interest expense, net	$	(110	)	$	(109	)		0.9	%
Other income, net		1,850			902			105.1

Interest expense consists of interest incurred from outstanding short-term borrowings. Interest expense increased by $1,000 in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018, as a result of increased borrowings under short-term bank loans, partly offset by an increase in cash and equivalents. We earn interest income from depositary accounts. Interest income was $95,000 in the three months ended September 30, 2019 as compared to $3,000 in the same period of 2018.

Non-operating income (expense), net primarily reflects (a) gains or losses recognized from the impact of exchange rates on our foreign currency-denominated working-capital transactions and (b) depreciation of assets acquired with government subsidies, as described under “—Key Components of Results of Operations—PRC Government Research and Development Funding” above. Our non-operating income was $1.85 million in the three months ended September 30, 2019 due to gains and losses of the RMB to U.S. dollar exchange rate during the quarter, compared to non-operating income of $902,000 in the three months ended September 30, 2018 due to gains and losses of RMB-to-U.S. dollar exchange rate during the quarter.

Income Tax Expense

The following presents components of income tax expense for the indicated periods:

	Three Months Ended September 30,
	2019		2018
	(in thousands)
Current:
U.S. federal	$	-	$	-
U.S. state				-
Foreign		328		(461	)
Total current income tax expense		328		(461	)
Deferred:
U.S. federal		-		-
U.S. state		-		-
Foreign		-		-
Total deferred income expense		-		-
Total current income tax expense	$	328	$	(461	)

On December 22, 2017, the Tax Cuts and Jobs Act, or the Tax Act, was enacted into law. The new legislation contains several key tax provisions that affect us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. There were no adjustments made in the three months ended September 30, 2019. The accounting for the tax effects of the Tax Act was completed in 2018.

Our effective tax rate differs from statutory rates of 21% for U.S. federal income tax purposes and 15% to 25% for Chinese income tax purposes due to the effects of the valuation allowance and certain permanent differences as it pertains to book-tax differences in the value of client equity securities received for services. Our two PRC subsidiaries, ACM Shanghai and ACM Wuxi, are liable for PRC corporate income taxes at the rates of 15% and 25%, respectively. Pursuant to the Corporate Income Tax Law of the PRC, our PRC subsidiaries generally would be liable for PRC corporate income taxes as a rate of 25%. According to Guoshuihan 2009 No. 203, an entity certified as an “advanced and new technology enterprise” is entitled to a preferential income tax rate of 15%. ACM Shanghai was certified as an “advanced and new technology enterprise” in 2012 and again in 2016 and 2018, with an effective period of three years.

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We file income tax returns in the United States and state and foreign jurisdictions. Those federal, state and foreign income tax returns are under the statute of limitations subject to tax examinations for 2009 through 2016. To the extent we have tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state or foreign tax authorities to the extent utilized in a future period.

Net Income Attributable to Redeemable Non-Controlling Interests

As described above under “—Proposed Listing of ACM Shanghai Shares on STAR Market,” in the three months ended September 30, 2019, ACM Shanghai sold to seven investors a total number of shares representing 4.2% of its then-outstanding ACM Shanghai shares. ACM Research continues to hold the remaining 95.8% of ACM Shanghai’s outstanding shares. As a result, commencing with the three months ended September 30, 2019, we reflect, as net income attributable to non-controlling interests, the portion of our net income allocable to the minority holders of ACM Shanghai shares. In the three months ended September 30, 2019, this amount totaled $307,000.

Comparison of Nine Months Ended September 30, 2019 and 2018

Revenue

	Nine Months Ended September 30,
	2019		2018		Y/Y %Change
	(in thousands)
Revenue	$	82,916	$	53,795		54.1	%

The increase in revenue of $29.1 million in the nine months ended September 30, 2019 as compared to the same period in 2018, was driven by an $18.2 million increase in revenue from single-wafer cleaning tools, and an $11.0 million increase in revenue from back-end wafer assembly and packaging equipment. The revenue increase reflected an increased number of tools shipped, coupled with higher selling prices associated with the equipment sold and increased customer acceptances from prior period shipments received and recognized as revenue during the nine months ended September 30, 2019.

Cost of Revenue and Gross Margin

	Nine Months Ended September 30,
	2019			2018			Y/Y %Change
	(in thousands)
Cost of revenue	$	44,705		$	29,662			50.7	%
Gross profit	$	38,211		$	24,133			58.3
Gross margin		46.1	%		44.9	%		1.2	%

Cost of revenue increased $15.0 million and gross profit increased $14.1 million in the nine months ended September 30, 2019, as compared to the corresponding period in 2018, primarily due to increased sales volume. Gross margin increased by 1.2 percentage points during the nine months ended September 30, 2019, from the comparable period in 2018.

Operating Expenses

	Nine Months Ended September 30,
	2019		2018		Y/Y %Change
	(in thousands)
Sales and marketing expense	$	8,679	$	7,766		11.8	%
Research and development expense		9,598		6,224		54.2
General and administrative expense		5,992		6,312		(5.1	)
Total operating expenses	$	24,269	$	20,302		19.5

Sales and marketing expense increased by $913,000 in the nine months ended September 30, 2019, as compared to the corresponding period in 2018.

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Research and development expense increased by $3.4 million in the nine months ended September 30, 2019 as compared to the corresponding period in 2018, principally as a result of increases in testing fees and personnel costs. Research and development expense represented 11.6% of our revenue in the nine months ended September 30, 2019 and 11.6% of our revenue in the nine months ended September 30 2018. Without reduction by grant amounts received from PRC governmental authorities (see “—Key Components of Results of Operations—PRC Government Research and Development Funding”), gross research and development expense totaled $12.5 million, or 15.1% of revenue, in the nine months ended September 30, 2019 and $6.2 million, or 13.0% of revenue, in the nine months ended September 30, 2018. Research and development expense relates to the development of new products and processes and encompasses our research, development and customer support activities.

General and administrative expense decreased by $320,000 in the nine months ended September 30, 2019 as compared to the corresponding period in 2018.

Other Income and Expenses

	Nine Months Ended September 30,
	2019			2018			Y/Y % Change
	(in thousands)
Interest expense, net	$	(410	)	$	(344	)		19.2	%
Other income, net		2,132			1,213			75.8

Interest expense increased by $66,000 in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018, principally as a result of increased borrowings under short-term bank loans. We earn interest income from depositary accounts. Interest income was $128,000 in the nine months ended September 30, 2019 as compared to $20,000 in the nine months ended September 30, 2018.

Our non-operating income was $2.1 million in the nine months ended September 30, 2019 due to gains and losses of the RMB- to-U.S. dollar exchange rate during the quarter, compared to non-operating income of $1.2 million in the nine months ended September 30, 2018 due to gains and losses of RMB-to-U.S. dollar exchange rate during the quarter.

Income Tax Expense

The following presents components of income tax expense for the indicated periods:

	Nine Months Ended September 30,
	2019			2018
	(in thousands)
Current:
U.S. federal	$	-		$	-
U.S. state		-			-
Foreign		(667	)		(647	)
Total current tax expense		(667	)		(647	)
Deferred:
U.S. federal		-			-
U.S. state		-			-
Foreign					0
Total deferred tax expense
Total income tax expense		(667	)		(647	)

There were no adjustments with respect to the Tax Act made in the nine months ended September 30, 2019.

Net Income Attributable to Redeemable Non-Controlling Interests

As described above under “—Proposed Listing of ACM Shanghai Shares on STAR Market,” in the nine months ended September 30, 2019, ACM Shanghai sold to seven investors a total number of shares representing 4.2% of its then-outstanding ACM Shanghai shares. ACM Research continues to hold the remaining 95.8% of ACM Shanghai’s outstanding shares. As a result, commencing with the nine months ended September 30, 2019, we reflect, as net income attributable to non-controlling interests, the portion of our net income allocable to the minority holders of ACM Shanghai shares. In the nine months ended September 30, 2019, this amount totaled $307,000.

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Liquidity and Capital Resources

During the first nine months of 2019 we funded our technology development and operations principally through application of proceeds from the initial public offering of Class A common stock and concurrent private placements in November 2017, proceeds from a follow-on public offering of Class A common stock in August 2019, and, to a lesser extent, from short-term borrowings by ACM Shanghai from local financial institutions. During the nine months ended September 30, 2019, our operations used cash flow of $4.8 million and we received $2.9 million in research and development grants from local and central PRC governmental authorities.

We believe our existing cash and cash equivalents, our cash flow from operating activities, and short-term bank borrowings by ACM Shanghai will be sufficient to meet our anticipated cash needs for at least the next twelve months. We do not expect that our anticipated cash needs for the next twelve months will require our receipt of any PRC government subsidies. Our future working capital needs will depend on many factors, including the rate of our business and revenue growth, the payment schedules of our customers, and the timing of investment in our research and development as well as sales and marketing. To the extent our cash and cash equivalents, cash flow from operating activities and short-term bank borrowings are insufficient to fund our future activities in accordance with our strategic plan, we may determine to raise additional funds through public or private debt or equity financings or additional bank credit arrangements. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies and products. If additional funding is necessary or desirable, we may not be able to obtain bank credit arrangements or to affect an equity or debt financing on terms acceptable to us or at all.

As described above under “—Proposed Listing of ACM Shanghai Shares on STAR Market,” proceeds received from investors to purchase shares of ACM Shanghai in the third quarter of 2019 have been deposited and are being held in reserve in segregated cash and cash-equivalent accounts pending either (a) completion of the STAR Market listing and PRC initial public offering or (b) application to repurchase the shares from the investors. As a result, during that period those proceeds will not be available to operate our business or for other corporate purposes.

Sources of Funds

Equity and Equity-Related Securities. During the three months ended September 30, 2019, we received:

•

net proceeds of $26.5 million from our sale of 2,053,572 shares of Class A common stock to the public, of which we have applied, or will apply, $3.4 million of net proceeds to repurchase outstanding shares of Class A common stock (see “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds—Issuer Purchases of Equity Securities” in this Part II), and to cancel options to acquire shares of Class A common stock, from certain officers and directors, and an officer affiliate, pursuant to an equity purchase agreement entered into in connection with the public offering; and

•

proceeds of $140,000 from sales of common stock pursuant to option exercises.

Indebtedness. ACM Shanghai is a party to lines of credit with four banks, as follows:

Lender	Agreement Date	Maturity Date	Annual Interest Rate			Maximum Borrowing Amount(1)		Amount Outstanding at September30, 2019
						(in thousands)
Bank of Shanghai Pudong Branch	January 2019	January 2020		5.22	%	RMB50,000		RMB49,792
						$	7,070	$	7,041
Shanghai Rural Commercial Bank	Feburary 2019	January 2020		5.66	%	RMB20,000		RMB10,000
						$	2,828	$	1,414
Bank of Communications	January 2019	January 2020 - February 2020		5.66	%	RMB20,000		RMB20,000
						$	2,828	$	2,828
China Everbright Bank	Feburary 2019	March 2020 - April 2020		4.94% - 5.66	%	RMB50,000		RMB30,996
						$	7,070	$	4,382

						RMB140,000		RMB110,788
						$	19,796		15,665

(1)

Converted from RMB to U.S. dollars as of September 30, 2019.

All of the amounts owing under the lines of credit with Bank of Shanghai Pudong Branch are guaranteed by our Chairman of the Board, Chief Executive Officer and President Dr. David H. Wang and by our subsidiary Cleanchip Technologies Ltd. All of the amounts owing under the line of credit with Shanghai Rural Commercial Bank are secured by accounts receivable and guaranteed by Dr. Wang. All of the amounts owing under the lines of credit with China Everbright Bank are guaranteed by Dr. Wang.

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Working Capital. The following table sets forth selected working capital information:

	September 30, 2019
	(in thousands)
Cash and cash equivalents	$	47,264
Accounts receivable, less allowance for doubtful amounts		43,144
Inventory		43,506
Working capital	$	133,914

Our cash and cash equivalents at September 30, 2019 were unrestricted and, except for proceeds received from investors to purchase shares of ACM Shanghai that we have elected to hold in reserve in segregated cash and cash-equivalent accounts as described in “—Proposed Listing of ACM Shanghai Shares on STAR Market,” are being held for working capital purposes. ACM Shanghai, our only direct PRC subsidiary, is, however, subject to PRC restrictions on distributions to equity holders. We currently intend for ACM Shanghai to retain all available funds any future earnings for use in the operation of its business and do not anticipate its paying any cash dividends. We have not entered into, and do not expect to enter into, investments for trading or speculative purposes. Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating activities. Fluctuations vary depending on cash collections, client mix, and the timing of shipment and acceptance of our tools.

Uses of Funds

Cash Flow from Operating Activities. Our operations used cash flow of $4.8 million in the first nine months of 2019. Our cash flow from operating activities is influenced by (a) the amount of cash we invest in personnel and technology development to support anticipated future growth in our business, (b) the magnitude of our product sales and associated gross profits, and (c) the amount and timing of payments by customers.

Capital Expenditures. We estimate that our capital expenditures in 2019 will total approximately $2.4 million. We incurred $946,000 of capital expenditures during the nine months ended September 30, 2019 and had unpaid capital commitments of $303,000 as of September 30, 2019. ACM Shanghai is evaluating the desirability of entering into an agreement to purchase land in the Shanghai PRC region that could serve as a site for a future production facility and research and development center, and that would require additional capital expenditures for ACM Shanghai in 2019 or 2020.

Contractual Obligations and Requirements. Our contractual obligations and other commercial commitments are summarized in the section captioned “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations and Requirements” in our Annual Report. Other than changes that occurred in the ordinary course of business, we had no material changes to our contractual obligations reported in our Annual Report during the first nine months of 2019. For additional discussion, see note 16 to our condensed consolidated financial statements included elsewhere in this report.

Off-Balance Sheet Arrangements

As of September 30, 2019, we did not have any significant off-balance sheet arrangements, as defined in Item 303 (a)(4)(ii) of Regulation S-K under the Securities Act of 1933.

Emerging Growth Company Status

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, and may take advantage of provisions that reduce our reporting and other obligations from those otherwise generally applicable to public companies. We may take advantage of these provisions until the earliest of December 31, 2022 or such time that we have annual revenue greater than $1.0 billion, the market value of our capital stock held by non-affiliates exceeds $700 million or we have issued more than $1.0 billion of non-convertible debt in a three-year period. We have chosen to take advantage of some of these provisions, and as a result we may not provide stockholders with all of the information that is provided by other public companies. We have, however, irrevocably elected not to avail ourselves, as would have been permitted by Section 107 of the JOBS Act, of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards, and we therefore will be subject to the same new or revised accounting standards as public companies that are not emerging growth companies

Item 3.

Quantitative and Qualitative Disclosures about Market Risks

We are a smaller reporting company as defined by Item 10(f)(1) of Regulation S-K under the Securities Act of 1933 and as such are not required to provide information under this Item.

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Item 4.

Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and interim chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission, or the SEC. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2019, our chief executive officer and interim chief financial officer concluded that, as of such date, our disclosure controls and procedures over financial reporting were effective.

Changes in Internal Control over Financial Reporting

During the three months ended September 30, 2019, no changes were identified to our internal control over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

From time to time we may become involved in legal proceedings or may be subject to claims arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

There have been no material developments with regard to legal proceedings in the three months ended September 30, 2019.

ITEM 1A.

RISK FACTORS

There have been no material changes to the risk factors discussed in Item 1A, “Risk Factors” of Part I in our Annual Report. In addition to the other information set forth in this report, you should carefully consider those risk factors, which could materially affect our business, financial condition and future operating results. Those risk factors are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition and operating results.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Equity Securities

In the three months ended September 30, 2019, we issued and sold to employees and consultants an aggregate of 69,333 unregistered shares of Class A common stock upon the exercise of stock options at per share exercise prices between $0.75 and $1.50. These transactions did not involve any underwriters, any underwriting discounts or commissions, or any public offering. We believe the offers, sales and issuances of these shares were exempt from registration under the Securities Act of 1933 by virtue of Section 4(a)(2) thereof (or Regulation D promulgated thereunder) because the issuance of securities to the recipients did not involve a public offering or in reliance on Rule 701 under said Act because the transactions were pursuant to a contract relating to compensation as provided under such rule. The recipients of the shares represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the shares issued in these transactions. The recipients had adequate access, through a relationship with us, to information about us. The sales of these shares were made without any general solicitation or advertising.

Use of Initial Public Offering Proceeds

The net proceeds of our initial public offering of Class A common stock in November 2017, after deducting underwriting discounts and commissions and offering expenses, were $17.3 million. There has been no material change in the planned use of proceeds from that described in the final prospectus filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933 on November 3, 2017. To date we have applied $10.8 million of the net proceeds to purchase inventory and an additional $2.1 million in the ordinary course of business operations.

Issuer Purchases of Equity Securities

Following is a summary of stock repurchases during the three months ending September 30, 2019:

Period	Total Number of Shares Purchased(1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Program)
July 2019		—		—		—		—
August 2019		—		—		—		—
September 2019		59,465	$	13.195		—		—
Total		59,465	$	13.195		—		—

(1)

On August 14, 2019, we entered into an equity purchase agreement under which we agreed to repurchase, at a price per share of $13.195 (the net proceeds per share we received in a public offering of Class A common stock), shares of Class A common stock from certain of our officers and directors and an officer affiliate. We have been fulfilling our repurchase obligations under the equity purchase agreement by either acquiring outstanding shares of Class A common stock or canceling outstanding vested options to acquire Class A common stock (at a purchase price net of the applicable option exercise price). This table reflects those outstanding shares that were repurchased under the equity purchase agreement during the three months ending September 30, 2019. In September 2019 we cancelled options to acquire a total of 53,571 shares of Class A common stock. We have a continuing obligation under the equity purchase agreement to complete the purchase of an additional 154,821 shares of Class A common stock, which we expect to complete in the fourth quarter of 2019. For further information, please see notes 11 and 15 to our condensed consolidated financial statements included elsewhere in this report.

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Item 6.

Exhibits

The following exhibits are being filed as part of this report:

Exhibit Number		Description
10.01		Equity Purchase Agreement dated August 4, 2019 between ACM Research, Inc. and certain of its directors and executive officers and an officer affiliate
10.02		Letter agreement dated June 12, 2019 between ACM Research, Inc. and Mark McKechnie
10.03		Partnership Agreement of Hefei Shixi Chanheng Integrated Circuit Industry Venture Capital Fund Partnership (LP) dated September 5, 2019 by and among Infotech National Emerging Industry Venture Investment Guidance Fund (LP), Hefei Guozheng Asset Management Co, Ltd., Hefei Economic and Technological Development Zone Industrial Investment Guidance Fund Co., Ltd., ACM Research (Shanghai), Inc., Hefei Tongyi Equity Investment Partnership (LP), Shenzen Waitan Technology Development Co., Ltd., and Beijing Shixi Qingliu Investment Co., Ltd.
31.01		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ACM RESEARCH, INC.
Date: November 13, 2019	By:	/s/ Mark McKechnie
		Mark McKechnie
		Chief Financial Officer and Treasurer (Principal Financial Officer)