ACM Research, Inc. - Quarter Report: 2021 March (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

For the quarterly period ended March 31, 2021

or

For the transition period from _________ to _____________

Commission file number: 001-38273

ACM Research, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

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

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 (§232.405 of this chapter) 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.

 

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

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

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

 

TABLE OF CONTENTS

 

 

 

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.

FORWARD-LOOKING STATEMENTS AND STATISTICAL DATA

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 under the heading “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview,” of Part I of this report contains statistical data and estimates, including forecasts, that are based on information provided by Gartner, Inc., or Gartner, in “Forecast: Semiconductor Wafer Fab Equipment, Worldwide, 4Q20 Update” (December 22, 2020), 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.

PART I.          FINANCIAL INFORMATION

Item 1.          Financial Statements

ACM RESEARCH, INC.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

 

 

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

ACM RESEARCH, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income

(In thousands, except per share data)

(Unaudited)

 

 

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

ACM RESEARCH, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

 (In thousands, except per share data)

(Unaudited)

 

 

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

ACM RESEARCH, INC.

Condensed Consolidated Statements of Cash Flows

 (In thousands)

(Unaudited)

 

 

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

ACM RESEARCH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

			Effective interest held as at
Name of subsidiaries	Place and date of incorporation		March 31, 2021				December 31, 2020
ACM Research (Shanghai), Inc.	PRC, May 2005			91.7	%			91.7	%
ACM Research (Wuxi), Inc.	PRC, 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.	PRC, 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	%

		Three Months Ended March 31,
		2021				2020
Numerator:
Net income		$	5,822			$	1,963
Net income attributable to non-controlling interests and redeemable non-controlling interests			352				258
Net income available to common stockholders, basic and diluted		$	5,470			$	1,705
Weighted average shares outstanding, basic			18,786,870				18,120,363
Effect of dilutive securities			3,081,410				2,946,273
Weighted average shares outstanding, diluted			21,868,280				21,066,636
Net income per common share:
Basic			0.29				0.09
Diluted		$	0.25			$	0.08

		Three Months Ended March 31,
		2021				2020
Single Wafer Cleaning, Tahoe and Semi-Critical Cleaning Equipment		$	32,413			$	22,784
ECP (front-end and packaging), Furnace and Other Technologies			5,550				-
Advanced Packaging (excluding ECP), Services & Spares			5,769				1,564
Total Revenue By Product Category			43,732				24,348
Wet cleaning and other front-end processing tools			31,900				22,784
Advanced packaging, other back-end processing tools, services and spares			11,832				1,564
Total Revenue Front-end and Back-End		$	43,732			$	24,348

		Three Months Ended March 31,
		2021				2020
Mainland China		$	43,696			$	24,289
Other Regions			36				59
		$	43,732			$	24,348

		March 31, 2021				December 31, 2020
Accounts receivable		$	60,394			$	56,441
Less: Allowance for doubtful accounts			-				-
Total		$	60,394			$	56,441

		March 31, 2021				December 31, 2020
Raw materials		$	34,631			$	32,391
Work in process			21,461				23,871
Finished goods			47,134				32,377
Total inventory		$	103,226			$	88,639

		March 31, 2021				December 31, 2020
Manufacturing equipment		$	5,924			$	5,966
Office equipment			1,260				1,047
Transportation equipment			213				216
Leasehold improvement			2,551				2,398
Total cost			9,948				9,627
Less: Total accumulated depreciation			(4,049	)			(3,745	)
Construction in progress			2,873				2,310
Total property, plant and equipment, net		$	8,772			$	8,192

		March 31, 2021				December 31, 2020
Land use right purchase amount		$	9,674			$	9,744
Less: Accumulated amortization			(145	)			(98	)
Land use right, net		$	9,529			$	9,646

Year ending December 31,
2021		$	196
2022			196
2023			196
2024			196
2025			196

		March 31, 2021				December 31, 2020
Prepayment for property		$	39,474			$	39,450
Security deposit for land use right			750				756
Others			251				290
Total other long-term assets		$	40,475			$	40,496

		March 31, 2021				December 31, 2020
Line of credit up to RMB 80,000 from China Everbright Bank,
1)due on April 1, 2021 with an annual interest rate of 4.70%. *1 and fully repaid on March 23, 2021.			-				4,599
2)due on June 27, 2021 with an annual interest rate of 4.25%. *1			1,370				1,380
3)due on April 29, 2021 with an annual interest rate of 2.80%. *1 and fully repaid on March 23, 2021.			-				820
4)due on June 27, 2021 with an annual interest rate of 2.70%. *1			2,080				2,080
5)due on September 30, 2021 with an annual interest rate of 2.50%. *1			2,855				-
Line of credit up to RMB 20,000 from Bank of Communications,
1)due on April 12, 2021 with an annual interest rate of 4.65%.			1,522				1,533
2)due on May 24, 2021 with an annual interest rate of 3.65%.			1,522				1,533
Line of credit up to RMB 70,000 from Bank of Shanghai Pudong Branch,
1)due on May 27, 2021 with an annual interest rate of 4.68%. *2			2,557				2,575
2)due on June 27, 2021 with an annual interest rate of 4.68%. *2 and fully repaid on March 29, 2021.			-				1,380
3)due on May 28, 2021 with an annual interest rate of 3.48%. *2			2,442				2,442
4)due on June 7, 2021 with an annual interest rate of 3.50%. *2			1,521				1,521
5)due on June 16, 2021 with an annual interest rate of 3.50%. *2			1,837				1,838
Line of credit up to RMB 80,000 from China Merchants Bank,
1)due on August 10, 2021 with annual interest rate of 3.85%.			1,370				1,380
2)due on August 25, 2021 with annual interest rate of 3.85%.			3,044				3,066
3)due on February 1, 2022 with annual interest rate of 3.85%.			1,370				-
Total		$	23,490			$	26,147

		March 31, 2021				December 31, 2020
Accrued commissions		$	7,838			$	7,127
Accrued warranty			4,196				3,975
Accrued payroll			4,422				3,068
Accrued professional fees			211				384
Accrued machine testing fees			1,632				1,595
Others			3,586				2,656
Total		$	21,885			$	18,805

		Three Months Ended March 31,
		2021				2020
Operating lease cost		$	515			$	377
Short-term lease cost			79				50
Lease cost		$	594			$	427

		Three Months Ended March 31,
		2021				2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow from operating leases		$	594			$	427

		December 31,
2021		$	1,834
2022			2,439
2023			978
2024			876
2025			22
Total lease payments			6,149
Less: Interest			(800	)
Present value of lease liabilities		$	5,349

		March 31, 2021				December 31, 2020
Remaining lease term and discount rate:
Weighted average remaining lease term (years)			1.93				2.11
Weighted average discount rate			4.87	%			5.14	%

		March 31, 2021				December 31, 2020
Loan from China Merchants Bank		$	19,042			$	19,570
Less: Current portion			(1,598	)			(1,591	)
		$	17,444			$	17,979

Year ending December 31,
2021		$	1,191
2022			1,654
2023			1,733
2024			1,815
2025 and onwards			12,649
		$	19,042

		March 31, 2021				December 31, 2020
Subsidies to Stress Free Polishing project, commenced in 2008 and 2017		$	1,221			$	1,266
Subsidies to Electro Copper Plating project, commenced in 2014			2,016				2,156
Subsidies to Polytetrafluoroethylene, commenced in 2018			51				130
Subsidies to Tahoe-Single Bench Clean, commenced in 2020			1,005				1,544
Subsidies to Backside Clean-YMTC National Project, commenced in 2020			1,941				2,591
Other			405				347
Total		$	6,639			$	8,034

		March 31, 2021				December 31, 2020
Ninebell		$	1,988			$	1,666
Shengyi			157				134
Hefei Shixi			4,487				4,540
Total		$	6,632			$	6,340

		March 31, 2021				December 31, 2020
Trading securities listed in Shanghai Stock Exchange
Cost		$	14,912			$	15,020
Market value		$	27,003			$	28,239

Prepaid expenses		March 31, 2021				December 31, 2020
Ninebell		$	1,778			$	1,607

Accounts payable		March 31, 2021				December 31, 2020
Ninebell		$	2,925			$	2,898
Shengyi			1,585				1,195
Total		$	4,510			$	4,093

		Three Months Ended March 31
Purchase of materials		2021				2020
Ninebell		$	6,882			$	2,153
Shengyi			358				58
Total		$	7,240			$	2,211

		Three Months Ended March 31
Service fee charged by		2021				2020
Shengyi		$	142			$	46
Ninebell			-				-
Total		$	142			$	46

Balance at December 31, 2019		$	60,162
Net income attributable to redeemable non-controlling interests			258
Effect of foreign currency translation gain attributable to redeemable non-controlling interests			(953	)
Balance at March 31, 2020		$	59,467

		Three Months Ended March 31,
		2021				2020
Stock-Based Compensation Expense:
Cost of revenue		$	71			$	45
Sales and marketing expense			505				94
Research and development expense			229				187
General and administrative expense			405				363
		$	1,210			$	689

		Three Months Ended March 31,
		2021				2020
Stock-based compensation expense by type:
Employee stock purchase plan		$	1,085			$	431
Non-employee stock purchase plan			40				172
Subsidiary option grants			85				86
		$	1,210			$	689

	Number of Option Share		Weighted Average Grant Date Fair Value			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term
Outstanding at December 31, 2020	3,191,411		$	5.13		$	12.73		7.13 years
Granted	106,400			50.67			111.98
Exercised	(255,582)			1.78			4.55
Forfeited/cancelled	(11,989)			27.45			62.58
Outstanding at March 31, 2021	3,030,240			6.93		$	16.70		7.22 years
Vested and exercisable at March 31, 2021	1,809,322

	Three months ended March 31, 2021
Fair value of common share(1)	$48.25-51.07
Expected term in years(2)	5.50-6.25
Volatility(3)	48.53%
Risk-free interest rate(4)	1.00%
Expected dividend(5)	0%

(1)	Equal to closing value 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 ACM’s comparable companies 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.

	Number of Option Shares		Weighted Average Grant Date Fair Value			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term
Outstanding at December 31, 2020	836,038		$	1.02		$	3.07		4.92 years
Granted	-			-			-
Exercised	(54,358)			1.51			5.44
Expired	-			-			-
Forfeited/cancelled	(76)			0.30			0.75
Outstanding at March 31, 2021	781,604		$	0.99		$	2.91		4.64 years
Vested and exercisable at March 31, 2021	773,139

	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, 2020	5,423,654		$	0.23		$	1.89		3.50 years
Granted	-			-			-
Exercised	-			-			-
Expired	-			-			-
Forfeited/cancelled	(46,154)			0.24			2.00
Outstanding at March 31, 2021	5,377,500		$	0.24		$	2.00		3.26 years
Vested and exercisable at March 31, 2021	-

•	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

		Three Months Ended March 31,
		2021				2020
Total income tax benefit (expense)		$	2,770			$	(304	)

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, 2020, 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 wet-cleaning and other front-end processing 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.

Revenue from wet cleaning and other front-end processing tools totaled $31.9 million, or 72.9% of total revenue, for the three months ended March 31, 2021, as compared to $22.8 million, or 93.6% of total revenue, for the same period in 2020. Selling prices for our wet-cleaning and other front-end processing tools range from $1 million to more than $5 million. Our customers for wet-cleaning and other front-end processing tools have included Semiconductor Manufacturing International Corporation, Shanghai Huali Microelectronics Corporation, The Huahong Group, SK Hynix Inc., Yangtze Memory Technologies Co., Ltd, and ChangXin Memory Technologies.

Revenue from advanced packaging, other back-end processing tools, services and spares totaled $11.8 million, or 27.1% of total revenue for the three months ended March 31, 2021, as compared to $1.6 million, or 6.4% of total revenue for the same period in 2020.  Selling prices for these tools range from $0.5 million to more than $4 million.  Our customers for advanced packaging, and other back-end processing tools have included Jiangyin Changdian Advanced Packaging Co. Ltd., a leading PRC-based wafer bumping packaging house that is a subsidiary of JCET Group Co., Ltd.; Nantong Tongfu Microelectronics Co., Ltd., a PRC-based chip assembly and testing company that is a subsidiary of Nantong Fujitsu Microelectronics Co., Ltd.; Nepes Co., Ltd.,  a semiconductor packaging company based in South Korea which acquired the operations of Deca Technologies’ Philippines manufacturing facility in 2020;  and Wafer Works Corporation, a leading PRC-based wafer supplier.

We estimate, based on third-party reports and on customer and other information, that our current product portfolio addresses more than $5 billion of the global wafer equipment market.  By product line, we estimate an approximately $2.5 billion market opportunity is addressed by our wafer cleaning equipment, $1.7 billion by our furnace equipment, $500 million by our electro-chemical plating, or ECP equipment, and more than $300 million by our stress-free polishing, or SFP, advanced packaging, wafer processing, and other back-end processing equipment. By major equipment segment, Gartner estimates a 2020 global market size of $3.5 billion for wafer cleaning equipment (auto wet stations, single-wafer processors, batch spray processors, and other clean process equipment), $2.4 billion for furnace equipment (tube CVD, oxidation/diffusion furnace, and batch atomic layer deposition), and $546 million for ECD (electro-chemical deposition).  Based on Gartner’s estimates, the total available global market for these equipment segments increased by 15% from $5.6 billion in 2019 to $6.4 billion in 2020, and is expected to increase by 6% to $6.8 billion in 2021.

We have focused 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 has helped us penetrate the mature chip manufacturing markets and build credibility with additional industry leaders. We have used a “demo-to-sales” process to place evaluation equipment, or “first tools,” with a number of selected customers.

Since 2009 we have delivered more than 150 wet cleaning and other front-end processing tools, more than 130 of which have been accepted by customers and thereby generated revenue to us. The balance of the delivered tools are awaiting customer acceptance should contractual conditions be met. To date, a substantial majority of our sales of single-wafer wet cleaning equipment for front-end manufacturing have been to customers located in Asia, and we anticipate that a substantial majority of our revenue from these products will continue to come from customers located in this region for the foreseeable future. We have begun to add to our efforts to further address customers in North America, Western Europe and Southeast Asia by expanding our direct sales and services teams and increasing our global marketing activities.

We are 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:

In 2020 we introduced and delivered a range of new tools intended to broaden our revenue opportunity with global semiconductor manufacturers.  Product extensions include the Ultra SFP ap tool for advanced packaging solutions, the Ultra C VI  18-chamber single wafer cleaning tool for advanced memory devices, and the Ultra ECP 3d platform for through-silicon-via, or tsv,  application. New product lines include the Ultra fn Furnace, our first dry processing tool, and a suite of semi-critical cleaning systems which include single wafer back side cleaning, scrubber, and auto bench cleaning tools.

We have been issued more than 350 patents in the United States, the People’s Republic of China or PRC, Japan, Singapore, South Korea and Taiwan.

We conduct a substantial majority of our product development, manufacturing, support and services in the PRC, with additional product development and subsystem production in South Korea.  Substantially all of our integrated tools are built to order at our manufacturing facilities in the Pudong region of Shanghai, which facilities now encompass a total of 236,000 square feet of floor space for production capacity, with an additional 100,000 square feet having been added in 2021 with the lease of a second building at 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 1,000,000 square foot development and production center that will incorporate state-of-the-art manufacturing systems and automation technologies, and will provide floor space to support significantly increase production capacity and related research and development activities. 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 in the PRC 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 technologies, and enable us to design innovative products and solutions to address their needs.

Corporate Background

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

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

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:

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.

Recent Developments

STAR Market Listing and IPO

In June 2019 we announced our intention to complete, within the following three years:

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, South 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 December 31, 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. The Listing Committee subsequently determined to reassess the approval application in light of allegations regarding our business and operations that were contained in a report issued by J Capital Research USA Ltd. on October 8, 2020 and an ensuing putative class action lawsuit against our company and three of our executive officers filed on December 21, 2020 (See “Item 1. Legal Proceedings” of Part II of this report). Pending the completion of the Listing Committee’s reassessment, the STAR Listing 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:

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 has affected our business and operating results since the first quarter of 2020. Since that time, our personnel have been largely unable to travel between our offices in the United States and our facilities in the PRC, which may impact our ability to effectively operate our company and to oversee our operations. 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.

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

PRC 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:

Unearned government subsidies received are deferred for recognition and recorded as other long-term liabilities (see note 13 in the Notes to Condensed Consolidated Financial Statements included herein under “Item 1. Financial Statements.”) in the balance sheet until the criteria for such recognition are satisfied.

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

As described above under “—Recent Developments—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. During the second quarter of 2020, the redemption feature of the private placement funding terminated and the aggregate proceeds of the funding were reclassified from redeemable non-controlling interests to non-controlling interests. As a result, 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.

How We Evaluate Our Operations

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

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

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

Shipments, adjusted EBITDA, free cash flow and adjusted operating income (loss) are not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP.

Shipments

Shipments consist of two components:

“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 a 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 March 31, 2021 totaled $74 million, as compared to $12 million in the three months ended March 31, 2020, and $67 million in the three months ended December 31, 2020.

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 (loss), which is the nearest GAAP equivalent. Some of these limitations are:

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

The $3.1 million increase in adjusted EBITDA for the three-months ended March 31, 2021 as compared to the same period in 2020 reflected an increase of $1.0 million in unrealized loss on trading securities, an increase of $3.9 million in net income, an increase of $0.5 million in stock-based compensation, and an increase of $0.4 million in interest expense, and an increase of $0.3 million in depreciation and amortization, offset by a tax benefit for the three-months ended March 31, 2021 as compared to a tax expense for the same period on 2020.

We do not exclude from adjusted EBITDA expense reductions and non-operating other income attributable to PRC governmental grants because we consider and incorporate the expected amounts and timing of those grants in incurring expenses and capital expenditures. If we did not receive the grants, our cash expenses therefore would be lower, and our cash position would not be affected, to the extent we have accurately anticipated the amounts of the grants. For additional information regarding our PRC grants, please see “—Key Components of Results of Operations—PRC Government Research and Development Funding.”

Free Cash Flow

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

The $5.5 million increase in free cash flow for the three-months ended March 31, 2021 as compared to the same period in 2020 reflected the factors driving net cash provided by operating activities, including increases in advances from customers, accounts payable, other payables and accrued expenses and net income, partly offset by increases in inventory, accounts receivables, and other liabilities. These were partly offset by an increase of purchases of property and equipment and intangible assets.  Consistent with our methodology for calculating adjusted EBITDA, we do not adjust free cash flow for the effects of PRC government subsidies, because we take those subsidies into account in incurring expenses and capital expenditures.

Adjusted Operating Income

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