ACM Research, Inc. - Quarter Report: 2020 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, 2020

☐	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		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	16,662,218 shares outstanding as of November 3, 2020
Class B Common Stock, $0.0001 par value	1,802,606 shares outstanding as of November 3, 2020

TABLE OF CONTENTS

PART I.		FINANCIAL INFORMATION	4
	Item 1.	Financial Statements (unaudited)	4
		Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	4
		Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019	5
		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019	6
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019	8
		Notes to Condensed Consolidated Financial Statements	9
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	Item 3.	Quantitative and Qualitative Disclosures about Market Risks	41
	Item 4.	Controls and Procedures	41
PART II.		OTHER INFORMATION	42
	Item 1.	Legal Proceedings	42
	Item 1A.	Risk Factors	42
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
	Item 6.	Exhibits	43
SIGNATURE			44

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. 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, ULTRA C and ULTRA FURNACE 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.

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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.

The information included in this report under the heading “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview” contains statistical data and estimates, including forecasts, that are based on information provided by Gartner, Inc., or Gartner, in “Forecast: Semiconductor Wafer Fab Manufacturing Equipment (Including Wafer-Level Packaging), Worldwide, 4Q19 Update” (December 2019), or the Gartner Report. The Gartner Report represents research opinions or viewpoints that are published, as part of a syndicated subscription service, by Gartner and are not representations of fact. The Gartner Report speaks as of its original publication date (and not as of the date of this report), and the opinions expressed in the Gartner Report are subject to change without notice. While we are not aware of any misstatements regarding any of the data presented from the Gartner Report, estimates, and in particular forecasts, involve numerous assumptions and are subject to risks and uncertainties, as well as change based on various factors, that could cause results to differ materially from those expressed in the data presented below.

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.

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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, 2020		December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	92,203	$	58,261
Restricted cash		-		59,598
Trading securities (note 11)		23,888		-
Accounts receivable, less allowance for doubtful accounts of $0 as of September 30, 2020 and December 31, 2019 (note 3)		59,796		31,091
Other receivables		6,177		2,603
Inventories (note 4)		64,182		44,796
Prepaid expenses		5,531		2,047
Total current assets		251,777		198,396
Property, plant and equipment, net (note 5)		5,974		3,619
Land use right, net (note 2)		9,284		-
Operating lease right-of-use assets, net (note 8)		4,568		3,887
Intangible assets, net		335		344
Deferred tax assets (note 17)		10,093		5,331
Long-term investments (note 10)		6,580		5,934
Other long-term assets		8,008		192
Total assets		296,619		217,703
Liabilities, Redeemable Non-controlling Interests and Stockholders’ Equity
Current liabilities:
Short-term borrowings (note 6)		28,327		13,753
Accounts payable		35,639		13,262
Advances from customers		8,011		9,129
Income taxes payable		3,589		3,129
Other payables and accrued expenses (note 7)		18,494		12,874
Current portion of operating lease liability (note 8)		1,388		1,355
Deferred revenue		819		-
Total current liabilities		96,267		53,502
Long-term operating lease liability (note 8)		3,180		2,532
Other long-term liabilities (note 9)		6,454		4,186
Total liabilities		105,901		60,220
Commitments and contingencies (note 18)
Redeemable non-controlling interests (note 15)		-		60,162
Stockholders’ equity:
Common stock – Class A, par value $0.0001: 50,000,000 shares authorized as of September 30, 2020 and December 31, 2019; 16,657,135 shares issued and outstanding as of September 30, 2020 and 16,182,151 shares issued and outstanding as of December 31, 2019 (note 14)		2		2
Common stock–Class B, par value $0.0001: 2,409,738 shares authorized as of September 30, 2020 and December 31, 2019; 1,802,606 shares issued and outstanding as of September 30, 2020 and 1,862,608 shares issued and outstanding as of December 31, 2019 (note 14)		-		-
Additional paid in capital		100,145		83,487
Accumulated surplus		25,758		15,507
Accumulated other comprehensive income (loss)		1,037		(1,675	)
Total ACM Research, Inc. stockholders’ equity		126,942		97,321
Non-controlling interests		63,776		-
Total stockholders’ equity		190,718		97,321
Total liabilities, redeemable non-controlling interests, and stockholders’ equity	$	296,619	$	217,703

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,
	2020			2019			2020			2019
Revenue	$	47,665		$	33,427		$	111,062		$	82,916
Cost of revenue		27,324			17,173			61,137			44,705
Gross profit		20,341			16,254			49,925			38,211
Operating expenses:
Sales and marketing		3,924			3,886			11,524			8,679
Research and development		4,343			3,492			13,241			9,598
General and administrative		4,568			1,846			9,100			5,992
Total operating expenses, net		12,835			9,224			33,865			24,269
Income from operations		7,506			7,030			16,060			13,942
Interest income		179			95			834			128
Interest expense		(272	)		(205	)		(611	)		(538	)
Change in fair value of financial liability		(6,533	)		-			(11,964	)		-
Unrealized gain on trading securities		8,970			-			8,970			-
Other income (expense), net		(1,759	)		1,850			(933	)		2,132
Equity income (loss) in net income (loss) of affiliates		182			(9	)		539			260
Income before income taxes		8,273			8,761			12,895			15,924
Income tax benefit (expense) (note 17)		1,747			328			(416	)		(667	)
Net income		10,020			9,089			12,479			15,257
Less: Net income attributable to non-controlling interests and redeemable non-controlling interests		1,393			307			2,228			307
Net income attributable to ACM Research, Inc.	$	8,627		$	8,782		$	10,251		$	14,950
Comprehensive income:
Net income	$	10,020		$	9,089		$	12,479		$	15,257
Foreign currency translation adjustment		5,757			(2,591	)		4,099			(2,902	)
Comprehensive Income		15,777			6,498			16,578			12,355
Less: Comprehensive income attributable to non-controlling interests and redeemable non-controlling interests		2,698			307			3,614			307
Comprehensive income attributable to ACM Research, Inc.	$	13,079		$	6,191		$	12,964		$	12,048

Net income attributable to ACM Research, Inc. per common share (note 2):
Basic	$	0.47		$	0.52		$	0.57		$	0.91
Diluted	$	0.40		$	0.45		$	0.48		$	0.80

Weighted average common shares outstanding used in computing per share amounts (note 2):
Basic		18,201,943			16,999,746			18,124,665			16,381,944
Diluted		21,555,296			19,354,214			21,257,661			18,699,010

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 Nine Months Ended September 30, 2020 and 2019

(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		Accumulated Other Comprehensive Income (Loss)			Non-controlling interests		Total Stockholders’ Equity
Balance at December 31, 2019		16,182,151		$	2		1,862,608		$	-	$	83,487		$	15,507	$	(1,675	)	$	-	$	97,321
Net income		-			-		-			-		-			10,251		-			1,585		11,836
Foreign currency translation adjustment		-			-		-			-		-			-		2,712			2,233		4,945
Exercise of stock options		592,946			-		-			-		2,191			-		-			-		2,191
Stock-based compensation		-			-		-			-		4,323			-		-			-		4,323
Conversion of class B common shares to Class A common shares		60,002			-		(60,002	)		-		-			-		-			-		-
Share cancellation (note 12)		(242,681	)		-		-			-		(9,715	)		-		-			-		(9,715	)
Issuance of warrants (note 12)		-			-		-			-		19,859			-		-			-		19,859
Exercise of stock warrants		64,717			-		-			-		-			-		-			-		-
Reclassification of redeemable non-controlling interest		-			-		-			-		-			-		-			59,958		59,958
Balance at September 30, 2020		16,657,135		$	2		1,802,606		$	-	$	100,145		$	25,758	$	1,037		$	63,776	$	190,718

	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 December 31, 2018		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

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, 2020 and 2019

(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		Accumulated Other Comprehensive Income (Loss)			Non- controlling interests		Total Stockholders’ Equity
Balance at June 30, 2020		16,250,092	$	2		1,802,606	$	-	$	76,189	$	17,131	$	(3,415	)	$	61,078	$	150,985
Net income		-		-		-		-		-		8,627		-			1,393		10,020
Foreign currency translation adjustment		-		-		-		-		-		-		4,452			1,305		5,757
Exercise of stock options		407,043		-		-		-		1,318		-		-			-		1,318
Stock-based compensation		-		-		-		-		2,779		-		-			-		2,779
Issuance of warrants (note 12)		-		-		-		-		19,859		-		-			-		19,859
Balance at September 30, 2020		16,657,135	$	2		1,802,606	$	-	$	100,145	$	25,758	$	1,037		$	63,776	$	190,718

	Common Stock Class A					Common Stock Class B
	Shares			Amount		Shares			Amount		Additional Paid-in Capital			Accumulated Surplus		Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance at June 30, 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

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,
	2020			2019
Cash flows from operating activities:
Net income	$	12,479		$	15,257
Adjustments to reconcile net income from operations to net cash used in operating activities:
Depreciation and amortization		774			586
Loss on disposals of property, plant and equipment		1			296
Equity income in net income of affiliates		(539	)		(260	)
Unrealized gain on trading securities		(8,970	)		-
Deferred income taxes		(4,632	)		(757	)
Stock-based compensation		4,323			2,919
Change in fair value of financial liability		11,964			-
Net changes in operating assets and liabilities:
Accounts receivable		(27,575	)		(19,634	)
Other receivables		(3,512	)		1,187
Inventory		(18,362	)		(5,889	)
Prepaid expenses		(3,371	)		323
Other long-term assets		(839	)		(182	)
Accounts payable		22,023			(417	)
Advances from customers		(1,142	)		746
Income tax payable		389			162
Other payables and accrued expenses		5,962			2,352
Deferred revenue		819			-
Other long-term liabilities		2,172			(1,441	)
Net cash flow used in operating activities		(8,036	)		(4,752	)

Cash flows from investing activities:
Purchase of property and equipment		(3,583	)		(832	)
Purchase of intangible assets		(81	)		(114	)
Purchase of land-use-right		(9,331	)		-
Purchase of trading securities		(14,680	)		-
Prepayment for property		(6,978	)		-
Investments in unconsolidated affiliates		-			(4,348	)
Net cash used in investing activities		(34,653	)		(5,294	)

Cash flows from financing activities:
Proceeds from short-term borrowings		31,068			18,267
Repayments of short-term borrowings		(16,881	)		(11,770	)
Repayments of notes payable		(1,820	)		-
Proceeds from stock option exercise to common stock		2,191			312
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		14,558			59,175

Effect of exchange rate changes on cash, cash equivalents and restricted cash	$	2,475		$	(2,407	)
Net increase (decrease) in cash, cash equivalents and restricted cash	$	(25,656	)	$	46,722

Cash, cash equivalents and restricted cash at beginning of period		117,859			27,124
Cash, cash equivalents and restricted cash at end of period	$	92,203		$	73,846

Supplemental disclosure of cash flow information:
Interest paid	$	611		$	538
Cash paid for income taxes	$	4,606		$	-

Reconciliation of cash, cash equivalents and restricted cash in condensed consolidated statements of cash flows:
Cash and cash equivalents	$	92,203		$	47,264
Restricted cash		-			26,582
Cash, cash equivalents and restricted cash	$	92,203		$	73,846
Non-cash financing activities:
Warrant conversion to common stock	$	399		$	-
Share cancellation, note 12	$	9,715		$	-
Issuance of warrant for settlement of financial liability and cancellation of note receivable	$	19,859		$	-

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)

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

NOTE 1 – DESCRIPTION OF BUSINESS

ACM Research, Inc. (“ACM”) and its subsidiaries (collectively with ACM, the “Company”) develop, manufacture and sell single-wafer wet cleaning equipment used to improve the manufacturing process and yield for advanced integrated chips. The Company markets and sells 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 initially in 2005 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 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 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. (“ACM Shengwei”), to manage activities related to addition of future long-term production capacity.

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

In June 2019 ACM announced plans to complete over the next three years a listing (the “STAR 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. To meet a STAR Listing requirement that it have multiple independent stockholders in the PRC, ACM Shanghai completed private placements of its shares in June and November 2019, following which, as of September 30, 2020, the private placement investors held a total of 8.3% of the outstanding shares of ACM Shanghai and ACM Research held the remaining 91.7%. As part of the STAR Listing process, in June 2020 the ownership interests held by the private investors were reclassified from redeemable non-controlling interests to non-controlling interests as the redemption feature was terminated. (Note 15).

In preparation for the STAR IPO, the Company completed a reorganization in December 2019 that included the sale of all of the shares of CleanChip by ACM to ACM Shanghai for $3,500. The reorganization and sale had no impact on the Company’s consolidated financial statements.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

The Company has direct or indirect interests in the following subsidiaries:

		Effective interest held as at
Name of subsidiaries	Place and date of incorporation	September 30, 2020			December 31, 2019
ACM Research (Shanghai), Inc.	China, May 2005		91.7	%		91.7	%
ACM Research (Wuxi), Inc.	China, July 2011		91.7	%		91.7	%
CleanChip Technologies Limited	Hong Kong, June 2017		91.7	%		91.7	%
ACM Research Korea CO., LTD.	Korea, December 2017		91.7	%		91.7	%
Shengwei Research (Shanghai), Inc.	China, March 2019		91.7	%		91.7	%
ACM Research (CA), Inc.	USA, June 2019		91.7	%		91.7	%
ACM Research (Cayman), Inc.	Cayman Islands, April 2019		100.0	%		100.0	%

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The Company’s consolidated financial statements include the accounts of ACM and its subsidiaries, including ACM Shanghai and its subsidiaries, which include ACM Wuxi, ACM Shengwei and CleanChip (the subsidiaries of which include ACM California and ACM Korea). ACM’s 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 Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. 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, 2019 included in ACM’s Annual Report on Form 10-K for the year ended December 31, 2019.

The accompanying condensed consolidated balance sheet as of September 30, 2020, condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2020 and 2019, condensed consolidated statements of changes in stockholders’ equity for the three and nine months ended September 30, 2020 and 2019, and condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019 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, 2020 and the results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for any future period.

COVID-19 Assessment

The outbreak of COVID-19, the coronavirus, has grown both in the United States and globally, and related government and private sector responsive actions have adversely affected the Company’s business operations. In December 2019 a series of emergency quarantine measures taken by the PRC government disrupted domestic business activities during the weeks after the initial outbreak of COVID-19. Since that time, an increasing number of countries, including the United States, have imposed restrictions on travel to and from the PRC and elsewhere, as well as general movement restrictions, business closures and other measures imposed to slow the spread of COVID-19. The situation continues to develop, however, and it is impossible to predict the effect and ultimate impact of the COVID-19 outbreak on the Company’s business operations and results. While the quarantine, social distancing and other regulatory measures instituted or recommended in response to COVID-19 are expected to be temporary, the duration of the business disruptions, and related financial impact, cannot be estimated at this time. The COVID-19 outbreak has been declared a worldwide health pandemic that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn and changes in global economic policy that could reduce demand for the Company’s products and its customers’ chips and have a material adverse impact on the Company’s business, operating results and financial condition. Through September 30, 2020 the Company did not experience significant negative impact of COVID-19 on its operations, capital and financial resources, including overall liquidity position.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

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 valuation of financial 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 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.

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,
	2020		2019		2020		2019
Numerator:
Net income	$	10,020	$	9,089	$	12,479	$	15,257
Net income attributable to non-controlling interests and redeemable non-controlling interests		1,393		307		2,228		307
Net income available to common stockholders, basic and diluted	$	8,627	$	8,782	$	10,251	$	14,950

Weighted average shares outstanding, basic		18,201,943		16,999,746		18,124,665		16,381,944
Effect of dilutive securities		3,353,353		2,354,468		3,132,996		2,317,066
Weighted average shares outstanding, diluted		21,555,296		19,354,214		21,257,661		18,699,010

Net income per common share:
Basic	$	0.47	$	0.52	$	0.57	$	0.91
Diluted	$	0.40	$	0.45	$	0.48	$	0.80

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, 2020 and 2019, 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 of warrants and stock options for the three and nine months ended September 30, 2020 and 2019.

Land use right, net

The land use right represents the cost to purchase a right to use state-owned land in the PRC with lease terms of 50 years expiring in 2070, for which an upfront lump-sum payment was made during the first nine months of 2020. The Company classifies the land use right as non-current assets on the condensed consolidated balance sheets.

The land use right is carried at cost less accumulated amortization and impairment losses, if any. Amortization is computed using the straight-line method over the term specified in the land use right certificate, which is 50 years.

Concentration of Credit Risk

The Company is potentially subject to concentrations of credit risks in its accounts receivable. For the nine months ended September 30, 2020 and 2019, the Company’s three largest customers accounted for 79.8% and 72.3%, respectively, of revenue. For the three months ended September 30, 2020 and 2019, the Company’s three largest customers accounted for 72.1% and 98.6%, respectively, of revenue. As of September 30, 2020 and December 31, 2019, the Company’s three largest customers accounted for 76.9% and 67.7%, respectively, of the Company’s accounts receivables. The Company believes that the receivable balances from these largest customers do not represent a significant credit risk based on past collection experience.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

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 pre-existing incurred loss impairment methodology 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. In October 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842), which defers the effective date for public filers that are considered small reporting companies as defined by the Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Since the Company is a smaller reporting company, implementation is not needed until January 1, 2023. 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 is evaluating the impact of this standard on its consolidated financial statements, including accounting policies, processes and systems and expects the standard will have a minor impact on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 will simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is evaluating the impact of the adoption of ASU 2019-12, but does not expect it to have a material impact on income taxes as reported in its consolidated financial statements.

NOTE 3 – ACCOUNTS RECEIVABLE

At September 30, 2020 and December 31, 2019, accounts receivable consisted of the following:

	September 30, 2020		December 31, 2019
Accounts receivable	$	59,796	$	31,091
Less: Allowance for doubtful accounts		-		-
Total	$	59,796	$	31,091

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, 2020 and December 31, 2019. At September 30, 2020 and December 31, 2019, accounts receivable of $0 and $1,433, respectively, were pledged as collateral for borrowings from financial institutions.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

NOTE 4 – INVENTORIES

At September 30, 2020 and December 31, 2019, inventory consisted of the following:

	September 30, 2020		December 31, 2019
Raw materials	$	27,254	$	15,105
Work in process		13,882		10,407
Finished goods		23,046		19,284
Total inventory	$	64,182	$	44,796

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, 2020 and December 31, 2019, property, plant and equipment consisted of the following:

	September 30, 2020			December 31, 2019
Manufacturing equipment	$	4,093		$	3,902
Office equipment		926			627
Transportation equipment		177			124
Leasehold improvement		1,471			1,442
Total cost		6,667			6,095
Less: Total accumulated depreciation		(3,751	)		(3,077	)
Construction in progress		3,058			601
Total property, plant and equipment, net	$	5,974		$	3,619

Depreciation expense was $195 and $176 for the three months ended September 30, 2020 and 2019, respectively, and $569 and $528 for the nine months ended September 30, 2020 and 2019, respectively.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

NOTE 6 – SHORT-TERM BORROWINGS

At September 30, 2020 and December 31, 2019, short-term borrowings consisted of the following:

	September 30, 2020		December 31, 2019
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. It was fully repaid on January 23, 2020.	$	-	$	5,057
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. It was fully repaid on February 21, 2020.		-		1,433
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% and fully repaid on January 19, 2020.		-		1,433
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% and fully repaid on January 22, 2020.		-		717
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% and fully repaid on February 14, 2020.		-		717
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 and fully repaid on March 24, 2020.		-		3,250
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 and fully repaid on April 2, 2020.		-		1,146
Line of credit up to RMB 80,000 from China Everbright Bank, due on April 1, 2021 with an annual interest rate of 4.70%, guaranteed by the Company’s CEO.		4,404		-
Line of credit up to RMB 80,000 from China Everbright Bank, due on June 27, 2021 with an annual interest rate of 4.25%, guaranteed by the Company’s CEO.		1,321		-
Line of credit up to RMB 80,000 from China Everbright Bank, due on April 29, 2021 with an annual interest rate of 2.80%, guaranteed by the Company’s CEO.		820		-
Line of credit up to RMB 80,000 from China Everbright Bank, due on June 27, 2021 with an annual interest rate of 2.70%, guaranteed by the Company’s CEO.		2,079		-
Line of credit up to RMB 20,000 from Bank of Communications, due on April 12, 2021 with an annual interest rate of 4.65%.		1,468		-
Line of credit up to RMB 20,000 from Bank of Communications, due on May 24, 2021 with an annual interest rate of 3.65%.		1,468		-
Line of credit up to RMB 70,000 from Bank of Shanghai Pudong Branch, due on May 27, 2021 with an annual interest rate of 4.68%, guaranteed by the Company’s CEO and Cleanchip Technologies Limited.		2,466		-
Line of credit up to RMB 70,000 from Bank of Shanghai Pudong Branch, due on June 27, 2021 with an annual interest rate of 4.68%, guaranteed by the Company’s CEO and Cleanchip Technologies Limited.		1,321		-
Line of credit up to RMB 70,000 from Bank of Shanghai Pudong Branch, due on May 28, 2021 with an annual interest rate of 3.48%, guaranteed by the Company’s CEO and Cleanchip Technologies Limited.		2,441		-
Line of credit up to RMB 70,000 from Bank of Shanghai Pudong Branch, due on June 7, 2021 with an annual interest rate of 3.50%, guaranteed by the Company’s CEO and Cleanchip Technologies Limited.		1,521		-
Line of credit up to RMB 70,000 from Bank of Shanghai Pudong Branch, due on June 16, 2021 with an annual interest rate of 3.50%, guaranteed by the Company’s CEO and Cleanchip Technologies Limited.		1,837		-
Line of credit up to RMB 30,000 from Bank of China Pudong Branch, due on December 17, 2020 with annual interest rate of 4.35%, guaranteed by the Company’s CEO.		2,496		-
Line of credit up to RMB 80,000 from China Merchants Bank,due on August 10, 2021 with annual interest rate of 3.85%.		1,321		-
Line of credit up to RMB 80,000 from China Merchants Bank,due on August 25, 2021 with annual interest rate of 3.85%.		2,936		-
Line of credit up to KRW 500,000 from Industrial Bank of Korea, due on July 11, 2021 with an annual interest rate of 3.99%,guaranteed by the ACM-KOREA CEO.		428		-
Total	$	28,327	$	13,753

Interest expense related to short-term borrowings amounted to $272 and $205 for the three months ended September 30, 2020 and 2019, respectively, and $611 and $538 for the nine months ended September 30, 2020 and 2019, respectively.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

NOTE 7 – OTHER PAYABLE AND ACCRUED EXPENSES

At September 30, 2020 and December 31, 2019, other payable and accrued expenses consisted of the following:

	September 30, 2020		December 31, 2019
Accrued commissions	$	7,785	$	4,082
Accrued warranty		3,449		2,811
Accrued payroll		2,960		2,092
Accrued professional fees		40		165
Accrued machine testing fees		1,481		1,456
Others		2,779		2,268
Total	$	18,494	$	12,874

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,				Nine Months Ended September 30,
	2020		2019		2020		2019
Operating lease cost	$	384	$	363	$	1,139	$	1,064
Short-term lease cost		73		92		170		117
Lease cost	$	457	$	455	$	1,309	$	1,181

Supplemental cash flow information related to operating leases was as follows for the three and nine-month periods ended September 30, 2020 and 2019, respectively:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow from operating leases	$	457	$	455	$	1,309	$	1,181

Maturities of lease liabilities for all operating leases were as follows as of September 30, 2020:

	December 31,
2020	$	390
2021		1,592
2022		1,580
2023		912
2024		872
2025		22
Total lease payments		5,368
Less: Interest		(800	)
Present value of lease liabilities	$	4,568

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

The weighted average remaining lease terms and discount rates for all operating leases were as follows as of September 30, 2020 and December 31, 2019:

	September 30, 2020			December 31, 2019
Remaining lease term and discount rate:
Weighted average remaining lease term (years)		3.70			3.02
Weighted average discount rate		5.29	%		5.43	%

NOTE 9 – OTHER LONG-TERM LIABILITIES

Other long-term liabilities represent subsidies that we have received from governmental authorities, including China’s Ministry of Science and Technology, the Shanghai Municipal Commission of Economy and Information, and the Shanghai Science and Technology Committee, for development and commercialization of certain technology but have not yet earned and recognized. As of September 30, 2020 and December 31, 2019, other long-term liabilities consisted of the following unearned government subsidies:

	September 30, 2020		December 31, 2019
Subsidies to Stress Free Polishing project, commenced in 2008 and 2017	$	1,126	$	1,251
Subsidies to Electro Copper Plating project, commenced in 2014		2,188		2,666
Subsidies to Polytetrafluoroethylene, commenced in 2018		125		135
Subsidies to Tahoe-Single Bench Clean, commenced in 2020		1,962		-
Subsidies to Backside Clean-YMTC National Project, commenced in 2020		751		-
Other		302		134
Total	$	6,454	$	4,186

NOTE 10 – LONG TERM INVESTMENTS

In September 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, 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, 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 equity 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) (“Hefei Shixi”), a Chinese limited partnership based in Hefei, China. Pursuant to such Partnership Agreement, on September 30, 2019, ACM Shanghai invested $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 equity method.

The components of long-term investments were as follows:

	September 30, 2020		December 31, 2019
Ninebell	$	2,088	$	1,538
Shengyi		134		107
Hefei Shixi		4,358		4,289
Total	$	6,580	$	5,934

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

NOTE 11 – TRADING SECURITIES

Pursuant to a Partnership Agreement dated June 9, 2020 (the “Partnership Agreement”) and a Supplementary Agreement thereto dated June 15, 2020 (the “Supplementary Agreement”), ACM Shanghai became a limited partner of Qingdao Fortune-Tech Xinxing Capital Partnership (L.P.), a Chinese limited partnership based in Shanghai, China (the “Partnership”) of which China Fortune-Tech Capital Co., Ltd serves as general partner and thirteen unaffiliated entities serve, with ACM Shanghai, as limited partners. The Partnership was formed to establish a special fund that would purchase, in a strategic placement, shares of Semiconductor Manufacturing International Corporation, (“SMIC”) to be listed on the STAR Market. SMIC is a Shanghai-based foundry that has been a customer of the Company’s single-wafer wet-cleaning tools. The limited partners of the Partnership contributed to the fund a total of RMB 2.224 billion ($315,000), of which ACM Shanghai contributed RMB 100 million ($14.2 million), or 4.3% of the total contribution, on June 18, 2020.

Upon the closing of the SMIC offering in July 2020, the initial number of SMIC shares owned by the Partnership was apportioned to all of the limited partners in proportion to their respective capital contributions (4.3% in the case of ACM Shanghai). All of the SMIC shares acquired by the Partnership are subject, under applicable Chinese laws, to lock-up restrictions that prevent sales of the shares for one year after the shares were acquired. Thereafter an individual limited partner will be able to instruct the general partner to sell, on behalf of the limited partner, all or a portion of the limited partner’s apportioned shares, subject to compliance with all laws, regulations, trading rules, the Partnership Agreement and the Supplementary Agreement. Alternatively, following the lock-up period, limited partners holding at least thirty percent of the total SMIC shares held by the Partnership will be able, pursuant to a call auction in accordance with the Supplementary Agreement, to cause the general partner to arrange to sell all of the shares desired to be offered by each of the limited partners that complies with procedural requirements provided in the Supplementary Agreement.

ACM Shanghai’s investment is accounted for as trading securities, and is stated at market value which is classified as Level 2 of the hierarchy established under ASC No. 820 with valuations based on quoted prices for identical securities in active markets, less a discount applied to reflect the remaining lock-up period.

The components of trading securities were as follows:

	September 30, 2020		December 31, 2019
Trading securities listed in Shanghai Stock Exchange
Cost	$	14,680	$	-

Market value	$	23,888	$	-

Unrealized gain on trading securities amounted to $8,970 for the three and nine months ended September 30, 2020.

NOTE 12 – FINANCIAL LIABILITY CARRIED AT FAIR VALUE

In December 2016 Shengxin (Shanghai) Management Consulting Limited Partnership (“SMC”) paid 20,123,500 RMB ($2,981 as of the date of funding) (the “SMC Investment”) to ACM Shanghai for investment pursuant to terms to be subsequently negotiated. SMC is a PRC limited partnership partially owned by employees of ACM Shanghai.

In March 2017 (a) ACM issued to SMC a warrant (the “Warrant”) exercisable to purchase 397,502 shares of Class A common stock at a price of $7.50 per share, for a total exercise price of $2,981, and (b) ACM Shanghai agreed to repay the SMC Investment within 60 days after the exercise of the Warrant. In March 2018 SMC exercised the Warrant in full, as a result of which (1) ACM issued 397,502 shares of Class A common stock to SMC, (2) SMC borrowed the funds to pay the Warrant exercise price pursuant to a senior secured promissory note (the “SMC Note”) in the principal amount of $2,981 issued to ACM Shanghai, which in turn issued to ACM a promissory note (the “Intercompany Note”) in the principal amount of $2,981 in payment of the Warrant exercise price. Each of the SMC Note and the Intercompany Note bears interest at a rate of 3.01% per annum and matures on August 17, 2023. The SMC Note was secured by a pledge of the shares issued upon exercise of the Warrant.

In connection with its follow-on public offering of Class A common stock in August 2019, ACM agreed to purchase a total of 154,821 of the Warrant shares from SMC at a per share price of $13.195, of which (a) $1,161 was applied to reduce SMC’s obligations to ACM Shanghai under the SMC Note, and which ACM then withheld for its own account and applied to reduce ACM Shanghai’s obligations to ACM under the Intercompany Note, and (b) the remaining $882 was paid to SMC. In a separate transaction, ACM Shanghai repaid $1,161 of the SMC Investment in cash, which reduced the amount of the SMC Investment due to SMC to $1,820.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

The SMC Note and SMC Investment are offsetting items in the Company’s consolidated balance sheet in accordance with Accounting Standards Codification 210-20-45-1 up to April 30, 2020.

In preparation for the STAR IPO, ACM Shanghai was required to terminate its financial relationship with SMC. In order to facilitate such termination, on April 30, 2020, ACM entered into two agreements relating to outstanding obligations among ACM Research, ACM Shanghai and SMC. Pursuant to such agreements: (i) ACM Shanghai assigned to ACM its rights under the SMC Note, including the right to receive payment of the $1,820 payable thereunder; (ii) ACM cancelled the outstanding $1,820 obligation of ACM Shanghai under the Intercompany Note; (iii) SMC surrendered its remaining 242,681 Warrant shares to ACM Research; and (iv) in exchange for such 242,681 Warrant shares, ACM agreed to deliver to SMC certain consideration (“SMC Consideration”) agreed upon by ACM Research and SMC, subject to obtaining certain PRC regulatory approvals. Under the agreements, if the required approvals were not obtained by December 31, 2023, ACM would cancel the SMC Note as consideration for the 242,681 Warrant shares. In a separate transaction in April 2020, ACM Shanghai repaid the remaining $1,820 of the SMC Investment in cash.

For the period beginning April 30, 2020 the SMC Consideration is accounted for as a financial liability, and the Company applies fair value option to measure the SMC Consideration in accordance with Accounting Standards Codification 825-15-4a. On April 30, 2020, the SMC Consideration was $9,715. The financial liability was remeasured to fair value as of the end of each of the reporting periods.

On July 29, 2020 ACM and SMC entered into an amended agreement under which, in settlement of the SMC Consideration, ACM issued to SMC a warrant (the “SMC 2020 Warrant”) to purchase 242,681 shares of Class A common stock at a purchase price of $7.50 per share, and ACM cancelled the SMC Note. The financial liability was remeasured to fair value of $21,679 as of July 29, 2020, and was retired with the issuance of the SMC 2020 Warrant. The Company recognized a change in fair value of financial liability of $6,533 and $11,964 for the three and nine months ended September 30, 2020, respectively, which was charged to the consolidated statement of operations.

The SMC 2020 Warrant was initially measured at fair value at the issuance date and classified as equity permanently in accordance with Accounting Standards Codification 815. The fair value of the SMC 2020 Warrant amounted to $21,679 based on the grant date using the Black-Scholes valuation model with the following assumptions:

	Nine Months Ended September 30,
	2020
Fair value of common share(1)	$89.28
Expected term in years(2)	3.42
Volatility(3)	47.42%
Risk-free interest rate(4)	0.15%
Expected dividend(5)	0%

(1)	Fair value of Class A common stock was the closing market price of the Class A common stock on July 29, 2020.

(2)	Expected term of share options is based on the average of the vesting period and the contractual term for each grant according to Staff Accounting Bulletin 110.

(3)	Volatility is calculated based on the historical volatility of the stock of companies comparable to ACM in the period equal to the expected term of each grant.

(4)	Risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the share options in effect at the time of grant.

(5)	Expected dividend is assumed to be 0% as ACM has no history or expectation of paying a dividend on its common stock.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

NOTE 13 – RELATED PARTY BALANCES AND TRANSACTIONS

Prepaid expenses		September 30, 2020				December 31, 2019
Ninebell		$	2,272			$	348

Accounts payable	September 30, 2020		December 31, 2019
Ninebell	$	3,197	$	727
Shengyi		609		488
Total	$	3,806	$	1,215

	Three Months Ended September 30				Nine Months Ended September 30
Purchase of materials	2020		2019		2020		2019
Ninebell	$	4,029	$	2,591	$	9,552	$	7,395
Shengyi		599		261		1,113		453
Total	$	4,628	$	2,852	$	10,665	$	7,848

	Three Months Ended September 30				Nine Months Ended September 30
Service fee charged by	2020		2019		2020		2019
Shengyi	$	14	$	-	$	204	$	-
Ninebell		22		-		22		-
Total	$	36	$	-	$	226	$	-

NOTE 14 – 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.

During the nine months ended September 30, 2020 and 2019, ACM issued 592,946 and 193,642 shares of Class A common stock upon option exercises by employees and non-employees, respectively. During the nine months ended September 30, 2020, ACM issued 64,717 shares of Class A common stock upon a cashless warrant exercise by a non-employee.

During the three months ended September 30, 2020 and 2019, ACM issued 407,043 and 89,015 shares, respectively, of Class A common stock upon option exercises by employees and non-employees.

During the nine months ended September 30, 2020, SMC transferred and cancelled its ownership of 242,681 shares of Class A common stock to ACM in exchange for the SMC 2020 Warrant (Note 12)

There were issued and outstanding 16,657,135 shares of Class A common stock and 1,802,606 shares of Class B common stock at September 30, 2020 and 16,182,151 shares of Class A common stock and 1,862,608 shares of Class B common stock at December 31, 2019.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

NOTE 15 – REDEEMABLE NON-CONTROLLING INTERESTS

The components of the change in redeemable non-controlling interests for the nine months ended September 30, 2020 are presented in the following table:

Balance at December 31, 2019	$	60,162
Net income attributable to redeemable non-controlling interests		643
Effect of foreign currency translation gain attributable to redeemable non-controlling interests		(847	)
Reclassification of redeemable non-controlling interest		(59,958	)
Balance at September 30, 2020	$	-

Upon the submission of application documents by ACM Shanghai for the STAR Listing and the STAR IPO to the Shanghai Stock Exchange during the second quarter of 2020, the redemption feature of the private placement funding (Note 1) terminated and the aggregate proceeds of the funding therefore were reclassified from redeemable non-controlling interests to non-controlling interests. Further, upon the termination of such redemption feature, the Company released the aggregate proceeds of the private placement funding from reserved cash, which the Company previously had voluntarily imposed in light of a potential redemption.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

NOTE 16 – STOCK-BASED COMPENSATION

In January 2020 ACM Shanghai adopted a 2019 Stock Option Incentive Plan (the “Subsidiary Stock Option Plan”) that provides for, among other incentives, the granting to officers, directors, employees of options to purchase shares of ACM Shanghai’s common stock. The fair value of the stock options granted is estimated at the date of grant based on the Black-Scholes option pricing model using assumptions generally consistent with those used for ACM’s stock options. Because ACM Shanghai shares are not currently publicly traded, the expected volatility is estimated with reference to the average historical volatility of a group of publicly traded companies that are believed to have similar characteristics to ACM Shanghai.

ACM’s stock-based compensation consists of employee and non-employee awards issued under the 1998 Stock Option Plan and the 2016 Omnibus Incentive Plan and as standalone options. ACM granted stock options to employees under the 2016 Omnibus Incentive Plan during the nine months ended September 30, 2020. The vesting condition may consist of service period determined by the Board of Directors for s grant or certain performance conditions determined by the Board of Directors for a grant. The fair value of the stock options granted with service period based condition is estimated at the date of grant using the Black-Scholes option pricing model. The fair value of the stock options granted with market based condition is estimated at the date of grant using the Monte Carlo simulation model.

The following table summarizes the components of stock-based compensation expense included in the consolidated statements of operations:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Stock-Based Compensation Expense:
Cost of revenue	$	44	$	154	$	132	$	213
Sales and marketing expense		237		172		495		252
Research and development expense		193		759		568		939
General and administrative expense		2,305		472		3,128		1,515
	$	2,779	$	1,557	$	4,323	$	2,919

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Stock-based compensation expense by type:
Employee stock purchase plan	$	2,651	$	1,329	$	3,717	$	1,841
Non-employee stock purchase plan		44		228		356		1,078
Subsidiary option grants		84		-		250		-
	$	2,779	$	1,557	$	4,323	$	2,919

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

Employee Awards

The following table summarizes the Company’s employee share option activities during the nine months ended September 30, 2020:

	Number of Option Share			Weighted Average Grant Date Fair Value		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Outstanding at December 31, 2019		2,994,063		$	2.59	$	6.77	7.05 years
Granted		778,399			11.98		28.70
Exercised		(327,917	)		1.56		4.33
Expired		-			-		-
Forfeited/cancelled		(40,515	)		4.94		13.04
Outstanding at September 30, 2020		3,404,030		$	4.81	$	11.95	7.14 years
Vested and exercisable at September 30, 2020		2,061,793

As of September 30, 2020 and December 31, 2019, $9,697 and $4,712, respectively, of total unrecognized employee stock-based compensation expense, net of estimated forfeitures, related to stock-based awards for ACM were expected to be recognized over a weighted-average period of 1.96 years and 1.47 years, respectively. Total recognized compensation cost may be adjusted for future changes in estimated forfeitures.

Non-employee Awards

The following table summarizes ACM’s non-employee stock option activities during the nine months ended September 30, 2020:

	Number of Option Shares			Weighted Average Grant Date Fair Value		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Outstanding at December 31, 2019		1,101,613		$	0.82	$	2.69	5.85 years
Granted		20,000			10.29		25.60
Exercised		(265,029	)		0.91		3.34
Expired		-
Forfeited/cancelled		(111	)		0.30		0.75
Outstanding at September 30, 2020		856,473		$	1.01	$	3.02	5.11 years
Vested and exercisable at September 30, 2020		819,819

As of September 30, 2020 and December 31, 2019, $235 and $406, 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 0.11 years and 0.23 years, respectively. Total recognized compensation cost may be adjusted for future changes in estimated forfeitures.

The fair value of options granted to employee and non-employee with a service period based condition is estimated on the grant date using the Black-Scholes valuation model with the following assumptions.

	Nine Months Ended September 30,	Year Ended December 31,
	2020	2019
Fair value of common share(1)	$22.07-85.27	$13.64-16.81
Expected term in years(2)	5.50-6.25	6.25
Volatility(3)	42.17%-48.15%	39.91%-40.35%
Risk-free interest rate(4)	0.27%-0.82%	1.69%-2.46%
Expected dividend(5)	0%	0%

(1)	Fair value of Class A common stock value was the closing market price of the Class A common stock on the grant date.

(2)	Expected term of share options is based on the average of the vesting period and the contractual term for each grant according to Staff Accounting Bulletin 110.

(3)	Volatility is calculated based on the historical volatility of the stock of companies comparable to ACM in the period equal to the expected term of each grant.

(4)	Risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the share options in effect at the time of grant.

(5)	Expected dividend is assumed to be 0% as ACM has no history or expectation of paying a dividend on its common stock.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

The fair value of option granted to employee with market based condition is estimated on the grant date using the Monte Carlo simulation model with the following assumptions.

	Nine Months Ended September 30,
	2020
Fair value of common share(1)	$22.07
Expected term in years(2)	9.20 - 9.80
Volatility(3)	45.10%
Risk-free interest rate(4)	2.68%
Expected dividend(5)	0%

(1)	Fair value of Class A common stock value was the closing market price of the Class A common stock on the grant date.

(2)	Expected term of share options is based on the average of the vesting period and the contractual term for each grant according to Staff Accounting Bulletin 110.

(3)	Volatility is calculated based on the historical volatility of the stock of companies comparable to ACM in the period equal to the expected term of each grant.

(4)	Risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the share options in effect at the time of grant.

(5)	Expected dividend is assumed to be 0% as ACM has no history or expectation of paying a dividend on its common stock.

ACM Shanghai Option Grants

The following table summarizes the ACM Shanghai employee stock option activities during the nine months ended September 30, 2020:

	Number of Option Shares in ACM Shanghai			Weighted Average Grant Date Fair Value		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Outstanding at December 31, 2019		-		$	-	$	-		-
Granted		5,869,808			0.22		1.87
Exercised		-			-		-
Expired		-			-		-
Forfeited/cancelled		(330,770	)		0.23		1.87
Outstanding at September 30, 2020		5,539,038		$	0.22	$	1.87	3.76 years
Vested and exercisable at September 30, 2020		-

During the three and nine months ended September 30, 2020, the Company recognized stock-based compensation expense of $84 and $250, respectively, related to stock option grants of ACM Shanghai. As of September 30, 2020, $911 of total unrecognized non-employee stock-based compensation expense, net of estimated forfeitures, related to ACM Shanghai stock-based awards were expected to be recognized over a weighted-average period of 2.75 years. Total recognized compensation cost may be adjusted for future changes in estimated forfeitures.

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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

NOTE 17 – INCOME TAXES

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

The Company considers all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become realizable. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carry-forward periods) and projected taxable income in assessing the realizability of deferred tax assets. In making such judgments, significant weight is given to evidence that can be objectively verified.

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. Since September 30, 2019, the Company has not maintained a valuation allowance except for a partial valuation allowance on certain U.S. deferred tax assets. 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.

ACM Shanghai has shown a three-year historical cumulative profit and has projections of future income. As a result, the Company does not maintain a valuation allowance.

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 (expense) of $1,747 and $328 during the three months ended September 30, 2020 and 2019, respectively, and $(416) and $(667) during the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020, the Company’s total unrecognized tax benefits were $155, which would not affect the effective tax rate if recognized. The Company will recognize interest and penalties, when they occur, related to uncertain tax provisions as a component of tax expense. No interest or penalties were recognized for the nine months ended September 30, 2020.

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, 2019. 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 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 as it pertains to book-tax differences in the value of client equity securities received for services and the treatment of stock-based compensation. The Company’s three PRC subsidiaries, ACM Shanghai, ACM Wuxi and ACM Shengwei, are liable for PRC corporate income taxes at the rates of 15%, 25% and 25%, respectively. Pursuant to the Corporate Income Tax Law of the PRC, ACM’s 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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ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

ACM files 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 2019. To the extent ACM has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the U.S. Internal Revenue Service or state or foreign tax authorities to the extent utilized in a future period. The U.S. Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. It contains several provisions that may have financial statement effects. Key aspects of the CARES Act include the following:

•	repealed the 80% taxable income limitation for 2018, 2019 and 2020, and allows those years to be carried back up to five years;

•	allows corporations to claim 100% of AMT credits in 2019, and provides for an election to take the entire refundable credit amount in 2018;

•	raised the Section 163(j) ATI limit from 30% to 50% for businesses; and

•	made technical corrections to TCJA for Qualified Improvement Property (“QIP”) and designates QIP as 15-year property for depreciation purposes, which makes QIP a category eligible for 100% bonus depreciation

The CARES Act is not expected to have a material impact on income taxes in the Company’s consolidated financial statements.

Income tax expense was as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020			2019
	(in thousands)				(in thousands)
Total income tax benefit (expense)	$	1,747	$	328	$	(416	)	$	(667	)

NOTE 18 – 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, 2020, the Company had $1,369 of open capital commitments.

Covenants in ACM Shengwei’s Grant Contract for State-owned Construction Land Use Right in Shanghai City, with the China (Shanghai) Pilot Free Trade Zone Lin-gang Special Area Administration require, among other things, that ACM Shengwei pay liquidated damages in the event that (a) it does not make a total investment (including the costs of construction, fixtures, equipment and grant fees) of at least RMB 450.0 million ($63,400) or (b) within six years after the land use right is obtained, the Company does not (i) generate a minimum specified amount of annual sales of products manufactured on the granted land or (ii) pay to the PRC at least RMB 157.6 million ($22,000) in annual total taxes (including value-added taxes, corporate income tax, personal income taxes, urban maintenance and construction taxes, education surcharges, stamp taxes, and vehicle and shipping taxes) as a result of operations in connection with the granted land.

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, 2020, 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, 2019, 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 in Part I, Item 1A. “Risk Factors” in our Annual Report, as well as 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 and other front-end 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 and other front-end processing equipment totaling $38.4 million, or 80.3% of total revenue, for the three months ending September 30, 2020 compared to $28.3 million, or 84.8% of total revenue, for the corresponding period in 2019. We recognized revenue from sales of single-wafer wet cleaning and other front-end processing equipment totaling $99.0 million, or 89.1% of total revenue, for the nine months ending September 30, 2020 compared to $70.1 million, or 84.5% of total revenue, for the corresponding period in 2019.

Based on Gartner’s December 2019 estimates, the market for global wafer cleaning equipment (auto wet stations, single-wafer processors, and other clean process) grew by 20% to $3.46 billion in 2018, decreased by 5% to $3.28 billion in 2019, and was expected to decrease by 6% to $3.07 billion in 2020. We estimate, based on third-party reports and on customer and other information, that our cleaning products address more than 80% of this global wafer cleaning equipment market.

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 120 single-wafer wet cleaning and other front-end processing tools, more than 105 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 tools have been developed using our key proprietary technologies:

•	Space Alternated Phase Shift, or SAPS, technology for flat and patterned wafer surfaces (such as via or deep trench with stronger structure), 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;

•	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; and

•	Electro-Chemical Plating, or ECP, technology for advanced metal plating, which includes Ultra ECP AP, or Advanced Packaging, technology for back-end assembly processes and Ultra ECP MAP, or Multi-Anode Partial Plating, technology for front-end wafer fabrication processes.

We conduct substantially all of our product development, manufacturing, support and services in the People’s Republic of China, or the PRC. All of our tools are built to order at our manufacturing facilities in the Pudong region of Shanghai, which now encompass a total of 136,000 square feet of floor space for production capacity, with 50,000 square feet having been added in the second quarter of 2020 through an expansion of our second facility in the Pudong region of Shanghai. In May 2020 ACM Shanghai, through its wholly owned subsidiary Shengwei Research (Shanghai), Inc., entered into an agreement for a land use right in the Lingang region of Shanghai. In July 2020 Shengwei Research (Shanghai), Inc. began a multi-year construction project for a new development and production center. The planned 1,000,000 square foot facility will incorporate state-of-the-art manufacturing systems and automation technologies, and will provide the floor space to support significantly more production capacity and related research and development activities when fully-staffed and supplied. 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, Tahoe and ECP technologies, and enable us to design innovative products and solutions to address their needs.

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We have been issued more than 285 patents in the United States, the PRC, Japan, Korea, Singapore and Taiwan.

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. In 2007 we began to focus our development efforts on single-wafer wet-cleaning solutions for the front-end chip fabrication process. Since that time, we have strategically built our technology base and expanded our product offerings:

•	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 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 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.

•	In April 2020 we introduced the Ultra Furnace, our first system developed for multiple dry processing applications.

•	In May 2020 we introduced the Ultra C Family of semi-critical cleaning systems, including the Ultra C b for backside clean, the Ultra C wb automated wet bench, and the Ultra C s scrubber.

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. Since that time, we have expanded our geographic presence:

•	In 2011 we formed a wholly owned subsidiary in the PRC, ACM Research (Wuxi), Inc., which now is a wholly owned subsidiary of ACM Shanghai, to manage sales and service operations.

•

In June 2017 we formed a subsidiary in Hong Kong, CleanChip Technologies Limited, which now is a wholly owned subsidiary of ACM Shanghai, 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 subsidiary in the Republic of Korea, ACM Research Korea CO., LTD., which now is a wholly owned subsidiary of ACM Shanghai, to serve our customers based in the Republic of Korea and perform sales, marketing, and research and development activities.

•	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.

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 PRC (including Taiwan), Korea and throughout Asia, providing convenient access and reduced shipping and manufacturing costs.

•	Our initial factory is located in the Pudong Region of Shanghai and has a total of 36,000 square feet of available floor space.

•	In September 2018 we announced the opening of a second factory, also in the Pudong region of Shanghai. This facility initially had a total of 50,000 square feet of available floor space for production capacity, which was increased by 50,000 square feet in the second quarter of 2020.

•	In July 2020 ACM Shanghai began a multi-year construction project to build a development and production center in the Lingang region of Shanghai. The new facility is expected to have a total of 1,000,000 square feet of available floor space for production. capacity.

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Recent Developments

STAR Market Listing and IPO

In June 2019 we announced our intention to complete:

•	a listing, which we refer to as the STAR Listing, of shares of ACM Shanghai on the Shanghai Stock Exchange’s 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, at a pre-offering valuation of not less than RMB 5.15 billion ($747.1 million).

We believe the STAR Listing will help us scale our business in mainland PRC, as we continue to seek to broaden our markets in Europe, Japan, Korea, Taiwan and the United States. Our global headquarters will continue to be located in Fremont, California, and we are committed to maintaining the listing of Class A common stock on the Nasdaq Global Market.

To qualify for the STAR Listing, ACM Shanghai was required to have multiple independent stockholders in the PRC. In June and November 2019, ACM Shanghai entered into private placement agreements with fifteen investors pursuant to which the investors purchased ACM Shanghai shares for a total of RMB 416.1 million ($59.7 million as of the investment dates). As of September 30, 2020, 91.7% of the outstanding shares of ACM Shanghai were owned by ACM Research and 8.3% were owned by the private placement investors.

Upon the submission of application documents by ACM Shanghai for the STAR Listing and STAR IPO to the Shanghai Stock Exchange during the second quarter of 2020, the shares of ACM Shanghai issued to the private placement investors were reclassified from redeemable non-controlling interests to non-controlling interests. Upon the termination of such redemption feature, we released the aggregate proceeds of the private placement funding from reserved cash, which we previously had voluntarily imposed in light of a potential redemption.

On September 30, 2020, the application was approved by the Listing Committee of the STAR Market. Listing of ACM Shanghai’s shares on the STAR Market remains subject to submission of formal registration and to review and approval by the China Securities Regulatory Commission.

ACM Shanghai currently proposes to offer up to ten percent of its shares in the STAR IPO. The net proceeds of the STAR IPO are expected to be used to fund:

•

the land lease for, and construction of, ACM Shanghai’s proposed development and production center in the Lingang region of Shanghai;

•

product development to upgrade and expand our process equipment targeted at more advanced process nodes, including technical improvement and development of TEBO megasonic cleaning equipment, Tahoe single wafer wet bench combined cleaning equipment, front-end brush scrubbing equipment, front end process electroplating equipment, Stress Free Polish equipment and vertical furnace equipment; and

•

working capital.

COVID–19 Outbreak

Following its initial outbreak in December 2019, COVID–19, or the coronavirus, spread across the PRC, the United States and globally. The COVID–19 outbreak affected our business and operating results for the first quarter of 2020. The COVID–19 situation continues to evolve, and it is impossible for us to predict the effect and ultimate impact of the COVID–19 outbreak on our business operations and results. While the quarantine, social distancing and other regulatory measures instituted or recommended in response to COVID–19 are expected to be temporary, the duration of the business disruptions, and related financial impact, of the outbreak cannot be estimated at this time. For an explanation of some of the risks we potentially face, please read carefully the information provided under “Item 1A. Risk Factors—Risks Related to the COVID–19 Outbreak,” of Part I of our Annual Report which is incorporated by reference in “Item 1A. Risk Factors” of Part II of this report.

The following summary reflects our expectations and estimates based on information known to us as of the date of this filing:

•

Operations: We conduct substantially all of our product development, manufacturing, support and services in the PRC, and those activities have been directly impacted by the COVID–19 outbreak and related restrictions on transportation and public appearances. In February 2020 our ACM Shanghai headquarters were closed for an additional six days beyond the normal Lunar New Year Holiday in accordance with Shanghai government restrictions related to the outbreak. We took steps before and after the Lunar New Year to ensure no employees took unreasonable risks to rush back to work. Currently substantially all of our staff have returned to work at both of our Shanghai facilities. To date we have not experienced absenteeism of management or other key employees, other than certain of our executive officers being delayed in traveling back to the PRC after working from our California office in February. Our corporate headquarters are located in Alameda County in the San Francisco Bay Area and are the subject of a number of state and county public health directives and orders. These actions have not negatively impacted our business to date, however, because of the limited number of employees at our headquarters and the nature of the work they generally perform.

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•

Customers: Our customers’ business operations have been, and are continuing to be, subject to business interruptions arising from the COVID–19 outbreak. Historically a majority of our revenue from sales of single-wafer wet cleaning equipment for front-end manufacturing has been derived from customers located in the PRC and surrounding areas that have been impacted by COVID–19. Three customers that accounted for 73.8% of our revenue in 2019 and 87.6% of our revenue in 2018 are based in the PRC and Korea. One of those customers, Yangtze Memory Technologies Co., Ltd. — which accounted for 27.5% of our 2019 revenue and 39.6% of our 2018 revenue — is based in Wuhan. While Yangtze Memory Technologies Co., Ltd. and other key customers continued to operate their fabrication facilities without interruption during and after the first quarter of 2020, they were forced to restrict access of service personnel and deliveries to and from their facilities. A portion of the shipments we previously had expected to deliver in the first quarter of 2020 were postponed due to these factors, and were subsequently delivered in the second quarter of 2020.

•

Suppliers: Our global supply chain includes components sourced from the PRC, Japan, Taiwan, the United States and Europe. While the COVID–19 outbreak has resulted in significant governmental measures being implemented to control the spread of COVID–19 around the world, to date we have not experienced material issues with our supply chain. As with our customers, we continue to be in close contact with our key suppliers to help ensure we are able to identify any potential supply issues that may arise.

•

Projects: Our strategy includes a number of plans to support the growth of our core business, including the STAR Listing and STAR IPO with respect to shares of ACM Shanghai described above as well as ACM Shanghai’s recent acquisition of a land use right in the Lingang area of Shanghai where we began construction of a new research and development center and factory in July 2020. The extent to which COVID–19 impacts these projects will depend on future developments that are highly uncertain, but to date, the timing of these ongoing projects has not been delayed or disrupted by COVID–19 or related government measures.

Government Research and Development Funding

ACM Shanghai has received six special government grants from the PRC’s Ministry of Science and Technology, the Shanghai Municipal Commission of Economy and Information, and the Shanghai Science and Technology Committee. 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. The fifth grant was made in 2020, and relates to the development of Tahoe single bench cleaning technologies. The sixth grant was made in 2020, and relates to the development of backside cleaning technologies. These governmental authorities provide the majority of the funding, although ACM Shanghai is also required to invest certain amounts in the projects.

The 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 $0.7 million and $2.9 million in the first nine months of 2020 and 2019 respectively.

•

Government grants used to acquire depreciable assets are transferred from long-term liabilities to property, plant and equipment when the assets are acquired, and the recorded amounts of the assets are credited to other income over the useful lives of the assets. These credits totaled $110,000 and $111,000 in the first nine months of 2020 and 2019, 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.

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•	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.

“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, 2020 totaled $59 million, as compared to $43 million in the three months ended September 30, 2019, and $45 million in the three months ended June 30, 2020. Shipments in the nine months ended September 30, 2020 totaled $116 million, as compared to $90 million in the corresponding period in 2019.

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;

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•	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,
	2020			2019
	(in thousands)
Adjusted EBITDA Data:
Net Income	$	12,479		$	15,257
Interest expense (income), net		(223	)		410
Income tax expense		416			667
Depreciation and amortization		774			586
Stock based compensation		4,323			2,919
Change in fair value of financial liability		11,964			-
Unrealized gain on trading securities		(8,970	)		-
Adjusted EBITDA	$	20,763		$	19,839

Adjusted EBITDA in the nine months ended September 30, 2020 increased by $0.9 million as compared to the same period in 2019 due to a decrease of $2.8 million in net income, a decrease of $9.0 million from unrealized gain on trading securities, a decrease of $0.6 million in net interest expense, and a decrease of $0.3 million income tax expense, and was offset by an increase of $12.0 million in non-cash, non-operating expense, and an increase of $1.4 million 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 “—Government Research and Development Funding.”

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,
	2020			2019
	(in thousands)
Free Cash Flow Data:
Net cash used in operating activities	$	(8,036	)	$	(4,752	)
Purchase property and equipment		(3,583	)		(832	)
Purchase of intangible assets		(81	)		(114	)
Purchase of land-use-right		(9,331	)		-
Purchase of trading securities		(14,680	)		-
Free cash flow	$	(35,711	)	$	(5,698	)

Free cash flow declined by $30.0 million in the nine months ended September 30, 2020, as compared to the same period in 2019, primarily due to (a) investments in ACM Shanghai’s development and production center in the Lingang region of Shanghai, (b) purchase of long-term investments in Qingdao Fortune-Tech Xinxing Capital Partnership (L.P.), a Chinese limited partnership based in Shanghai which participated in the Star Market IPO of Semiconductor Manufacturing International Corporation, or SMIC, in which ACM Shanghai is a limited partner, (c) factors driving net cash provided by operating activities (an increase in accounts payable, other long-term liabilities and inventory, offset by an increase in accounts receivable and other receivables), and (d) increased purchases of property and equipment. 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.

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Adjusted Operating Income

Adjusted operating income excludes stock-based compensation. 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 table reflects the exclusion of stock-based compensation, or SBC, from line items comprising income from operations:

`	Nine Months Ended September 30,
	2020									2019
	Actual (GAAP)			SBC			Adjusted (Non- GAAP)			Actual (GAAP)			SBC			Adjusted (Non-GAAP)
	(in thousands)
Revenue	$	111,062		$	-		$	111,062		$	82,916		$	-		$	82,916
Cost of revenue		(61,137	)		(132	)		(61,005	)		(44,705	)		(213	)		(44,492	)
Gross profit		49,925			(132	)		50,057			38,211			(213	)		38,424
Operating expenses:
Sales and marketing		(11,524	)		(495	)		(11,029	)		(8,679	)		(252	)		(8,427	)
Research and development		(13,241	)		(568	)		(12,673	)		(9,598	)		(939	)		(8,659	)
General and administrative		(9,100	)		(3,128	)		(5,972	)		(5,992	)		(1,515	)		(4,477	)
Income from operations		16,060			(4,323	)		20,383			13,942			(2,919	)		16,861

Adjusted operating income for the nine months ended on September 30, 2020 increased by $3.5 million, as compared with the same period in 2019, due to a $2.1 million increase in income from operations, and a $1.4 million increase 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, 2020 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 2018-13, Fair Value Measurement (Topic 820) effective January 1, 2020. For information regarding the impact of recently adopted accounting standards, refer to note 2 to the condensed consolidated 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.

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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,
	2020			2019			2020			2019
Revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenue		57.3			51.4			55.0			53.9
Gross margin		42.7			48.6			45.0			46.1
Operating expenses:
Sales and marketing		8.2			11.6			10.4			10.5
Research and development		9.1			10.4			11.9			11.6
General and administrative		9.6			5.5			8.2			7.2
Total operating expenses, net		26.9			27.6			30.5			29.3
Income from operations		15.8			21.0			14.5			16.8
Interest income (expense), net		(0.2	)		(0.3	)		0.2			(0.5	)
Change in fair value of financial liability		(13.7	)		-			(10.8	)		-
Unrealized gain on trading securities		18.8			-			8.1			-
Other income (expense), net		(3.7	)		5.5			(0.8	)		2.6
Equity income (loss) in net income (loss) of affiliates		0.4			(0.0	)		0.5			0.3
Income before income taxes		17.4			26.2			11.6			19.2
Income tax benefit (expense)		3.7			1.0			(0.4	)		(0.8	)
Net income		21.1			27.2			11.3			18.4
Less: Net income attributable to non-controlling interests and redeemable non-controlling interests		2.9			0.9			2.0			0.4
Net income attributable to ACM Research, Inc.		18.2	%		26.3	%		9.3	%		18.0	%

Comparison of Three Months Ended September 30, 2020 and 2019

Revenue

	Three Months Ended September 30,
	2020		2019		% Change 2020 v 2019
`	(in thousands)
Revenue	$	47,665	$	33,427		42.6	%

The increase in revenue of $14.2 million in the three months ended September 30, 2020 as compared to the same period in 2019 consisted of an increase in revenue of $10.0 million from single-wafer cleaning and other front-end processing equipment and an increase in revenue of $4.2 million from back-end wafer assembly and packaging equipment and spares.

Cost of Revenue and Gross Margin

	Three Months Ended September 30,
	2020			2019			% Change 2020 v 2019
	(in thousands)
Cost of revenue	$	27,324		$	17,173			59.1	%
Gross profit		20,341			16,254			25.1	%
Gross margin		42.67	%		48.63	%		-6.0

Cost of revenue increased $10.2 million and gross profit increased $4.1 million in the three months ended September 30, 2020 as compared to the corresponding period in 2019 due to the increased sales volume offset by a 6.0% decrease in gross margin, which reflected differences in 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.

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Operating Expenses

	Three Months Ended September 30,
	2020		2019		% Change 2020 v 2019
	(in thousands)
Sales and marketing expense	$	3,924	$	3,886		1.0	%
Research and development expense		4,343		3,492		24.4	%
General and administrative expense		4,568		1,846		147.5	%
Total operating expenses	$	12,835	$	9,224		39.1	%

Sales and marketing expense increased by $38,000 in the three months ended September 30, 2020 as compared to the corresponding period in 2019. Sales and marketing expense consists primarily of:

•

compensation of personnel associated with pre- and after-sale 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 $851,000 in the three months ended September 30, 2020 as compared to the corresponding period in 2019, principally as a result of increases in new product development, testing fees and personnel costs. Research and development expense represented 9.1% and 10.4% of our revenue in the three months ended September 30, 2020 and 2019, respectively. Without reduction by grant amounts received from PRC governmental authorities (see “—Government Research and Development Funding”), gross research and development expense totaled $4.7 million, or 13.1% of revenue, in the three months ended September 30, 2020 and $4.4 million, or 13.1% of revenue, in the corresponding period in 2019. 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 $2.7 million in the three months ended September 30, 2020 as compared to the corresponding period in 2019. 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;

•

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 in the United States and the PRC.

Other Income and Expenses

	Three Months Ended September 30,
	2020			2019			% Change 2020 v 2019
	(in thousands)
Interest Income	$	179		$	95			88.4	%
Interest Expense		(272	)		(205	)		32.7	%
Interest Income (expense), net	$	(93	)	$	(110	)		-15.5	%

Other income (expense), net	$	(1,759	)	$	1,850			-195.1	%

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Interest income consists of interest earned on our cash and equivalents and restricted cash accounts, offset by interest expense incurred from outstanding short-term borrowings. We incurred $93,000 of interest expense, net in the three months ended September 30, 2020 as compared to $110,000 of interest expense, net in the corresponding period in 2019. This was a result of a larger balance of cash and equivalents offset by increased borrowings under short-term bank loans.

Other income, 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 “—Government Research and Development Funding” above. Other income (expense), declined by $3.6 million in the three months ended September 30, 2020 as compared to Other income (expense) in the corresponding period in 2019, due primarily to realized losses of $2.5 million resulting from changes in the RMB-to-U.S. dollar exchange rate, compared to a gain of $1.8 million in the prior year period, which was partly offset by higher other income related to PRC funding in the three months ended September 30, 2020 compared to the prior year period.

Change in fair value of financial liability

We recognized a change in fair value of financial liability of $6.5 million for the three months ended September 30, 2020, which was charged to the condensed consolidated statement of operations, as described in note 12 to the condensed consolidated financial statements included in this report,

Unrealized gain from trading securities

We recorded an unrealized gain of $9.0 million for the three months ended September 30, 2020 based on the change in market value of ACM Shanghai’s indirect investment in SMIC shares on the STAR Market as is described in note 11 to the condensed consolidated financial statements included in this report.

Income Tax Expense

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

	Three Months Ended September 30,
	2020		2019
	(in thousands)
Total income tax benefit (expense)	$	1,747	$	328

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 and the treatment of stock-based compensation. 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.

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.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted on March 27, 2020. It contains several provisions that may have financial statement effects. Key Aspects of the CARES Act include the following:

•

repealed the 80% taxable income limitation for 2018, 2019 and 2020, and allows those years to be carried back up to five years;

•

allows corporations to claim 100% of AMT credits in 2019, and provides for an election to take the entire refundable credit amount in 2018;

•

raised the Section 163(j) ATI limit from 30% to 50% for businesses; and

•

made technical corrections to TCJA for Qualified Improvement Property (“QIP”) and designates QIP as 15-year property for depreciation purposes, which makes QIP a category eligible for 100% bonus depreciation.

The CARES Act is not expected have a material impact on income taxes in the Company’s consolidated financial statements.

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Net Income Attributable to Non-Controlling Interests and Redeemable Non-Controlling Interests

	Three Months Ended September 30,
	2020		2019		% Change 2020 v 2019
	(in thousands)
Net income attributable to non-controlling interests	$	1,393	$	307		353.7	%

As described above under “—STAR Market Listing and IPO,” in 2019, ACM Shanghai sold a total number of shares representing 8.3% of its outstanding ACM Shanghai shares. ACM Research continues to hold the remaining 91.7% 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 and redeemable 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, 2020, this amount totaled $1.4 million as compared to $0.3 million in the corresponding period in 2019.

Comparison of Nine Months Ended September 30, 2020 and 2019

Revenue

	Nine Months Ended September 30,
	2020		2019		% Change 2020 v 2019
	(in thousands)
Revenue	$	111,062	$	82,916		33.9	%

The increase in revenue of $28.1 million in the nine months ended September 30, 2020 as compared to the same period in 2019 reflected increases in revenue of $28.9 million from single-wafer cleaning and other front-end processing equipment, offset by a decrease in revenue of $0.8 million from back-end wafer assembly and packaging equipment and spares.

Cost of Revenue and Gross Margin

	Nine Months Ended September 30,
	2020			2019			% Change 2020 v 2019
	(in thousands)
Cost of revenue	$	61,137		$	44,705			36.8	%
Gross profit		49,925			38,211			30.7	%
Gross margin		44.95	%		46.08	%		-1.1

Cost of revenue increased $16.4 million and gross profit increased $11.7 million in the nine months ended September 30, 2020, as compared to the corresponding period in 2019, due to increased sales volume and higher gross margin. Gross margin decreased by 1.1 percentage points during the nine months ended September 30, 2020, as compared to the comparable period in 2019 due to differences in product mix.

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Operating Expenses

	Nine Months Ended September 30,
	2020		2019		% Change 2020 v 2019
	(in thousands)
Sales and marketing expense	$	11,524	$	8,679		32.8	%
Research and development expense		13,241		9,598		38.0	%
General and administrative expense		9,100		5,992		51.9	%
Total operating expenses	$	33,865	$	24,269		39.5	%

Sales and marketing expense increased by $2.8 million in the nine months ended September 30, 2020, as compared to the corresponding period in 2019. 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 $3.6 million in the nine months ended September 30, 2020 as compared to the corresponding period in 2019, principally as a result of increases in testing fees and personnel costs. Research and development expense represented 11.9% and 11.6% of our revenue in the nine months ended September 30, 2020 and 2019, respectively. Without reduction by grant amounts received from PRC governmental authorities (see “—Government Research and Development Funding”), gross research and development expense totaled $13.9 million, or 12.5% of revenue, in the nine months ended September 30, 2020 and $12.5 million, or 15.1% of revenue, in the corresponding period in 2019. 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 $3.1 million in the nine months ended September 30, 2020 as compared to the corresponding period in 2019. 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;

•

professional fees, including accounting and legal fees;

•

other corporate expenses; and

•

allocated overhead for rent and utilities.

Other Income and Expenses

	Nine Months Ended September 30,
	2020			2019			% Change 2020 v 2019
	(in thousands)
Interest Income	$	834		$	128			551.6	%
Interest Expense		(611	)		(538	)		13.6	%
Interest Income (expense), net	$	223		$	(410	)		-154.4	%

Other income (expense), net	$	(933	)	$	2,132			-143.8	%

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Interest income consists of interest earned on our cash and equivalents and restricted cash accounts, offset by interest expense incurred from outstanding short-term borrowings. We earned $223,000 of interest income, net in the nine months ended September 30, 2020 as compared to incurring ($410,000) of interest expense, net in the corresponding period in 2019. This was a result of a larger balance of cash and equivalents and restricted cash partly offset by increased borrowings under short-term bank loans.

Other income, 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 “—Government Research and Development Funding” above. Other income (expense), declined by $3.1 million in the nine months ended September 30, 2020 as compared to Other income (expense) in the corresponding period in 2019, due primarily to realized losses of $2.0 million resulting from changes in the RMB-to-U.S. dollar exchange rate, compared to a gain of $2.3 million in the prior year period. This was partly offset by higher other income related to PRC funding in the nine months ended September 30, 2020 compared to the prior year period.

Change in fair value of financial liability

We recognized a change in fair value of financial liability of $12.0 million for the nine months ended September 30, 2020, which was charged to the condensed consolidated statement of operations, as described in note 12 to the condensed consolidated financial statements included in this report.

Unrealized gain from trading securities

We recorded an unrealized gain of $9.0 million for the nine months ended September 30, 2020 based on the change in market value of ACM Shanghai’s indirect investment in SMIC shares on the STAR Market as is described in note 11 to the condensed consolidated financial statements included in this report.

Income Tax Expense

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

	Nine Months Ended September 30,
	2020			2019
	(in thousands)
Total income tax expense	$	(416	)	$	(667	)

•

repealed the 80% taxable income limitation for 2018, 2019 and 2020, and also allows those years to be carried back up to five years;

•

allows corporations to claim 100% of AMT credits in 2019, and also provides for an election to take the entire refundable credit amount in 2018;

•

raises Section 163(j) ATI limit from 30% to 50% for businesses; and

•

makes technical corrections to TCJA for Qualified Improvement Property (“QIP”), and designates QIP as 15-year property for depreciation purposes, which makes QIP a category eligible for 100% bonus depreciation.

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The CARES Act is not expected have a material impact on income taxes in the Company’s consolidated financial statements.

Net Income Attributable to Non-Controlling Interests and Redeemable Non-Controlling Interests

	Nine Months Ended September 30,
	2020		2019		% Change 2020 v 2019
	(in thousands)
Net income attributable to non-controlling interests	$	2,228	$	307		625.7	%

As described above under “—STAR Market Listing and IPO,” in 2019 ACM Shanghai sold 8.3% of its shares to private placement investors in connection with the STAR Listing. ACM Research continues to hold the remaining 91.7% of ACM Shanghai’s outstanding shares. As a result, commencing with the nine months ended September 30, 2019, we have reflected, as net income attributable to non-controlling interests and redeemable 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, 2020, this amount totaled $2.3 million, as compared to $0.3 million for the prior year period.

Liquidity and Capital Resources

During the first nine months of 2020, we funded our technology development and operations principally through our beginning cash balance, including application of net proceeds from our initial public offering and follow-on public offering of Class A common stock in 2017 and 2019, respectively, and net proceeds from our private equity raises and short-term borrowings by ACM Shanghai from local financial institutions.

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.

Sources of Funds

Cash Flow from Operating Activities. Our operations used cash flow of $8.0 million in the first nine months of 2020. Our cash flow from operating activities is influenced by (a) the level of net income, (b) the amount of cash we invest in personnel and technology development to support anticipated future growth in our business, (c) increases in the number of customers using our products, and (d) the amount and timing of payments by customers.

Equity and Equity-related Securities. During the nine months ended September 30, 2020, we received proceeds of $2.2 million from sales of Class A common stock pursuant to option exercises.

Release of Voluntarily Restricted Proceeds. During the nine months ended September 30, 2020, we released the restrictions on $58.8 million of the cash proceeds received from the private placement investors that purchased ACM Shanghai shares in anticipation of the STAR Listing (see “—Recent Developments—STAR Market Listing and IPO” above). Previously, due to the investors’ redemption rights, we had voluntarily chosen to hold the proceeds as restricted cash. These redemption rights were removed upon submission of the STAR Listing application.

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Short-Term Loan Facilities. We have short-term borrowings with three banks, as follows:

Lender	Agreement Date	Maturity Date	Annual Interest Rate			Maximum Borrowing Amount(1)		Amount Outstanding at September 30, 2020
						(in thousands)
Bank of China Pudong Branch	June 2020	December 2020		4.35	%	RMB30,000		RMB17,000
						$	4,404	$	2,496
Bank of Shanghai Pudong Branch	April 2020	May 2021 - June 2021		3.48%-4.68	%	RMB70,000		RMB65,296
						$	10,276	$	9,585
Bank of Communications	April 2020	April 2021 - May 2021		3.65%-4.65	%	RMB20,000		RMB20,000
						$	2,936	$	2,936
China Everbright Bank	April 2020	April 2021 - June 2021		2.7%-4.7	%	RMB80,000		RMB58,749
						$	11,744	$	8,625
China Merchants Bank	August 2020	August 2021		3.85	%	RMB80,000		RMB29,000
						$	11,744	$	4,257
Industrial Bank of Korea	July 2020	July 2021		3.99	%	KRW500,000		KRW500,000
						$	428	$	428
						$	41,532	$	28,327

(1)

Converted from RMB to dollars as of September 30, 2020. All of the amounts owing under the line of credit with China Everbright Bank and Bank of China Pudong Branch are guaranteed by Dr. David Wang, our Chief Executive Officer, President and Chair of the Board. All of the amounts owing under the line of credit with Bank of Shanghai Pudong Branch are guaranteed by Dr. Wang and CleanChip Technologies LTD, a wholly owned subsidiary of ACM Shanghai. All of the amounts owing under the line of credit with Industrial Bank of Korea are guaranteed by YY Kim, CEO of ACM Research (Korea).

Government Research and Development Grants. As described under “Government Research and Development Funding,” ACM Shanghai has received research and development grants from local and central PRC governmental authorities. ACM Shanghai received cash payments of $2.9 million related to such grants received in the nine months ended September 30, 2020, as compared to cash payments of $1.5 million related to such grants received during the same period in 2019. Not all grant amounts are received in the year in which a grant is awarded. Because of the nature and terms of the grants, the amounts and timing of payments under the grants are difficult to predict and vary from period to period. In addition, we expect to apply for additional grants when available in the future, but the grant application process can extend for a significant period of time and we cannot predict whether, or when, we will determine to apply for any such grants.

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

	September 30, 2020
	(in thousands)
Cash and cash equivalents	$	92,203
Accounts receivable, less allowance for doubtful amounts		59,796
Inventory		64,182
Working capital	$	216,181

Our cash and cash equivalents at September 30, 2020 were unrestricted and 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.

We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and any future earnings to support the operation of and to finance the growth and development of our business and do not anticipate paying any cash dividends in the foreseeable future.

Uses of Funds

Capital Expenditures. We incurred $3.7 million in capital expenditures in the first nine months of 2020, compared to $0.9 million during the same period in 2019.

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Trading Securities. ACM Shanghai made an indirect investment of $14.7 million in SMIC shares on the STAR Market through ACM Shanghai’s investment in Qingdao Limited Partnership Fund, during the first nine months of 2020, as is described in note 11 to the condensed consolidated financial statements included in this report.

Lingang-Related Investments. ACM Shanghai, through its wholly owned subsidiary Shengwei Research (Shanghai), Inc., purchased a land use right for $9.3 million in the first nine months of 2020, as described in note 2 to the condensed financial statements included in this report. ACM Shanghai pre-paid $7.0 million in the first nine months of 2020 for a deposit towards a potential purchase of housing properties which was recorded in other long term assets in the condensed consolidated balance sheets.

Off-Balance Sheet Arrangements

As of September 30, 2020, 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 December 31, 2020, at which time we will become a “large accelerated filer” for purposes of the SEC’s disclosure requirements as the result of the market value of our capital stock held by non-affiliates exceeding $700 million as of June 30, 2020. We have chosen to take advantage of some of the emerging growth company 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.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2020. 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 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, 2020, our chief executive officer and 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, 2020, 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 nine months ended September 30, 2020 or in the subsequent period up to the date of this report.

Item 1A.

Risk Factors

Except as set forth below and Item 1A, “Risk Factors” of Part II in our Quarterly Report for the quarterly period ended June 30, 2020, there were 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.

Short sellers of our stock may be manipulative and may drive down the market price of our Class A common stock.

Short selling is the practice of selling securities that a seller does not own but rather has borrowed, or intends to borrow, from a third party with the intention of buying identical securities at a later date to return to the lender. A short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the price of the stock to decline, some short sellers publish, or arrange for the publication of, opinions or characterizations regarding the relevant issuer, its business prospects and similar matters calculated to or which may create negative market momentum, which may permit them to obtain profits for themselves as a result of selling the securities short. The use of the Internet, social media, and blogging have allowed short sellers to publicly attack a company’s credibility, strategy and veracity by means of so-called “research reports” that mimic the type of investment analysis performed by legitimate securities research analysts. Issuers with limited trading volumes or substantial retail stockholder bases can be particularly susceptible to higher volatility levels, and can be particularly vulnerable to such short attacks.

Short seller publications are not regulated by any governmental or self-regulatory organization or any other official authority in the United States and are not subject to the certification requirements imposed by the SEC in Regulation Analyst Certification. Accordingly, the opinions they express may be based on distortions of actual facts or, in some cases, outright fabrications. In light of the limited risks involved in publishing such information, and the significant profits that can be made from running successful short attacks, short sellers will likely continue to issue such reports.

While we intend to strongly defend our public filings against any such short seller attacks, in many situations we could be constrained, either by principles of freedom of speech, applicable state law or issues of commercial confidentiality, in the manner in which we are able to proceed against the relevant short seller.

Such short-seller attacks have, and may cause in the future, temporary or possibly long term, declines in the market price of Class A common stock.

Our ability to sell our tools to Chinese customers may be restricted by regulatory actions

The Bureau of Industry and Security of the U.S. Department of Commerce has added, and may continue to add, certain PRC entities to the Entity List, or otherwise restrict the export of American technology to the PRC. For example, in September 2020, certain U.S. suppliers of capital equipment to Semiconductor Manufacturing International Corporation, or SMIC, one of the largest chip manufacturers in the PRC, received letters from the U.S. Department of Commerce informing them of additional license requirements for shipments to the SMIC. The Entity List and other actions by the U.S. Department of Commerce impose limitations on the supply of certain U.S. products and services to the affected entities, including a requirement that an export license be obtained in order to export products and services to the listed entities. Challenges faced by SMIC and its key suppliers could indirectly impact SMIC’s demand for our products.

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We cannot be certain what additional actions the U.S. government may take with respect to PRC entities, and whether such actions will impact our relationships with our PRC-based customers, including changes to the Entity List restrictions, export regulations, tariffs or other trade restrictions, or whether the Chinese government may take any actions in response to U.S. government action that may adversely affect our ability to do business with our PRC-based customers. Even in the absence of new restrictions, tariffs or trade actions imposed by the U.S. or Chinese government, our PRC-based customers may take actions to reduce dependence on the supply of components subject to potential U.S. trade regulations, including our tools, which could have a material adverse effect on our operating results. We are unable to predict the duration of the restrictions imposed by the U.S. government or of any additional governmental actions that may impact our relationships with our PRC-based customers, any of which could have a long-term adverse effect on our business, operating results and financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Equity Securities

In the three months ended September 30, 2020, we issued and sold to employees and consultants an aggregate of 150,162 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 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.

Item 6.

Exhibits

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

Exhibit Number		Description
4.01‡		Warrant to Purchase Class A Common Stock issued to Shengxin (Shanghai) Management Consulting Limited Partnership dated July 29, 2020
10.01		Amendment No. 1 to Share Transfer and Note Cancellation Agreement dated July 29, 2020 between ACM Research, Inc. and Shengxin (Shanghai) Management Consulting Limited Partnership
10.02		Adoption Agreement dated July 29, 2020 between ACM Research, Inc. and Shengxin (Shanghai) Management Consulting Limited Partnership (amending the Second Amended and Restated Registration Rights Agreement between ACM Research, Inc. and certain of its stockholders filed with the SEC on October 18, 2017 as Exhibit 10.09 to Amendment No. 1 to Registration Statement on Form S-1)
10.03‡+		Facilities Agreement dated August 3, 2020 between China Merchants Bank Co., Ltd. Shanghai Branch and ACM Research (Shanghai), Inc.
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

‡ Certain information redacted and replaced with “[***]”.

+ Unofficial English translation of original document prepared in Mandarin Chinese.

*The certifications attached as Exhibit 32.01 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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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 9, 2020	By:	/s/ Mark McKechnie
		Mark McKechnie
		Chief Financial Officer, Executive Vice President and Treasurer (Principal Financial Officer)